Journal entries are the foundational building block that makes accounting what it is today – the language of business. Business managers are faced with tough decisions on a daily basis ranging from making long term capital investment to making recurring operational expenses.
Without journal entries, getting the information to aid decision makers perform their jobs will be really difficult.
What is a journal?
A journal is the subsidiary book of account where all transactions are recorded. This is to say that the journal is the raw accounting data blocks that holds vital financial information that relates to an entity’s day-to-day operations. These raw accounting data are recorded chronologically by date.
The general journal is the generally referred to as the book of original entry where bookkeepers and accountants apply the principle of double entry.
What is a journal entry? | meaning of a journal entry
A journal entry is the act of entering business transaction data into the journal. The account to be debited is entered first while the account to be credited is entered below it, slightly indented to the right (see above image). Every single journal entry is unique and must be complete. It is the function of accounting department to ensure that journal entries are correctly made.
Journal vs ledger
A lot of people think that journal and ledger are the same thing. Well, in as much as they both perform identical job – holding business transaction information. The way and manner they do it differs.
A journal is like a diary where transactions or activities are initially entered before they are moved to a more stable account called a ledger. Technically speaking, while a journal is a subsidiary book, a journal is a principal book. Journals are also called original books of entry because entries are first made in journal while ledgers are called secondary
Another subtle difference between a journal and a ledger is that while the journal contains information in their raw state, a ledger contains a bit more refined information.
But hey! These things no longer mater in this day and age where we now have plethora of accounting software that can do practically anything. A properly configured accounting software only requires the bookkeeper to make entry once and the system will take care of every other thing – you see why the subtle difference between a journal and a ledger has become an academic exercise. New generation bookkeepers are surely having it easy.
Uses of a journal entry
Eliminate guess work is the key benefit of using a journal rather than posting straight into the ledgers as there are occasions where a particular debit entry will have more than one correct corresponding credit entry that can be passed if we do not have the complete picture if we are posting directly into ‘T’ Account or general ledger account.
A journal also acts a teaching tool where the finance manager or head of accounts during the time of approval draws up a simple journal on the voucher so that the junior accounting clerk saddled with the responsibility of posting into the system would not make mistake and learn as well.
The fact that a journal entry has both items listed with description makes the chance of erroneously making a corresponding entry of a transaction into the wrong account is reduced.
I have once helped a client clean up their system as a result of the fact that the consultant who installed Sage accounting software while setting up the accounting department configured the system in such a way that accounting staff can directly post into ledger rather than journalizing the transaction first. I discovered this while auditing the accounting information system of the entity.
Fundamentals of a journal entry
Generally speaking, the act of entering business transaction details into journal is known as journalizing. We journalize into the general Journal. Best practice is to put descriptive narrative so that anyone looking at the account will at a glance understand what the account is all about and do not abbreviate the name of the account.
Accounting cycle starts with the identification of accounts to be debited and those to be credited, then ends with the preparation of final accounts, the trial balance is somewhere at the middle of the accounting cycle. The identification of the accounts to be debited or credited is guided by what account is going up in value and what account is losing value.