The journal is the book of first entry.

It used to be an actual book that the bookkeeper would use to make accounting entries. These days bookkeepers enter transactions on the computer using an accounting program. Our recording in the journal is also called a journal or a journal entry. The journals look like this:

Does this look at all familiar? It should we have been doing this throughout the previous section on double-entry accounting. Journals are simply debits and credits in chronological (date) order. The purpose of journals is to keep a day-to-day record of a business and its transactions.

Each transaction also requires a brief explanation of the transaction (below the debit and credit). This explanation should accurately describe what took place, so that anyone who glanced at it for the first time could easily identify what occurred.

Each journal can also be matched to the relevant supporting document (such as a check stub or a receipt) by use of a cross-referencing code or folio number. This code or folio number simply cross-references between one document and another. If the first transaction above of $15,000 capital was made by issuing check number 38, then one could write Ch-38 (for example) under the folio number.

Using the folio number to match a journal entry to a source document would enable a person to easily trace the recorded transaction back to the source document and verify that the transaction actually took place (as evidenced by the source document). Journals may also often include a cross-referencing code or folio number to cross-reference between the journal entries and the accounts (the next step). Each specific item, such as bank, would have its own folio number, and this would be used to cross-reference from the journal entry involving bank to the banks account in the ledger (this will be covered in the next section). The folio numbers make it simple to trace information through the steps in the accounting cycle. These cross-referencing numbers or codes would work like this:

Sal-1 is the individual code for the salaries account. J-1 is the code for journal page 1. One could thus follow information from the journal entry to an account in the ledger, or from an account in the ledger back to the journal entries. There are actually various different types of journals, and in our next lesson we're going to see what they look like and how they work.

General Journal Entries

The journal is the point of entry of business transactions into the accounting system. It is a chronological record of the transactions, showing an explanation of each transaction, the accounts affected, whether those accounts are increased or decreased, and by what amount. A general journal entry takes the following form:

Date

Name of account being debited Amount Name of account being credited Optional: short description of transaction

Amount

Consider the following example that illustrates the basic concept of general journal entries. Mike Peddler opens a bicycle repair shop. He leases shop space, purchases an initial inventory of bike parts, and begins operations. Here are the general journal entries for the first month: Date 9/1 Account Names & Explanation Cash Capital Owner contributes $7500 in cash to capitalize the business. Debit 7500 Credit 7500

9/8

Bike Parts Accounts Payable Purchased $2500 in bike parts on account, payable in 30 days. Expenses Cash Paid first month's shop rent of $1000. Cash Accounts Receivable Revenue Repaired bikes for $1100; collected $400 cash; billed customers for the balance. Expenses Bike Parts $275 in bike parts were used. Cash Accounts Receivable Collected $425 from customer accounts. Accounts Payable Cash Paid $500 to suppliers for parts purchased earlier in the month.

2500 2500

9/15

1000 1000

9/17

400 700 1100

9/18

275 275

9/25

425 425

9/28

500 500

Most of the above transactions are entered as simple journal entries each debiting one account and crediting another. The entry for 9/17 is a compound journal entry, composed of two lines for the debit and one line for the credit. The transaction could have been entered as two separate simple journal entries, but the compound form is more efficient. In this example, there are no account numbers. In practice, account numbers or codes may be included in the journal entries to allow each account to be positively identified with no confusion between similar accounts. The journal entry is the first entry of a transaction in the accounting system. Before the entry is made, the following decisions must be made:

which accounts are affected by the transaction, and which account will be debited and which will be credited.

Once entered in the journal, the transactions may be posted to the appropriate T-accounts of the general ledger. Unlike the journal entry, the posting to the general ledger is a purely mechanical process - the account and debit/credit decisions already have been made