A journal entry is the first — and most important — step in accounting. It records every business transaction by showing which accounts are debited and credited, forming the backbone of the double-entry bookkeeping system used in virtually every country worldwide.
Assets
Cash, Equipment…
=
Liabilities
Loans, Payables…
+
Equity
Capital, Retained…
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Journal Entry
A chronological record of a transaction showing which accounts are affected, whether those accounts increase or decrease (debit vs credit), and the amounts involved.
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Double-Entry Bookkeeping
Every transaction has two equal sides: a debit and a credit. The total debits must always equal the total credits, keeping the accounting equation balanced.
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Chart of Accounts
A numbered list of all accounts available in the general ledger, organised into five types: Assets, Liabilities, Equity, Revenue, and Expenses.
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Accrual vs Cash
Under accrual accounting, record transactions when they occur, not when cash moves. This gives a more accurate picture of financial performance.
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Source Documents
Invoices, receipts, bank statements, and purchase orders that provide evidence a transaction actually occurred and support each journal entry.
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Posting to Ledger
After recording in the journal, entries are posted to individual ledger accounts (T-accounts) where running balances are maintained per account.
Core Rules
Debit & Credit Rules — At a Glance
Memorise these five rules and you can work out any journal entry.
Each example below includes the business scenario, the correct journal entry in T-account format, and a plain-English explanation of why each account is debited or credited.
01
Owner Invests Cash in Business
Transaction: Sarah starts a consulting business and invests $50,000 of her own cash.
Account
Debit
Credit
Cash
$50,000
Owner's Capital
$50,000
(To record owner's initial investment)
Why? Cash is an asset — it increases, so we debit it. Owner's Capital is equity — it increases, so we credit it. Assets ↑ $50k = Equity ↑ $50k. ✓ Balanced.
02
Purchase Equipment on Credit
Transaction: Company purchases office equipment worth $15,000 from a vendor on account (no cash paid yet).
Account
Debit
Credit
Office Equipment
$15,000
Accounts Payable
$15,000
(To record purchase of equipment on credit)
Why? Equipment (asset) increases → debit. Accounts Payable (liability) increases because the company now owes the vendor → credit. Assets ↑ $15k = Liabilities ↑ $15k. ✓
03
Service Revenue — Cash Received
Transaction: Consulting firm provides services and receives $8,500 in cash from a client.
Account
Debit
Credit
Cash
$8,500
Service Revenue
$8,500
(To record cash service revenue)
Why? Cash (asset) increases → debit. Service Revenue (income that increases equity) → credit. Assets ↑ and Equity ↑ by $8,500. ✓
04
Service Revenue — On Account (Accrual)
Transaction: Firm bills a client $12,000 for completed services; payment is expected in 30 days.
Account
Debit
Credit
Accounts Receivable
$12,000
Service Revenue
$12,000
(To record service revenue earned on account)
Why? Accounts Receivable (asset) increases because the client owes money → debit. Under accrual accounting, revenue is recognised when earned, not when cash arrives → credit Service Revenue.
05
Pay Rent Expense in Cash
Transaction: Company pays $3,500 cash for the current month's office rent.
Transaction: Company receives a $800 utility bill at month-end but has not yet paid it.
Account
Debit
Credit
Utilities Expense
$800
Utilities Payable
$800
(To accrue utilities expense at month-end)
Why? Under accrual accounting, expenses are recorded when incurred. Utilities Expense → debit; Utilities Payable (a liability, money still owed) → credit.
07
Collect Cash from Accounts Receivable
Transaction: Client pays $5,000 toward their outstanding balance on account.
Account
Debit
Credit
Cash
$5,000
Accounts Receivable
$5,000
(To record collection on outstanding receivable)
Why? Cash (asset) increases → debit. Accounts Receivable (asset) decreases → credit. This is a simple swap of one asset form for another. Total assets are unchanged.
08
Pay Accounts Payable
Transaction: Company pays off $10,000 owed to a vendor for previously purchased equipment.
Account
Debit
Credit
Accounts Payable
$10,000
Cash
$10,000
(To record payment on accounts payable)
Why? Accounts Payable (liability) decreases → debit. Cash (asset) decreases → credit. Both assets and liabilities fall by $10,000. ✓
09
Record Monthly Depreciation
Transaction: Monthly straight-line depreciation on equipment is $500.
