A journal entry records a transaction as equal debits and credits across two or more accounts. The same forty or so entries cover most of what a small or mid-size business records, and they are also the entries a reviewer or auditor sees again and again. This library groups them by transaction cycle so you can find the one you need, check it against a client's books, and see which ones carry audit risk.
Rules used throughout: assets and expenses increase with debits, liabilities, equity and revenue increase with credits. Every entry shows the accounts only. Amounts depend on the facts. For the adjusting entries behind the close, see adjusting journal entries.
Revenue and receivables
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 1 | Sale on credit | Accounts receivable | Sales revenue |
| 2 | Cost of the goods sold (perpetual inventory) | Cost of goods sold | Inventory |
| 3 | Cash sale including sales tax | Cash | Sales revenue; sales tax payable |
| 4 | Customer deposit before delivery | Cash | Contract liability (deferred revenue) |
| 5 | Revenue earned from a deposit | Contract liability | Sales revenue |
| 6 | Customer payment received | Cash | Accounts receivable |
| 7 | Sales return or credit memo | Sales returns and allowances (or revenue); inventory | Accounts receivable; cost of goods sold |
| 8 | Provision for expected credit losses | Credit loss expense | Allowance for credit losses |
| 9 | Write-off of an uncollectible account | Allowance for credit losses | Accounts receivable |
| 10 | Customer check returned for insufficient funds | Accounts receivable | Cash |
Entries 1 and 4 to 5 are where ASC 606 timing matters; see revenue recognition and deferred revenue. Entries 8 and 9 are covered in bad debt expense.
Purchasing and payables
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 11 | Inventory purchased on account | Inventory | Accounts payable |
| 12 | Freight-in on inventory | Inventory | Accounts payable |
| 13 | Operating expense bill received | Expense account | Accounts payable |
| 14 | Payment of a vendor bill | Accounts payable | Cash |
| 15 | Insurance premium paid in advance | Prepaid expenses | Cash |
| 16 | Monthly amortization of the premium | Insurance expense | Prepaid expenses |
| 17 | Services received, not yet billed, at period end | Expense account | Accrued liabilities |
Entry 17 is the common source of understated liabilities; see accrued expenses.
Payroll
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 18 | Payroll recorded | Wages expense | Cash (net pay); payroll withholdings payable |
| 19 | Employer payroll taxes | Payroll tax expense | Payroll taxes payable |
| 20 | Remitting withholdings and taxes | Payroll liabilities | Cash |
| 21 | Accrued paid time off | Compensation expense | Accrued compensated absences |
| 22 | Bonus accrued at year end | Bonus expense | Accrued bonuses |
Cash and treasury
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 23 | Bank fees per the statement | Bank charges | Cash |
| 24 | Transfer between bank accounts | Cash, receiving account | Cash, sending account |
| 25 | Credit card statement paid | Credit card payable | Cash |
| 26 | Petty cash replenished | Expense accounts | Cash |
Entries 23 and 26 usually surface during the bank reconciliation.
Inventory
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 27 | Shrinkage found in the physical count | Cost of goods sold | Inventory |
| 28 | Write-down to lower of cost and net realizable value | Cost of goods sold (or write-down expense) | Inventory (or reserve) |
| 29 | Vendor rebate or purchase discount received | Accounts payable or cash | Inventory (or cost of goods sold) |
| 30 | Periodic method: set ending inventory | Inventory (ending) | Cost of goods sold |
| 31 | Periodic method: remove beginning inventory | Cost of goods sold | Inventory (beginning) |
See inventory costing and inventory observation.
Fixed assets
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 32 | Equipment purchased | Equipment | Cash or accounts payable |
| 33 | Monthly depreciation | Depreciation expense | Accumulated depreciation |
| 34 | Disposal at a gain | Cash; accumulated depreciation | Equipment; gain on disposal |
| 35 | Impairment of a long-lived asset | Impairment loss | Asset (or accumulated impairment) |
See PP&E capitalization and depreciation.
Debt and equity
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 36 | Loan proceeds | Cash | Notes payable |
| 37 | Interest accrued | Interest expense | Accrued interest payable |
| 38 | Dividend declared | Retained earnings | Dividends payable |
| 39 | Dividend paid | Dividends payable | Cash |
| 40 | Shares issued above par | Cash | Common stock (par); additional paid-in capital |
See equity rollforward.
Period-end and corrections
Three more entries round out the close, outside the numbered list. Income tax provision: debit income tax expense, credit income taxes payable and deferred tax liability (or debit a deferred tax asset). Reclassification of a misposted item: debit the correct account, credit the wrong account. Reversing entry: debit the accrued liability, credit the expense, dated the first day of the new period.
Which entries get the closest look
Auditors do not test all 40 equally. Under AU-C 240, journal entry testing targets entries that are more likely to be used to manage results: manual entries to unusual accounts, entries by people who do not normally post, entries at or after period end with little explanation, round-dollar amounts and entries with no description. Entries 8, 17, 21, 28 and 35 are estimates that management controls, so they get attention for bias. Entries 2, 5 and 7 matter for cutoff. Entry 13 matters for completeness of liabilities.
A good entry has a date in the right period, a description that says why, support attached and an approver who is not the preparer. See journal entry testing and the journal entry testing workpaper.
Common mistakes
- Debiting an expense for a capital purchase.
- Recording a customer deposit as revenue.
- Writing off receivables against expense under the allowance method.
- Booking an accrual with no reversal plan.
- Posting to accounts payable in QuickBooks without a vendor name, which breaks the subledger link.
- Back-dating entries into a closed period.
FAQ
What are the basic rules of debits and credits?
Debits increase assets and expenses and decrease liabilities, equity and revenue. Credits do the opposite. Every entry has equal debits and credits.
What is the difference between an adjusting and a correcting entry?
An adjusting entry brings balances up to date at period end, such as accruals and depreciation. A correcting entry fixes an error in an earlier entry.
Which journal entries do auditors worry about most?
Manual entries near period end, entries to unusual accounts, estimates controlled by management, and entries without support.
Do I need a reversing entry for every accrual?
No. Reversal suits accruals paid in one amount; balances that build over time are updated with a new entry each period.
What is a compound journal entry?
An entry with more than two accounts, such as a cash sale with sales tax, or payroll with several withholdings.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- FASB ASC 330 (inventory), ASC 360 (property, plant and equipment), ASC 326-20 (credit losses), ASC 606 (revenue) and ASC 710-10-25-1 (compensated absences)
- AICPA, AU-C section 240, Consideration of Fraud in a Financial Statement Audit (journal entry testing, paragraphs on management override)
Part of CORAA University · Evidence and audit procedures: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error