Journal entries are the backbone of bookkeeping, providing a detailed record of business transactions. While you can manage journal entries independently for your small business, hiring a bookkeeper can streamline the process, saving you valuable time and effort.
As a small business owner, you often take on multiple roles, including that of a bookkeeper or accountant. Recording journal entries is a fundamental part of this role, as they document all your business transactions.
These entries form the first step in the accounting cycle, representing the financial activities that affect your business. Understanding how to create proper journal entries is crucial because they follow the double-entry accounting method, where each entry involves both a debit and a credit.
Failing to understand and create journal entries can potentially skew your financial reports and affect your business decisions, resulting in unnecessary confusion and chaos.
Did you know?
The term “journal” in “journal entries” originates from the Latin word “diurnalis,” meaning daily. Initially, journals were used to record daily transactions, hence the name. Today, despite advancements in accounting software, the concept of journal entries remains fundamental in accurately tracking a business’s financial activities.
Meet Sarah, for instance. She’s a small business owner running a cozy café in Miami, passionate about serving the best drip coffee and specialty sandwiches to her customers. But when it comes to managing the financial side of her business, Sarah often finds herself feeling overwhelmed.
One day, while reviewing her books at the end of the month, Sarah spots a discrepancy in her records. Something seems to be missing in the expenses, something doesn’t seem to be adding up… but she can’t put a finger on it.
Thankfully, she uses one account to pay for everything she purchases for the business, so she decides to check her bank statement for the month. And there it is! A large case of vanilla-flavored sugar.
She recalls now: she was expecting to receive her vanilla sugar order, but it didn’t arrive when it was supposed to due to the stormy weather. When it did arrive, the café was bustling with customers, and she jotted it down on the back of her personal diary instead of in the journal using the double-entry accounting method. As a result, her books didn’t balance.
If you, too, are DIYing your bookkeeping, you probably relate to Sarah’s struggles. But whether or not you hire a bookkeeper, it’s important to understand and speak ‘the language of business’ (accounting) so you can monitor your financial operations.
What is a journal entry?
Journal entries are records of all business transactions. They form the first step in the accounting cycle and represent the financial activities that affect your business.
They include crucial details like the date, amounts credited and debited, a brief description, and the accounts impacted (revenue, expenses, assets, liabilities, and equity).
This practice is fundamental to the double-entry accounting method, which ensures the accounting equation (Assets = Liabilities + Equity) remains balanced and accurate.
Transactions recorded in the general journal are eventually posted to the general ledger.
Purpose of journal entries
Think of journal entries as the backbone of your financial records. This information is not just for you; it’s also crucial for audits, taxes, and making smart business decisions.
By keeping detailed journal entries, you can easily monitor your expenses, see how your business is performing financially, and spot areas where you can improve. So, while they might seem like just another task, journal entries are actually key to keeping your business’s financial health in check.
General journal, general ledger, and their relationship with journal entries
Each journal entry impacts at least two accounts, ensuring that debits and credits balance, adhering to the double-entry accounting principle. For instance, a sale recorded in the general journal will debit accounts receivable and credit sales revenue in the general ledger, ensuring accurate financial tracking.
General journal: recording transactions
The general journal is where all financial transactions are initially recorded, including the date, description, and amounts debited and credited. This chronological record is foundational for financial reporting and analysis.
General ledger: organizing accounts
The general ledger is a master repository of all individual accounts used by a business, categorized by transaction type, such as assets, liabilities, equity, revenue, and expenses.
How to prepare journal entries
Let’s revisit Sarah’s problem from earlier and apply what we just learned to ensure her books are balanced.
Sarah’s journal entry:
Sarah’s café needed a big case of vanilla-flavored sugar, which she ordered and paid for using her business bank account. However, due to the chaos of a busy day, that transaction wasn’t correctly accounted for in her logs.
Here’s how Sarah’s should have done the journal entry:
- Date the transaction: Record the date when the purchase was made.
- Debit the Supplies Account: Increase the Supplies account to reflect the purchase of the sugar.
- Credit the Cash/Bank account: Decrease the Cash/Bank account to reflect the payment made for the sugar.
Here’s how the journal entry should have looked:
- Date: 2024-03-27
- Debit: Supplies account $120 (for the sugar)
- Credit: Cash/Bank account $120 (for the payment)
Let’s walk through the process of preparing the journal entry for this transaction.
Step 1: Pinpoint the accounts that will be affected
Preparing journal entries for your small business begins with a fundamental task: pinpointing which transactions require recording. If you’re using accounting software, a significant portion of this task is automated, leaving you to handle month-end adjustments, such as bank account reconciliations, and accounting for accrued expenses like payroll.
Before creating and recording a journal entry, it’s vital to determine which accounts in your general ledger will be impacted. In the case of Sarah’s purchase of vanilla-flavored sugar, the affected accounts would likely include her pantry or expense account and her cash account.
How to identify the right accounts?
Organize your transactions by grouping bank deposits, expenses, and sales entries according to their types. This approach simplifies the journal entry process and makes it more efficient.
Organize your transactions: Grouping bank deposits, expenses, and sales entries by transaction type streamlines the journal entry process.
Exercise sound judgment: Although it may seem complex initially, with practice, you’ll gain a better understanding of which accounts are suitable for your transactions.
Step 2: Identify your account types
When Sarah spends $120 on the sugar for her pantry, she’ll record it as an expense in her pantry or expense account. At the same time, she’ll reduce the balance in her cash account.
To increase an expense account, you’ll debit it, while to decrease your cash account – which is an asset – you’ll credit it.
Guidelines to identify account types
1. Keep in mind the various account types
There are five main types: assets, liabilities, expenses, revenues, and capital/owner equity accounts. Each accounting journal entry should fit into one of these categories. For example, the pantry account is categorized as an expense, while the cash account is an asset.
2. Apply standard accounting principles to determine debited and credited accounts
In the case of Sarah’s sugar transaction, she’ll increase her expenses by debiting the pantry or expense account since she’s buying an item for the pantry. At the same time, she’ll decrease her assets by crediting the cash account, as she’s using cash for the purchase.
| Account Type | Debit | Credit |
| Assets: Resources owned by the business with economic value and expected to provide future benefits. Examples include cash, accounts receivable, inventory, and property. | Increase | Decrease |
| Liabilities: Obligations or debts owed by the business to external parties. They represent amounts owed to creditors or other entities and may include loans, accounts payable, and accrued expenses. | Decrease | Increase |
| Expenses: Costs incurred by the business in its day-to-day operations to generate revenue. They represent the outflow of resources or the consumption of assets, such as wages, utilities, rent, and supplies. | Increase | Decrease |
| Revenues: Income earned by the business from its primary activities, such as sales of goods or services. They represent inflows of resources or increases in assets resulting from business operations. | Decrease | Increase |
| Capital/Owner Equity: The owner’s investment in the business and the retained earnings generated by the business over time. It reflects the ownership interest in the assets of the business after deducting liabilities. | Decrease | Increase |
Step 3: Create your journal entry
Now that you’ve pinpointed the relevant accounts and understood their types, it’s time to create your journal entry.
Here are some tips to keep in mind:
- Mention the correct date: Begin by dating your journal entry to ensure it’s recorded in the correct accounting period.
- Specify account details: Clearly mention the account name along with its corresponding General Ledger (G/L) account number for accuracy.
Debit and credit allocation: In the scenario of purchasing the vanilla-flavored sugar for her pantry, Sarah should debit (increase) her pantry or expense account, as it represents the cost incurred for day-to-day operations. Simultaneously, she should credit (decrease) her cash account because she is spending money. This ensures balance and accuracy in her financial records.
| Journal Entry No. | Date | Account | Debit | Credit |
| 1 | 2024-03-27 | Cafe pantry (expense) | $120 | |
| 1 | 2024-03-27 | Cash (asset) |
$120 |
In this journal entry
- The Date column represents the date of the transaction.
- The Cafe Pantry account is debited with $120 because it represents an increase in expenses due to the sugar purchase.
- The Cash Account is credited with $120 because it represents a decrease in cash assets as a result of spending on the sugar.
Take note that we’ve included the date for both entries. This marks it as our first journal entry. After each account name, we’ve added the account number. Just remember, we’ve increased the cafe pantry account and decreased the cash account.
The best software for recording journal entries
When it comes to dealing with numbers, sticking to this traditional pen-and-paper approach can lead to messy mistakes and unnecessary hassle. That’s where technology steps in, offering a quicker and more accurate solution.
