The vast majority of businesses, worldwide, rely on double-entry, accrual accounting to record, track, and report financial transactions. For these firms, every sale, purchase, payment, revenue receipt, disbursement, bank loan, bad debt, dividend, or expense calls for transactions that must enter the accounting system. This means that even very small organizations normally register quite a few transactions every business day. The normal point of entry for all such transactions is the bookkeeper's journal.
Transactions and their entry into an accounting journal are usually considered the first steps in the accounting cycle, as Exhibit 1 below shows. The exceptions are situations where entries are captured first in a daybook (or book of original entry) before they transfer to the journal.
Historically, journals were always bound as sewn-page notebooks. Bookkeepers hand-wrote each entry in ink, shortly after the firm closed a sale, incurred an expense, earned revenues, or otherwise impacted the firm's accounts.
Today, of course, journals usually exist as part of an accounting system software application. Users, therefore, enter journal transactions either manually, through onscreen forms, or automatically, as with a point-of-sale system. Also, most accounting software systems provide user guidance and error-checking to help ensure that entries register correctly as debits or credits in the appropriate accounts. And, the software also automates the second stage of the accounting cycle, posting journal entries to a ledger.
The name "journal," from Old French and Latin origins, suggests a daily activity (jour is French for "day"). Personal diaries and newspapers are sometimes called journals for the same reason. While other accounting records may update less frequently, journals update either continuously or at least daily. As a result, the journal builds a running list of account transactions as they occur. Consequently, should anyone ask which actions happened on a given day, the journal provides the answer.
Some businesses use one or more daybooks (or books of original entry) instead of the journal as the first data entry point for transactions. Entries in daybooks build in chronological order, just as they do in journals. Entries in the firm's various daybooks are frequently transferred to the firm's journal, and then ultimately to the ledger. With daybooks, in other words, the journal becomes the second step in the accounting cycle, while the ledger becomes third.
Explaining Journal in Context
Sections below further define, explain and illustrate the term journal and example journal transactions, in context with related terms and concepts from the fields of accounting and bookkeepin, focusing on three themes:
- First, defining Journal, Daybook, and Book of Original Entry for bookkeeping and accounting purposes.
- Second, showing how different financial transactions impact accounts in five basic account categories..
- Third, contrasting Information the journal provides with information the ledger provides.
- What is a bookkeeping journal? And what is a daybook?
- What is the journals role in the accounting cycle?
- What is a Daybook? Book of original entry? Why do firms use daybooks?
- Define your terms: Journal entry, debit, credit, and chart of accounts.
- Example journal and ledger entries.
- For more on the general ledger and ledger posting, see the article, General Ledger
- For more on the role of journal and ledger in the accounting cycle, see the article Accounting Cycle.
- See the article, Double-Entry Accounting for an explanation of Debit, Credit, and Double-Entry Systems.
- The article Account explains account categories and the Chart of Accounts.
Most business firms record and report financial activity with a double-entry accounting system. Exhibit 1 above shows the significant steps in the accounting cycle for these firms. Note especially that the journal is the initial data entry point for transaction records. And, these records build ultimately into the firm's financial accounting reports at the end of the accounting cycle.
At various times, accountants copy (post) journal entries to a ledger—another record book. While the journal lists entries chronologically, the ledger organizes entries by account, as Exhibit 9, below, shows.
Near the end of each accounting period, accountants create a trial balance from the systems accounts, as part of an end-of-period check for accuracy. As a result, the trial balance should show that total debits equal total credits across all accounts. If the two totals do not agree, they make adjusting entries and corrections. Account names and balances then appear in the firm's financial accounting reports for the period.
Daybook Entry to Accounting System
Some firms add daybooks to the start of the accounting cycle, before the journal. Exhibit 2. above shows how the accounting cycle expands, slightly, when daybooks are present.
They add daybooks to the cycle when there is:
- A desire to put record-capturing into the hands of people directly engaging in transaction activity. These may include salespeople, warehouse receivers, maintenance personnel, or customer refund agents, for instance.
- A need to capture additional information beyond the essential transaction details for the journal. Daybook entries may also include useful data on customers, vendors, or the transaction event.
- A desire to keep together entries of one or another kind, for example:
- A sales daybook just for sales transactions. This is useful for keeping track of sales trends, or individual salesperson or sales team performance.
- A different sales daybook for each sales region. Using regional daybooks can be helpful when different regions need to be managed as different markets, with different market characteristics.
- A cash daybook for keeping cash transactions together. This is useful for keeping close watch on the companys working capital and cash flow.
