A journal entry is the formal recording of a transaction on a company’s books. The name comes from accountants and bookkeepers historically recording transactions in a paper journal, which would then be posted to a general ledger. While today’s business owners and accounting professionals record their transactions electronically rather than in books and journals, terms like “journal entry” and even “bookkeeping” reflect the profession’s paper-based past. Journal Entry Basics While some companies may have more sophisticated protocols for recording journal entries—requiring robust documentation and authorization every time a journal entry is made—every journal entry has at least the following three elements: The date of the journal entry The debit side of the journal entry The credit side of the journal entry The first element is self-explanatory for most small businesses—it’s the date that the transaction being recorded by the journal entry took place. The second element—the debit side—is used to record one, some, or all of the following: An increase to an asset account A decrease to a contra-asset account A decrease to a liability account An increase to a contra-liability account A decrease to a revenue account An increase to an expense account A reduction in owner’s equity The third element—the credit side—is used to record one, some, or all of the following: A decrease to an asset account An increase to a contra-asset account An increase to a liability account A decrease to a contra-liability account An increase to a revenue account A decrease to an expense account An increase in owner’s equity The sum of the amounts on the debit side must equal the sum of the amounts on the credit side. This is a fundamental principle of double-entry accounting. How To Record A Journal Entry Let’s examine how to record a journal entry for a basic transaction that happens on a routine basis within many small businesses. For example, let’s say you send a $1,000 invoice on July 1 for services your business completed for a client. Here are the steps you would take to record this journal entry. Step 1: Isolate the Transaction Ideally, a journal entry would record just one transaction. Although a single journal entry could technically record multiple transactions, such journal entries can quickly become confusing and overly complex. So ideally, you would isolate the one transaction that you are recording a journal entry for. In our example, the transaction is sending an invoice to a customer. Even if other transactions occurred on the same day that you sent the invoice—such as, perhaps, the same customer paying you for a previous invoice, your company receiving a loan, or you purchasing additional supplies for your business—these other transactions would be recorded in their own journal entries. The journal entry you are recording now would only be to record you sending an invoice to your customer. Step 2: Determine Which Financial Accounts the Transaction Affects In this example, the two accounts affected by the transaction are: revenue because you earned income for performing services and accounts receivable because your customer will pay you for these services at some point in the future Note: If you keep your books on a cash basis, you would not record revenue and would in fact make no journal entry, until you are actually paid by your customer. Of course, a journal entry for a single transaction can affect more than two accounts. For example, if you performed services for a customer, and they paid you some money up front for your services while you invoiced for the remainder, the journal entry would affect three accounts: revenue, cash, and accounts receivable. Step 3: Determine the Amount Increased or Decreased for Each Account In our example, you earned $1,000 in revenue, and your customer owes you $1,000. In this case, both revenue and accounts receivable would increase by $1,000. Step 4: Determine Your Debits and Credits Now that you know that you have to increase revenue by $1,000 and increase accounts receivable—which is an asset account—by the same, you need to determine which account gets debited and which account gets credited. If you’re having trouble recalling the debit vs. credit rules, you could refer to the bulleted lists under “Journal Entry Basics” above and note that an increase to a revenue account is booked as a credit and an increase to an assets account is booked as a debit. So now you know that you need to credit revenue for $1,000 and debit accounts receivable for $1,000. Step 5: Record the Journal Entry on the Appropriate Date In this case, the date of the journal entry would be the date of the invoice, July 1. Now, you have the information necessary to make your journal entry: the date, the debit side, and the credit side. So your journal entry would be recorded like this: DateAccountDebitCreditJuly 1, 20__Accounts Receivable$1,000Revenue$1,000Total$1,000$1,000 The total of your debits equals the total of your credits, so you know that your journal entry balances. Of course, if you’re using professional accounting software, it will record the majority of your journal entries for you, as long as you correctly classify your transactions within the software. That said, understanding how journal entries work will help you review your books in your software, as well as record any additional journal entries that cannot be automated by your software.