A journal entry is a record of a business transaction in the accounting records of a business. It is usually recorded in the general ledger and contains information such as the date, accounts affected, debit and credit amounts, and a brief description of the transaction. Journal entries are used to record unique or recurring items such as depreciation or bond amortization. They are the fundamental building blocks that provide data on how transactions affect accounts and balances.
The logic behind a journal entry is to record every business transaction in at least two places, known as double-entry accounting. For example, when a business generates a sale for cash, this increases both the revenue account and the cash account. Or, if a business buys goods on account, this increases both the accounts payable account and the inventory account.
Journal entries can be used to adjust or reverse another entry or account balance, or they can be used to directly enter information like depreciation or amortization that accumulates during the month. A compound journal entry is one that includes more than two lines of entries and is frequently used to record complex transactions or several transactions at once.
A properly documented journal entry consists of the correct date, amount(s) that will be debited, amount that will be credited, narration of the transaction, and unique reference number. All financial reporting is based on the data contained in journal entries, and there are various types to meet business needs.
