Journal entries are a fundamental aspect of accounting because they track money that is coming and going. Even though the format may vary, every journal entry example will have a statement about debits and credits and the kind of transaction that occurred.
What Is a Journal Entry?
A journal entry is when you make a record of a transaction that happens in connection with your personal or business accounts. You can use this to keep track of money spent and money received. Journal entries are also helpful in organizing accounts payable, accounts receivable, and expenses in connection with inventory. Whether you’re learning about accounting for work or about to go on your first accounting interview, you’ll want to get familiar with journal entries and how they work.
How Do You Make a Journal Entry?
There are three basic steps when making a journal entry, and writing the actual entry itself comes last.
1. Specify the Transaction Entered
While this may seem like the easiest step, it is also one that is commonly overlooked. You have to structure your business in a way that identifies each applicable transaction. This involves ensuring that everyone involved in making payments or collecting them has a thorough understanding of which kinds of transactions qualify.
For example, should you record if an employee spends US$50 in fuel as they travel to meet with a potential new client? For some businesses, no, but for others it is an essential entry in their accounting journal — for accounting, operational analysis, and tax reporting purposes.
With the help of a spreadsheet or accounting software, you can also use journal entries to track trends relating to money spent and money received. This data can help save money and increase profit margins, but only if you carefully specify which transactions to enter.
2. Analyze Each Transaction
Analyzing each transaction is similar to creating a brief narrative about the impact of the transaction on the company.
For example, if a business purchases three new computers for employees, they may analyze the transaction in this way: “Purchased three PCs using cash and then added to our inventory.”
In this way, you have a concrete description of which assets you reduced and which assets you acquired, as well as the accounts impacted by the transaction. In this case, the asset reduced was cash, the assets acquired were computers, and the accounts impacted were cash and inventory.
3. Journaling the Transaction
When it comes time to journal business transactions, you are, essentially, putting your analysis of each transaction into writing. In addition to including the information ascertained by your analysis, you also put in a brief description of the nature of the transaction. With all of this information combined in one entry, you get a convenient snapshot of the transaction and how it impacted your company’s finances. While most companies prefer to have very brief descriptions of each transaction, there is no hard and fast rule. You can include as much detail as you’d like.
To use the computer example above, the entry may look like this, assuming each of the three computers cost US$1,000:
| Date | Name of Account | Debit | Credit |
| July 30 | Cash -Inventory | US$3,000.00 | US$3,000.00 |
| 1. To record the purchase of three computers added to inventory. |
You could also choose to record a purchase like this using three different journal entries. The following general address have a bit more detail, particularly an inventory number assigned to each computer based on the year acquired and a number.
| Date | Name of Account | Debit | Credit |
| July 30 | Cash -Inventory | US$1,000.00 | US$1,000.00 |
| 1. To record the purchase of Computer 2022-1 added to inventory. | |||
| Date | Name of Account | Debit | Credit |
| July 30 | Cash -Inventory | US$1,000.00 | US$1,000.00 |
| 1. To record the purchase of Computer 2022-2 added to inventory. | |||
| Date | Name of Account | Debit | Credit |
| July 30 | Cash -Inventory | US$1,000.00 | US$1,000.00 |
| 1. To record the purchase of Computer 2022-3 added to inventory. |
Also, accounting entries are often organized according to an accounting cycle or accounting period. This makes it easier to identify financial transactions according to the month, year, or fiscal period in which they occurred. When properly organized, journal entries are the foundation of financial statements.