What Is a Journal Entry in Accounting? Debits, Credits, and Examples

A journal entry in accounting is the dated record of a single business transaction, showing which accounts were affected and assigning equal debit and credit amounts to them. It is the first place a transaction gets written down, and every later report, from the general ledger to the tax return, depends on it being right. To record one, you capture the date the transaction happened, the accounts involved, the debit and credit amounts, a short description of what occurred, and a reference number that ties the entry back to its source document.

What Goes Into a Journal Entry

A complete entry has five parts. Leave any of them out and the record becomes hard to defend during a review.

The date the transaction occurred, not the date you got around to entering it. This is what determines the reporting period the transaction falls into.¹
The account names affected, pulled from your chart of accounts. A $500 office supply purchase touches both a cash account and an expense account.
The debit and credit amounts. Total debits must equal total credits.
A description explaining what the transaction was and why it happened. The IRS expects supporting documents to identify the payee, amount, date, and business purpose.²
A reference number linking the entry to its source document. Most accounting software assigns these automatically.

The description line is where people cut corners, and it is the part auditors care about most. If someone reviewing your books six years from now cannot tell what a transaction was for, the entry has not done its job.

Debits and Credits

Every journal entry uses double-entry accounting. Each transaction has two sides: when your business spends cash to buy equipment, cash decreases and equipment increases, and both changes get recorded. That keeps the accounting equation in balance, so assets equal liabilities plus equity. If a $1,200 payment is recorded, the debited accounts total $1,200 and the credited accounts total $1,200.³

Debits sit on the left, credits on the right. That positioning is universal. Debits are not “good” and credits are not “bad.” Whether a debit increases or decreases an account depends on what kind of account it is.

Normal Balances

This is the piece that trips people up. Some accounts increase when you debit them; others increase when you credit them.

Assets carry a normal debit balance. A debit increases them, a credit decreases them. Buying a truck means debiting the vehicle asset account.
Expenses carry a normal debit balance. Recording rent or utilities means debiting the expense account.
Owner withdrawals carry a normal debit balance. Money the owner takes out of the business is a debit.
Liabilities carry a normal credit balance. Taking on a loan means crediting the liability.
Equity carries a normal credit balance. Owner investments increase equity through credits.
Revenue carries a normal credit balance. Earning income means crediting revenue.

A quick way to remember: accounts that show what the business owns or spends carry debit balances. Accounts that show what the business owes or earns carry credit balances. Recording against the normal balance reduces that account.

How to Record One

Recording an entry (sometimes called journalizing) and posting it to the general ledger are two steps, though software usually does them together.

The recording step is where you input the date, account names, debit and credit amounts, description, and reference number into the journal. The journal is the chronological diary of every transaction; each entry gets logged in the order it happens.

Posting is the second step, transferring the journalized amounts into the individual accounts in the general ledger. The general ledger organizes transactions by account rather than by date, so the running balance of cash, accounts receivable, or any other account is visible at a glance. Post a $2,500 equipment purchase and the cash balance drops by $2,500 while the equipment account rises by the same amount.

In most accounting software, clicking “save” or “post” handles both steps at once, journalizing the entry and updating the ledger balances in real time. Understanding the distinction still matters when you are troubleshooting errors, because a transaction can be correctly journalized but posted to the wrong account.

Checking Your Work With a Trial Balance

After posting entries for a period, you run a trial balance. It lists every general ledger account and its balance, then totals all debits and all credits. If the two totals match, the entries are mathematically consistent. A balanced trial balance does not guarantee the books are error-free, though. It will not catch a transaction posted to the wrong account, an entry recorded for the wrong amount on both sides, or a transaction never recorded at all.

Entries That Touch More Than Two Accounts

Not every transaction involves just two accounts. A compound journal entry affects three or more accounts at once. If you purchase $3,000 of inventory by paying $1,000 cash and financing $2,000, the entry debits inventory $3,000, credits cash $1,000, and credits accounts payable $2,000. The rule holds: total debits still equal total credits.

Compound entries are common for payroll, loan payments that split between principal and interest, and asset purchases with partial financing. They keep related pieces of one transaction together instead of scattering them across multiple entries.

Types You’ll Encounter Over a Period

Opening entries carry forward the closing balances from the prior period at the start of a new one.
Standard entries record day-to-day sales, purchases, and payments.
Adjusting entries align revenues and expenses with the period they belong to.
Closing entries zero out temporary accounts like revenue and expenses at period-end, moving their balances into retained earnings.
Reversing entries are optional entries at the start of a new period that undo certain adjusting entries from the prior one.
Correcting entries fix errors found after posting, without deleting the original record.