Account
Debit
Credit
Depreciation Expense
$500
Accumulated Depreciation
$500
(To record monthly depreciation on equipment)
Why? Depreciation Expense reduces equity → debit. Accumulated Depreciation is a contra-asset (it offsets the equipment's gross value) → credit. Net asset value decreases each month.
10
Owner Withdraws Cash (Drawings)
Transaction: Owner withdraws $2,000 in cash for personal use.
Account
Debit
Credit
Owner's Drawings
$2,000
Cash
$2,000
(To record owner's withdrawal from business)
Why? Owner's Drawings is an equity reduction account — it increases (reducing equity) → debit. Cash (asset) leaves the business → credit. Both assets and equity fall by $2,000. ✓
11
Receive Advance Payment (Unearned Revenue)
Transaction: Client pays $6,000 upfront for services to be delivered next month.
Account
Debit
Credit
Cash
$6,000
Unearned Revenue
$6,000
(To record client advance payment)
Why? Cash received → debit Cash. Services not yet delivered → the money is a liability (obligation to perform) → credit Unearned Revenue. Revenue is recognised only when earned.
12
Recognise Previously Unearned Revenue
Transaction: Services from the prior example are now delivered. Recognise $6,000 in revenue.
Account
Debit
Credit
Unearned Revenue
$6,000
Service Revenue
$6,000
(To recognise revenue earned from advance)
Why? Liability (Unearned Revenue) is settled → debit. The obligation is fulfilled, so Service Revenue is now earned → credit.
13
Record Salaries Payable (Accrual)
Transaction: Month-end: $9,200 in salaries are earned by employees but will not be paid until next week.
Account
Debit
Credit
Salaries Expense
$9,200
Salaries Payable
$9,200
(To accrue salaries at month-end)
Why? Work was performed this period → recognise Salaries Expense now (debit). The amount is not yet paid → create a liability, Salaries Payable (credit).
14
Prepay Insurance (Prepaid Expense)
Transaction: Company pays $2,400 for a 12-month insurance policy upfront.
Account
Debit
Credit
Prepaid Insurance
$2,400
Cash
$2,400
(To record 12-month insurance prepayment)
Why? Prepaid Insurance is an asset (future economic benefit) → debit. Cash decreases → credit. Each month, $200 is expensed from Prepaid Insurance to Insurance Expense.
15
Amortise Prepaid Insurance (Monthly)
Transaction: Record one month of insurance expense from the prepaid policy above.
Account
Debit
Credit
Insurance Expense
$200
Prepaid Insurance
$200
(To record insurance expense for the month)
Why? Insurance Expense increases as the coverage period elapses → debit. Prepaid Insurance (asset) is consumed → credit.
16
Compound Entry — Purchase Assets, Part Cash & Part Credit
Transaction: Company buys $20,000 of machinery: pays $8,000 cash and puts $12,000 on account.
Account
Debit
Credit
Machinery
$20,000
Cash
$8,000
Accounts Payable
$12,000
(To record purchase of machinery — cash and credit)
Why? This is a compound entry. Machinery (asset) → debit $20,000. Two credits: Cash decreases $8,000 and a new liability (Accounts Payable) of $12,000 is created. Total debits $20,000 = Total credits $20,000. ✓
17
Sales Return (Customer Returns Goods)
Transaction: A customer returns $1,500 of merchandise purchased on account.
Account
Debit
Credit
Sales Returns & Allowances
$1,500
Accounts Receivable
$1,500
(To record customer merchandise return)
Why? Sales Returns is a contra-revenue account that reduces net sales → debit. Accounts Receivable decreases because the customer no longer owes the returned amount → credit.
18
Bad Debt Write-Off (Direct Method)
Transaction: Company determines that $750 owed by a specific client is uncollectable and writes it off.
Account
Debit
Credit
Bad Debt Expense
$750
Accounts Receivable
$750
(To write off uncollectable receivable)
Why? Bad Debt Expense (expense that reduces equity) increases → debit. Accounts Receivable (asset) decreases because it is no longer expected to be collected → credit.
19
Take Out a Bank Loan
Transaction: Company borrows $25,000 from the bank at 6% annual interest.
Account
Debit
Credit
Cash
$25,000
Notes Payable
$25,000
(To record bank loan proceeds)
Why? Cash (asset) increases → debit. Notes Payable (long-term liability) increases — the company now has a legal obligation to repay → credit. Assets ↑ = Liabilities ↑. ✓
20
Pay Loan Interest
Transaction: Company pays $125 in monthly interest on the bank loan above.
