Journal entry accounting is foundational to strong bookkeeping and financial reporting processes. Business owners need to master the basics of journal entries to see how their company is performing.
It can help business owners ensure that their financial records are accurate and complete, and it helps when preparing financial statements and tracking financial performance.
Whether you're keeping track of transactions in a general ledger by hand or using accounting software, clear and orderly journal entries ensure your records are valuable, useful, and compliant.
What is a journal entry in accounting?
Journal entry (or summary) accounting is the process of recording financial transactions as summaries in an accounting system. Each transaction becomes a separate entry, listed chronologically to show the financial position of a business at any given time.
If you're an Amazon seller or online marketplace seller, journal entry (or summary) accounting may be ideal for business. It differs from transactional accounting, which records every transaction event as a line item in QuickBooks. Overall, summary accounting can help you close your books quickly each month.
In journal entry accounting, every transaction is analyzed and classified into specific accounts based on the nature of the transaction. Each transaction affects at least two accounts and follows the double-entry accounting principle, which states that for every debit you record, you must record an equal credit.
Debit and credit: What's included in a journal entry?
Each journal entry includes key information about the financial transaction.
- Date: The date the transaction occurred.
- Account title: The name of the account(s) affected by the transaction.
- Debit account and amount: The account being increased, and the amount of the increase.
- Credit account and amount: The account being decreased, and the amount of the decrease.
Simple journal entry example
What does a journal entry example look like in practice? Imagine your company receives $100 in cash from a customer or client paying for your services. The journal entry might look something like this.
- Date: 10 July 2023
- Account title: debit, accounts receivable
- Debit amount: $100
- Accounts receivable amount: $100
You can use journal entries to track your business's financial activity. You can also use them to prepare financial statements, such as the balance sheet and income statement.
Purpose of a journal entry: Why are they important for small businesses?
Small businesses need accurate financial records to keep track of their growth and understand where to improve operations. Journal entry, in particular, simplifies Amazon seller accounting by offering an organized way to track sales and expense summaries.
Maintaining accurate journal entries enables small business owners and online sellers to make informed business decisions, analyze financial performance, and meet reporting requirements.
When it comes to reporting requirements, all small businesses must comply with IRS tax regulations. Rather than dreading tax season every year, journal entry accounting can make it easier for you or your bookkeeper to prepare your tax returns.
Accurate records that record all income and expenses provide an easy, chronological audit trail that can also be useful in finding deductions and allowances.
Journal entries form the basis for preparing financial statements such as the balance sheet, income statement, and cash flow statement.
These statements are vital for assessing profitability, identifying sales trends and changes in seasonal demand, and making informed decisions regarding budgeting, investments, pricing, and resource allocation.
Finally, journal entry accounting helps establish internal controls within a small business.
By requiring proper authorization, documentation, and segregation of duties for recording transactions, small businesses can lower the risk of fraud or unauthorized transactions. Journal entries provide a clear audit trail that can help prevent errors or irregularities.
How to write a journal entry for small business bookkeeping
Journal entries are entered into your general ledger if you use accounting software or into a subsidiary ledger if your business manages its accounting manually.
It's far easier to use an automated accounting solution to record summaries. But whether you do it by hand or use a tool like QuickBooks, follow these steps.
1. Determine what accounts will be affected
To create a journal entry, identify the accounts affected by the transaction. You can do this by sorting your transactions by type. For example, if you have bank deposits, expenses, and sales entries to make, you can sort them into those three categories.
Once you've sorted your transaction, you can identify the accounts affected by it. For example, a bank deposit will affect your cash account, while purchasing printer ink will impact your office supplies account.
Here are some tips for identifying the right accounts:
- Use common sense. If you need help deciding which account to use, ask yourself what the transaction affects. For example, you would use your office supplies account if you are buying office supplies.
- Use a chart of accounts. A chart of accounts is a list of all your general ledger accounts. It can help you identify the correct accounts for each transaction.
- Get help from an accountant. If you still need to decide which accounts to use, you can always get help from an accountant.
- Write the journal entry once you have identified the accounts affected by the transaction.
2. Assign an account type
Journal entries fall under five categories:
- Assets or items of value, including cash, accounts receivable, bank accounts, and items like furniture or laptops.
- Liabilities or things you owe, such as accounts payable, debts, and loans.
- Expenses or normal costs associated with doing business, like office supplies, rent, and payroll.
