Journal Entry in Bookkeeping and Accounting

Know the Significance of Journal Entry

A Bookkeeping Journal is that part of bookkeeping and accounting that records the financial transactions of a business organization. Bookkeeping starts with a journal and thus its maintenance is of great significance to a business’ accounting.

1. What is a Journal?

A journal is a detailed record of all financial transactions belonging to a business organization. It is to be used for reconciliation of and transfer to other records of accounting (such as general ledger) in the future. The transaction’s date, affected accounts, and amount of transaction are stated in a journal.

A journal is a record which is maintained as a book for accounting purposes. Financial transactions are entered by the book-keeper as journal entries whenever a business transaction is made. With every expense and income, one or more business accounts are affected. A journal entry keeps details of all such changes in accounts.

Maintaining a journal is essential to keeping records objectively. It allows concise reviewing of records and their transfer later in the process of accounting. Along with the general ledger, journals are also reviewed during trade or while conducting audits.

Journals are maintained both manually and in computerized systems. Manual accounting system includes journals like sales journal, purchases journal, general journal, cash disbursements journal, and cash receipts journal. Computerized accounting system has eliminated the need for maintaining different journals as most of the tasks are automated. However, a general journal is still necessary to be maintained to record adjusting entries and unique financial transactions.

There are two methods of recording journal entries: the single-entry bookkeeping method and the double-entry bookkeeping method.

2. Single-Entry Bookkeeping

Single-entry bookkeeping is the most basic accounting method and is used rarely in business. Single-entry bookkeeping system does not record transactions but only records events. For example, events such as 10,000 units of goods were purchased from Mr. A are noted in a journal.

The amount of payment made on a purchase will be recorded as the cash reduced from total amount, and the total ending balance will be recorded below it. Expense and income can be recorded separately by making two columns so that the total amount of expense and income made by the business can be tracked, apart from just the total ending balance.

3. Double-Entry Bookkeeping

Double-entry bookkeeping is the most common accounting method used in business. This method directly affects the manner in which journals are maintained and their entries are recorded. Double-entry bookkeeping records every journal entry in two columns. This depicts that each business transaction comprises of an exchange between two sides, debit and credit.

The amount of payment made on a purchase will be recorded as two transactions in the journal entry. The payment amount will be reduced in the cash account and the same amount will be increase in the inventory or current asset account.

4. Use of Journal in Investment

The financial investment sector also requires the use of a journal. Professional managers and individual investors use journals as comprehensive records of the trades made in their own accounts. Journals are used by investors for evaluation, taxing, and auditing purposes.

Journals help investors to keep track of their trading performance and use it to learn from previous experiences and improve their trading practices. Journals record all their trades including profitable, unprofitable, watch-lists, pre-market records, post-market records, notes on reasons for purchase or sale of investment, etc. This helps investors in learning as much as they can from their trading history and improvising their future trading choices.