How to record a journal entry: a three-question method

A journal entry records one transaction: the date, the accounts affected, the debit and credit amounts, and a short description, ideally with the source document's reference. Here is a method that works for almost every transaction.

The three questions

1. Which accounts change? Name them from the chart of accounts. Use the most specific one that fits.
2. Does each one increase or decrease?
3. Debit or credit? Apply each account's normal balance: assets and expenses increase with debits; liabilities, equity and revenue increase with credits.

Then check that total debits equal total credits.

Worked examples

A credit sale. A design studio invoices a client 1,200 for finished work, payable in 30 days. Accounts receivable (asset) increases: debit 1,200. Service revenue increases: credit 1,200. Revenue is recorded now because the work is done, even though no cash has arrived.

A purchase partly paid. The studio buys a 2,400 drawing tablet, paying 400 now and owing 2,000. Equipment increases: debit 2,400. Cash decreases: credit 400. Accounts payable increases: credit 2,000. This is a compound entry — three accounts, one transaction.

Payroll with an amount still owed. Salaries for the month are 4,000; 3,600 is paid on the 31st and 400 next week. Salaries expense: debit 4,000. Cash: credit 3,600. Salaries payable: credit 400.

Read the document first

The source document tells you most of what you need: the date, who the parties are, what was delivered, the terms and the amount. Payment terms tell you whether cash moved. A purchase order, though, doesn't create an entry — it's only a request until goods arrive or money is paid.

Check before you post

A balanced entry can still be wrong. The most common errors are the right accounts on the wrong sides, an expense recorded where an asset was needed (or the reverse), and a missing line in a compound entry. Once an entry is posted, don't edit it: reverse it and post the corrected entry, so the audit trail shows what happened.

How an entry is laid out

A journal entry is written with the debits first and the credits indented or in a separate column, followed by a narration. The partly paid tablet purchase above looks like this:

Good narrations answer "what and why" for a reviewer who wasn't there: the item, the counterparty and the document reference.

Four more worked examples

A loan repayment that includes interest. The studio pays 1,150 to the bank: 1,000 reduces the loan and 150 is interest for the month. Debit Bank loan 1,000; debit Interest expense 150; credit Cash 1,150. Only the interest is an expense — repaying principal just reduces the liability.

A sale with sales tax. A shop sells goods for 500 plus 15% sales tax, paid by card. Debit Cash 575; credit Sales revenue 500; credit Sales tax payable 75. The tax belongs to the tax authority, so it's a liability, not revenue. (The cost of the goods sold is recorded separately in a perpetual inventory system.)

A customer deposit. A client pays 900 in advance for work starting next month. Debit Cash 900; credit Unearned revenue 900. When the work is done, debit Unearned revenue and credit Service revenue.

Owner's drawings. The owner takes 600 for personal use. Debit Drawings 600; credit Cash 600. Drawings aren't an expense of the business.

Recurring and period-end entries

Some entries repeat every month — rent, depreciation, loan interest, payroll accruals. Accounting systems let you set these up as recurring journals, but each still needs review: rates change, assets are sold, loans are repaid. Period-end adjusting entries (accruals, deferrals, depreciation) follow the same three-question method; the adjusting entries guide covers them.

Common mistakes

• Recording revenue when cash is received for work already invoiced, instead of reducing receivables.
• Expensing items that are assets, such as equipment or a year's prepaid insurance.
• Leaving out a line in a compound entry — the tax, the interest or the amount still owed.
• Recording a purchase order or a quotation as if a transaction had happened.
• Vague narrations like "adjustment" or "per John", which make the entry impossible to review later.
• Editing a posted entry instead of reversing and correcting it.

Frequently asked questions

How many lines can a journal entry have?

As many as the transaction needs. An entry with more than two lines is a compound entry; all that matters is that total debits equal total credits.

Who should approve journal entries?

Routine entries generated by systems (sales, purchases, payroll) are controlled by the processes that create them. Manual journals — especially large or unusual ones — should be reviewed and approved by someone other than the preparer, which is a basic segregation-of-duties control.

What's the difference between the journal and the ledger?

The journal records each transaction in date order. The ledger collects the effect on each account. Entries are recorded in the journal first and then posted to the ledger.

Practise it

Start with the free first journal entries lesson, then source documents and compound journal entries. The T-account posting simulator shows each entry landing in the ledger. For a realistic test, the Northstar Trading case has a month of documents to record, and the journal entry assessment mirrors the tests employers set. The Start from zero pathway puts the lessons in order.