One of the most fundamental concepts in accounting is the journal entry – a record that accompanies every financial transaction a business makes. Whether a company is making a sale, paying a bill, or taking out a loan, a journal entry will need to be created to reflect those activities in its financial records.

A journal entry tracks the movement of money in and out of your business and keeps your records accurate. Understanding how to create and manage these entries is key to maintaining financial health and avoiding costly mistakes. Below, we’ll explain what journal entries are, why they matter, and how to structure them correctly.

What’s in this article?

• What is a journal entry in accounting?
  
• How do you structure a journal entry, and what information should it include?
  
• What are common mistakes to avoid when making journal entries?
  
• How can Stripe help with journal entries?
  

What is a journal entry in accounting?

A journal entry is how your business records a financial transaction for accounting purposes. It’s a detailed note that tells you where your money is coming from and where it’s going. Every time you buy something, sell a product, or pay bills, you need to create a journal entry to reflect that transaction in your accounting system.

A journal entry typically involves two parts: debits and credits. For every debit, there’s a corresponding credit. For example, if you pay rent, the journal entry would show a debit (an increase) to your expenses and a credit (a decrease) to your cash.

Journal entries can help businesses maintain detailed records of all financial activities. This information is used to create financial statements, such as a balance sheet and income statement, which show the business’s overall health.

How do you structure a journal entry, and what information should it include?

A journal entry has four main components:

• Date: Record the date the transaction took place, whether it’s a sale, purchase, or payment.

• Accounts involved: Every journal entry will impact at least two accounts. For example, if you receive payment from a sale, accounts receivable (AR) and sales revenue might be the accounts involved. It’s important that you record the appropriate accounts involved in each transaction.

• Debits and credits: In accounting, the total amount debited must always equal the total amount credited. For example, if you receive £500 for a service you provided, you would debit cash for £500 (because cash is increasing) and credit accounts receivable for £500 (because AR is decreasing).

• Description: This is a short note explaining the transaction. This might include the reason for the transaction or any relevant details. For instance, it could say “Sold services to [Client Name] for £500” or “Paid for office supplies”. Leave a short but specific note for future reference and to help you stay organised.

Here’s an example of a journal entry:

• Date: 15 January 2024

• Account 1 (Debit): Cash – £500

• Account 2 (Credit): Accounts receivable – £500

• Description: Payment received from [Client Name] for services rendered.

What are common mistakes to avoid when making journal entries?

If you’re new to accounting and bookkeeping, pay attention to these common mistakes around journal entries.

• Forgetting to balance debits and credits: Every journal entry should be balanced, meaning your debits must always equal your credits. If they don’t, your books won’t reconcile, leading to inaccurate financial statements that can cause bigger problems in the future.

• Categorising accounts incorrectly: One mistake that might be easy to make is miscategorising transactions. For example, you might accidentally record a loan repayment under expenses instead of current liabilities, or categorise a sale under the incorrect income category. This type of error can distort your income statement and balance sheet, leading to complications when you review your financials later. Always make sure you’re using the right accounts, and consult your chart of accounts or an accountant if you’re unsure.

• Not recording all transactions: Some might be tempted to skip recording small or routine transactions because they seem inconsequential. However, each transaction directly contributes to the accuracy of your financial statements. One missed expense can create larger discrepancies over time. Be consistent and record everything – no matter how minor it seems. This is especially important for cash-based businesses in which small payments or purchases can easily be overlooked.

• Omitting dates or descriptions: Forgetting to record a date or a description for your journal entries can create issues in the future, especially when you’re trying to match up transactions during reconciliation. Always include the date of the transaction and a clear, concise description to help you (and anyone else reviewing your books) understand the context of each entry.

• Overlooking accruals and prepaid expenses: For many businesses, expenses and revenues need to be recorded when they’re incurred, not when cash changes hands. This is called accrual accounting. For example, if you pay for a one-year software subscription upfront, you’ll need to expense it over the course of the year – not all at once. If you don’t account for previously paid expenses, unearned revenue, or accrued liabilities, your financial reporting will be impacted. This can result in inaccurate profit and loss reports.

• Recording without proper documentation: It’s important that you hold on to all documents that back up your journal entries. Without receipts, invoices, or contracts as validation, it’s much easier to make mistakes – and missing documentation can cause issues if you’re audited. Always attach documentation or reference it in your journal entries. This could be as simple as noting the invoice number or uploading a scanned receipt to your accounting system.

• Failing to review or reconcile regularly: Making journal entries is one part of the accounting process, but reviewing and reconciling them on a routine basis is just as important. If you’re not regularly checking your journal entries against your bank and credit card statements or accounting software, you might miss discrepancies. Regular reconciliation can help you catch potentially costly errors early.

• Ignoring tax implications: Recording certain types of expenses or income can affect your tax liabilities or deductions. If you’re unsure about the tax impact of a transaction, consult a tax advisor or accountant to make sure you’re staying compliant and not missing out on tax-saving opportunities.

How can Stripe help with journal entries?

Stripe automatically tracks all payments, charges, and fees. This can help make recording entries easier and improve accuracy.

When you make a sale or receive a payment, Stripe automatically generates a journal entry, so you don’t have to create each entry manually. This can be done for one-off payments or recurring transactions if you’re using subscriptions. Stripe can also track transaction fees. When Stripe deducts a processing fee from a payment, it automatically records the fee as an expense – freeing up your time from needing to manually calculate these small but important details.

Stripe can also integrate with accounting software such as QuickBooks or Xero via apps from the Stripe App Marketplace. Once your Stripe account syncs with your platform, it logs journal entries for revenue, fees, refunds, and other related transactions directly onto your books.