From tracking profits to filing tax returns, accurate record keeping smooths your business journey, every step of the way. One of the fundamental skills to master is journalizing transactions. But what does journalizing transactions mean in accounting, and how can you get started? We’ll answer these questions and provide a few examples below.
What does journalizing transactions mean?
When you keep a personal journal, it documents your day. A business journal works in a similar way, documenting all your financial transactions in chronological order. This gives you a detailed record of all the money flowing in and out of your accounts. Journalizing transactions forms the first step in the accounting process, providing relevant information that can be used later to write up formal financial statements.
A journal entry usually follows a specific format. It must include the account name, the amount you’re crediting or debiting, a description of the transaction, and the date. The document you record each entry in is called the book of original entry, with the process of entering new entries called journalizing.
Types of journals in accounting
We’ve already mentioned the book of original entry above, which is also sometimes referred to as a general journal. This is the main document that you’ll use for recording transactions in a journal. While small businesses might only need a single journal, larger companies or those with specialized needs might need to use several distinct journals. A few different types of journals you could use include:
Owner’s equity journal
Accounts receivable journal
Accounts payable journal
Cash payment journal
You can use each of these specialty journals to journalize transactions related to each type of account. For example, the purchase journal would be used to record any credit purchases made, such as new office supplies and machinery. The cash payment journal would be used to record any cash transactions.
Eventually, all these journalized transactions will be transferred to the general ledger.
Journalizing transactions in double-entry accounting
Learning how to journalize transactions is an important step in mastering double-entry accounting. With this method, you’ll need to make two journal entries for each financial transaction. If you debit one account, it must be balanced with a credit to a second account. This ensures that your accounts fall in line with the accounting equation:
Assets = Liability + Owner’s Equity
By recording double entries for each transaction, you can ensure that the equation is always in balance. The sum of your debits should always be equal to the sum of your credits.
Debits are entries that increase asset and expense accounts, but decrease liability, equity, and revenue accounts.
Credits are entries that decrease asset and expense accounts, but increase liability, equity, and revenue accounts.
For example, if you paid $500 in cash to purchase supplies, you would journalize this transaction with a debit to the expense account and a credit to the cash account.
How to journalize transactions
Let’s put it all together now with a step-by-step guide to journalizing transactions.
Step 1: Break your transaction down to the relevant accounts. There should be at least two accounts involved for every transaction, one for debits and one for credits.
Step 2: Choose the most relevant accounts to record the transaction under. This could include liability, revenue, expense, and asset accounts.
Step 3: Make sure the credit and debit amounts are balanced according to the accounting equation. If you debit one account, you must credit the other.
Step 4: Journalize your transaction by recording it as a journal entry. Include all relevant details including date and description of the activity.
Accounting transaction examples
What qualifies as a transaction in accounting? A few accounting transaction examples could include the following:
Receiving money through a lender
Receiving income as a cash payment for products sold
Purchasing assets for your business
Paying salary or wages to your employees
Recording depreciation costs of a fixed asset
These should all be recorded in the appropriate accounts as journal entries.
The bottom line
Journalizing takes a bit of practice to master, but it’s well worth it to keep your business’s finances in order. Jotting down all transactions in your journals as they happen reduces the chance of accounting errors over time. You can make sure the accounting equation is always in balance, with a clear, chronological view of financial activity over time.
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