Debits and credits in practice
Every entry has at least one debit and one credit, and the totals must match. Debit and credit do not mean good or bad. They are the two sides of an account: debits increase assets and expenses, while credits increase liabilities, equity and revenue.
Accounting software usually creates these automatically when you enter an invoice or bill. A manual journal entry is for something the software cannot infer, such as a correction, a transfer between accounts or an adjustment.
An illustrative example
A business pays $1,200 for a year of insurance in January. The entry debits prepaid insurance and credits cash for $1,200. At the end of each month, an adjusting entry debits insurance expense and credits prepaid insurance for $100, so each month carries one-twelfth of the cost. The numbers are round and ignore sales tax.
Over the year the prepaid balance falls to zero and the full $1,200 reaches the income statement, spread across the months it covers.
Recurring and adjusting entries
Recurring entries repeat with the same accounts and often the same amount, such as monthly rent accruals or amortization. Setting them up as templates saves time but they still need review when circumstances change.
Adjusting entries are made at period end to bring balances to what they should be: accrued expenses, deferred revenue, prepaid costs and amortization. They are the reason the adjusted trial balance differs from the unadjusted one.
The explanation each entry needs
The Canada Revenue Agency expects records to support the income and expenses you report. Receipts should show the date, the seller and buyer, and a description of what was bought. A manual entry should therefore say who prepared it, why it was made, and where the support is, such as an invoice, a statement or a calculation.
Avoid vague descriptions like “adjustment” or “fix”. Generally, supporting documents are kept for six years from the end of the last tax year they relate to. Ask your accountant who approves manual entries and how late corrections are handled once a period is closed.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Business recordsCanada Revenue Agency
- Where and how long to keep recordsCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.