Journal Entry

Definition

A journal entry is the formal, chronological record of a financial transaction within the double-entry bookkeeping system. It documents a transaction by applying equal debit and credit amounts to the affected accounts, ensuring the accounting equation (Assets = Liabilities + Equity) always remains balanced.

Journal entries translate business activity into structured, auditable data, forming the foundational building blocks of the general ledger and all financial statements.

The Double-Entry Foundation: Every transaction impacts at least two accounts. The journal entry captures this duality, ensuring total debits always equal total credits. When recording an entry, accountants answer four key questions:

1. Which accounts are affected? (e.g., Cash, Deferred Revenue)
2. Did the account increase or decrease? (Dictated by debit/credit rules)
3. By what amount?
4. Is the entry balanced? (Total Debits = Total Credits)

Journal Entry Format and Components

A well-structured journal entry doesn’t just record numbers, it tells the story of a transaction. Each entry must include enough detail to show what happened, when, and why, allowing accountants (and auditors) to trace events, verify accuracy, and catch errors.

Every journal entry typically includes:

• Date – When the transaction occurred or was posted.
• Header/Entry Type – A short descriptor (e.g., “Revenue Recognition,” “Accrual Adjustment”).
• Reference Number – A unique identifier linking to source documents, invoices, or subledger entries.
• Accounts Affected – The name and number of each account impacted (at least one debit and one credit).
• Amounts – Debits and credits listed in equal totals to maintain balance.
• Description or Memo – A concise explanation of the transaction’s purpose.
• Additional Details (optional) – Subsidiary or entity involved, currency, department, or project code.

Example

Date: 2025-10-14

Header: Revenue Recognition

Reference: JE-000245

Debit: Deferred Revenue (2400) $1,000

Credit: Subscription Revenue (4000) $1,000

Description: Monthly revenue recognition – Customer A (ASC 606 compliance)

This entry records one month of earned revenue from a prepaid annual subscription, reducing deferred revenue and recognizing income in the appropriate period.

How Journal Entries Work

The entire foundation of a journal entry lies in the Debit (Dr) and Credit (Cr) duality, the mechanism by which every financial transaction is recorded.

Debits and Credits aren’t about “good” or “bad”; they are simply the directional tools used to change an account’s balance. Debits and credits move in opposite directions depending on the account type: 

• To Increase an Asset or Expense account, you use a Debit.
• To Decrease an Asset or Expense account, you use a Credit.

Conversely:

• To Increase a Liability, Revenue, or Equity account, you use a Credit.
• To Decrease a Liability, Revenue, or Equity account, you use a Debit.

The 6 Types of Journal Entries

While every journal entry follows the same double-entry logic, the purpose behind each varies. Across IFRS and US GAAP, these six types form the backbone of accurate, compliant accounting records.

1. Opening Entries: These bring forward the ending balances from the previous period as the beginning balances of the current one. They establish continuity in the books.
2. Adjusting Entries: Recorded at period-end to align books with accrual accounting principles. They capture items not yet recognized, such as accrued expenses, accrued revenue, prepaid expenses, and deferred revenue. Adjusting entries ensure that revenue and expenses are recognized in the correct period under the matching and revenue recognition principles.
3. Reversing Entries: Posted at the start of a new period to undo specific adjusting entries from the prior one. They simplify bookkeeping and prevent double-counting.
4. Transfer Entries: Used to reclassify or allocate balances between accounts, such as moving costs from one department to another or shifting funds between entities within a group. 
5. Compound Entries: A single journal entry that affects more than two accounts. Common for payroll, revenue recognition, or complex billing transactions that require multiple debits and credits. 
6. Closing Entries: Made at the end of the accounting period to transfer balances from temporary accounts (revenue, expense, gains, losses) into permanent equity accounts, typically retained earnings. This resets income statement accounts for the next fiscal period.

The SaaS Journal Entry Challenge

SaaS companies face complex journal entry demands due to high-volume transactions like deferred revenue, usage-based billing, refunds, and multi-element contracts. Each must comply with IFRS/US GAAP and ASC 606, mapping accurately to general ledger (GL) accounts. Common challenges include

• High-volume billing data misaligned with GL systems, causing duplicates or omissions.
• Manual deferred revenue schedules in spreadsheets, risking errors.
• Delayed revenue recognition from lagging invoices or usage data.
• Prolonged month-end closes and audit inaccuracies.

These issues lead to ASC 606 non-compliance, extended close cycles (>5 days), and audit errors, frustrating controllers.

Ordway as a Subledger

Ordway’s subledger automates journal entries: individual, bulk, or summarized for transactions like subscriptions, usage charges, and refunds. It applies ASC 606 logic, ensuring accurate revenue recognition, and syncs entries to NetSuite, QuickBooks, Xero, or Sage Intacct with full audit trails. Controllers benefit from:

• Error-free GL mapping, reducing reconciliations.
• Month-end closes cut to hours not days
• ASC 606-compliant entries with detailed metadata.

Example: Automated Journal Entries in a SaaS Billing Cycle

A SaaS company invoices a customer $24,000 for an annual subscription on January 1. The customer pays upfront.

January 1 – Invoice and Payment

• Debit: Cash (1000) +$24,000

• Credit: Deferred Revenue (2400) +$24,000

January 31 – Monthly Revenue Recognition

• Debit: Deferred Revenue (2400) –$2,000

Credit: Subscription Revenue (4000) +$2,000

Ordway Process

• The billing subledger records the invoice and payment.

• The revenue subledger applies the ASC 606 recognition schedule.

• Ordway auto-generates and posts the journal entries—either individually or in summarized form—to connected GLs such as NetSuite, QuickBooks, Xero, or Sage Intacct.

• Each entry carries full source references, ensuring traceability, balanced postings, and an audit-ready trail.

Result: the controller reviews reconciled, compliant journal data without manual uploads or spreadsheet tie-outs—closing the books faster and cleaner.