What is a Journal Entry?

A ‘journal entry’ is a record of a financial transaction or event in accounting. It is the fundamental way accountants and bookkeepers track the flow of money and financial activities within a business or organization. Journal entries are typically the first step in the accounting process and serve as the basis for creating financial statements and reports.

Here’s how a journal entry is typically structured:

– Date: The date on which the financial transaction or event occurred.

– Account: The name of the specific account affected by the transaction. Accounts are typically categorised as assets, liabilities, equity, revenue, or expenses.

– Debit: The amount entered on the left side of the journal entry. Debits increase asset accounts, decrease liability accounts, and are used to record expenses.

– Credit: The amount entered on the right side of the journal entry. Credits increase liability accounts, equity accounts, and revenue accounts.

– Description or Memo: A brief description or explanation of the transaction, providing context for the entry.

Journal entries follow the double-entry accounting system, which means that every transaction affects at least two accounts, with one account debited and the other credited. The total debits must always equal the total credits to maintain the balance of the accounting equation:

Assets = Liabilities + Equity

Journal entries are essential for maintaining accurate financial records, tracking financial transactions, and preparing financial statements like the income statement and balance sheet. These entries serve as a chronological record of an organisation’s financial activities and are critical for financial reporting, analysis, and decision-making.