In bookkeeping and accounting, a journal is a record of financial transactions, entered as they occur. Entering transactions into a journal is usually the first step in the accounting cycle, as Exhibit 1 below shows. The exceptions are situations where entries are first captured in a daybook (or book of original entry) before they transfer to the journal.
Historically, journals were always bound notebooks in which a bookkeeper hand wrote entries 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 systems provide user guidance and error-checking to help ensure that entries register correctly as debits or credits in the appropriate accounts. And, 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 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 transactions occurred on a given day, the journal provides the answer.
Firms sometimes 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 transferred frequently 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.
Journal Explained in Context
Sections below further define, explain, and illustrate example journal transactions. Note especially that journal appears in context with related terms and concepts from the fields of accounting and bookkeeping.
- What is a bookkeeping journal? And what is a daybook?
- What is the journal's role in the accounting cycle?
- 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 below shows the major 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.
Exhibit 1. The accounting cycle. Transactions enter the journal as the first step in the cycle. The journal builds into a chronological list, adding entries one after another in the order they occur. Journal entries transfer (post) to the ledger as the second step.
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 system's 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.
Some firms add daybooks to the start of the accounting 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 basic transaction details for the journal. Daybook entries may also include additional data on customers, vendors, or the transaction event.
- A desire to keep together entries of one or another kind, for example:
- A sales daybook for all sales transactions.
- A different sales daybook for each sales region.
- A cash daybook for keeping cash transactions together.
Exhibit 2. below shows how the accounting cycle expands, slightly, when daybooks are present.
Exhibit 2. The first accounting cycle steps when daybooks are present. Some transactions enter the accounting system through daybooks, while others enter the journal directly.
Daybooks Are to Journals As Sub Ledgers Are to the General Ledger
Daybooks—when present—stand in relation to the journal in the same way that sub ledgers stand in relation 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.
Basic transaction data move frequently 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, sales person, or sales location. Capturing and preserving such data is the daybook's basic 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.
The basic building block of a double entry accounting system is the account. An 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.
The firm's complete list of accounts for journal entries is called its chart of accounts. Every financial event impacts at least two accounts from this list. And, the kind of impact (debit or credit) depends on which of five chart of accounts categories the accounts belong to.
Firstly, There Are the "Balance Sheet" Account Categories:
- Asset Accounts.
Resources of value business owns and uses for earning revenues.
Example: Cash on hand.
Example: Accounts receivable.
- Liability Accounts.
Debts and other financial obligations owed by the business.
Example: Accounts payable.
Example: Salaries payable.
- Equity Accounts.
The owner's claim to business assets. Equity is what owners own outright.
Example: Owner capital
Example: Retained earnings
Secondly, There Are the "Income Statement" Account Categories:
- Revenue Accounts.
Example: Product sales revenues
Example: Interest earned revenues
- Expense Accounts,
Expenses incurred in the course of business.
Example: Direct labor costs
Example: Advertising expenses
In practice, even a small firm may list a hundred or more such accounts as the basis for its accounting system, while a very large and 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 change to another account 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||Increases account balance||Decreases account balance|
|Liability acct||Decreases account balance||Increases account balance|
|Equity acct||Decreases account balance||Increases account balance|
|Revenue acct||Decreases account balance||Increases account balance|
|Expense acct||Increases account balance||Decreases account balance|
|Exhibit 3. Debit and credit impacts on account balance depend on which category the account belongs to.|
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 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 could be the asset account "Cash on hand."
- If, instead, the asset purchase is financed 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 especially 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 especially 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 account of the same kind. These are the contra accounts that "work against" other accounts in their own 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 reliable 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.
1-2 September journal transactions
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.|
3 September Journal Transactions
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.|
5 September Journal Transactions
On 5 September, a written check from Customer 1 arrives ($4,200) and the company sends its own 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.|
6 and 7 September Journal Transactions
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 $820 worth of supplies have been used from the supplies inventory since it was last checked. 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 Help Verify That 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 is paired with an equal credit entry. Notice, by the way, that the journal above follow 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 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 hand written, journal data were posted into ledgers only periodically. This meant that 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.