Accurately recording financial activity is essential to maintaining organized and reliable accounting records. Two common methods used to track changes in your accounts are using journal entries and payments (deposit or withdrawals). Although they might seem similar, they serve different purposes. Knowing when to use each one helps you avoid mistakes and keeps your financial reports clean and compliant.
This guide will explain the difference between journal entries and payments, and help you decide when to use each one.
When to Use a Journal Entry
Use a journal entry when you're manually adjusting balances between accounts and no actual money is entering or leaving your bank. Journal entries are typically used for internal accounting actions or corrections.
Common examples:
Recording a transaction that doesn’t come from an invoice or payment such as depreciation or bank fees.
Moving money between internal accounts.
Correcting a past entry.
Reclassifying funds from one account to another.
Recording accruals or adjustments.
Pro-Tip: Think of journal entries as behind-the-scenes adjustments where there is no impact to your bank account, but your records change.
When to Use a Payment
Use a deposit or withdrawal payment when actual money moves in or out of your bank accounts. Payments are used to reflect real-world financial transactions involving cash flow.
Common examples:
Paying a client from their trust funds.
Transferring earned fees to your business account.
Issuing a refund.
Paying a vendor bill.
Pro-Tip: If money is moving to, or from, a bank account, it should be recorded as a payment and not a journal entry.