Journal Entries and Financial Accounting
Very simple in financial accounting, a journal can be defined as follows: “The book of accounts where transactions are first recorded is called a journal.”
In a broader sense, it can be stated as follows: “The book of accounts where transactions are analyzed into debits and credits, recorded with explanations and according to date, is called a journal. The journal is referred to as the primary book, main book, auxiliary book, daily book, etc.”
The main purpose of a journal is to keep the ledger accurate and error-free. Considering this purpose, a journal can be defined as follows: “The book of accounts where transactions are analyzed into debits and credits, recorded with explanations and according to date, for the purpose of accurately preparing the ledger, is called a journal.”
Primary Books of Accounts
The book in which transactions are initially recorded after they occur is called the primary book. According to the steps of the accounting cycle, after identifying the transactions, they are first recorded in the journal by date. Therefore, it can be said that the journal is the primary book of accounts.
Functions of Journal in Accounting
Purpose of Journals in Accounting Cycle
i) Accuracy in Bookkeeping: It ensures that transactions are recorded correctly and in accordance with regulations.
ii) Verification: Accounting journals can be examined during audits.
iii) Basis for Financial Reporting: The foundation for preparing financial statements is established by summarizing the information recorded in the journal and posting it to the general ledger.
Features of Accounting Journal
The second step of modern accounting is the posting of transactions to journals. Although commonly understood as the first step in the accounting cycle, accounting journals entail the following characteristics when analyzing their meaning and usage:
1) Second Level of Accounting: The first step in modern accounting is to identify transactions, and the second step is to post transactions to journals.
2) Primary Book: Transactions are recorded in the journal immediately after identification.
3) Date-Based Recording: Transactions in the journal are recorded based on their dates.
4) Explanation: Another feature of the journal is that each transaction is recorded with an explanation.
5) Dual Existence: According to the double-entry method of accounting, transactions are recorded in the journal by analyzing debits and credits.
6) Supporting Book: Initially, transactions are recorded in the journal to rectify errors in the ledger. Consequently, the journal serves as the supporting book of the ledger.
7) Daily Book: Transactions are recorded in the journal on the same day they occur, making the journal recognized as the daily book.
8) Specific Format: Transactions are recorded in the journal according to a precise format.
9) Balancing: Each transaction is recorded with equal amounts of debit and credit to maintain balance. Therefore, equal amounts are debited and credited for each transaction.
10) Classification: Based on the type of organization and the number of transactions, the journal is divided into several parts. For example, Purchases journal, Sales journal, Cash Receipts journal, etc.
Steps to Record a Journal Entry
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- Identify the Transaction: Determine the nature of the transaction and the accounts involved.
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- Analyze the Transaction: Decide which accounts are debited and which are credited, and determine the amounts.
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- Record the Entry: Enter the date, accounts, amounts, and description into the journal.
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- Verify Accuracy: Ensure that the total debits equal the total credits for each entry.
Importance of Accounting Journals
1) Application of Double Entry System: According to the double entry system, each transaction is recorded in accounting books as debits and credits. This allows the total amounts of debits and credits to be known.
2) Classification of Transactions: Transactions are classified in the journal according to accounts. This makes it easy to understand the nature of transactions at any time.
3) Details of Transactions: The journal records the date, related parties, amount, and a brief description of each transaction. This allows anyone to obtain necessary information about a transaction at any time.
4) Transaction Analysis: Each transaction in the journal is analyzed to determine which account is debited and which is credited. This simplifies the process of posting to the ledger.
5) Maintaining Continuity: Transactions are recorded in the journal in chronological order. This ensures the continuity of the transactions.
6) Initial Accounting of Transactions: Transactions are recorded in the journal in chronological order as they occur.
7) Future Reference: The journal serves as a future reference for collecting information as needed.
8) Reduction of Confusion: Proper recording of transactions in the journal prevents misunderstandings and confusion among the related parties.
9) Correction of Errors: Transactions are initially recorded in draft form in the journal. This makes it easy to correct any errors that are detected.
10) Prevention of Fraud and Embezzlement: Recording transactions in the journal as they occur prevents fraud and embezzlement.
11) Clean and Clear Ledger Maintenance: Since transactions are transferred from the journal to the ledger, they can be recorded accurately, concisely, and clearly in the ledger.
12) Information Supply: The journal is considered a reservoir of information because it contains all types of information related to transactions.
Example of Journal Entry:
⇒ Purchase of office supplies $500.
Solution:-
Office Supplies (Asset) – $500 Debit
Accounts Payable (Liability) – $500 Credit
Fundamental Characteristics of Accounting Journals for Effective Record Keeping
More Resources
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