What are journal entries?

What are journal entries

Understanding journal entries can be confusing. Your accountant or bookkeeper has probably let you know that these are essential for your accounting. Why do you need journal entries? What are the components of a journal entry? When would you use a journal entry? We will discuss these questions and provide examples of when journal entries are necessary for your books. 

Why do you need journal entries?

Journal entries are used to record activity that cannot be posted with a typical transaction such as an invoice or bill. The majority of these entries involve non-cash transactions. Some examples of non-cash transactions include depreciation, prepaid expenses, and deferred income tax. 

What are the components of a journal entry?

The image below shows an example of a journal entry made to adjust depreciation for a tow truck. 

What are journal entries

  1. Account area: The account area is used to record the account to be adjusted. Typically, the account that is to be debited will be listed first, and the account to be credited will be listed last. 
  2. Debits/Credits: The debit/credit sections are used to determine if amounts are moving into or out of an account. Depending on the type of account, a debit or credit will increase or decrease the balance in an account. 
  3. Amount: The amount field is used to enter the amount of the adjustment being recorded.
  4. Description: The description (or narration) is used to enter detail about the journal entry’s purpose. 

It is important to note that in order for a journal entry to be recorded, the total debit and total credit amounts need to be equal. 

When would you use a journal entry?

Journal entries are used in specific instances. Some examples of these instances include:

  • To record depreciation of a fixed asset for a period
  • To allocate an expense over a period of time (ex: prepaid insurance or prepaid rent)
  • To enter adjustments from your tax accountant 
  • To correct errors from a closed period

The most common journal entries you will see are entries used for tax purposes. To learn more about these types of entries, check out our article about adjusting entries.