Learn how journal entries work in double-entry bookkeeping, with clear explanations and practical examples.
What Is a Journal Entry?
A journal entry is a record of a financial transaction using the double-entry bookkeeping system.
Each journal entry records which accounts are debited and credited, the amounts involved, and usually a date and description of the transaction.
How Does a Journal Entry Work?
A journal entry normally includes:
- The transaction date
- The accounts affected
- Debit and credit amounts
- A short explanation or reference
Remember that debits and credits do not automatically mean money coming in or going out. Their effect depends on the type of account.
Practical Journal Entry Examples
Example 1: Purchasing Office Equipment
A business buys office equipment for £500 and pays immediately from its bank account. Ignore VAT for this example.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Office Equipment | 500 | – |
| Bank | – | 500 |
| Total | 500 | 500 |
Office Equipment is debited because the business has acquired an asset. Bank is credited because the bank balance has decreased.
Example 2: Receiving a Customer Payment
A customer pays £300 into the business bank account to settle an existing sales invoice.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Bank | 300 | – |
| Trade Receivables | – | 300 |
| Total | 300 | 300 |
Bank is debited because the bank balance increases. Trade Receivables is credited because the customer now owes the business less money.
Example 3: Recording an Accrued Expense
At the end of the month, the business owes £200 for electricity used but not yet invoiced. Ignore VAT for this example.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Electricity Expense | 200 | – |
| Accrued Expenses | – | 200 |
| Total | 200 | 200 |
Electricity Expense is debited to recognise the cost in the correct accounting period. Accrued Expenses is credited to recognise the outstanding liability.
Common Journal Entry Mistakes
- Recording a debit without a matching credit
- Using the wrong account
- Confusing expenses with assets
- Recording income twice when a customer pays an invoice
- Forgetting to include VAT where applicable
- Posting adjustments in the wrong accounting period
Journal Entries in Xero and QuickBooks
Accounting software such as Xero and QuickBooks automatically creates double-entry records for many everyday transactions, including invoices, bills and payments.
Manual journals are generally used for accounting adjustments that are not recorded through the normal transaction workflows.
Understanding journal entries helps you identify posting errors and understand how transactions affect the financial statements.
Test Your Knowledge
A business pays £150 from its bank account for office stationery used immediately. Ignore VAT.
Which account is debited and which is credited?
Click to reveal the answer
Debit: Stationery Expense — £150
Credit: Bank — £150
Stationery Expense increases, while the bank balance decreases. Total debits equal total credits.