An accounting entry is a formal record that documents a transaction. In most cases, an accounting entry is made using the double entry bookkeeping system, which requires you to make both a debit and credit entry, and which eventually leads to the creation of a complete set of financial statements. An accounting entry can also be made in a single entry accounting system; this system typically tracks only cash receipts and cash disbursements, and shows only those results needed to construct an income statement.
There are three primary types of accounting entries, which are:
- Transaction entry. This is the primary type of business event for which you would create an accounting entry. Examples of accounting transactions are the recordation of an invoice to a customer, an invoice from a supplier, the receipt of cash, and the purchase of a fixed asset. This type of accounting entry is used under both the accrual basis and cash basis of accounting.
- Adjusting entry. This is a journal entry used at the end of an accounting period to adjust the balances in various general ledger accounts to more closely align the reported results and financial position of a business to meet the requirements of an accounting framework, such as GAAP or IFRS. This type of accounting entry is used under the accrual basis of accounting.
- Closing entry. This is a journal entry used at the end of an accounting period to shift the ending balances in all revenue, expense, gain, and loss accounts (known as temporary accounts) into the retained earnings account. Doing so empties out the temporary accounts, so that they can begin accumulating transactional information in the next accounting period.
Accounting entries for transactions are typically created through a transaction interface in the accounting software, so that you may not even realize that you are creating an accounting entry (such as, for example, when creating a customer invoice). If you are creating an adjusting accounting entry, then you will use a journal entry format (assuming that a double entry accounting system is being used). If you are closing the books at the end of an accounting period, the accounting software will likely create the closing entry automatically; you will not even see the entry.