Journal Entry

A journal entry is the record of one business transaction in the accounting books. It states the date, the accounts affected, the amount debited or credited to each, and a short description, with total debits equal to total credits. Journal entries are the first formal step in recording a transaction; they are then posted to the accounts in the general ledger.

Journal entries are the working unit of double-entry accounting. Most are generated automatically by billing, payroll, banking and payment systems, but accountants also post manual entries for estimates, corrections and period-end adjustments. Because manual entries can change reported results directly, they receive close attention from controllers and auditors, and they make up much of the work in the financial close.

A journal entry is like a line in a diary that never leaves anything out. Instead of "paid the plumber", it says: on 3 March, $200 went out of the bank account and $200 of repairs cost came in, because the plumber fixed a leak.

Each diary line has two sides that weigh the same. Later, someone copies each side into the right folder, the bank folder and the repairs folder, so the totals in each folder stay current. The diary keeps the story in date order; the folders keep the running totals.

• Date. The accounting date, which decides which period the transaction falls into.
• Accounts and amounts. At least one debit line and one credit line, using codes from the chart of accounts.
• Description. A narrative explaining what happened and why.
• Reference. A link to the supporting document, such as an invoice, contract, bank statement or calculation.
• Preparer and approver. In controlled systems, who created the entry and who approved it.

A simple example: on 1 March a company pays $1,200 rent in cash for March.

An entry with more than two lines is called a compound entry. Paying a $10,000 salary, for instance, might debit wage expense $10,000 and credit cash $8,000 and tax withholding payable $2,000.

• Routine entries. Everyday sales, purchases, receipts and payments, usually generated by subledgers and posted to the general ledger in summary.
• Adjusting entries. Period-end entries that apply accrual accounting: recording expenses incurred but not yet billed, revenue earned but not yet invoiced, depreciation, and the release of prepaid expenses and deferred revenue.
• Reversing entries. Entries dated on the first day of a new period that cancel an accrual made at the end of the previous one, so the actual invoice can be recorded normally when it arrives.
• Recurring entries. Entries with the same amount every period, such as monthly rent or a fixed amortisation charge.
• Closing entries. Year-end entries that move revenue and expense balances to retained earnings, part of the year-end close.
• Correcting entries. Entries that fix an earlier error, usually by reversing it and recording it properly.

Worked example of an adjusting and reversing pair: on 31 March a company has used $800 of electricity but will not receive the bill until April. It debits utilities expense $800 and credits accrued liabilities $800, so March bears the cost. On 1 April it reverses the entry. When the $800 bill arrives and is posted to accounts payable as usual, the reversal and the bill cancel out in April, leaving April with no electricity cost from March.

In banks, payment processors and wallet providers, every money movement produces journal entries in an internal ledger. A transfer between two customers debits one account and credits the other; a card settlement records gross sales, interchange and fees on separate lines. Well-built systems make journal entries immutable: an error is corrected by a new reversing entry, never by editing the original. They also attach a unique reference to each request and apply idempotency checks, so a network retry cannot post the same entry twice. Matching these entries to bank and processor records is the job of transaction reconciliation.

Manual journal entries are a known route for error and for financial-statement fraud, because a person can move amounts between accounts or into a period without an underlying transaction. Common controls include:

• Approval. A maker-checker rule, so no one can post a significant manual entry alone.
• Restricted access. Limiting who can post to sensitive accounts such as cash, revenue or control accounts.
• Audit trail. Logging who created, changed and approved each entry, and when. India has required companies' accounting software to keep an edit log of every change to the books since 1 April 2023.
• Review of unusual entries. Looking at entries posted at odd times, by unusual users, in round amounts or just before period end.

Auditing standards on fraud, such as ISA 240 issued by the IAASB and the PCAOB's AS 2401 in the US, require auditors to test the appropriateness of journal entries because management can override controls through them. Tools such as anomaly detection are increasingly used to pick out entries for review.

• International Auditing and Assurance Standards Board (IAASB)
• Internal Revenue Service: Recordkeeping