A simple journal entry is a journal entry that involves only two accounts: one account is debited and the other is credited, for the same amount. It is the most basic way of recording a transaction under double-entry accounting, in which every transaction affects at least two accounts and total debits must always equal total credits. Paying rent in cash, buying supplies on credit and collecting money from a customer are typical transactions recorded with a simple entry.
When a transaction affects three or more accounts, for example a sale partly for cash and partly on credit, the entry is a compound journal entry. Any compound entry could in principle be broken into several simple entries, but recording it as one keeps the whole transaction together.
Format of a simple journal entry
Entries are first recorded in a book of original entry, usually the general journal or a computerized equivalent. Each simple entry contains:
- The date of the transaction.
- The account to be debited and the amount, written first and aligned to the left.
- The account to be credited and the amount, written beneath and indented.
- A short explanation, often with a reference to the supporting document such as an invoice or receipt number.
After recording, the amounts are posted to the individual accounts in the general ledger, and periodically checked with a trial balance.
Examples
A newly opened design studio records its first week of transactions with simple entries:
| Date | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 2 June | Owner invests cash | Cash | Owner's capital | $25,000 |
| 3 June | Pays June rent | Rent expense | Cash | $2,200 |
| 4 June | Buys a computer on credit | Equipment | Accounts payable | $3,000 |
| 6 June | Bills a client for completed work | Accounts receivable | Service revenue | $4,500 |
| 9 June | Pays the computer supplier | Accounts payable | Cash | $3,000 |
Each entry keeps the accounting equation in balance. On 4 June, for instance, assets rise by $3,000 and liabilities rise by $3,000. On 9 June, an asset and a liability both fall by $3,000. After these five entries, cash is $25,000 minus $2,200 minus $3,000, or $19,800, and total debits equal total credits of $37,700.
By contrast, if on 6 June the client had paid $1,500 immediately and owed the remaining $3,000, the studio would debit cash $1,500 and accounts receivable $3,000 and credit service revenue $4,500, a compound entry with three accounts.
Rules that guide the entry
Choosing the debit and credit depends on the type of account. A debit increases assets, expenses and owner's drawings, and decreases liabilities, equity and revenue. A credit does the opposite. Bookkeepers analyze each transaction by asking which two accounts changed, whether each increased or decreased, and therefore which side of each account is affected. The accounts used come from the business's chart of accounts.
Common errors
Because a simple entry has only two lines, errors are usually easy to spot, but several types still occur. Reversing the debit and credit doubles the error in both accounts. Choosing the wrong account, for example debiting repairs expense instead of equipment, leaves the trial balance in balance but misstates the statements; this is an error of principle. Transposing digits, such as recording $540 as $450, may affect both sides equally and go unnoticed. Omitting an entry entirely is also not caught by the trial balance. Reviewing source documents, using clear account descriptions and having a second person check entries, a basic form of internal control, reduce these risks. In modern software most simple entries are generated automatically when a user records an invoice or payment, but the same debit and credit logic sits behind every screen.