Journal / Daybook / Book of original entry
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 13 January 2012.
The Meaning of Journal (Daybook, Book of original entry)
In bookkeeping and accounting, a journal is a place for recording transactions as they occur. Entering transactions into a journal is usually considered the first step in the accounting cycle (see Exhibit 1, below). The exception would be situations where entries are first captured in a record called a daybook (or book of original entry), before they are transferred to the journal.
The Journal
Historically, journals were always bound notebooks in which a bookkeeper hand wrote entries shortly after a sale was closed, an expense was incurred, revenues were received, or any other event occurred that impacted the company's accounts.
Today, of course, journals are usually implemented in software as part of an accounting system, where transaction data are entered either manually through onscreen forms or automatically (e.g., from a point of sale system). Most accounting systems provide user guidance and error-checking, to help ensure that the appropriate accounts are impacted, and that debit or credit entries are registered correctly. Software, moreover, automates the second stage of the accounting cycle, posting journal entries to a ledger.
The name "journal," from Old French and Latin origins, suggests daily activity (jour, French for "day"). Personal diaries and newspapers are sometimes called "journals" for the same reason. Other accounting records may be updated less frequently, but journals are normally updated either continuously or at least daily, keeping a running list of account-impacting transactions as they occur. Should anyone ask specifically which transactions occurred on any given day, the journal provides the answer.
Daybooks
Organizations may in some cases use one or more daybooks (books of original entry) as the original data entry point for transactions. Entries are made in daybooks in chronological order, just as they are in journals. Day books are added to the start of the accounting cycle when there may be a desire or need to put record capturing into the hands of people directly engaged in transaction activity, when there is a need to capture additional transaction information, or when there is a desire to keep together entries of one or another kinds (e.g., a "sales daybook" or a different sales daybook for each sales region, or a "cash daybook" for keeping together cash transactions."
Daybooks stand in relation to the journal in very much the same way that sub ledgers stand in relation to the general ledger. The daybook (or sub ledger) has the same structure as its "parent," the journal (or general ledger), but it may contain additional details about transactions, or customers, or venders, etc., that do not transfer to the parent. Where daybooks are used, however, all daybook entries are passed, in chronological order to the journal, where they are entered in appropriate form (e.g., as debits or credits to accounts from the organization's chart of accounts).
• The Journal in the Accounting Cycle
• Journal Entries, Debits and Credits, and the Chart of Accounts
• Example Journal and Ledger Entries
- Journal Entries
- Ledger Entries
[ Page Top] [ Encyclopedia ] [ Business Case Books & Tools ] [ Home ] The Journal in the Accounting Cycle
Exhibit 1 below shows the major steps in the accounting cycle, as practiced where accounting is based on a double entry system (the approach to accounting used by the overwhelming majority of companies and organizations, worldwide). The journal is the initial data entry point for transaction records that ultimately build into the organization's financial accounting reports at the end of the accounting cycle.
Exhibit 1. The accounting cycle. Transactions are entered into the journal as the first step in the accounting cycle. The journal is organized chronologically, that is, entries are added one after another in the order they occur. Journal entries are transferred to a ledger (posted to a ledger) as the second step. |
Journal entries are copied to (posted to) a ledger—another record book. Whereas the journal organizes entries chronologically, the ledger organizes entries by account (see the Example section below). The ledger summaries of account transactions are checked for accuracy by computing a trial balance, which should show that across all accounts, total debits equals total credits. If the two totals do not agree, adjusting entries are made and ledger entries are corrected, after which the transaction data are brought into the period's financial accounting reports.
Journal Entries and the Chart of Accounts
The basic building block in in a double entry accounting system is the account, which can be defined as a place for recording changes in value (additions and subtractions) for one specific purpose. When transactions are entered into the journal, those making entries are responsible for knowing which accounts to impact and whether the impacts should register as debits or credits.
The organization's complete list of accounts to be used for journal entries is called its chart of accounts. Every journal entry will impact at least two member accounts from this list, and the kind of impact (debit or credit) depends on which of five chart of accounts categories the accounts belong to.
First, there are the so-called "balance sheet" account categories:
1. Asset accounts: Things of value that are owned and used by the business.
Example: Cash on hand
Example: Accounts receivable
2. Liability accounts: Debts that are owed by the business.
Example: Accounts payable
Example: Salaries payable
3. Equity accounts: The owner's claim to business assets.
Example: Owner capital
Example: Retained earnings
Secondly, there are the so-called "income statement" account categories:
4. Revenue accounts: The amounts earned from the sale of goods and services, or investment income, or extraordinary income.
Example: Product sales revenues
Example: Interest earned revenues
5. Expense accounts: Costs incurred in the course of business.
Example: Direct labor costs
Example: Advertising expenses
In practice, even a small organization may list a hundred or more such accounts as the basis for its accounting system, and very large and complex organizations may use thousands. Nevertheless, for bookkeeping and accounting purposes, all named accounts fall into one of the five categories above.
Every financial transaction brings a journal entry with at least two equal and offsetting account changes, the change in one account called a debit (DR) and the change in another account called a credit (CR). Whether a debit or a credit increases or decreases the account balance depends on the kind of account involved, as shown below in Exhibit 2:
| Debit (DR) Entry ... | Credit (CR) Entry ... | |
| Asset account | Increases (adds to) account balance | Decreases (subtracts from) account balance |
| Liability account | Decreases (subtracts from) account balance | Increases (adds to) account balance |
| Equity account | Decreases (subtracts from) account balance | Increases (adds to) account balance |
| Revenue account | Decreases (subtracts from) account balance | Increases (adds to) account balance |
| Expense account | Increases (adds to) account balance | Decreases (subtracts from) account balance |
| Exhibit 2: As debits and credits are entered into the journal for different accounts, the impact of the entry either adds to or subtracts from the current value (balance) of the accounts. Whether a debit or a credit adds or subtracts value depends on account category—asset, liability, equity, revenue, or expense. It also depends on whether or not the account is a contra account within a category. | ||
Suppose, for example, that a company acquires assets valued at $100,000. The journal entry for the acquisition will show that an asset account increases $100,000, perhaps asset account "factory manufacturing equipment." Because this is an asset account, its balance increase is called a debit. However, the balance sheet is now temporarily out of balance until there is an offsetting credit of $100,000 to another account, somewhere in the system. This could be, for instance:
- A credit of $100,000 to another asset account, reducing that account value by $100,000. This could be the asset account "cash on hand."
