Understanding the Definition of an Accounting Journal
The Journal Every Business Owner Should Keep
New business owners and aspiring entrepreneurs won't get far in business without understanding what an accounting journal is and why it's so fundamentally important to success. You'll need an accounting journal for day-to-day operations, for budgeting, and—of course—for tax purposes. And you'll need to keep track of all those things as soon as you open your doors to clients or customers and begin engaging in commerce.
Exactly What Is an Accounting Journal?
An accounting journal is just what it sounds like—it's a place to record the details of all the financial transactions of your business. And it keeps a record as to which of your accounts these transactions affect. In accounting terms, a journal refers to a financial record kept in the form of a book, spreadsheet, or accounting software. It contains all the recorded financial transaction information about a business. It's also known as a book of first entry.
Keeping an accounting journal can prevent your business from overspending in some areas while underspending in others. It can also prevent you (and your executives) from overdrawing funds, and it can help you spot any irregularities before they get out of hand. In short, although it's just a simple book or a computer spreadsheet, an accounting journal can prevent a potential crisis from starting; or spreading.
Before computers, an accounting journal was a physical log book with multiple columns to record financial transactions for a company. Today, most businesses use some type of financial accounting software to record and manage their business transactions. These transactions are then assigned to a specific ledger class using a "chart of accounts" number to prepare profit and loss statements, financial statements, and other important financial reports.
How to Create an Accounting Journal
An accounting journal is created by entering information from receipts, sales tickets, cash register tapes, invoices, and other data sources that show financial transactions that have occurred—including returned, damaged or stolen inventory. Business transactions should be presented in the journal in chronological order.
Entries are initially recorded using the double-entry method or the single-entry method of bookkeeping. Typically, although transactions are basically entered in the order in which they occur, debts are entered in their own order, before credits are entered. You don't have to stick to this format, but everyone who records in the journal should adhere to the same agreed-upon guidelines to prevent confusion.
Each listed transaction is referred to as a journal entry. Information from the journal is then recorded in the business ledgers.
If you haven't already started your business, think about which individuals in your company you want to have access to your accounting journal. Obviously, it should only be people you trust and individuals with designated financial or management roles within your organization. This is definitely a situation where less is more and it might mean only granting access to your chief financial officer or treasurer, or—in a simpler organization—you and your bookkeeper.
Although you don't want too many individuals to have access to your accounting journal, it's also a bad idea to let just one person have oversight of it. A select few should know the contents of the journal to prevent any inappropriate spending or budget shortfalls from wreaking havoc on your company's finances.