- Revenue or the money you receive from selling your products or services.
- Capital/owner equity, which represents your ownership or financial interest in the business.
All journal entries in accounting will fall under one of these categories. Use standard accounting rules to determine which account is credited or debited.
3. Create your journal entry
Finally, add your journal entry to your physical ledger or accounting software. Include the date, the general ledger account number, account name, and debit and credit amount. Make sure you use the double-entry bookkeeping process.
5 types of journal entries in accounting, including adjusting journal entries
There are many different types of journal entries in accounting. What you use depends on your business and the nature of its transactions.
For example, an ecommerce business may need to record recurring payments to support subscription-based products or services.
These are a few common journal entry types that most businesses will use.
1. Simple entries
Simple entries are the most basic type of accounting journal entry. They involve only two accounts: one debit and one credit. For example, a simple entry to record the purchase of supplies for cash would debit the supplies account and credit the cash account.
2. Compound entries
These entries involve more than two accounts. For example, a compound entry to record the payment of salaries would debit the salaries expense account, credit the cash account, and credit the liability account for accrued salaries.
3. Adjusting entries
Adjusting entries are made at the end of an accounting period to record changes in account balances that you haven't reflected in the general ledger. For example, an adjusting entry to record accrued interest expense would debit the interest expense account and credit the liability account for accrued interest.
4. Closing entries
These entries are made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts. For example, a closing entry to transfer the balance of the revenue account to the retained earnings account would debit the revenue account and credit the retained earnings account.
5. Reversing entries
These entries are made at the beginning of the next accounting period to reverse the effects of adjusting entries. For example, a reversing entry to reverse the adjusting entry for accrued interest expense would debit the liability account for accrued interest and credit the interest expense account.
If your business uses accounting software, these types of journal entries won’t matter in your daily bookkeeping. Accounting software creates entries for you “behind the scenes” when you enter an invoice or payment.
Best practices for tracking journal entries
When recording and tracking accounting journal entries, it is essential to ensure accuracy, clarity, and consistency. First, use clear and concise language when describing each transaction. Include all the necessary details using language that is specific and unambiguous.
This specificity means recording the date, accounts affected, and corresponding debit and credit amounts. Clear, complete information facilitates easy understanding and analysis of the entry. And in the event of an error or audit, you can look back to verify where you made a mistake.
Next, it’s best practice to use the double-entry principle. This principle requires every entry to have at least one debit and one credit entry. Ensure that the total debits equal the total credits, maintaining the balance between the accounting equation: assets equal liabilities plus equity.
It’s useful to have standardized account titles consistent with your company’s chart of accounts. For your finance and accounting teams, it’s useful to maintain uniformity and make it easier to classify and analyze transactions. Keep your entries sequential based on the date of each transaction to simplify the audit trail.
And whenever possible, attach supporting documentation such as invoices, receipts, or contracts to journal entries. This documentation helps verify the accuracy and validity of the recorded transactions. Strong record-keeping can protect your business from fraud or theft, and it can come in handy in the event of an audit.
The most common mistakes in journal entry accounting relate to data entry. Be careful to record the right account, amount, and date when making a journal entry.
Transposition errors, or when you accidentally reverse the order of two numbers, are also common. For example, the accountant enters “321” instead of “123. Doing so can lead to significant errors in your financial statements.
The right ecommerce automation software can help you reduce the risk of errors from manual data entry across business operations.
How to use accounting software to automate accounting journal entries
Accounting automation software can take on the more manual parts of journal entry or summary accounting. The right software connects an accounting platform like QuickBooks to your stores, sales channels, and POS system.
As a result, you can sync sales as summaries, sort expenses, validate data, and reconcile accounts automatically to save time on everyday business tasks.
Whether you sell on a marketplace or through an online store, a solution like Webgility can help you sync order and expense data between your stores and QuickBooks Online or QuickBooks Desktop. Keep your books, prices, and even inventory counts up to date across your entire operation.
You can even record sales tax, customer and item details, shipping and payment expenses, refunds, and marketplace fees to track profitability, analyze sales performance, and forecast inventory.
Webgility simplifies double-entry bookkeeping by capturing marketplace fees, seller expenses, Amazon settlements, Shopify payouts, and more to ensure your books and bank statements match up. Plus, Webgility's plans and prices are designed for sellers who practice summary or detailed accounting.