A journal entry is the formal record of a financial transaction in the accounting system. It captures the date, accounts affected, amounts, and a description of each transaction before it is posted to the ledger. In double-entry bookkeeping, every journal entry must contain at least one debit and one credit of equal value.
The journal is often called the book of original entry because it is where transactions are first recorded before being classified in the ledger.
Structure of a Journal Entry
A properly formatted journal entry contains five elements:
| Element | Purpose | Example |
|---|---|---|
| Date | When the transaction occurred | 15/06/YYYY |
| Account(s) debited | Which account(s) receive a debit | Office equipment |
| Account(s) credited | Which account(s) receive a credit | Bank |
| Amount | The monetary value | £4,500 |
| Narrative | Brief description of the transaction | Purchase of desks for new office |
Standard Format
The conventional layout lists the debited account first, followed by the credited account, which is typically indented:
15 June
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Office equipment | 4,500 | |
| Bank | 4,500 |
Purchase of office desks, invoice ref. 2847
The narrative (also called the narration) provides context. Under the Companies Act 2006, accounting records must be sufficient to show and explain the company’s transactions, making clear narrations an important compliance matter.
Types of Journal Entries
Simple Journal Entries
A simple journal entry involves only two accounts: one debited and one credited. Most day-to-day transactions fall into this category.
Example: Paying rent by bank transfer
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Rent expense | 2,000 | |
| Bank | 2,000 |
Compound Journal Entries
A compound journal entry involves three or more accounts. These are necessary when a single transaction affects multiple accounts.
Example: Recording a credit sale with VAT
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Accounts receivable | 6,000 | |
| Sales revenue | 5,000 | |
| VAT output tax | 1,000 |
Sale to Customer Ltd, invoice 3041, standard-rated at 20%
The total debits (£6,000) equal the total credits (£5,000 + £1,000), maintaining the balance.
Adjusting Journal Entries
Adjusting entries are made at period end to ensure revenues and expenses are recorded in the correct accounting period. They are required by the accruals basis of accounting mandated by FRS 102 and the Companies Act.
Common adjusting entries include:
- Accruals: Recognising expenses incurred but not yet invoiced
- Prepayments: Deferring expenses paid in advance
- Depreciation: Spreading the cost of fixed assets over their useful life
- Bad debt provisions: Estimating irrecoverable receivables
- Provisions: Recognising estimated liabilities
Example: Accruing for electricity used but not yet billed
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Electricity expense | 350 | |
| Accruals | 350 |
Reversing Journal Entries
A reversing entry is posted at the start of a new period to cancel out an adjusting entry from the previous period. This simplifies recording the actual invoice when it arrives.
Example: Reversing the electricity accrual on 1 April
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Accruals | 350 | |
| Electricity expense | 350 |
When the actual invoice for £380 arrives, it is recorded normally without the risk of double-counting.
Closing Journal Entries
At year end, closing entries transfer the balances of income and expense accounts to retained earnings (or profit and loss reserves) on the balance sheet. This resets income and expense accounts to zero for the new financial year.
Example: Closing sales revenue
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Sales revenue | 250,000 | |
| Profit and loss account | 250,000 |
When to Use Manual Journal Entries
In modern accounting software, most transactions are recorded automatically through invoicing, banking, and payroll modules. Manual journal entries are typically reserved for:
- Year-end adjustments such as depreciation, accruals, and prepayments
- Correction of errors where a transaction was posted to the wrong account
- Non-routine transactions such as the write-off of a bad debt
- Intercompany entries in group accounting
- Opening balances when setting up a new accounting system
- Revaluation of assets or foreign currency balances
Journal Entries in UK Practice
VAT Considerations
UK businesses registered for VAT must ensure that journal entries correctly account for input and output tax. Standard-rated supplies attract 20% VAT, reduced-rate supplies 5%, and some supplies are zero-rated or exempt.
A common VAT-related journal entry involves the quarterly VAT settlement:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| VAT output tax | 12,000 | |
| VAT input tax | 8,500 | |
| VAT payable to HMRC | 3,500 |
This entry consolidates the VAT accounts and creates the liability to HMRC.
Corporation Tax
At year end, a company must accrue for corporation tax on its profits. The current main rate is 25% (or 19% for companies with profits under £50,000, with marginal relief between £50,000 and £250,000).
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Corporation tax expense | 15,000 | |
| Corporation tax payable | 15,000 |
Payroll Entries
Monthly payroll generates several journal entries covering gross pay, employer’s National Insurance, pension contributions, and the net pay liability:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Gross wages | 8,000 | |
| Employer’s NIC | 960 | |
| Employee’s NIC payable | 640 | |
| PAYE payable | 1,360 | |
| Pension contributions payable | 720 | |
| Net wages payable | 6,240 |
The Journal and the Ledger
The relationship between the journal and the ledger is sequential. The journal records what happened; the ledger classifies it by account. Posting is the process of transferring entries from the journal to the ledger.
| Step | Record | Purpose |
|---|---|---|
| 1 | Source document (voucher) | Evidence of the transaction |
| 2 | Journal entry | Chronological record |
| 3 | Ledger posting | Classification by account |
| 4 | Trial balance | Verification of accuracy |
| 5 | Financial statements | Reporting to stakeholders |
This audit trail is fundamental to UK accounting and is required by both the Companies Act and HMRC.
Common Errors in Journal Entries
Errors of Principle
Recording a transaction in the wrong category of account. For example, debiting a fixed asset account for a repair that should be treated as a revenue expense.
Errors of Commission
Posting to the correct type of account but the wrong specific account. For example, debiting the electricity account instead of the gas account.
Transposition Errors
Reversing digits in the amount, such as entering £5,400 instead of £4,500. These errors cause the trial balance to disagree by a number divisible by 9.
Errors of Omission
Failing to record a transaction entirely. The trial balance will still balance, but both sides will be understated.
Reversal of Entries
Recording the debit as a credit and the credit as a debit. The trial balance balances, but the affected accounts are doubly misstated.
Journal Entries and Financial Statements
Every line item on the income statement and balance sheet is the aggregation of individual journal entries posted through the ledger. The accuracy of the financial statements depends entirely on the accuracy of the underlying journal entries.
For UK companies filing at Companies House, the accounts must give a true and fair view of the company’s financial position. This requirement, embedded in the Companies Act 2006, means that journal entries must be:
- Complete: All transactions are recorded
- Accurate: Correct amounts and accounts
- Timely: Recorded in the correct period
- Properly classified: Posted to appropriate account categories
- Adequately disclosed: Supported by narrations and documentation