Adjusting Entries at Year-End

If your business uses the accrual method, adjusting entries are what make the financial statements honest. The IRS defines the accrual method as reporting income in the year you earn it and deducting expenses in the year you incur them, no matter when cash changes hands.⁴ Adjusting entries bridge the gap between when cash moves and when the economic event happens.

Accrued expenses: you owe money for something that happened this period but has not been paid. Wages earned in December and paid in January are the classic example. Debit wage expense, credit wages payable.
Accrued revenues: you earned income you have not received. Consulting work finished in December but invoiced in January means debiting accounts receivable and crediting revenue.
Deferred expenses: you paid in advance for something that covers future periods. Prepaid insurance is the common one. Debit the expense account and credit the prepaid asset as each month of coverage is used up.
Deferred revenues: a customer paid before you delivered. Gift cards and subscriptions fall here. Debit unearned revenue and credit revenue as you fulfill the obligation.
Depreciation: long-lived assets lose value over time, spread across their useful life. Each period, debit depreciation expense and credit accumulated depreciation.

Skipping adjusting entries means the financial statements overstate or understate your position, which can create problems on tax returns. The point of the accrual method is matching income and expenses to the correct year.⁴

Fixing Mistakes

Mistakes happen. The account might be wrong, the amount might be off, or a transaction might have been recorded twice. The professional fix is a correcting entry, not deleting the original. Keeping the original preserves the audit trail and shows exactly what happened and when.

The standard approach is to record a new entry that reverses the incorrect portion, then record the correct amount. If you debited office supplies for $500 when the purchase was actually $50, you credit office supplies $450 to bring the account back to the right balance and note the correction in the description field.

How serious the correction needs to be depends on the size of the error. A small current-period mistake gets a simple journal entry. An error that affects previously issued financial statements can require restating those statements, which mostly matters for companies with external reporting obligations.

Source Documents and How Long to Keep Them

Every journal entry should trace back to a source document proving the transaction happened. Common ones include invoices and sales receipts, bank statements, purchase orders, and payroll records. Federal law under IRC Section 6001 requires anyone liable for tax to keep records sufficient to establish income, deductions, and credits.⁵ The records need to show gross income, deductions, and credits clearly.²

IRS retention periods depend on the record:

Three years is the standard period for records supporting income, deductions, and credits on a return.⁶
Four years for employment tax records, measured from filing the fourth-quarter return for the year.⁷
Six years if you fail to report income exceeding 25% of the gross income shown on your return.⁶
Seven years for a claim of loss from worthless securities or a bad debt deduction.⁶
Indefinitely if you do not file a return or file a fraudulent one.⁶

The Department of Labor separately requires employers to preserve payroll records for at least three years.⁸ For property records, keep everything until the period of limitations expires for the year you dispose of the property, since those records are what you use to calculate gain or loss on the sale.⁶

If you store records electronically, the IRS requires your system to produce legible hard copies on demand, maintain an audit trail linking ledger entries to source documents, and include controls against unauthorized changes.⁹ You can destroy original paper documents after confirming your electronic system meets these requirements, but if you later stop maintaining the hardware or software needed to access the digital records, the IRS treats them as destroyed.

What Happens When Entries Are Wrong

Inaccurate entries do not just throw off internal reports. They can lead to incorrect tax returns, and incorrect tax returns trigger penalties. Under IRC Section 6662, the IRS imposes a 20% accuracy-related penalty on tax underpayments caused by negligence, which includes failing to keep adequate books and records. If sloppy entries cause you to understate taxable income by $20,000, the penalty alone could be $4,000 before interest.

During an audit, the IRS expects organized records by year and by type of income or expense, along with receipts labeled with dates and business purpose.¹⁰ Entries with vague or missing descriptions make that process harder and give auditors reason to dig deeper.

The quieter consequence is making bad business decisions from bad data. If revenue accounts are overstated because an adjusting entry got skipped, the business looks more profitable than it is. That kind of error compounds and can lead to cash flow problems no penalty notice needs to explain.

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Internal Revenue Service. Tax Years
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Internal Revenue Service. What Kind of Records Should I Keep
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Columbia Finance. Create a General Journal Entry
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Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods
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Office of the Law Revision Counsel. 26 U.S. Code 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns
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Internal Revenue Service. How Long Should I Keep Records
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Internal Revenue Service. Employment tax recordkeeping
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U.S. Department of Labor. Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA)
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Internal Revenue Service (IRS). Revenue Procedure 97-22 Guidance for Taxpayers Maintaining Books and Records by Electronic Storage System
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Internal Revenue Service. Audits Records Request