Why You Should Keep an Accounting Journal for Your Business?
Effectively managing a business demands accurate money tracking. Understanding credits and debits lets you assess performance and focus areas. Enter the accounting journal—a tool capturing all business transactions, whether on paper or digitally. This article offers insights into the accounting journal, its purpose, entry creation, and its critical role in businesses.
The accounting journal - a definition
In plain terms, an accounting journal is a detailed record of all transactions made by a business within a certain accounting cycle. Often, an accounting journal is referred to as a book of first entry or a book of original entry.
As the name suggests, the accounting journal is where transactions are first recorded as they are made on a daily basis. An accounting journal can be kept in the form of a paper book, as a digital record or as part of an accounting software application.
Why you should keep an accounting journal
An accounting journal is a valuable tool that business owners can use to judge how much they are spending and receiving on a daily basis. The information in your accounting journal can be used to evaluate if you are spending too much money on one area of your business as opposed to another. Accountants can look at the data in the accounting journal and evaluate it to find any irregularities or mistakes.
Additionally, the information in the accounting journal is used to create other accounting records such as the general ledger and subledgers within the general ledger. This information is then collated to create tax documents. It can be said that the accounting journal forms the foundation of all accounting documents to come afterwards. Whether you are self-employed or operate a company, maintaining an accounting journal is vital to the financial health of your business.
How to create accounting journal entries
Creating an accounting journal involves collecting all information about the financial transactions your business makes as they occur. The accounting journal will contain data from receipts, invoices, cash register tapes, purchase orders and so on. Any details of damaged, returned or stolen inventory should also be included. All transactions should be written down in chronological order. Each individual transaction is known as a journal entry.
Usually, bookkeepers and accountants will use one of two methods when creating an accounting journal. There is double-entry bookkeeping, which is the most common method and single-entry bookkeeping, which is not as common but often used for businesses without large amounts of turnover.
The principle behind double-entry bookkeeping is that every transaction impacts at least two different accounts. The first account relates to the nature of the transaction. If you were to buy a new piece of equipment for your business, it would need to be entered into the accounting journal with a number that designates it as a fixed asset expense.
The second account would deal with how the transaction was paid. In the case of buying equipment, if you paid in cash the transaction would be logged in your cash account.
This process applies to sales, as well. If a sale is made, the item sold would be entered into its corresponding account, for example, office furniture. The invoice issued for the customer would be flagged for accounts receivable.
Single-entry bookkeeping is a simpler method of accounting and involves keeping a running total of the cash coming in and out of a business. As its name suggest, only one account is used to record this information.
The difference between a general ledger and an accounting journal
For anyone who is new to the principles of accounting and accounting terms, the difference between the accounting journal and the general ledger can be confusing. However, there are distinct differences between these two tools as they are indeed separate entities from each other that work together to provide research data and financial insights into a business.
As we have seen, the accounting journal is where all transactions are first recorded. The records are kept in chronological order and derive from all current transactions. The accounting journal does not begin with an opening balance.
The general ledger is often referred to as the book of secondary entries. It contains a range of subledgers that will contain detailed information about transactions, such as payments made and retention. This information is taken from the accounting journal. The general ledger is used to provide an overview of a business’s financial situation.
The information within it is needed to create financial statements such as the income statement, the cash flow statement and the balance sheet. While the data in the accounting journal does not need to balance, all figures in the general ledger do have to be balanced.
To sum up
The information in the accounting journal is used to populate the subledgers in the general ledger which then provides data for the creation of the three main financial statements. For this reason, all information in the accounting journal must be accurate and up to date.
Many business owners find it difficult to keep track of their expenses. The good news is that you don’t need to have a university degree to manage your accounting! Tracking business expenses can be made simpler and more efficient with the use of a Mooncard payment system. By using Mooncard, you can have a running list of all expenses made on behalf of your business that is collected in chronological order in real-time.
The process is simple: make a purchase using your Mooncard payment card, then take a digital photo of the receipt. This is then turned into an expense report by the Mooncard solution and sent straight to your accounting department who can then manually enter it into the accounting journal or have it automatically entered. If you would like to arrange a free, no-obligation online demonstration of the Mooncard solution, just visit the Mooncard website.