Your business is growing, but your financial records are a mess. How long can you keep running like this without dealing with the consequences? If you’re like most businesses, errors in your accounting entries could be causing more damage than you realize. The truth is, poor journal entries might be the root of your financial problems.
In Saudi Arabia’s fast-evolving economy, accurate financial records are essential for long-term success. Every transaction—whether it’s a sale, purchase, or expense—must be carefully documented. These journal entries turn raw financial data into actionable insights, helping you, your accountant, or your bookkeeper make informed decisions. Properly recorded journal entries ensure accurate financial reports, tax filings, and smooth business operations.
We'll cover everything you need to know about accounting entries, including step-by-step instructions on recording journal entries accurately.
Journal entries are the simplest form of accounting records. They track each financial transaction and form the foundation of all your business’s financial activities. Every sale, purchase, or payment needs to be documented to maintain accurate records.
Journal entries follow a structured process: they are recorded chronologically using the double-entry accounting system. This means every transaction impacts at least two accounts—one is debited, and the other is credited.
The key rule: debits must always equal credits. This balance ensures accuracy and keeps your books in order.
For example, when your business makes a purchase, you debit an expense account and credit cash. No matter how many accounts are involved, every debit has an equal and opposite credit. This balance keeps the accounting equation (Assets = Liabilities + Equity) intact, giving a true picture of your financial health.
In short, debits must equal credits. It may sound simple, but mastering the details of journal entries gives you a major edge in managing your finances.
Now that you understand the basics of journal entries, let’s look at their essential role in maintaining accurate financial reports.
Journal entries are the foundation for your financial statements. Every time you record a transaction, it directly impacts your balance sheet, profit and loss statement, and cash flow statement. Mastering journal entries helps in the following ways:
Let’s look into it in more detail.
In Saudi Arabia, businesses are required to follow International Financial Reporting Standards (IFRS) for transparent and reliable financial reporting. While some larger businesses are required to follow IFRS, smaller entities may still use local GAAP unless they choose to voluntarily comply with IFRS.
How IFRS Affects Journal Entries:
Additionally, businesses in Saudi Arabia must also account for Value-Added Tax (VAT), which is regulated by the Zakat Tax and Customs Authority (ZATCA). This is recorded separately from other transactions to ensure proper tax reporting.
For example:
Following these standards ensures your financial records are compliant, accurate, and transparent.
Let’s now look at the key components that make up a journal entry and how each part plays a role in ensuring accuracy.
A journal entry contains specific components that give a clear picture of the transaction. Let’s break down each part:
For more detailed information on making journal entries, check out this guide: Mastering Journal Entries.
Now that we've broken down the components of a journal entry, let's take a closer look at the different types of journal entries and when each one is used.
In accounting, different types of journal entries are used based on the nature of the transaction. Understanding these types helps you record transactions accurately and efficiently.
The general journal is used for less frequent or non-routine transactions. Examples include purchasing long-term assets, recording depreciation, or writing off bad debts.
Special journals are used to record recurring transactions that happen frequently in your business. These are usually divided into categories like:
Beyond these common journals, businesses often need to record specific types of entries to ensure financial accuracy and completeness. These include:
Each type of journal entry plays a role in maintaining clear and accurate financial records. Let’s now take a look at how to create a journal entry and the process involved.
You may find the journal entry process detailed, but breaking it down into steps makes it more manageable. Here's a quick guide:
Understand the transaction you're recording. Review supporting documents like receipts, invoices, or contracts. For example, if you purchase inventory on credit, ensure you have the correct details before proceeding.
Next, identify which accounts are impacted by the transaction. Accounts generally fall into five categories: Assets, Liabilities, Equity, Revenue, and Expenses.
For instance, buying inventory on credit affects both the Inventory (Asset) and Accounts Payable (Liability) accounts.
Decide whether each account should be debited or credited. The basic rule is:
For example, when you pay a supplier, you'd debit Accounts Payable (to reduce liability) and credit Cash (to decrease assets).
Now, record the transaction in the general journal. Make sure to include:
After recording the journal entry, transfer the information to the general ledger. Each account will have a corresponding ledger entry, which updates its balance.
Lastly, double-check that your books are balanced. The total debits should always equal the total credits for the transaction. This verification ensures your accounting system works correctly and the books are balanced.
