What is a journal entry?
Published
A journal entry records the effect of a single financial transaction on two or more accounts, with total debits equal to total credits. It is the smallest unit in an accounting system: every figure in every report originates in one, and can be traced back to it.
The examples on this page use a fictional business (Al Waha Office Supplies). Figures are illustrative only and are not real business data or sector benchmarks.
The core equations
Σ Debits = Σ CreditsΣ Debits − Σ Credits = 0
Net amount = Gross ÷ 1.15VAT amount = Gross × (15 ÷ 115) = Gross × 0.130435
Assets = Liabilities + EquityExample 1: buying an asset on a tax invoice
Al-Waha buys office equipment for SAR 5,750 including tax, paid from the bank.
Applying the second equation:
Net = 5,750 ÷ 1.15 = SAR 5,000VAT = 5,750 × (15 ÷ 115) = SAR 750
| Account | Debit | Credit |
|---|---|---|
| Office furniture and equipment | 5,000 | |
| Input VAT | 750 | |
| Bank | 5,750 | |
| Total | 5,750 | 5,750 |
The SAR 750 is not an expense. It is a receivable from ZATCA, offset against output VAT on the return. Booking it as an expense is equivalent to writing it off.
Example 2: a complete sales cycle in three linked entries
This is where entries stop being isolated. Al-Waha sells goods for SAR 34,500 including VAT (30,000 + 4,500). Those goods cost SAR 17,400 in inventory. The customer pays in instalments.
Entry 1 - recognise the sale when the invoice is issued:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 34,500 | |
| Sales | 30,000 | |
| Output VAT | 4,500 |
Entry 2 - recognise the cost of the goods sold, same date:
| Account | Debit | Credit |
|---|---|---|
| Cost of sales | 17,400 | |
| Inventory | 17,400 |
This is the entry most often missed. Skip it and profit is overstated while book inventory drifts away from the physical count.
Entry 3 - collect a partial payment of SAR 20,000:
| Account | Debit | Credit |
|---|---|---|
| Bank | 20,000 | |
| Accounts receivable | 20,000 |
Gross profit on the deal = 30,000 − 17,400 = SAR 12,600Margin = 12,600 ÷ 30,000 = 42%Receivable outstanding = 34,500 − 20,000 = SAR 14,500Cash actually received = SAR 20,000
Note the spread: profit earned is 12,600, cash in is 20,000, and 4,500 is owed to ZATCA. Three different numbers from one transaction, each answering a different question. This is the root reason profit never equals cash.
Example 3: a reversing correction
In May, you discover that SAR 12,000 of rent was posted to the utilities account in April - after April was closed.
Wrong approach: reopen April and edit the entry. Correct approach: post a correcting entry dated in May.
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 12,000 | |
| Utilities expense | 12,000 |
The original entry stays in the record. The audit trail remains readable: what happened, when it was found, and how it was fixed.
Three common mistakes, quantified
| Mistake | Direct effect |
|---|---|
| Posting the gross amount (5,750) to expense without splitting the tax | Expense overstated by SAR 750 and the same amount of input VAT forfeited. Across a quarter with SAR 128,666 of taxable purchases, that is SAR 19,300 |
| Forgetting the cost-of-sales entry | Gross profit overstated, book inventory above physical, and the whole variance surfaces at once at year-end count |
| Editing an entry in a filed period | Your books no longer agree with what you submitted to ZATCA, with nothing on record to explain the difference |
Journal entry vs. general ledger
| Journal entry | General ledger | |
|---|---|---|
| Ordered by | Date | Account |
| Answers | What happened on 14 May? | What is the bank balance and how did it get there? |
| Unit | One transaction | One account over time |
| Relationship | The source | The result of posting |
The same transaction appears in both. Posting turns entries into a ledger, and the ledger is what builds the trial balance.
Types you will encounter in practice
- Automatic - generated from a document: sales invoice, receipt voucher, purchase bill.
- Manual - for transactions with no document: bank charges, currency differences, monthly depreciation.
- Adjusting - at period end: releasing a prepayment, accruing a cost whose invoice hasn't arrived.
- Closing - moving revenue and expense balances into retained earnings at year end.
- Reversing - cancelling the effect of a prior entry without deleting it.
Pre-posting checklist
- Do debits equal credits?
- Is the date inside an open period?
- If it's a tax invoice, has VAT been separated?
- If it records a sale, is there a matching cost-of-sales entry?
- Are the accounts the most accurate ones, or just the nearest ones?
- Is there an attachment or reference that will still explain this entry a year from now?
Frequently asked questions
Can a journal entry be deleted after posting?
Technically possible in some systems; rejected by sound accounting practice. Deletion breaks the audit trail and makes it impossible to explain why a previously issued report has changed. A reversing entry removes the effect and keeps the record.
How many accounts can one entry touch?
At least two, with no upper limit. A monthly payroll entry at a small business often runs to ten lines: basic salary, housing allowance, transport allowance, GOSI payable, staff advances deducted, and the bank.
If an entry balances, is it correct?
No - balancing is necessary but not sufficient. An entry posting rent to utilities balances perfectly, is completely wrong, and will not be caught by the trial balance.
When do I need a manual entry rather than a document?
Bank charges, currency differences, depreciation, stock adjustments, and reclassifications. Sales and purchases are better raised from source documents so the link back to the invoice survives - a link you will want during any tax review.
What is the difference between the document date and the posting date?
The document date is the date on the invoice as issued. The posting date is the accounting date that determines which period the transaction falls into. Normally they are the same; a gap arises with late entry, and it should be deliberate and explainable rather than accidental.