- If instead of cash, the asset purchase is financed with a bank loan, the offsetting transaction in the journal entry could be a credit to a liability account such as "bank loans payable," increasing that account value by $100,000.
When the journal entry is complete, the basic accounting equation holds and the balance sheet stays balanced:
Assets = Liabilities + Equities
And, for the account journal entries that follow from a single transaction:
Debits = Credits
The bookkeeper or accountant dealing with journal entries faces one complication, however, in that not all accounts work additively with each other on the primary financial accounting reports—especially on the income statement and balance sheet. There are cases where one account offsets the impact of another account in the same category. These are the contra accounts that "work against" other accounts in their own categories. In some cases, the contra accounts reverse the debit and credit rules in Exhibit 2 above.
For example, an "accounts receivable" account and an "allowance for doubtful accounts" account are both asset accounts. "Allowance for doubtful accounts," however, is a contra asset account that ultimately reduces the impact (balance) contributed by "accounts receivable." When these journal entries make their way into the financial reports, the balance sheet result is a "net accounts receivable" less than the "accounts receivable" value.
In any case, the bookkeeper or accountant working with journal entries needs to have a complete knowledge of the organization's chart of accounts and a solid command of double entry bookkeeping rules—or else, accounting software that provides clear guidance and good error checking.
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Example Journal and Ledger Entries
Journal entries and their contribution to ledger entries are illustrated here for a small subset of one company's chart of accounts, summarized below in Exhibit 3:
| Grande Corporation Chart of Accounts | ||
| Acct No. | Account Name | Acct Category |
|---|---|---|
| 101 | Cash on hand | Asset |
| 110 | Accounts receivable | Asset |
| 125 | Supplies inventory | Asset |
| 139 | Merchandise inventory | Asset |
| 200 | Accounts payable | Liability |
| 410 | Product sales revenue | Revenue |
| 525 | Cost of goods sold | Expense |
| 610 | Supplies expense | Expense |
| Exhibit 3. Eight accounts from one company's chart of accounts, to illustrate journal and ledger entries in the examples below. | ||
In reality, of course, the full chart of accounts, journal, and ledger will include many accounts not shown here. However, for one week's activity affecting these accounts, the journal and ledger entries might appear as shown below.
Journal Entries
On 1 September, two customers place product orders, on credit. Customer 1 orders $4,200 in products, Customer 2 orders $5,800 in products. Later the same day, the company ships the products.
Grande Corporation Date Account Debit Credit 01-Sep-11 110 Accounts receivable $5,800 01-Sep-11 525 Cost of goods sold $10,000 |
On 2 September, the company places a $1,180 order for office supplies:
Date Account Debit Credit |
On 5 September, a written check from Customer 1 arrives ($4,200) and the company sends its own check to the office supplies vendor ($1,180) for supplies ordered on 2 September:
Date Account Debit Credit 05-Sep-11 200 Accounts payable $1,800 |
On 6 September, Customer 2 makes a credit card payment for goods ordered on 1 September ($5,800) and Customer 3 purchases products, pays in cash ($1,250) and takes delivery immediately. Also, it is noted that the $820 worth of supplies have been used from the supplies inventory since it was last checked. Finally, Customer 4 orders products on credit ($1,850) which have not yet shipped by the end of the day.
Date Account Debit Credit 06-Sep-11 101 Cash on hand $1,250 06-Sep-11 525 Cost of goods sold $1,250 06-Sep-11 610 Supplies expense $820 06-Sep-11 110 Accounts receivable $1,850 |
By reviewing the journal entries above, it should be no surprise that one part of the accounting equation holds (Total debits = Total credits). It is easy to see on the journal page that every debit entry is paired with an equal credit entry. Notice, by the way, that the journal entries follow the convention used throughout a double entry system, of listing debit figures to the left of their companion credit figures.
From the journal page, however, it is not so easy to judge whether the company is making money or losing money. That information is not completely visible until the end of the accounting period when account balances from the ledger are brought together on the income statement. That information comes a step closer, however, when journal entries are posted to the ledger, where account summaries show how different account balances are running (e.g., balances for sales revenue accounts and expense accounts).
Ledger Entries
As the second step in the accounting cycle, journal entries are posted to the organization's general ledger and sometimes, from there to various sub ledgers as well. The general ledger, however, is the "top level" ledger, having an account record for every account in the chart of accounts.
Historically, when journals and ledgers were written notebooks, and entries were hand written, journal data were posted into ledgers only periodically. This meant that account balances were known only through the most recent posting. Software-based accounting systems however, are usually programmed to update ledger accounts continuously, so as to keep running account balances at all times, as suggested in Exhibit 4 below.
Account summaries in the ledger are usually presented in the form of T-accounts, as shown in Exhibit 4 below with each of the eight accounts from Exhibit 3 and the journal entry examples above. The T-account name refers to the T-shaped lines, dividing the accounts debit entries from credit entries. Again, debits always appear on the left, and credits appear on the right.
Exhibit 4. T-accounts in the general ledger after journal entries have been posted. |
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