Exhibit 2. above shows how the accounting cycle expands, slightly, when transactions enter the system through daybooks.
Daybooks Are to Journals As Sub-Ledgers Are to the General Ledger
Daybooks—when present—relate to the journal in the same way that sub-ledgers relate to the general ledger.
- Firstly, the daybook (or sub-ledger) has the same structure as its parent, the journal (or general ledger).
- Secondly, transactions appear first in the daybook and then transfer, later, to the journal.
- Thirdly, transactions post from the journal to sub-ledgers and then transfer, later, to the general ledger.
Initial transaction data move more or less continuously from daybooks to the journal. As a result, daybook transaction data such as account name and number, transaction amount, date, and type (debit or credit), move to the journal.
- Daybook entries may also include additional transaction data that do not transfer to the parent journal, such as customer details, salesperson, or sales location. Capturing and preserving such data is the daybook's reason for being.
In any case, daybook entries move to the journal in chronological order. And, in the journal, they appear as debits or credits to individual accounts from the firm's Chart of accounts.
Accounts are the basic building blocks of a a double-entry accounting system.
Each account is a record of the value and changes in value for one specific purpose. When transactions enter the journal, those making entries are responsible for knowing which accounts to impact and whether the impacts should register as debits or credits.
Every organization that has its own accounting system maintains a fixed list of all the accounts that make up the accounting system. This list is the Chart of Accounts, and it is the authoritative last word on which accounts are active in the system and which are not. Every financial event impacts at least two or more of the specific accounts on the Chart.
The nature of the tranasaction impact on an account depends on which of the five basic account categories has the account. THe five account categories come in two groups.
Account Group 1: Three "Balance Sheet" Account Categories:
- Asset Accounts.
Resources of value owned by the business and used for earning revenues. For example:
Cash on Hand
- Liability Accounts.
Debts and other financial obligations owed by the business. For instance:
- Equity Accounts.
The owners claim to business assets. Equity is what owners own outright. For example:
Example: Owner capital
Example: Retained earnings
Acount Group 2: Two "Income Statement" Account Categories:
- Revenue Accounts.
Money earned. For instance:
Product Sales Revenues
Interest Earned Revenues
- Expense Accounts,
Expenses incurred in the course of business. For Example:
Direct labor costs
In practice, even a small firm may list a hundred or more such accounts as the basis for its accounting system, while larger and more complex organizations may use thousands. Nevertheless, for accounting purposes, all accounts fall into one of the five categories above.
Every Financial Event Brings At Least Two Journal Entries
Every financial event brings at least two equal and offsetting account changes. The change in one account is a debit (DR), and the impact to another is the opposite, a credit (CR). Whether a "debit" or a credit increases or decreases the account balance depends on the kind of account involved, as Exhibit 3 shows.
|Debit (DR) Entry||Credit (CR) Entry|
|Asset acct||Increase account balance||Decrease account balance|
|Liability acct||Decrease account balance||Increase account balance|
|Equity acct||Decrease account balance||Increase account balance|
|Revenue acct||Decrease account balance||Increase account balance|
|Expense acct||Increase account balance||Decrease account balance|
|Exhibit 3. Debit and credit impacts on account balance depending on which category holds the account belongs.|
Suppose, for example, a firm purchases an asset for $100,000. Two journal entries must follow.
- Firstly, a journal entry for the acquisition shows an asset account increasing by $100,000. This account could be an asset account such as "Factory equipment." Because this is an asset account, the balance increase is a debit.
Secondly, however, the Balance Sheet is now temporarily out of balance until the firm makes an offsetting credit of $100,000 to another account somewhere in the system. This offsetting credit could be either of the following:
- A "credit" of $100,000 to another asset account, decreasing its balance by $100,000. This account could be the asset account "Cash on hand."
- If instead, the firm finances the asset purchase with a bank loan, the offsetting credit entry in the journal could be a credit to a liability account such as "Bank loans payable." As a result, the credit transaction increases the account balance by $100,000.
Double-Entry Rules Maintain Balance Sheet Balance.
Notice in the above example that the first transaction disturbs the Balance sheet balance, while the second transaction always restores the balance. Therefore, when both journal entries are complete, the basic accounting equation holds:
Assets = Liabilities + Equities
And, for the account journal entries that follow from a single transaction:
Debits = Credits
The Role of Contra Accounts
The bookkeeper or accountant dealing with journal entries faces one complication, however. Note that not all accounts work additively with each other on the financial accounting reports—especially on the Income statement and Balance sheet.
