An accounting entry is a record of a financial transaction in an organization’s accounting system. It represents the movement of financial resources, such as assets, liabilities, equity, revenues, or expenses, as a result of an economic event. Accounting entries are the building blocks of the double-entry bookkeeping system, which is the foundation of modern accounting.
In the double-entry bookkeeping system, every accounting entry affects at least two accounts: one account is debited (increased), and another account is credited (decreased). This system ensures that the accounting equation (Assets = Liabilities + Equity) remains in balance for every transaction. Each accounting entry must have a corresponding and equal debit and credit to maintain the balance of the accounting equation.
Accounting entries are typically recorded in the general journal or subsidiary journals (such as sales journal, purchase journal, or cash receipts journal) and then posted to the general ledger. The general ledger contains all the accounts of an organization, and its balances represent the financial position of the entity at a given point in time.
Here’s a simple example to illustrate an accounting entry:
Suppose a business purchases office supplies worth $500 on credit from a supplier. In this case, the accounting entry would involve two accounts:
- Debit (increase) the “Office Supplies” expense account by $500, which is an expense account that represents the cost of office supplies consumed during the period.
- Credit (increase) the “Accounts Payable” account by $500, which is a liability account representing the amount owed to the supplier for the office supplies.
By recording this accounting entry, the business captures the financial transaction, reflecting the purchase of office supplies on credit and the resulting increase in both expenses and liabilities. This entry helps maintain the accuracy and completeness of the organization’s financial records and ensures the accounting equation remains in balance.
Example of an Accounting Entry
Let’s consider a fictional example of a small business called “CleanSweep Services” to illustrate an accounting entry.
CleanSweep Services is a company that provides professional cleaning services to residential and commercial clients. The company purchases cleaning supplies worth $1,000 on credit from a vendor called “Sparkle Supplies.”
To record this transaction in CleanSweep Services’ accounting system, the following double-entry accounting entry would be made:
- Debit (increase) the “Cleaning Supplies” expense account by $1,000: This records the cost of the cleaning supplies as an expense, which will be used in the course of providing cleaning services to clients.
- Credit (increase) the “Accounts Payable” account by $1,000: This records the liability to the vendor, Sparkle Supplies, for the credit purchase of the cleaning supplies.
The accounting entry would look like this in the general journal:
By recording this accounting entry, CleanSweep Services captures the financial transaction, reflecting the purchase of cleaning supplies on credit and the resulting increase in both expenses and liabilities. This entry helps maintain the accuracy and completeness of the company’s financial records and ensures the accounting equation remains in balance.