What is a General Journal?
A general journal is a systematic record of a company’s financial transactions arranged in chronological order. Its primary function is to aid in the reconciliation of accounts and facilitate the generation of financial statements. Sometimes referred to as an individual journal or book of original entry, it documents various transactions such as cash receipts and payments, inventory balances, purchases, and sales.
The general journal serves multiple purposes within an entity:
- Tracking assets and liabilities: It helps in monitoring changes in the entity’s assets and liabilities over time.
- Allocating and assigning costs and expenses: It records the allocation of costs and expenses to different accounts for accurate financial reporting.
- Posting entries to the general ledger accounts: Transactions recorded in the general journal are eventually posted to the respective accounts in the general ledger.
- Monitoring revenues and expenses: It captures revenue generation and expenditure activities of the entity.
- Reconciling accounts: By recording transactions systematically, the general journal aids in reconciling accounts to ensure accuracy in financial reporting.
- Producing financial statements: Information from the general journal is crucial in preparing financial statements such as income statements, balance sheets, and cash flow statements.
The data contained in the general journal plays a pivotal role in compiling comprehensive and accurate financial statements, providing stakeholders with insights into the entity’s financial performance and position.
Structure of a Standard Journal Entry
The structure of a journal entry can vary slightly among accountants, but it generally follows a similar format to ensure clarity and consistency within the financial department. Typically presented in a table format, a journal entry comprises five columns, each serving a specific purpose:
- Reference number: This column contains a unique identifier for the transaction, aiding in easy retrieval and review by the financial department if needed.
- Entry date: The second column records the date of the journal entry. Usually, this date corresponds to when the transaction occurred, especially if recorded in a specialised journal.
- Account titles and explanation: Positioned in the third column, this section is often the most extensive. It lists the names of the accounts involved in the transaction, with the account associated with the debit entry on the same row as its explanation. Similarly, the account linked to the credit entry aligns with its explanation.
- Debit: The fourth column specifies the monetary value entering the account, known as the debit. It records increases in assets and expenses or decreases in liabilities and equity.
- Credit: Lastly, the fifth column outlines the monetary value exiting the account, termed as the credit. This records decreases in assets and expenses or increases in liabilities and equity.
This structured approach in journal entry formatting facilitates clear communication and understanding of financial transactions within the entity’s accounting system.
General Journal vs Special Journal
General journals and special journals are the two main types of journals used in accounting. General journals cover transactions that special journals don’t, such as accrual adjustments, prepayments, debt, correction of errors, closing entries, and the sale or purchase of non current assets.
On the other hand, special journals are designed to record specific types of transactions, usually on a daily basis, such as purchases and sales.
Accountants typically prefer using special journals because they allow for efficient management of transactions. This is particularly useful for entities with a high volume of daily transactions, which could become cumbersome to manage without specialised journals that categorise these transactions.
For instance, large corporations and businesses may have hundreds of transactions occurring daily, and without specialised journals, accountants would need to record all these transactions in a single journal.
Types of Journal Entries
Here‘s an overview of different types of journal entries:
Opening Entry
Opening entries serve two main purposes. Firstly, they record the initial funding and starting balance when a new entity begins its operations. Secondly, they represent the balance at the start of each accounting period, typically lasting a month but subject to variation.
Example: An accountant assesses the entity’s balance after the previous accounting period, determining it to be $15,000. This amount forms the opening entry, representing the starting balance for the new period.
Transfer Entry
Transfer entries involve shifting expenses or income between accounts. As no external party is involved, the total of the accounts involved usually balances to zero. This balance is achieved by crediting the account from which money is moved and debiting the receiving account.
Example: An accountant is tasked with moving $4,000 from the entity’s primary account to a subsidiary account. The primary account is credited $4,000, representing the money leaving, while the subsidiary account is debited $4,000, symbolising the funds received.
Closing Entry
Closing entries follow opening entries and involve transferring the balance determined in the opening entry into the entity’s primary account at the end of each accounting period. This prepares the books for the next period.
Example: After determining a balance of $11,000 through the opening entry, the accountant transfers this sum from a temporary account into the entity’s primary account. This action is recorded as a closing entry, effectively closing the temporary account and debiting the primary account with $11,000.
Adjustment Entry
Adjustment entries are recorded for transactions that the entity has accounted for but not yet included in a journal. These transactions often involve expense accrual, revenue accrual, or deferred accrual. They remain unrecorded because they haven’t materialised by the end of the accounting period. To rectify this, an accountant makes adjustment entries in the general ledger to account for these transactions.
Example: Suppose an accountant works for a construction company that has completed a building project but hasn’t billed the client yet. The client owes the entity $200,000. In this case, the accountant records an adjustment entry in the general ledger, debiting $200,000 to reflect the owed payment.
Compound Entry
A compound entry consolidates multiple account transactions receiving a debit or credit into a single entry. It’s commonly used for situations like paying multiple employees simultaneously. Although the total value of credits and debits usually balances, the number of credits and debits can vary.
Example: Consider a business with 200 employees all being paid on the same day, with $900 transferred into each employee’s account. Instead of recording 100 separate transactions, the accountant consolidates them into a single compound entry of $90,000 in the journal.
General Journal vs General Ledger
The double entry accounting system relies on two important tools: the general ledger and the general journal. These tools help businesses organise their financial information and make sure everything runs smoothly and profitably. To understand how this system works, it‘s important to know the difference between the two: the general ledger and the general journal.
Role and Functionality
The general journal is the initial point of entry for all business transactions. It records transactions in the order they occur, providing a detailed chronological history of financial activities.
The general ledger serves as a centralised repository for all accounts used in the accounting system, providing a comprehensive overview of the financial position and performance of the business.
Sequence of Recording
Transactions are first recorded in the general journal before they are transferred to the general ledger. This ensures that all transactions are captured accurately and comprehensively.
Entries from the general journal are posted to the general ledger, where they are organised into individual accounts based on their nature, such as assets, liabilities, equity, revenues, and expenses.
Structure and Content
Each entry in the general journal typically includes the date of the transaction, a sequential serial number for reference, and columns for recording debits and credits, facilitating the double entry accounting system.
General ledger accounts are typically represented in T shaped tables, with debits on the left side and credits on the right side. This format allows for easy visualisation of account balances and transaction details.
Specialisation and Tracking
In addition to the general journal, some businesses may maintain specialised journals such as sales journals, purchases journals, or cash receipts journals to record specific types of transactions efficiently.
The general ledger tracks the financial activity of the business across five main categories: assets (resources owned by the business), liabilities (obligations owed by the business), owner’s equity (the owner’s investment in the business), revenues (income generated from business operations), and expenses (costs incurred in generating revenue).
Posting and Summarisation
After recording transactions in the general journal, the next step is to post them to the appropriate accounts in the general ledger. This process involves transferring the debit and credit amounts from the journal entries to the corresponding ledger accounts.
The balances of all accounts in the general ledger are summarised in a trial balance, which ensures that total debits equal total credits. The information from the general ledger is then used to prepare financial statements such as the income statement, balance sheet, and statement of cash flows.
Focus and Emphasis
The primary focus of the general journal is to provide a chronological record of transactions, ensuring accuracy and accountability in financial reporting.
Unlike the general journal, which focuses on recording transactions in chronological order, the general ledger emphasises summarising account balances and presenting the financial position of the business at a given point in time.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