In some cases, one account offsets the impact of another of the same kind. These are the contra accounts that "work against" others in their categories. In some cases, the contra accounts reverse the debit and credit rules in Exhibit 3 above.
For example, "Allowance for doubtful accounts" and "Accounts receivable" are both asset accounts. Allowance for doubtful accounts, however, is also a contra asset account that ultimately reduces the impact (balance) of "Accounts receivable." When these journal entries make their way into the financial reports, the Balance sheet result is a "Net accounts receivable" that is less than the "Accounts receivable" value.
In any case, those working with journal entries must be familiar with the firm's chart of accounts and have a solid command of double-entry rules. And, they should be using accounting software that provides clear guidance and careful error checking.
Following sections illustrate journal entries and their contributions to the ledger, for a small subset of one firm's chart of accounts. Exhibit 4 shows eight of the firm's "accounts," which appear in this example.
|Grande Corporation Chart of Accounts|
|Account No.||Account Name||Account Category|
|101||Cash on Hand||Asset|
|410||Product Sales Revenue||Revenue|
|525||Cost of Goods Sold||Expense|
|Exhibit 4. Eight "accounts" from one company's chart of accounts, to illustrate journal and ledger entries in the examples below.|
In reality, of course, the full chart of accounts, journal, and ledger will include many more "accounts" in addition to those shown here. However, for a week's activity in just the accounts above, journal and ledger entries might appear as follows.
Journal Transactions for 1 - 2 September
On 1 September, Grande Corporation has two customers place product orders, on credit. Customer 1 orders $4,200 in products, Customer 2 orders $5,800 in products. As a result, the company ships the products later the same day. Exhibit 5 below shows the journal entries due to these events.
Journal for Fiscal Year 20YY
110 Accounts Receivable
|Exhibit 5. Journal entries due to two product purchases and product shipment on 1 September.|
Journal Transactions for 3 September
On 3 September, the company places a $1,180 order for office supplies. Exhibit 6 below shows the journal entries due to this order.
125 Supplies Inventory
|Exhibit 6. Journal entries due to two an order for office supplies on 3 September.|
Journal Transactions for 5 September
On 5 September, a written check from Customer 1 arrives ($4,200), and the company sends its bank check to the office supplies vendor ($1,180) for the supplies order of 2 September. Exhibit 7 below shows journal entries due to these events.
101 Cash on Hand
|Exhibit 7. Journal entries due to revenue receipt and cash payment on 5 September.|
Journal Transactions for 6-7 September
On 6 September, Customer 2 makes a credit card payment for the order of 1 September ($5,800). Also on 6 September, Customer 3 purchases products, pays in cash ($1,250) and takes delivery immediately.
On 7 September, the firm notes that the supplies inventory has decreased by $820 worth of supplies since the last check of supplies stock. Also on 7 September, Customer 4 orders products on credit ($1,850) which do not ship by the end of the day.
Journal entries due to 6 and 7 September events appear in Exhibit 8, below.
101 Cash on Hand
|Exhibit 8. Journal entries due to cash payment receipts, depletion of supplies inventory, and one new customer order on 6 and 7 September.|
Journal Entries Verify: Debits = Credits
With the journal entries above, it should be no surprise that one part of the accounting equation holds:
Total debits = Total credits
It is easy to see on the journal page that every debit entry pairs with an equal credit entry. Notice, by the way, that the journal above follows the universal convention of listing debit figures to the left of their companion credit figures.
From the journal page alone, however, it is not easy to judge whether the company is making money or losing money. That information is not completely visible until the end of the accounting period when account balances from the ledger are brought together for the trial balance. That information is partially visible, however, as soon as journal entries transfer (post) to the ledger. As a result of posting, account summaries show up-to-date account balances (e.g., balances for sales revenue accounts and expense accounts).
As the second step in the accounting cycle, journal entries sometimes move first to various sub-ledgers (if the firm uses sub-ledgers), and then always to the firm's general ledger. The general ledger is the top level ledger, having an account record for every active account in the chart of accounts.
Historically, when journals and ledgers were bound notebooks, and entries were handwritten, journal data were posted into ledgers only periodically. As a result, account balances were known only through the most recent posting. Today, however, accounting system software can update ledger accounts more or less continuously. As a result, account balances in the ledger are always current.
Account summaries in the ledger usually appear in the form of T-accounts, as Exhibit 9, below, shows. The exhibit presents T-account excerpts for each of the eight accounts in Exhibits 4 - 8. They are "T-accounts" because of the T-shaped lines that separate the account's debit entries from its credit entries. Again, debits always appear on the left, and credits appear on the right.