Accounting entries: a key accounting concept to master

For a company, accounting entries are the solid foundations of reliable accounting that reflects its financial situation.

But mastering accounting entries is not innate, and is governed by a set of principles and rules that you need to be familiar with. Whether you're making a purchase or a sale, together we're going to decipher what an accounting entry is and how to enter it in the journal in the correct way.

Bonus: find out how to reverse an entry if you make a mistake, and how the accounting entries file can help you.

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What is an accounting entry?

Definition

An accounting entry is the entry of a flow in the accounting journal that records all the company's transactions, whether economic, financial or commercial in nature, and which affect earnings or assets.

Accounting entries are the basis of bookkeeping. They are the basis for producing financial statements and other accounting documents that accurately reflect the financial health of the company.

Composition

An accounting entry is made up of different elements:

• the date on the supporting document (the invoice),
• the document reference
• the wording
• the accounts involved
• the debit amount
• the credit amount.

Accounting method

The recording of accounting entries is based on the principle of double-entry bookkeeping.

This means that each accounting entry :

• must include at least 2 lines, one with a credit amount, the other with a debit amount ;
• and the debit and credit must balance.

This makes it possible to trace the origin of each accounting transaction, and reduces the risk of fraud.

How to make an accounting entry in 6 steps

Step 1: Choosing your accounting journal

You have two options for recording your accounting entries:

• either list them in a single accounting journal, which will provide a chronological record of all your transactions, regardless of their nature;
• or record them in a number of subsidiary journals that can be used to group together transactions of a similar nature:
  • purchase journal
  • sales journal
  • cash journal
  • bank journal,
  • miscellaneous operations journal.

Step 2: Identify the right accounts for your transactions

How can you be sure that you're choosing the right accounts to record your accounting entries? Identifying the right class of account is the first step.

And to find exactly the right accounts to use, see the full list in our article on the general chart of accounts.

Step 3: Make the entry the right way round

Once you've identified the right accounts, how do you know whether to debit or credit them?

Depending on whether the account in question refers to assets or liabilities, income or expenses, crediting an account will not have the same effect: an increase in one case and a decrease in the other. The same applies to debits.

To avoid making any mistakes, here is a summary table of how these accounts interact with the debit and credit columns:

Step 4: Enter the accounting entry for the sale

Once you have identified the various amounts on the invoice that will make up the accounting entry :

• debit the revenue account (class 7) for the amount excluding VAT ;
• debit account 4457 Collected VAT for the VAT amount;
• credit the amount including VAT to the Customer account;
• record the bank transaction once the invoice has been paid by the customer:
  • credit account 411 Customers by the amount including VAT ;
  • debit account 512 Bank for the amount including VAT.

💡 Need to see a concrete example of a sales accounting entry?

Step 5: enter the purchase accounting entry

Once you've identified the various amounts on the invoice that will make up the accounting entry :

• credit account 401 Suppliers with the amount including VAT ;
• debit account 4456 Deductible VAT by the amount of the VAT;
• debit the purchase expense account (class 6) for the amount excluding VAT;
• post the bank transaction once the invoice has been paid:
  • debit account 401 Suppliers for the amount including VAT ;
  • credit account 512 Bank for the amount including VAT.

💡 Need to see a concrete example of a purchase accounting entry?

Step 6: enter the accounting entry to allocate the profit or loss

→ Do you have a loss?

If so, carry the loss forward to the next financial year by recording retained earnings.

→ Are you making a profit?

If so, you must allocate it :

• to the legal reserve (minimum 5% of profits),
• to other optional reserves (such as the statutory reserve),
• to dividends to be paid to shareholders.

💡 Find out in detail how to account for the appropriation of profits by following the steps step by step.

Reverse an accounting entry in the event of an error

Have you made an accounting entry error? You should know that you cannot delete or modify an accounting entry, but you can record a new entry to rectify the old one.

This is known as a reversal. You repeat the same operation but in the opposite direction so that the two balance out and therefore cancel each other out.

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The accounting records file: essential in the event of a tax audit

The FEC is a computer file that lists all your accounting entries.

Useful, and in some cases compulsory, it gives the tax authorities a reliable database from which to carry out their checks, quickly and remotely.

To generate your FEC and automate the management of your accounting entries as far as possible, you need accounting software.