Understanding the Definition of an Accounting Journal
The Journal Every Business Owner Should Keep
New business owners and aspiring entrepreneurs won't get far 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 as soon as you open your doors to clients or customers and begin engaging in commerce.
The Definition of 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.
It keeps a record of 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.
This can prevent your business from overspending in some areas while underspending in others. It can also prevent you and your executives from overdrawing certain accounts, 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 an Accounting Journal Is Created
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.
Business transactions should be presented in the journal in chronological order.
They're 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, debits are entered in that order before credits. 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 yet started your business, think about which individuals in your company you want to have access to the accounting journal. Obviously, it should only be people you trust and individuals with designated financial or management roles within your organization. This might mean the chief financial officer or treasurer, or—in a simpler organization—you, your bookkeeper and your accountant.
Although you don't want anyone and everyone to have access to your accounting journal, it's usually 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 the company's finances.