Watch our Video to see how journal entries are applied using HAL Accounting Software.
Now that you know the process, let’s look at some real-world examples of journal entries to see it in action.
These examples will show you how to record typical business transactions and reinforce the process we’ve discussed.
When a client makes a payment, you need to update your records to reflect the increase in cash and the reduction in receivables. Here's how you would record it:
Journal Entry:
This entry tracks your cash flow and ensures your records stay accurate.
When you purchase office supplies, you need to recognize the expense and reduce your cash balance. Here's how you record this transaction:
Journal Entry:
This entry reflects both the increase in office supplies expense and the corresponding decrease in cash.
When your company pays salaries to employees, you’ll record the expense and the reduction in cash. Here's how to record the payment:
Journal Entry:
This entry reflects the recognition of salary expenses and the reduction in cash for the payment made. Having seen some real-world examples, let’s now dive into the key rules for recording journal entries.
When recording journal entries, it's important to follow certain rules to ensure accuracy and compliance with accounting standards. Here are the key rules to remember:
For personal accounts (which represent individuals, companies, or other entities), the rule is simple:
This means that when your business receives something from an entity (like a customer or supplier), you debit their account. Conversely, when your business gives something (like making a payment), you credit that account.
Example: If you receive a payment from a customer, debit the cash account and credit the customer’s account (Accounts Receivable).
Nominal accounts deal with expenses, losses, incomes, and gains. The rule for nominal accounts is:
This rule ensures that all income and gains are recorded as credits while expenses and losses are debited.
Example: When paying rent, debit the rent expense account (increasing expenses) and credit cash (decreasing assets).
Real accounts refer to assets like cash, inventory, or equipment. The rule for real accounts is:
This helps track how your assets change over time as your business buys or sells them.
Example: If you purchase new equipment, debit the equipment account (increasing assets) and credit cash (decreasing assets).
Once you’ve recorded your journal entries and understood the rule, the next step is tracking them effectively. Let’s see how it’s done.
To track journal entries effectively, you need a system that suits your business needs. You can use spreadsheets for simplicity or opt for advanced accounting software like HAL for more robust tracking. Here are some tips for staying organized:
At the end of an accounting period, businesses must adjust and close accounting entries to ensure that their financial statements reflect the true financial position and performance of the company. Here's what each type of entry involves:
Adjusting entries are needed when transactions or events haven't been recorded. They ensure accounts show the true financial status.
Types of Adjusting Entries:
Example: If your business earned interest but hasn’t recorded it yet, you would make the following adjusting entry:
This entry updates the accounts to show the earned interest.
Closing entries are made at the end of the accounting period to transfer balances from temporary accounts (like revenue and expense accounts) to permanent accounts (such as retained earnings or capital). This process "closes out" temporary accounts so they start fresh in the next period, reflecting the net result of business operations for the current period.
For example, if your business has earned SAR 10,000 in revenue and incurred SAR 7,000 in expenses, you would close those accounts and transfer the net income of SAR 3,000 to retained earnings.
Example: To close out the revenue account:
For the expense account:
After these entries, the revenue and expense accounts will be reset to zero, and the net income (SAR 3,000) will be transferred to retained earnings.
By adjusting and closing entries, you ensure your financial records are accurate, up-to-date, and ready for the next period's transactions.
To make your accounting process easier and more efficient, consider using HAL Accounting Software. HAL ERP helps businesses stay organized and ensures your accounting entries are accurate so you can focus on growing your business. It automates and optimizes financial workflows, reducing manual work and increasing accuracy.
Visit our case studies to see how businesses in Saudi Arabia are handling their accounting with HAL.
Here’s how HAL ERP can help your business, too:
By now, you should have a clear understanding of how accounting entries work and why they’re vital for your business. The more you integrate journal entries into your accounting practices, the stronger your financial foundation will become. Every transaction, from sales to expenses, starts with a journal entry, ensuring that your accounts are up-to-date and balanced.
Accurate journal entries help you avoid mistakes, comply with accounting standards, and make smarter financial decisions. While the process may seem complex at first, with practice, recording transactions becomes smoother and more intuitive.
Ready to get started? Schedule a demo to see our system in action. Our experts will help with every question you may have.
