What is Journal in Accounting?

What is Journal in Accounting?

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Dec 27, 2023 11:17 IST

If you intend to work in the finance and accounting sector, understanding when to utilize an accounting journal can help you submit your taxes on time and assess the company’s financial position. What is Journal, its purpose, advantages, and other topics are covered in this article. Let’s explore!

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An official document listing the company’s financial transactions chronologically by date is known as a Journal in Accounting or a book of original entries. Accountants, bookkeepers, and auditors monitor and assess an organization’s financial situation using an accounting journal.  

Scroll your screen and explore What is Journal in accounting, its advantages, and its components. Also, we have covered basic journal accounting interview questions.

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What is Journal in Accounting?

Journals are detailed accounts that record all of the financial transactions of a business so that they can be reconciled in the future and used as a tool for transferring information to other accounting records, such as general ledgers. The ledger organizes the information in the journal by account and summarises all the transactions that have occurred in each account.

Journal Accounting is the first step in the accounting process, where each transaction is recorded in chronological order as it occurs. A journal usually describes the date, affected accounts, and transaction amounts in a double-entry bookkeeping method.

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Journaling with Double-Entry Bookkeeping

The most popular type of bookkeeping is double-entry accounting. Immediately, it affects the way journals are kept and journal entries are recorded immediately. Every business deal consists of a transfer of funds between two accounts.

This indicates that there are two columns for each journal entry. For instance, the bookkeeper enters two transactions in a journal entry if a business owner spends $1,000 in cash to buy inventory. Inventory, a current asset, increases by $1,000 while the cash account decreases by $1,000.

Using Single-Entry Bookkeeping in Journals

In accounting and business, single-entry bookkeeping is only sometimes employed. The setup is similar to a chequebook in that just one account is utilized for each journal entry, making it the most fundamental type of accounting. It is a short-running tally of cash coming in and going out.

For instance, if a business owner spends $1,000 cash to buy inventory, the single-entry system records a loss in cash of $1,000 and displays the total ending balance below it. A business can track total income and expenses rather than just the final balance by dividing income and expenses into two columns.

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What Are Debits and Credits?

Debits increase obligation, revenue, and equity balances while decreasing expense and asset accounts. On the other hand, credits add to the liability, revenue, and equity accounts while deducting from the asset and expenditure balances.

The fundamental accounting rule is the same: Debit the Interest Expense account and credit the Accrued Interest Payable account to reflect the accruing interest on a bank loan.

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Let’s understand basic journal entries for interviews that are frequently asked.

Here are some of the most important journal entries for interviews:

Transaction Debit Credit
Purchase of Goods on Credit Purchases account Accounts Payable account
Sale of Goods on Credit Accounts Receivable account Sales account
Cash Sales Cash account Sales account
Cash Purchase Purchases account Cash account
Depreciation Depreciation Expense account Accumulated Depreciation account
Bad Debts Bad Debt Expense account Accounts Receivable account
Provision for Doubtful Debts Bad Debt Expense account Provision for Doubtful Debts account
Payment of Salaries Salaries Expense account Cash account
Receipt of Interest Cash account Interest Income account
Payment of Rent Rent Expense account Cash account

Advantages of a Journal in Accounting

The advantages of an accounting journal are:

Chronological Record: A journal is like a chronological storybook of a company's financial activities. Every transaction is recorded in the order it occurs. This makes it easier to understand the sequence of events and can be especially helpful during audits or financial reviews.

Detail and Clarity: Journals provide detailed information about each transaction, including date, amounts, accounts affected, and a description. This level of detail ensures clarity and helps in understanding the nature and purpose of every transaction.

Error Detection and Correction: By recording transactions in a journal first, errors can be spotted and corrected early in the accounting process. It's like proofreading your work before submitting it; catching mistakes early saves time and hassle later.

Supports Double-Entry Bookkeeping: Journals support the double-entry system (every transaction affects at least two accounts) by showing how each transaction impacts various accounts. This system is key in maintaining balance in the books.

Reference and Tracking: Think of journals as a reference guide. They provide a historical record of all transactions, which can be invaluable for tracking trends, analyzing business performance over time, and planning for the future.

Legal Documentation: In many cases, journals serve as legal records. They can be used to demonstrate compliance with financial regulations and can be critical during legal proceedings or tax audits.

Facilitates Account Preparation: Journals make the preparation of final accounts easier. Since they organize transactions systematically, transferring these details to ledgers and then to final accounts becomes a more streamlined process.

Aids in Decision Making: Business owners and managers can use journal entries to analyze financial transactions and make informed decisions. By seeing where money is coming in and going out, they can identify opportunities for growth and areas to cut costs.

What are the Components of a Journal Entry?

  • Journal entries may contain multiple data points but generally include the following:
  • A header with the date written in the journal and a description of the entry type;
  • A unique reference or identification number;
  • One or more accounts, the sums that will be debited, and the date or dates on which these debits will be made;
  • A transaction will credit one or more accounts, a sum, and the date or dates on which the credit is made; and
  • A brief explanation of the transaction

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How to Enter a Transaction in a Journal for Accounting?

Follow these steps to enter a transaction in the accounting journal:

1. Keep Copies of Every Financial Record

Before writing an entry in an accounting journal, the accountant should gather all supporting documentation for a business or financial transaction. For accurate journal entries, gather bills, purchase orders, receipts, tapes from the cash register, and invoices. Start gathering the documents at the beginning of each fiscal year, and keep them all together in one folder. This makes sure you remember to make any essential diary entries.

2. Determine the Impact on Accounts 

Find the accounts in your general ledger that the journal entry will affect before posting. Sort your transactions so you can see the appropriate accounts.

It can be significantly simpler to enter journal entries if you arrange them according to transaction kinds. Purchases of new desks and computers impact a business’s cash and office supply accounts.

3. Establish the Type of Account.

Determine the account type from which money is debited and credited to create a journal entry. Examples of typical account kinds include assets, liabilities, revenue, and expenses. Because the business made purchases, the accountant reports expenses in the office supplies to account in the example above. Therefore, the cash account is an asset, whereas the office supply account is an expense.

4. Order the Transactions on the List, then Create the Journal Entry.

List each transaction chronologically, beginning with the earliest, to ensure the journal has all financial transactions. After gathering and reporting transactions, prepare your journal entry by inputting the correct date, account number, account name, and credit and debit information. Accountants include debit and credit for each transaction because Indian Accounting Standards employ the double-entry approach. The debit entries are on the left, and the credit entries are on the right. After creating all entries, an accountant checks that the debit and credit amounts are equal.

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Conclusion

In accounting, a journal of original entry is an official record of all business financial transactions. Now you know what is a journal in accounting, its advantages, a journal in single and double book accounting, etc. 

Top FAQs on Journal in Accounting

What is a journal in accounting?

A journal in accounting is a record where all financial transactions are documented in chronological order. It's the first place where transactions are recorded, using journal entries.

Why is a journal important in accounting?

Journals are crucial as they provide a detailed, chronological record of all business transactions, helping to ensure accuracy, facilitate audits, and form the basis for all further accounting processes.

What is a journal entry in accounting?

A journal entry is a record of a financial transaction in the journal. It includes the date of the transaction, the accounts affected, the amounts debited and credited, and a brief description.

How does the double-entry system relate to journal entries?

In the double-entry system, every transaction affects at least two accounts. Each journal entry records these changes with equal debits and credits, maintaining the balance of the accounting equation.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio