Accounting journals are a day-to-day record of the transactions that take place in your business. Items entered into the journals, known as journal entries, are then used to create the general ledger, which is then used to create financial statements for the business.
What are journal entries?
Journal entries contain information relating to a single transaction within the business.
In double-entry bookkeeping, each journal entry should contain the date, a description, a credit amount and a debit amount, for example:
If a business has bought a new computer for £750, the cash account decreases by £750, and the asset account increases by £750.
| Date | Description | Credit | Debit |
|---|---|---|---|
| 27/11/2024 | Office Equipment | 750.00 | |
| 27/11/2024 | Cash | 750.00 |
Remember, even though there may be more than one debit and credit, the amounts should balance when making your journal entries. This is because they show the movement of the transaction from one account to another. For example:
| Date | Description | Credit | Debit |
|---|---|---|---|
| 27/11/2024 | Office Equipment | 725.00 | |
| 27/11/2024 | Postage | 25.00 | |
| 27/11/2024 | Cash | 750.00 |
The examples used within this post don’t show the specific accounts that the funds are being transferred between. In QuickFile, this is done by showing the Nominal Account, such as (0030) Office Equipment. However, this may change between accounting software, so it has been left out of the following explanations.
You can learn more about how to enter a journal in QuickFile by reading the Knowledge Base article: Journals.
The 6 types of journal entries
There are six types of journal entries that are commonly used in business, each of them has a specific function, and together, they give an accurate statement of the business’s financial standing.
1. Opening entries
These are your opening balances for the period and can come from two places. Either you’ve opened a new account with a starting balance, you’ve completed a period and need to start a new one, or you could be setting up a new account with a different accounting package.
An example of this could be stock. Because stock is an asset, you typically have an opening balance at the start of the year and a closing balance at year-end. The year-end closing balance then becomes your opening balance of the following year.
Accounting software can make this process easy for you; for example, if you’re using QuickFile and entering a starting balance on an account, the journal entry is automatically created for you. However, we recommend double-checking it to ensure the corresponding account is correct.
2. Closing entries
These entries are completed at the end of an accounting period.
Balances need to be transferred from temporary accounts to permanent ones.
For example, at the end of the accounting period, balances will need to be transferred from temporary codes to more permanent ones. This would typically be from your profit and loss codes to a balance sheet code, such as “Retained Earnings and Undistributed Reserves”, essentially resetting your profit and loss balances.
At the end of your financial period, you can run the Simplified Year-End Tool in QuickFile which can complete most of the hard work for you. However, you still need to check that everything looks correct.
3. Transfer entries
There comes a time when you have to transfer an amount from one account to another. When this happens, you need to make sure the transaction is journaled appropriately.
For example, if a director purchases company shares, a transfer must be made from the director’s loan account to a “shares” account.
| Date | Description | Credit | Debit |
|---|---|---|---|
| 27/11/2024 | Director’s Loan | 5.00 | |
| 27/11/2024 | Ordinary Shares | 5.00 |
Another example would be accounting for the depreciation of an asset. Typically, your accountant would do this for you at year-end.
4. Adjusting entries
These are made at the end of an accounting period and are used to report unrecognised transactions. There are typically four types of transactions included in these entries:
- Expense accrual - an expense that has been reported before it’s actually been paid.
- Revenue accrual - work has been performed, or products have been delivered, but the customer has not yet been invoiced.
- Expense deferral - your business has made a pre-payment to a supplier.
- Deferred revenue - a customer has made a pre-payment to your business
5. Compound entries
If there are more than two lines in the journal, this is what’s known as a compound entry. Compound entries can happen when the transaction is complex, such as when running payroll. For example, when payroll is run, the gross amount needs to be recorded in your accounting; however, this transaction is then broken down into the net that the employee is paid, any taxes deducted and pension obligations.
For an in-depth explanation of how to add a payroll journal in QuickFile, check out the Recording Payroll article.
6. Reversing entries
These are made to reverse adjusting entries that have been made in a previous accounting period. For example, an adjusting entry has been made for an accrued expense in an earlier period, which has now been paid in the current period. If the reversing entry is not made, the expense will be reported twice, once in the previous period and once in the current period.
Do you need to worry about journals in your business?
It’s important to know the different types of journal entries, and when and why they should be used. That way, you can ensure your accounting is correct and that everything that needs to be included has been included.
However, if you are using software, such as QuickFile, for your accounting needs, most of the journals can be automatically created for you (or at least created with minimal manual input).
Are journals needed for income and expenditure?
If you’re using software such as QuickFile, you typically wouldn’t need to do this.
These entries are created for you when creating a sale or purchase invoice. In fact, you can see them by viewing the invoice, selecting “More options”, and then “Show nominal ledger entries”. Software packages will typically distribute these between the relevant nominal codes and tax, as appropriate.