Journal Entry Example for Small Business Owners

To help you work out different scenarios in your business, we’ve compiled a journal entry example for each common transaction. We also go over the components of journal entries and why they are important. 

What is a Journal Entry?

A journal entry is a chronological record of your business’s financial transactions. This is the main source of detailed data for accounting systems.

Debits and Credits

A debit signals an increase in assets and expenses and a decrease in liabilities and equity. A credit increases liabilities and equity, and decreases assets and expenses.

The Accounting Cycle

The accounting cycle is the steps that a business takes in recording, processing, and summarizing financial information. Journal entries are the foundation for financial statements. 

Double-entry Bookkeeping

Double-entry bookkeeping involves recording every financial transaction as two separate entries: a debit and a credit. Here are the most important benefits of this system:   

• Accuracy through double-checking each transaction.
• Maintaining the balance of the accounting equation: Assets = Liabilities + Equity. 
• Making sure that all financial transactions are recorded. 
• Providing a clear audit trail of the source of financial information.
• An easier way to assess financial performance.

Key Components of a Journal Entry Example

1. Date the transaction took place.
2. Name of the account affected by the transaction.
3. Debit and Credit columns.
4. The reason for the memo.
5. A reference code to identify the source document (e.g., invoice, receipt).

Journal Entry Example of Common Account Types 

Asset Accounts

Cash

• Received cash from sales
  • Cash (Debit) – 1,000
  • Sales Revenue (Credit) – 1,000

• Paid cash for rent
  • Rent Expense (Debit) – 500
  • Cash (Credit) – 500

Accounts Receivable

• Sold goods on credit
  • Accounts Receivable (Debit) – 500
  • Sales Revenue (Credit) – 500
• Received payment from a customer
• Cash (Debit) – 500
• Accounts Receivable (Credit) – 500

Inventory

• Purchased inventory on credit
  • Inventory (Debit) – 1,000
  • Accounts Payable (Credit) – 1,000
• Sold inventory for cash
  • Cash (Debit) – 1,500
  • Cost of Goods Sold (Debit) – 800
  • Inventory (Credit) – 800
  • Sales Revenue (Credit) – 1,500

Liability Accounts

Accounts Payable

• Purchased inventory on credit
  • Inventory (Debit) – 1,000
  • Accounts Payable (Credit) – 1,000
• Paid a creditor
  • Accounts Payable (Debit) – 1,000
  • Cash (Credit) – 1,000

Equity Accounts

Owner’s Capital

• Invested cash in the business
  • Cash (Debit) – 10,000
  • Owner’s Capital (Credit) – 10,000

Owner’s Drawings

• Withdrew cash for personal use
  • Owner’s Drawings (Debit) – 500
  • Cash (Credit) – 500

Retained Earnings

• Net income for the period
  • Income Summary (Debit) – 1,000
  • Retained Earnings (Credit) – 1,000

Revenue and Expense Accounts

Sales Revenue

• Sold goods for cash
  • Cash (Debit) – 1,000
  • Sales Revenue (Credit) – 1,000

Cost of Goods Sold

• Cost of inventory sold
  • Cost of Goods Sold (Debit) – 800
  • Inventory (Credit) – 800

Rent Expense

• Paid rent for the month
  • Rent Expense (Debit) – 500
  • Cash (Credit) – 500

How to Record a Journal Entry

1. Identify all the financial activities for a certain period, and the affected accounts for each transaction.
2. Determine if the account needs to be debited (increased) or credited (decreased).
3. Create a journal entry to record the details of each transaction, with the date, account titles, debits, credits, and reference information.
4. Post the information to the general ledger. You would also create a trial balance to verify the accuracy of your entries in the general ledger. 
5. At the end of the accounting period, adjust entries to recognize revenue earned but not yet received, expenses incurred but not yet paid, and corrections needed.
6. Verify that the total debits equal the total credits, and use the adjusted trial balance to prepare financial statements.
7. Make closing entries to transfer the temporary accounts to the retained earnings account to prepare for the next accounting period. 
8. Prepare a final trial balance so that only permanent accounts have balances.

Journal Entry Types for Small Businesses

Accrual vs Cash Basis Accounting Journal Entries

Accrual accounting recognizes revenue when it is earned and expenses when they are incurred. Cash accounting recognizes revenue and expenses when cash is actually received or paid. 

Cash basis accounting is easier to implement and understand for small businesses with limited transactions and for personal finances. Accrual basis accounting is good for businesses with significant credit sales or deferred revenue. It provides a more accurate picture of financial performance. Most public companies and many private companies must use accrual basis accounting reporting purposes.

Adjusting Entries

Adjusting entries at the end of an accounting period ensures that financial statements accurately reflect the company’s financial position and performance. For example, you might adjust the balances of certain asset and liability accounts to reflect their current values.

You typically need to adjust entries when you see a difference between cash flow and the accrual basis of accounting. For example, you might pay for expenses in advance and adjust the prepaid expense account to reflect the portion used up during the period. 

