How to write a journal entry, with the narrative

A book of prime entry is where a transaction is first written down, before it reaches the ledger. The day books take goods sold and bought on credit. The cash book takes money paid into and out of the bank.

The journal takes anything that fits in neither.

• The opening entries of a new business
• Writing off a debt that will not be paid
• Correcting an error
• One-off transactions, such as equipment bought on credit
• Something that passes between the owner and the business with no money through the business bank

To decide, ask two questions.

• Did money move through the business bank?
• Was it goods bought or sold on credit?

If both answers are no, use the journal.

The journal is not an account. It is an instruction, and the entry still has to be posted to the ledger.

A journal has three columns: details, debit and credit. Each entry has a date and a number.

Debit lines

Written first. Each names an account and puts the amount in the debit column.

Credit lines

Written after the debits. Each names an account and puts the amount in the credit column.

Narrative

A short note under the entry that says what it is for.

An entry can have more than one debit or more than one credit. Total debits must equal total credits.

Write the entry before anything is posted. The journal is the instruction, and the posting follows it.

1. Check that the transaction belongs in the journal. A bank payment goes in the cash book, and a credit sale of goods goes in the sales day book.
2. Name every account the transaction touches.
3. Decide what kind each account is, and whether it goes up or down. That gives the side.
4. Write the date and the next journal number. Journals are numbered in order, so a missing one is noticed.
5. Write the debit lines first, then the credit lines.
6. Add up both columns. If the totals differ, an amount or a side is wrong.
7. Write the narrative: what the entry is for, and a reference to the evidence, such as an invoice number.
8. Keep the evidence with the journal, and have someone other than the writer approve it.
9. Post each line to its account in the ledger.

Greenway Garden Design writes three journals in February.

On 4 February it buys a plan printer on credit from Inkwell Office Supplies. The invoice shows a net price of £1,150.00 and VAT of £230.00. The business can claim the VAT back.

The asset is debited with the net price. The VAT is debited to the VAT account.

The supplier is credited with the gross amount, £1,380.00, because that is what must be paid. Bank is not touched, because nothing has been paid yet.

On 18 February a customer, Yew Tree Nursery, closes down owing £285.00. The debt is written off. Ignore VAT on this one.

The debt is no longer an asset. It comes out of Trade receivables and becomes an expense. The customer's own account in the sales ledger is credited too.

On 25 February the owner brings her own van into the business. It is worth £3,800.00. No money moves, so the cash book is not used.

The business has a new asset, and it owes its owner £3,800.00 more. In each of the three journals the debits equal the credits.

The narrative lets anyone who reads the books later see what was done and why.

• What the entry is for
• A reference to the evidence, such as an invoice number
• Who authorised it, if the business asks for that

A narrative of one vague word, such as Adjustment, explains nothing.

A journal can move any amount between any accounts. That makes it useful, and it makes it a risk: a journal can hide a mistake or a theft. So the person who writes a journal does not approve it.

• Using the journal for something that has its own book. Money through the bank goes in the cash book. Goods bought or sold on credit go in the day books.
• Stopping at the journal. The entry is not in the ledger until each line is posted.
• Putting equipment bought on credit through the purchases day book. That day book is only for goods bought to sell on.
• Crediting Bank for something bought on credit. The credit goes to the supplier until the payment is made.
• Debiting the asset with the gross amount when the VAT can be claimed back. The asset takes the net price.
• Writing a narrative that names no evidence.
• Posting a journal that has no narrative and no approval. A journal that balances can still be wrong.

• Total debits equal total credits.
• Each account is on the side its kind needs: an asset or an expense going up is a debit, and a liability, capital or income going up is a credit.
• Someone who was not there could tell from the narrative what happened.
• The evidence is with the journal.
• The number follows on from the last journal, with no gap.
• Every line has been posted to the ledger, once.