What is a journal entry?

What a journal entry means

Most transactions reach the ledger through invoices, bills and bank reconciliation, and the software creates the double entry automatically. A journal entry is a direct posting to the general ledger. It lists the accounts affected, the debit and credit amounts (which must be equal), the date and a narrative explaining why.

Journals are mainly used for adjustments, often at the month end or year end:

• Depreciation of equipment
• Accruals and prepayments
• Payroll postings from a separate payroll system
• Corrections of items coded to the wrong account
• Clearing a suspense account
• Declaring dividends or recording Corporation Tax

Example

A company buys a £3,000 laptop and depreciates it over three years. At the year end, the accountant posts:

Account	Debit	Credit
Depreciation expense (profit and loss)	£1,000
Computer equipment: accumulated depreciation (balance sheet)		£1,000

Narrative: "Year 1 depreciation on laptop, straight line over 3 years."

A second example: the directors declare a £20,000 dividend paid out of the company's director's loan account rather than in cash. The journal debits dividends (an equity account) £20,000 and credits the director's loan account £20,000, clearing money the director owed the company.

Why it matters for your business

Journals are powerful because they can change any account directly, including ones that affect profit and tax. That makes them a common source of errors, and a place auditors and HMRC look when checking records. Every journal should have a clear narrative and supporting evidence, such as a depreciation schedule or dividend minutes.

For small businesses, it is good practice to let your accountant post journals rather than editing balances yourself, and to lock periods in Xero or QuickBooks once VAT returns are filed so earlier figures cannot be changed by accident.

Recurring journals

Regular adjustments, such as monthly depreciation or spreading an annual insurance premium, can be set up as repeating journals so management accounts are accurate every month without extra work.

Reversing journals are another time saver. An accrual posted at one month end can be set to reverse automatically on the first day of the next month, so the real bill, when it arrives, is not counted twice.