The same goes for receiving payment for goods or services before delivery, expenses incurred but not yet paid, revenue earned but not yet received, and recording depreciation expenses for long-term assets over time. 

Closing Entries

Closing entries are journal entries made at the end of an accounting period. This transfers the balances of temporary accounts (revenue, expense, and dividend accounts) to the retained earnings account. After this, your general ledger is ready for the next accounting period.

Reversing Entries

Reversing a journal entry is most common for entries for for recurring expenses or revenues. They can be reversed to avoid re-entering the same information each period. You can also do this for entries based on estimates, so you can adjust for actual amounts at the end of the period.   

Journal Entry Example for Small Business Owners

Example 1: Journal entry for a sales transaction

Scenario: Product costing $300 sold for $500 on credit. 

Journal Entry:

• Debit Accounts Receivable to record the amount owed by the customer. 
• Credit Sales Revenue to record the income earned from the sale.
• Debit Cost of Goods Sold to record the cost of the product sold.
• Credit Inventory to reduce the inventory balance by the cost of the product sold.

Example 2: Journal entry for an expense payment

Scenario: Company pays $200 for rent.

Journal Entry:

• Debit Rent Expense to record the expense incurred for rent.
• Credit Cash to record the cash paid for rent.

Example 3: Journal entry for payroll expenses

Scenario: Company’s weekly payroll is $10,000, with the employer portion of payroll taxes at 15% and employees withholding 10% of their wages for federal income tax.

Journal Entry:

• Debit Wages Expense to record the total wages paid to employees.
• Credit Federal Income Tax Payable to record the federal income tax withheld from employee wages.
• Credit Social Security Tax Payable to record the employer’s portion of Social Security taxes.
• Credit Medicare Tax Payable to record the employer’s portion of Medicare taxes.
• Credit Federal Unemployment Tax Payable to record the employer’s portion of federal unemployment taxes.
• Credit State Unemployment Tax Payable to record the employer’s portion of state unemployment taxes.
• Credit Cash to record the total amount of cash paid to employees, net of the taxes withheld.

Example 4: Journal entry for paying utility bills

Scenario: Company receives utility bill for $500 due in 30 days.

Journal Entry:

• Debit Utilities Expense subcategory that specifies the type of utility to record the expense incurred for utility services.
• Credit Accounts Payable to record the liability to the utility company for the unpaid bill.

Example 5: Journal entry for receiving a loan

Scenario: Company borrows $10,000 due in 12 months at 5% interest per year.

Journal Entry:

• Debit Cash to record the cash received.
• Credit Notes Payable to record the liability for the loan.

Note that loan interest is typically accrued over time and recorded as an expense. The specific method will depend on the loan terms and the company’s accounting policies.

Common Challenges in Managing Journal Entries

• Making sure that entries are recorded correctly.
• Regularly recording entries to avoid missed entries and errors. 
• Maintaining consistent formatting and standards for entries.
• Compliance with accounting standards and regulations.
• Properly integrating journal entries with other accounting systems and financial reports.

Best Practices for Recording Journal Entries

• Review easy entry carefully before posting to the general ledger.
• Reconcile accounts on a schedule to ensure accuracy.
• Use accounting software to automate tasks, reduce errors, and improve efficiency.
• When in doubt, consult with an accountant or bookkeeper.
• Stay updated on accounting standards and tax regulations.

Frequently Asked Questions

How often should I make journal entries in my small business?

Businesses with high transaction volumes or those that need daily oversight of their finances should record entries daily. Weekly is good for moderate transaction volumes, and monthly works for most businesses with low transaction volumes.

What’s the difference between a general ledger and a journal entry?

A general ledger is a book of accounts that provides a detailed record of all of a business’s financial transactions. Each account shows the debits and credits for that particular account. A journal entry is the first place where you record these transactions, in chronological order. 

Do I need an accountant to review my journal entries?

You can manage your own journal entries, but consulting with an accountant can help you avoid costly errors. These professionals can offer you valuable advice on financial management, tax planning, and business growth.

Can journal entries be corrected once recorded, and how?

If you accidentally recorded the wrong amount for an expense, you would create a reversing entry to correct the error. Then, you would make the correct entry.

What should I do if my debits and credits don’t match in a journal entry?

If you’re using accounting software, look for built-in tools that help you identify and correct errors automatically. If not:

1. Double-check the account titles, amounts, and debits and credits for obvious errors.
2. Verify that you posted the entry correctly to the general ledger. 
3. Look for related journal entries that could be affecting the balance, like a corresponding receivable or payable.

What Is AccountsBalance?

AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.

We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.

You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.

Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.

And here’s some free resources:

• Entrepreneur Bookkeeping Checklist
• Monthly Finance Meeting Agenda

In Summary

This is not an exhaustive list of every journal entry example out there. It does serve as a good list of the most common ones, however, to help you get a basic understanding of making entries and postings. If you choose to do your own accounting, we encourage you to dig deeper into the different scenarios specific to your business.