If you own or manage a company or know someone that does, you know that businesses account for all the expenses made for their upkeep. It is crucial to keep a record of transactions made by them to maintain economic stability.
Several unaccounted transactions cause an imbalance in financial statements such as balance sheets, leading to inefficient financial management. These records are kept with the help of several documents, one of which is an Accounting Journal.
The accounting journal is the first step towards registering a transaction in the books of a company. Creating a ledger comes next, which can further help with making financial statements for the company.
An Accounting Journal contains all the information regarding the expenses or transactions made by a business. One can also refer to an accounting Journal as the book of original entries as the transactions made are first registered in an accounting Journal.
The entries in the Accounting Journal are transferred into General Ledger, which allows accountants to turn them into financial statements.
These financial statements provide information about the financial stability and scope of growth for companies. Basic Accounting Journal entries include daily expenditures like the expansion of inventory, buying new assets, or paying off liabilities, along with bad debts.
Until recently, accountants were able to maintain accounting journals by making manual inputs to the journals. An accountant would provide manual inputs by making separate entries for every transaction.
However, technological advancement has made things easier as accounting software available in the market handles accounting journaling efficiently. Such software has reduced the chances of faulty journal entries and made things more transparent for companies.
Accounting journals allow businesses to record their trades over the past, allowing them to recognize deals and decisions leading to losses. Journals will help them to learn from past instances and make informed choices. Better choices can lead to higher profitability and growth with respect to other competitors.
To make journal entries, one must identify the debit and credit transactions as a journaling of business transactions requires their categorization into two columns. The double-entry method of bookkeeping is the most common one. In this method, a transaction is recorded in two different columns, debit and credit.
Take an example of a business person buying furniture for their office. Upon updating this account, the journal records two different entries made for this transaction.
As furniture comes under office equipment, which is an asset, the amount spent is debited in the office equipment account, while there is a case of credit in Cash. Thus, the double-entry journaling method allows better bookkeeping of expenses.
In the case of a single entry bookkeeping method, one registers all the transactions as cash inflows or outflows in a single account.
Should you always have a balanced Journal Entry?
Journaling does not mandate balancing. However, there is a scope of balancing credit and debit in the double-entry ledger system. One should ensure that the transactions made by a business are entered in a journal and categorized in debits and credits equally.
The debits represent the value added to an account, while credits represent the value reduction from another account. Upon a transaction, these entries must be made in separate columns, as a single line entry system limits the balancing of debits and credits.
Methods of Journaling
There are two methods of Accounting Journaling that are widely accepted, and one of them is the Double-Entry Bookkeeping method. This one is widely used and allows businesses to eliminate errors.
It also allows the accountants to make financial statements relatively easier than Single-Entry bookkeeping, which is the other method. The single-entry bookkeeping technique does not find regular usage.
A detailed explanation will help you understand which one is good for you, which follows this paragraph.
1. Double-Entry Bookkeeping System
Most businesses use this method, as it directly influences bookkeeping practices, making it more efficient. Every transaction entry made by a business in this method includes an exchange among two accounts, one of which faces a debit, while the other one gets the credit.
Although we have provided an example, let us go into details and learn how to utilize the Double-Entry Bookkeeping System. Let us consider a scenario in which a restaurant is expanding its business, and to do this it buys $2,000 worth of furniture and cutlery.
When this transaction is recorded in alignment with the double-entry bookkeeping system, two accounts change. The first one is the Cash account, which will face a credit of $2,000. On the other hand, the company’s assets will receive a debit of $2,000, which leads to a balanced journal.
2. Single-Entry Bookkeeping System Explained
This method of bookkeeping has become quite obsolete and is rarely used for journaling. The Single-entry bookkeeping system is the most basic form of journaling and is pretty similar to a cheque book, which will feature changes to a single account.
The example used above will affect the journal differently if this method is used. For the same transaction carried above, only the cash account will face a reduction of $2,000. The remaining balance in the cash account after this transaction is provided below the last transaction entry.
Differences between Ledger and Journal
Although both Ledgers and Journals are used to keep a record of transactions being made by businesses over time, they differ from one another in many aspects. A journal is meant to record the transactions chronologically, while the Ledger is meant to summarize and post the information obtained from a journal.
Journaling of transactions is the first step involved in the accounting procedures of a company. Transactions are analyzed and recorded in a journal chronologically.
A ledger is often referred to as an extension of the former. The journal entries of the business are recorded in the ledger account, which helps prepare financial statements.
Journals are usually descriptive and explain the transactions made by the business while in the case of ledgers, descriptions are not mandatory.
Tracking the expenses and transactions of a company is of utmost importance, and maintaining an accounting journal is the first step in this direction. Businesses must maintain their accounts efficiently to avoid errors in financial statements.
The double-entry bookkeeping method is the most common one, as it allows the making of descriptive and concise entries of transactions.
However, not every businessperson is well adept at bookkeeping practices, and they need help from accountants and other professionals frequently. Hiring a team of professionals can demand a lot of resources and funds from businesses that have just started.
Recording journal entries is something that ProfitBooks can take care of very efficiently.
ProfitBooks provides user-friendly software, which can help businesses carry out their bookkeeping practices efficiently. ProfitBooks can help businesses make and maintain a balanced ledger as a result of accurate bookkeeping.
Still unsure about doing it on your own? Don’t worry, ProfitBooks offers a remote bookkeeping service where a team of expert accountants record the transactions for you accurately.
Meanwhile, you can create your account for free today.
Try it out and let me know how it goes in the comments section below.
- What is a Ledger in Accounting?
- How to do Accounting for Small Business
- Accounts Payable – Meaning, Definition and Process