A journal entry is just an organized way to write down a transaction so it stays in balance. Two columns — debit and credit — record the same dollar amount on opposite sides, and the rules for which side goes where follow from the accounting equation. Once those rules click, recording journal entries becomes mechanical. This walkthrough sets up the logic and works through several common transactions end to end.
The Accounting Equation and Why Two Sides Exist
Every transaction is recorded under one identity:
Assets = Liabilities + Equity
The left side lists what the business owns; the right side lists where the money to buy those things came from — borrowed (liabilities) or invested/earned (equity). Each transaction touches at least two accounts so the equation stays balanced. Buy a $500 desk with cash: assets go up by $500 (desk) and down by $500 (cash). Borrow $5,000 from a bank: assets go up by $5,000 (cash), liabilities go up by $5,000 (loan).
Debits and credits are how that "at least two accounts" is recorded in a journal. A debit entry goes in the left column; a credit entry goes in the right. The total of debits in every transaction must equal the total of credits — that is the discipline that keeps the books balanced.
The Rules: When a Debit Increases an Account, and When It Decreases
The same word — debit — increases some accounts and decreases others. The split follows the equation.
- Assets are increased by a debit, decreased by a credit.
- Liabilities are increased by a credit, decreased by a debit.
- Equity is increased by a credit, decreased by a debit.
Revenue and expense are sub-categories of equity:
- Revenue increases equity, so it is increased by a credit.
- Expenses decrease equity, so they are increased by a debit.
Dividends paid also decrease equity, so they are increased by a debit — they share the expense pattern even though they are not expenses.
A useful memory anchor: anything on the left side of the equation (assets, plus their close cousin "expenses" because expenses use up assets) goes up with a debit. Anything on the right side (liabilities, equity, revenue) goes up with a credit. Decreasing any account uses the opposite side from what increases it.
The Anatomy of a Journal Entry
A journal entry has four parts:
- Date of the transaction.
- The debit account(s) listed first, with the debit amount in the left column.
- The credit account(s) listed below, indented, with the credit amount in the right column.
- A short description of the transaction.
Format:
Date Account name Debit Credit
Cash 5,000
Notes Payable 5,000
(Borrowed $5,000 from First National)Debits always go above credits, credits are indented, and the dollar amounts line up. Most introductory texts insist on this format because it makes errors easier to spot.
Worked Entries: Five Common Transactions
A new tutoring business called Bright Path opens on May 1. Each transaction is recorded as a journal entry.
1. Owner invests cash to start the business
The owner deposits $10,000 of personal cash into a business account in exchange for stock.
Cash (asset) goes up — debit it. Common stock (equity) goes up — credit it.
May 1 Cash 10,000
Common Stock 10,000
(Owner contribution to start the business)2. Buy equipment for cash
Bright Path buys a laptop for $1,500 cash.
Equipment (asset) goes up — debit. Cash (asset) goes down — credit.
May 3 Equipment 1,500
Cash 1,500
(Purchased laptop for tutoring sessions)3. Provide service on account
Bright Path tutors a student and bills $400, payable in 30 days.
Accounts receivable (asset) goes up — debit. Service revenue (revenue, equity-positive) goes up — credit.
May 8 Accounts Receivable 400
Service Revenue 400
(Tutoring session, invoice to client)4. Pay rent (an expense)
Bright Path pays $600 for May office rent in cash.
Rent expense (expense, equity-negative) goes up — debit. Cash (asset) goes down — credit.
May 10 Rent Expense 600
Cash 600
(May office rent)5. Collect on the earlier invoice
The student pays the $400 owed.
Cash (asset) goes up — debit. Accounts receivable (asset) goes down — credit.
May 30 Cash 400
Accounts Receivable 400
(Collected on May 8 invoice)Notice that entry 5 has no impact on revenue. The revenue was already recognized in entry 3 when the service was performed. Entry 5 is just swapping one asset (receivable) for another (cash). Confusing those two — when to recognize revenue vs. when to collect cash — is one of the most common mistakes early on.
Debits Must Equal Credits — and Compound Entries
Every entry must have debits totaling credits. Most entries touch only two accounts, but a compound entry can touch more. Suppose Bright Path buys $2,000 of equipment by paying $500 down and signing a note for the other $1,500.
May 12 Equipment 2,000
Cash 500
Notes Payable 1,500
(Equipment purchased — partial cash, balance on note)One debit ($2,000) balances two credits totaling $2,000. The rule is dollars matching, not number of lines matching.
Getting Help
Journal entries feed every other piece of accounting machinery: a balance only gets to the trial balance if it was journalized correctly, and period-end adjustments and closes are themselves more journal entries. For the closing process built on the same rules, see closing entries explained, and for the underlying debit/credit logic in one focused page, see debits vs. credits.
Conclusion
Recording journal entries is the discipline of writing each transaction so debits equal credits and the accounting equation stays balanced. The rules of which side of an account to use follow from where the account sits in that equation — assets and expenses are increased with debits, while liabilities, equity, and revenues are increased with credits. Work transactions through the worked examples a few times and the question "debit or credit?" stops being a coin toss.