Accounting software is a fantastic tool for simplifying the journal entry process. Unlike the manual task of writing out entries by hand, accounting software automates the process, handling routine transactions like accounts payable and accounting calculations with ease. This leaves you with just the occasional need to make adjustments, such as at month-end.
What’s more, accounting software takes care of closing entries for you, automatically calculating and posting them. This ensures that your opening balances are spot on for the start of the new fiscal year.
With these advantages in mind, here are the top four accounting software, as recommended by the experts at CoCountant.
1. QuickBooks
QuickBooks[1] is one of the most popular accounting software choices for small business owners due to its user-friendly interface and comprehensive features.
It offers efficient solutions for recording journal entries and streamlining various accounting tasks, making it an ideal choice for entrepreneurs looking to manage their finances effectively.
QuickBooks provides customizable templates for journal entries, making the process quick and straightforward. Additionally, its integration with bank accounts and other financial institutions allows for seamless transaction recording and reconciliation.
However, some users may find QuickBooks lacking in more advanced accounting functionalities, and the cost of subscription plans may be prohibitive for some small businesses.
2. Sage
Sage[2] is another top name that takes the lead, known for its robust features and scalability. It offers small business owners a range of tools for recording journal entries and managing other accounting tasks efficiently.
Sage’s intuitive interface and customizable reporting options make it a favorite among users seeking comprehensive financial management solutions. Moreover, Sage’s cloud-based platform ensures accessibility from anywhere, providing flexibility for business owners on the go.
However, some users may find Sage’s interface less intuitive compared to other software options, and the learning curve for mastering its features may be steeper.
3. Netsuite
Netsuite[3] is a comprehensive cloud-based ERP (Enterprise Resource Planning) system that offers small business owners a complete suite of accounting and business management tools.
Its robust features include advanced capabilities for recording journal entries, managing finances, inventory, and customer relations. Netsuite’s integrated platform provides real-time visibility into various aspects of business operations, allowing for informed decision-making.
However, Netsuite’s pricing structure may be prohibitive for small businesses with limited budgets, and its complex implementation process may require professional assistance.
4. Xero
Xero[4] is known for its user-friendly interface and affordability, making it a popular choice for small business owners worldwide. It offers a range of features for recording journal entries and managing accounting tasks efficiently.
Xero’s intuitive design and automation capabilities simplify the accounting process, allowing users to save time and reduce errors. Additionally, Xero’s extensive marketplace of third-party integrations provides flexibility for customizing the software to meet specific business needs.
However, some users may find Xero’s reporting capabilities lacking compared to more robust solutions, and customer support options may be limited for certain subscription tiers.
The bottom line
As Sarah works to resolve the discrepancy, she realizes it’s high time she prioritized her bookkeeping and learned the correct methods for recording entries. Of course, this wouldn’t have happened if she had outsourced bookkeeping in the first place, but her small business isn’t at the stage where it can afford a full-time bookkeeper—a part-time one who charges hourly rates is also out of the question due to the unpredictability of rates.
Psst! She obviously isn’t aware of CoCountant at this point, of course, otherwise she’d have easily hired a virtual bookkeeper for a low monthly price, preventing similar (and much bigger) mistakes in the future, ensuring her numbers always add up.
Don’t want to risk messing up your books like Sarah?
FAQs
What are general journal entries for a business?
General journal entries are records of financial transactions made by a business. They include the date, description, and amounts debited and credited for each transaction. These entries serve as the initial step in the accounting process before being transferred to ledger accounts.
What is a journal entry in accounting?
A journal entry in accounting is a detailed record of a financial transaction. It includes the date, description, and amounts debited and credited for each transaction. Journal entries are used to maintain accurate financial records and prepare financial statements.
What is a journal format?
The journal format typically includes columns for the date of the transaction, a description of the transaction, the account(s) debited, the account(s) credited, and the respective amounts. This format provides a structured way to record financial transactions in chronological order.
What is the rule of journal entry?
The rule of journal entry follows the double-entry accounting system, which states that for every transaction, there must be at least two accounts affected, with one account debited and another credited. The total debits must always equal the total credits to maintain the balance of the accounting equation (Assets = Liabilities + Equity).
