When a journal entry is the right tool
Use a manual entry for things that have no bill or payment behind them. Typical cases are depreciation, moving a transaction between accounts, recording prepaid expense amortization, and year-end adjustments.
Do not use one to fix something that has a normal route. A wrong category on a bank transaction should usually be fixed on the transaction itself, so the bank match stays intact.
Step by step
First, decide what happened in plain words. For example: the rent for the whole quarter was paid in advance, and one month's worth is now used up. Second, identify the accounts. Prepaid rent decreases, and rent expense increases.
Third, set the debit and credit. Rent expense gets the debit because expenses grow with debits. Prepaid rent gets the credit because the asset shrinks. Fourth, enter the date, usually the last day of the month. Fifth, write a clear memo. Finally, save and check the effect on your reports.
Writing memos that help later
A memo like adjustment tells you nothing a year later. Better is something that names the reason, the period and the supporting document, such as October prepaid insurance amortization per policy schedule.
Good memos help your CPA and make an audit trail. If someone asks about the entry, you can answer from the record without relying on memory.
Errors to avoid
Posting to the bank account in a manual entry is a frequent error. It changes the book balance without a real bank transaction, so your reconciliation will not match. Bank movements should come from deposits and payments.
Another is tagging a customer or vendor incorrectly. If you debit accounts receivable, many programs require a customer name, and a wrong name distorts aging reports. Also avoid entering in a closed period without checking with whoever closed it.
Review and reverse
After posting, run a quick report for the accounts used and make sure the balances moved as expected. Some entries are meant to be temporary, like an accrual at month end. Turn on the reversing option, so the books do not double count when the real bill arrives.
Keep a short log of recurring entries, such as monthly depreciation. If your bookkeeper handles this, ask for the schedule once a year.
A second example: moving a misposted amount
Suppose a payment for equipment was coded to repairs. The fix is to debit the equipment asset and credit repairs expense for the same amount, dated in the period you are correcting. Add a memo that says what was wrong and why. Repairs drops, the asset appears on the balance sheet, and the bank balance is untouched because no cash moved in the fix.
Common questions
Can I edit a journal entry later?
Usually yes, but be careful in closed periods. A correcting entry with a note is cleaner than rewriting history.
Do journal entries need approval?
In a small business there may be no formal approval, but a second person looking at manual entries is a smart control.
What is a compound journal entry?
One with more than two lines, such as a loan payment split between principal, interest and bank. Total debits must still equal total credits.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.