What is a Journal Entry?
A Journal Entry records a single financial transaction by specifying which accounts are debited and credited. Every transaction in your accounting system is represented as one or more journal entries.
Why Journal Entries Matter
Journal entries are the atomic unit of accounting. Understanding them helps you troubleshoot issues, make adjustments, and communicate with accountants. When something looks wrong in your financials, tracing back to the journal entries reveals what happened.
For founders, you rarely create journal entries manually. Your accounting software generates them from transactions you enter. But knowing the concept helps you understand what is happening behind the scenes.
Adjusting Journal Entries
At month-end, accountants often create adjusting journal entries to correct errors, recognize revenue, or accrue expenses. These are manual entries to align the books with economic reality.
Formula
Structure of a Journal Entry:
Date | Account | Debit | Credit | Description
Debits must equal Credits for each entry
Example
Recording a $5,000 Facebook ad campaign paid by credit card:
- Date: January 15
- Debit: Marketing Expense - Paid Ads: $5,000
- Credit: Credit Card Payable: $5,000
- Description: Facebook Q1 campaign payment
The expense is recorded immediately. The liability (credit card payable) will be cleared when you pay the card.