Top 5 examples of Journal Entry [2024 Guide]

What are Journal Entries?

Let's dive into the accounting world with a closer look at journal entries. These are the building blocks of financial tracking in business, helping companies keep a clear record of their daily transactions. 

The Journal, also known as the Book of Primary Entry, is where every transaction first gets recorded in a business. From there, the details in these simple entries are moved to other accounting books for further processing.

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Features of Journal Entries

Recording transactions in order: Journal entries are where every business transaction is first recorded, providing a straightforward method to tackle complex transactions.

The bedrock of accounting: Journals serve as the foundation for all the financial statements a business prepares, as all data from the journal is eventually transferred to other accounting books.

Compact and complete: Each journal entry contains just enough information to understand a financial transaction without any unnecessary details.

Consistent financial tracking: Following the double-entry system, journal entries ensure that all financial records are consistent and uniform.

Related reading: Form 7004 extension filing.

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How Does a Journal Entry Work?

Journal entries are based on the principle of double-entry accounting, which means that every transaction has two sides. Both sides are equally crucial and need to be recorded to keep things balanced.

Let's use a practical example: Imagine the owner of Inkle Books buys a software subscription worth $100. This purchase affects two accounts: he lowers his cash by $100, but his software expenses increase by the same amount.

In the language of accounting, this action is recorded as a debit and a credit. Anything added to the business, like the software purchase, is a debit. Anything taken out, like the cash, is a credit.

Thinking of debits and credits might be easier if you picture them as buckets. When Mr. Inkle buys the software subscription, he's moving $100 from his "cash bucket" to his "Software Expenses." In accounting terms, we call these buckets "accounts," which is how the double-entry system works.

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Example of a Journal Entry Format

Let's look at how Mr. Inkle Books records the purchase of software in his journal:

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This table shows that Mr. Inkle adds $100 to the Software Expense (as a debit) to increase his expenses and simultaneously deducts $100 from his Cash account (as a credit) to reflect the money spent.

Here are a couple of key rules to keep in mind for journal entries:

• Every transaction needs to involve at least two accounts.
• The amounts for debits and credits in a transaction must always match up, ensuring everything is balanced.

Types of Journal Entries

Simple Journal Entry

This type of entry involves just two accounts. You saw an example of this earlier with the transaction for buying paper.

Compound Journal Entry

This involves more than two accounts. It's used for more complex transactions. Here's an example to illustrate:

Suppose Inkle Tax purchases equipment worth $50,000 on credit and pays $10,000 in down payment through cash. The entry would look like this:

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This compound entry records multiple aspects of a single transaction—both the purchase and the associated costs, showing how cash and credit are used for payment.

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Examples of Journal Entries

Let's take a look at how you might record some everyday transactions in your business's journal:

Selling Goods or Services for Cash

• Cash Account: When you receive cash from a sale, you debit it to add it to your cash account.
• Revenue Account: You will have to record a corresponding revenue account.

Here's a table to illustrate the journal entry for selling goods or services for cash:

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In this entry, the "Amount" would be the cash value of the goods/services sold. You'd record the cash received by debiting the cash account and record a corresponding revenue account.

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Journal Entry for Rent Payments

When your business pays rent for the use of any building with cash.

Rental Expense Account: Since you’re gaining the use of a building, debit this account to increase the rental expense.

Payment Method:

• If you’ve paid with cash, credit the cash account to account for the money spent.

This entry captures the essence of the rental transaction, reflecting the increase in rental expense and cash outflow.

Here's a table to illustrate the journal entry for rental expenses:

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In this table:

• The "Amount" represents the cost associated with the rental expense.
• The debit entry for the rental expense shows that particular expense increase in your business.
• The credit entry shows the cash going out of the business operations.

Also read: Form 1120

Adjusting Journal Entry

Adjusting journal entries is another essential type of journal entry. To explain how these work, let's revisit Mr. Inkle's earlier transaction, where he bought equipment using both cash and credit.

Note: In addition to the above, we are also going to assume that the equipment will be used for five years. We will record an initial depreciation expense by apportioning one year of equipment value. 

Here's how each side of the transaction appears:

• Depreciation Expense: $10,000 Debited (increase)
• Accumulated Depreciation: $10,000 Credited (increase)

Here's how the journal entry would be recorded:

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This table records the adjustment needed when Mr. Inkle records a $10,000 depreciation expense for the initial purchase (equipment) of $50,000.

What is depreciation in accounting?

Think of depreciation like this: when a company buys something valuable, like a building or a piece of equipment, it doesn't just count the entire cost as an expense in one go. Instead, it spreads out that cost over the item's useful life. 

Why? Because things wear out or become less valuable over time.

So, depreciation is like recognising wear and tear by gradually reducing the asset's value on the company's books over its useful life. This reduction in value is recorded as an expense on the company's income statement. By doing this, a company can match the expense of using the asset with the revenue it generates over time, giving a more accurate picture of its financial health. There are different methods for calculating depreciation, but they all aim to reflect how the asset's value decreases over time.

Read about the double declining balance approach to depreciation.

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Summary

Today, there's some fantastic accounting software out there that can make life easier for founders and accountants by automating much of their bookkeeping. However, there's a snag—most of the time, your business's payments and receipts go through your bank account, and many banks aren't set up to integrate directly with this software. This gap means many businesses still end up spending considerable time manually entering their financial transactions into their accounting systems.

Check out Inkle Books, the bookkeeping platform designed specifically for US registered startups. 

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