Journal Entry
A journal entry is a record of a business transaction in an accounting journal. It includes the date of the transaction, the debit and credit amounts, the titles of the accounts affected by the transaction, and a brief description of the transaction.
Each journal entry is made up of at least one debit and one credit, and the total amount debited must always equal the total amount credited (due to the double-entry bookkeeping system used in accounting). This ensures that the accounting equation (Assets = Liabilities + Equity) remains in balance.
There are two types of journal entries:
- Simple Journal Entry: A simple journal entry involves only two accounts: one account is debited, and one account is credited.For example, a company pays rent of $500 in cash. The journal entry for this transaction would debit Rent Expense for $500 and credit Cash for $500.
- Compound (or Complex) Journal Entry: A compound journal entry involves more than two accounts. There can be one debit and multiple credits, one credit and multiple debits, or multiple debits and credits.For example, a company sells goods for $1,000 and the cost of the goods sold is $600. The journal entry for this transaction would debit Accounts Receivable for $1,000 (assuming the sale is on credit), credit Sales Revenue for $1,000, debit Cost of Goods Sold for $600, and credit Inventory for $600.
Journal entries provide a detailed record of all business transactions, making it possible to review, analyze, and audit the financial activities of a company. After a journal entry is recorded, the amounts are then posted to the respective accounts in the ledger.
Example of a Journal Entry
Simple Journal Entry
Let’s start with an example of a simple journal entry. Suppose a company, GoodBooks LLC, paid $2,000 on March 1, 2023, for rent of their office space. The journal entry for this transaction would look like this:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| March 1, 2023 | Rent Expense | $2,000 | |
| Cash | $2,000 |
In this transaction, Rent Expense is debited (increased) by $2,000 and Cash is credited (decreased) by $2,000.
Compound Journal Entry
Next, an example of a compound journal entry. Suppose GoodBooks LLC sold books worth $5,000 on credit on March 2, 2023, and the cost of these books to GoodBooks LLC was $3,000. The journal entry for this transaction would look like this:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| March 2, 2023 | Accounts Receivable | $5,000 | |
| Sales Revenue | $5,000 | ||
| Cost of Goods Sold | $3,000 | ||
| Inventory | $3,000 |
In this transaction, Accounts Receivable is debited (increased) by $5,000, Sales Revenue is credited (increased) by $5,000, Cost of Goods Sold is debited (increased) by $3,000, and Inventory is credited (decreased) by $3,000.
Note that the total debits equal the total credits in both cases, which maintains the balance of the accounting equation.
