What is Journal & How to Prepare Journal Entries in Accounting

What Is a Journal in Accounting?

A journal is the book in which a business records its financial transactions for the first time. It is commonly called the book of original entry, day book, or primary book of accounts.

In accounting, transactions are entered in the journal in chronological order. Each journal entry identifies the accounts affected, the account to be debited, the account to be credited, the transaction amount, and a brief explanation called narration.

A journal entry follows the double-entry principle. Therefore, the total amount entered on the debit side must equal the total amount entered on the credit side.

Total Debit Amount = Total Credit Amount

Purpose of a Journal in Accounting

The journal creates a dated and organised record of business transactions before they are posted to ledger accounts. It helps show what happened, which accounts were affected, and how each transaction was classified.

• Records transactions in the order in which they occur.
• Shows the debit and credit effect of each transaction.
• Provides a brief narration explaining the transaction.
• Creates a reference for posting entries to the ledger.
• Helps trace transactions back to source documents such as invoices, receipts, and payment records.

Journal Format and Its Columns

Proforma of a Journal

A standard journal generally contains the following columns:

1. Date: Records the date on which the transaction occurred.
2. Particulars: Shows the names of the accounts debited and credited. The account to be debited is written first. The credited account is written on the next line, usually preceded by the word “To.”
3. Ledger Folio: Shows the page or reference number of the ledger account to which the entry has been posted.
4. Debit Amount: Records the amount debited to the relevant account.
5. Credit Amount: Records the amount credited to the relevant account.
6. Narration: Gives a short explanation of the transaction below the journal entry.

How to Prepare Journal Entries in Accounting

The process of recording transactions in a journal is called journalising. A journal entry can be prepared by following these steps:

1. Read the transaction carefully: Identify what the business received, paid, purchased, sold, earned, or owed.
2. Identify the affected accounts: Determine the names of the accounts involved in the transaction.
3. Classify the accounts: Decide whether each account is an asset, liability, capital, revenue, or expense account. The traditional classification may also use personal, real, and nominal account types.
4. Determine the debit and credit: Apply the appropriate debit and credit rules to each affected account.
5. Record the entry: Write the debited account first and the credited account below it.
6. Check the amounts: Confirm that total debits equal total credits.
7. Add narration: Write a concise explanation describing the transaction.

Debit and Credit Rules for Journal Entries

The following rules show how increases and decreases are recorded under the accounting equation approach:

Account Type	Increase	Decrease	Normal Balance
Assets	Debit	Credit	Debit
Liabilities	Credit	Debit	Credit
Capital or Owner’s Equity	Credit	Debit	Credit
Revenue	Credit	Debit	Credit
Expenses	Debit	Credit	Debit
Drawings	Debit	Credit	Debit

The same rules can also be expressed through the traditional classification of accounts:

Account Type	Debit Rule	Credit Rule
Personal Account	Debit the receiver	Credit the giver
Real Account	Debit what comes in	Credit what goes out
Nominal Account	Debit expenses and losses	Credit income and gains

Simple and Compound Journal Entries

A journal entry may be simple or compound depending on the number of accounts affected.

• Simple journal entry: Affects one debit account and one credit account.
• Compound journal entry: Affects more than two accounts, such as one debit and two credits or two debits and one credit.

In both cases, the combined debit amount must equal the combined credit amount.

Journal Entry Example for a Cash Sale

A firm sold its product for $1,500 and received the full amount in cash.

>> The entries of journal entries are as follows.

The transaction is analysed as follows:

• Cash is received by the business, so the Cash account increases.
• Cash is an asset, and an increase in an asset is recorded as a debit.
• The sale increases business revenue.
• An increase in revenue is recorded as a credit to the Sales account.

