Journal entry
A record of a transaction in the accounting system, listing the accounts affected and the debit and credit amounts for each.
In short
- Every journal entry must balance: total debits equal total credits.
- Routine transactions post automatically from subledgers; manual entries handle accruals, adjustments and corrections.
- Manual entries carry the most risk and usually need review and support.
A journal entry is the basic unit of bookkeeping. It records one transaction or adjustment with a date, a description, the accounts affected, and a debit or credit amount for each. When posted, it updates the balances in the general ledger.
Debits and credits
Under double entry, each entry has at least one debit and one credit, and the totals must match. Debits increase assets and expenses and decrease liabilities, equity and revenue; credits do the opposite. Buying $800 of supplies on credit is a debit to Supplies expense and a credit to Accounts payable.
Automatic and manual entries
Most entries are created automatically: posting a supplier invoice, a customer invoice or a payroll run generates the entry behind the scenes. Manual journal entries are written by accountants for everything else: accruals, prepaid amortization, depreciation, reclassifications, corrections and period-end adjustments.
Controlling manual entries
Manual entries can move any amount between any accounts. They are where errors and fraud are most likely. Good practice is to require a clear description and supporting documents for each, to have them reviewed by someone other than the preparer, and to watch for unusual entries such as large round amounts, entries posted after the close or entries to rarely used accounts.
Worked example
Recording a prepaid insurance policy
On January 1, a business pays $12,000 for a year of insurance. Entry: debit Prepaid insurance $12,000, credit Bank $12,000. At the end of each month, an adjusting entry moves one month to expense: debit Insurance expense $1,000, credit Prepaid insurance $1,000.