Account
Debit
Credit
Interest Expense
$125
Cash
$125
(To record monthly loan interest payment)
Why? Interest Expense reduces equity → debit. Cash decreases → credit. Note: if interest is owed but not yet paid, credit Interest Payable (liability) instead of Cash.
Real World
Journal Entries in Real Business Scenarios
Theory sticks better with stories. Here are four real-world accounting situations and the lessons they teach.
☕ Startup / Retail
The Coffee Shop That Launched with One Entry
Maya opened "The Daily Brew" using $40,000 savings and a $30,000 bank loan. Her very first journal entry debited Cash $70,000, credited Owner's Capital $40,000, and credited Loan Payable $30,000 — capturing her entire funding structure in a single compound entry.
💡 A compound journal entry can capture complex financing arrangements. Total debits must always equal total credits.
🛒 E-Commerce
The Growing Retailer Who Was Always "Short on Cash"
TechStore Inc. recorded $500,000 in monthly on-account sales (debit Accounts Receivable, credit Revenue) but wondered why cash never grew. Once they distinguished revenue recognition from cash collection and tracked outstanding receivables, they improved collections by 40% in three months.
💡 Revenue ≠ cash. Accrual accounting records earnings when they're made, not when cash arrives. Monitor your receivables closely.
🏭 Manufacturing
The "Error" That Was Actually Correct
A manufacturing accountant was puzzled that equipment's book value never seemed to fall. She soon learned that Accumulated Depreciation, a contra-asset, shows on the balance sheet as an offset to the gross asset cost — not as a separate liability. The equipment's net value was declining every month; it just wasn't obvious until she understood contra-accounts.
💡 Contra-asset accounts reduce reported asset value — they don't create liabilities. Always review net asset value, not gross.
💼 Consulting
Why Profit and Cash Don't Always Agree
A consultant showed $100,000 profit for the quarter but her bank account grew by only $40,000. The gap: $60,000 in accounts receivable (revenue recognised but unpaid) and $20,000 in accrued expenses (costs recorded but not yet paid). Understanding this distinction changed how she managed her business.
💡 A profitable business can still face a cash crunch. Watch both your income statement and cash flow statement.
Visual Learning
T-Account & Entry Flow Diagrams
T-accounts are the classic tool for visualising how individual account balances change with each debit and credit.
The 5-Step Journal Entry Process
T-Account Example: First Month of Business
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FAQ
Frequently Asked Questions
Answers to the most common questions students and professionals ask about journal entries.
The double-entry system is anchored to the accounting equation (Assets = Liabilities + Equity). Every transaction affects at least two accounts so the equation always stays balanced. If debits don't equal credits, an error exists — the trial balance will catch it.
Revenue is income earned from selling goods or services. Accounts Receivable is a current asset — the amount customers owe but haven't yet paid. Under accrual accounting, you record both in the same entry when services are completed: debit Accounts Receivable, credit Service Revenue.
Identify the accounts involved, determine their type (Asset, Liability, Equity, Revenue, Expense), then apply the rules: Assets and Expenses increase with debits; Liabilities, Equity, and Revenue increase with credits. Confirm total debits equal total credits before posting.
A contra-asset has a normal credit balance and reduces the value of its paired asset. The most common example is Accumulated Depreciation, which offsets the gross cost of fixed assets so the balance sheet shows net book value. Contra-assets are not liabilities.
Under accrual accounting (the standard for most businesses), record transactions when they occur, not when cash moves. Record expenses when incurred; record revenue when earned. This gives a more accurate picture of financial performance across periods.
A compound journal entry involves more than two accounts. For example, buying equipment with part cash and part credit creates three lines: debit Equipment, credit Cash, credit Accounts Payable. The fundamental rule still applies — total debits must equal total credits.
The journal (book of original entry) records transactions in date order. The ledger (book of accounts) organises those entries by account, showing a running balance for each. Information flows from journal → ledger → trial balance → financial statements.
There's an error somewhere. Common causes: recording a transaction in only one account, reversing debit and credit, entering the wrong amount, or posting incorrectly to the ledger. Check each step systematically until total debits equal total credits.
Drawings reduce both assets (cash leaves) and equity. They are not an expense and do not appear on the income statement. Instead, they reduce Owner's Capital on the Statement of Owner's Equity. Debit Drawings (equity reduction), credit Cash (asset reduction).
Unearned revenue (also called deferred revenue) is cash received before services are delivered. It's a liability because the business has an obligation to perform. Once the service is delivered, debit Unearned Revenue and credit Service Revenue to recognise the income.