Particulars	Debit	Credit
Cash A/c Dr.	$1,500
To Sales A/c		$1,500
Being goods sold for cash

Basic Journal Entry Examples for Common Transactions

Business Transaction	Account Debited	Account Credited
Owner started the business with cash of $10,000	Cash A/c, $10,000	Capital A/c, $10,000
Purchased furniture for cash, $2,500	Furniture A/c, $2,500	Cash A/c, $2,500
Purchased goods on credit from Alex, $4,000	Purchases A/c, $4,000	Alex A/c, $4,000
Paid office rent in cash, $800	Rent Expense A/c, $800	Cash A/c, $800
Sold goods on credit to Jordan, $3,200	Jordan A/c, $3,200	Sales A/c, $3,200
Received cash from Jordan, $3,200	Cash A/c, $3,200	Jordan A/c, $3,200
Paid Alex in cash, $4,000	Alex A/c, $4,000	Cash A/c, $4,000
Owner withdrew cash for personal use, $500	Drawings A/c, $500	Cash A/c, $500

Journal Entry Example for a Credit Purchase

Suppose a business purchases goods worth $2,000 on credit from a supplier named Taylor.

• Purchases increase, so the Purchases account is debited.
• The amount owed to Taylor increases, so Taylor’s personal account is credited.

Particulars	Debit	Credit
Purchases A/c Dr.	$2,000
To Taylor A/c		$2,000
Being goods purchased on credit from Taylor

Compound Journal Entry Example

Suppose a business pays salaries of $2,000 and office rent of $1,000 together in cash. Two expense accounts are debited, while one Cash account is credited.

Particulars	Debit	Credit
Salaries Expense A/c Dr.	$2,000
Rent Expense A/c Dr.	$1,000
To Cash A/c		$3,000
Being salaries and office rent paid in cash

Types of Accounting Journals

A business may use a general journal for all transactions or maintain special journals for frequently occurring transactions. Common journal types include:

1. General Journal: Records transactions that do not belong in a specialised journal, including adjustments, corrections, and unusual entries.
2. Sales Journal: Records credit sales of goods.
3. Purchases Journal: Records credit purchases of goods.
4. Cash Receipts Journal: Records transactions involving cash received by the business.
5. Cash Payments Journal: Records cash paid by the business.
6. Sales Returns Journal: Records goods returned by customers from credit sales.
7. Purchases Returns Journal: Records goods returned to suppliers from credit purchases.

The exact journals maintained depend on the size of the business, the volume of transactions, and the accounting system used.

Journal Entries and Ledger Posting

Journalising and ledger posting are related but separate accounting steps. The journal records the complete transaction in chronological order. The ledger then groups entries account by account.

Basis	Journal	Ledger
Purpose	Records transactions in chronological order	Groups transactions by account
Stage	Book of original entry	Book of final classification
Information shown	Complete debit and credit entry with narration	Individual account movements and balances
Reference	Uses ledger folio to identify posting	May use journal folio to identify the source entry

Common Journal Entry Mistakes

• Debiting and crediting the wrong accounts.
• Recording unequal debit and credit amounts.
• Treating a credit purchase as a cash purchase.
• Recording the purchase of an asset as an ordinary expense.
• Using Sales A/c for the sale of a fixed asset instead of the relevant asset account.
• Omitting narration or writing narration that does not explain the transaction clearly.
• Entering a transaction twice or failing to record it at all.
• Using the transaction date incorrectly.
• Posting the entry to an incorrect ledger account.

Journal Entry Review Checklist

• Does the entry use the actual transaction date?
• Are all affected accounts identified correctly?
• Has each account been classified correctly as an asset, liability, capital, revenue, expense, or drawings account?
• Are the debit and credit rules applied correctly?
• Do the total debit and credit amounts agree?
• Does the narration clearly describe the transaction?
• Is the entry supported by an invoice, receipt, voucher, or another source document?
• Has the correct ledger folio or posting reference been entered?

Frequently Asked Questions About Accounting Journal Entries

What is a journal entry in simple words?

A journal entry is a dated record of a business transaction showing which account is debited, which account is credited, and the amount recorded in each account.

Why is a journal called the book of original entry?

It is called the book of original entry because transactions are first formally recorded in the journal before they are transferred to ledger accounts.

What is narration in a journal entry?

Narration is a short explanation written below a journal entry. It states the nature and purpose of the recorded transaction.

Can a journal entry contain more than one debit or credit?

Yes. A compound journal entry can contain multiple debit or credit accounts. However, the total debits must still equal the total credits.

What is the difference between a journal and a journal entry?

A journal is the accounting book or record that contains transactions. A journal entry is one individual transaction recorded within that journal.