Journal entries are the first step in the accounting cycle. They record all business transactions in a written format. Each time a business spends or earns money, it must write it down. These written records are called Journal entries. Every entry shows the date, the accounts involved, the amount, and a short description of the transaction. So, the answer to what is a journal entry: It is a written record that helps keep a proper track of all money-related actions in a business. We use Journal entries to keep accounts correct and up to date. These entries help accountants know how money moves in and out. Without them, it would be very hard to understand a company’s financial health. It also helps to prepare final accounts like the balance sheet and profit & loss account.
What is Journal Entries?
Journal entries help businesses note every money transaction. This is the base of accounting. All businesses, small or big, use this method.A Journal entry is a note or record of a business transaction. Each time a business buys, sells, pays, or earns money, it must write it down. These notes go in a special book called the Journal.
It tells us four main things:
- What happened in the transaction.
- When it happened.
- Which accounts got affected.
- How much money was involved.
Why is a Journal Entry Important?
Here is why we need Journal entries:
- They help record all transactions in the right order.
- They give proof that a transaction took place.
- They make future work easy, like creating ledgers and final accounts.
- They stop fraud or mistakes in money records.
- They help owners and managers see the full picture of money coming in and going out.
Format of Journal Entries
The Journal entry format is simple. You only need to write the date, account names, debit and credit amount, and a note.
The Journal Entry Format Looks Like This:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 01/04/2025 | Cash A/c Dr. To Sales A/c(Being goods sold for cash) | 5,000 | 5,000 |
What Do These Columns Mean?
- Date – The day you do the transaction.
- Particulars – The names of the accounts. Debit comes first, then credit with “To”.
- L.F. – Ledger Folio. It tells you the page number in the Ledger. (optional in exams)
- Debit – The amount of money coming in.
- Credit – The amount of money going out.
- Narration – A short note in brackets to explain the entry.
What are 3 Golden Rules of Journal Entries?
There are three rules that help you decide which account to debit and which to credit. These are called the 3 Golden Rules of Accounting.
Rule 1: For Personal Accounts
Debit the receiver, Credit the giver
This means, if someone gets something, you debit them. If someone gives something, you credit them.
Example: You pay ₹2,000 to Ramesh.
- Debit Ramesh A/c (Receiver)
Credit Cash A/c (Giver)
Rule 2: For Real Accounts
Debit what comes in, Credit what goes out
This rule applies to things like cash, furniture, land, etc.
Example: You buy a table for ₹3,000 in cash.
- Debit Furniture A/c (Comes in)
Credit Cash A/c (Goes out)
Rule 3: For Nominal Accounts
Debit all expenses and losses, Credit all incomes and gains
This is for things like rent, salary, interest, etc.
Example: You pay ₹1,000 as rent.
- Debit Rent A/c (Expense)
Credit Cash A/c (Money goes)
Types of Journal Entries
There are many kinds of Journal entries. Each one depends on the type of transaction.
1. Simple Journal Entry :A simple journal entry is the most basic form of recording a financial transaction in accounting. It involves only two accounts—one account is debited and the other is credited. It follows the double-entry system, where every debit has a corresponding credit of the same amount. Example: You pay a salary of ₹10,000.
- Salary A/c Dr. ₹10,000
To Cash A/c ₹10,000
2. Compound Journal Entry: A compound journal entry is an accounting entry that involves more than two accounts in one transaction. Unlike a simple journal entry (which has one debit and one credit), a compound journal entry can have multiple debits, multiple credits, or both, but the total of all debits must always equal the total of all credits.Example: You pay rent ₹3,000 and salary ₹7,000.
- Rent A/c Dr. ₹3,000
Salary A/c Dr. ₹7,000
To Cash A/c ₹10,000
3. Opening Journal Entry: An opening journal entry is the first journal entry made at the beginning of a new accounting period. It brings forward the closing balances of assets, liabilities, and capital from the previous accounting year into the new books of accounts. This ensures continuity in accounting records.Example:
- Cash A/c Dr.
Furniture A/c Dr.
To Capital A/c
(Being opening balance brought forward)
4. Closing Journal Entry: A closing journal entry is an accounting entry made at the end of an accounting period to close all nominal accounts—like incomes, gains, expenses, and losses—by transferring their balances to the Profit and Loss Account. These entries help reset these accounts to zero so they can start fresh in the next period. Example:
- Sales A/c Dr.
To Trading A/c
5. Adjustment Journal Entry: A adjustment journal entry is a special type of journal entry made at the end of an accounting period to adjust the accounts so that they show the true and fair view of the business. These entries help match incomes and expenses to the correct period, following the accrual basis of accounting. Example: Rent paid in advance ₹1,000.
- Prepaid Rent A/c Dr.
To Rent A/c
6. Rectification Journal Entry : A rectification journal entry is a special accounting entry used to correct errors made in the books of accounts. Mistakes happen in accounting due to wrong amounts, wrong accounts, or omission of entries. When such errors are found, we pass a rectification journal entry to fix them and make the accounts accurate. Example: Wages paid ₹500 wrongly debited to Salaries A/c
- Wages A/c Dr. ₹500
To Salaries A/c ₹500
7. Transfer Journal Entry: A transfer journal entry is an accounting entry used to move amounts from one account to another within the books. This type of entry does not involve any outside transaction. It simply adjusts or reallocates balances between related accounts inside the same business.Example: Move cash from Branch A to Branch B.
- Branch B A/c Dr.
To Branch A A/c
Relevance to ACCA Syllabus
Journal entries form the base of financial accounting, which is essential in Paper FA (Financial Accounting) and FR (Financial Reporting). ACCA expects students to understand how transactions affect financial statements. Journal entries allow learners to analyze adjustments, corrections, and the preparation of trial balances and financial statements. This understanding helps in advanced consolidation and financial analysis.
Journal Entries ACCA Questions
Q1. What does a journal entry always include?
A) Only the amount involved
B) Only the accounts used
C) Date, accounts, debit and credit amounts, and narration
D) Trial balance and ledgers
Ans: C) Date, accounts, debit and credit amounts, and narration
Q2. Which of the following accounts is classified under nominal accounts?
A) Bank
B) Machinery
C) Rent
D) Debtors
Ans: C) Rent
Q3. Which rule applies to real accounts in journal entries?
A) Debit all incomes, Credit all expenses
B) Debit the receiver, Credit the giver
C) Debit what comes in, Credit what goes out
D) Debit capital, Credit income
Ans: C) Debit what comes in, Credit what goes out
Q4. If cash is received from a debtor, which account is debited?
A) Debtor’s Account
B) Sales Account
C) Capital Account
D) Cash Account
Ans: D) Cash Account
Q5. Which journal entry is used to carry forward balances to a new financial year?
A) Closing Entry
B) Transfer Entry
C) Rectification Entry
D) Opening Entry
Ans: D) Opening Entry
Relevance to US CMA Syllabus
The US CMA syllabus covers accounting fundamentals in Part 1: Financial Planning, Performance, and Analytics. Understanding Journal entries helps CMA candidates apply correct debit-credit logic, which is crucial for preparing budgets, variance analysis, and internal controls.
Journal Entries CMA Questions
Q1. When salaries are paid in cash, the correct journal entry is:
A) Salaries A/c Dr. and Bank A/c Cr.
B) Bank A/c Dr. and Salaries A/c Cr.
C) Salaries A/c Dr. and Cash A/c Cr.
D) Cash A/c Dr. and Salaries A/c Cr.
Ans: C) Salaries A/c Dr. and Cash A/c Cr.
Q2. What type of journal entry has more than two accounts affected?
A) Opening Entry
B) Rectification Entry
C) Compound Entry
D) Transfer Entry
Ans: C) Compound Entry
Q3. Which statement is true about the debit side in journal entries?
A) It always shows profit
B) It represents money leaving
C) It shows increase in asset or expense
D) It shows decrease in liabilities only
Ans: C) It shows increase in asset or expense
Q4. You receive ₹20,000 in cash from a customer. What is the correct entry?
A) Sales A/c Dr. To Cash A/c
B) Cash A/c Dr. To Sales A/c
C) Cash A/c Dr. To Capital A/c
D) Customer A/c Dr. To Cash A/c
Ans: B) Cash A/c Dr. To Sales A/c
Q5. Which of these is NOT a purpose of journal entries?
A) Record all transactions chronologically
B) Track taxes for the government
C) Form base of ledger posting
D) Help in rectifying errors
Ans: B) Track taxes for the government
Relevance to US CPA Syllabus
For the US CPA, especially in AUD (Auditing) and FAR (Financial Accounting and Reporting) sections, accurate Journal entries help record and analyze transactions for audit, reporting, and compliance. Students must interpret journal entries under both US GAAP and IFRS.
Journal Entries CPA Questions
Q1. In US GAAP, what principle ensures both debit and credit sides of a journal entry are equal?
A) Matching Principle
B) Going Concern
C) Double-entry Principle
D) Cost Principle
Ans: C) Double-entry Principle
Q2. An error in the journal can be corrected by:
A) Canceling the journal
B) Deleting the entry
C) Rectification journal entry
D) Carrying it forward
Ans: C) Rectification journal entry
Q3. An accountant finds that a revenue of $5,000 was not recorded. What is the impact?
A) Assets overstated
B) Liabilities understated
C) Income understated
D) Expenses overstated
Ans: C) Income understated
Q4. Which journal entry is used to shift balances to income summary during closing?
A) Adjusting Entry
B) Transfer Entry
C) Opening Entry
D) Closing Entry
Ans: D) Closing Entry
Q5. Under accrual accounting, what is the correct entry for rent expense unpaid?
A) Rent A/c Dr. To Cash A/c
B) Rent A/c Dr. To Rent Payable A/c
C) Rent Payable A/c Dr. To Cash A/c
D) Prepaid Rent A/c Dr. To Rent A/c
Ans: B) Rent A/c Dr. To Rent Payable A/c
Relevance to CFA Syllabus
CFA Level I Financial Reporting and Analysis (FRA) requires knowledge of how journal entries affect financial statements. CFA students analyze entries to understand their impact on income statements, balance sheets, and cash flows under both IFRS and US GAAP.
Journal Entries CFA Questions
Q1. How does a journal entry help in financial analysis?
A) By showing tax rates
B) By showing internal cash flows
C) By showing impact on financial statements
D) By creating budgets
Ans: C) By showing impact on financial statements
Q2. What happens to the balance sheet if an expense is not journalized?
A) Assets increase
B) Liabilities increase
C) Net income increases
D) Equity decreases
Ans: C) Net income increases
Q3. Which entry type adjusts accounts at period-end for matching revenues with expenses?
A) Closing Entry
B) Opening Entry
C) Transfer Entry
D) Adjusting Entry
Ans: D) Adjusting Entry
Q4. Which component is NOT part of a standard journal entry?
A) Amount
B) Time
C) Credit/Debit
D) Cost Center
Ans: D) Cost Center
Q5. Under IFRS, when should an adjusting journal entry for depreciation be recorded?
A) At the start of the year
B) When assets are bought
C) At the year-end
D) Never required
Ans: C) At the year-end
