Definition
The word ‘journal’ has been derived from the French word ‘JOUR’ meaning daily records. Journal (also called the book of original entry) is the book in which all business transactions are first recorded in chronological order. Each entry is made using the double-entry bookkeeping system — meaning every transaction affects at least two accounts with a debit(Dr.) and a credit(Cr.). This journal record is the starting point of the accounting cycle — after recording transactions here, they are then posted to the Ledger to classify and summarize the effects on each account.
Format of Journal
1. Date: The date on which the transaction was recorded is mentioned.
2. Particulars: The item that is debited is mentioned first and the word 'Dr.' is also written after that. In the next line, the item which is credited is written, a few spaces away from the margin, starting with 'To'.
3.Narration- After every journal entry, a brief explanation of the transaction with necessary details is given.
4. Ledger Folio or LF: Ledger Folio shows the page number on which the ledger account of that particular item is made.
5. Amount (Dr.): The amount that is debited is mentioned here.
6. Amount (Cr.): The amount that is credited is mentioned here.
Steps in Journalizing
The process of recording transactions in the journal is called journalizing. The steps to be followed to record business transactions in a journal are:
Step 1: Ascertain the accounts related to a particular transaction.
Step 2: Find the nature of the related account.
Step 3: Ascertain the rule of debit and credit, applicable for the related account.
Step 4: Record the date of the transaction in the 'Date Column'.
Step 5: Write the name of the account to be debited in the particulars column along with the abbreviation 'Dr.' and the amount to be debited in the debit amount column.
Step 6: Write the name of the account to be credited in the next line starting with 'To' and the amount to be credited in the credit amount column.
Step 7: Write a brief explanation of the transaction as narration.
Step 8: Draw a line across the entire particulars column to separate one journal entry from the other.
Rule of Debit and Credit in Journalizing (Golden Rules of Accounting)
All the accounts are classified into three types under the traditional approach.
1. Personal Account
The accounts which relate to an individual, group of individuals, firm, company, or institute are considered to be personal accounts. There are three types of personal accounts:
- Natural Personal Account: Accounts of natural persons i.e. accounts of particular human beings are considered in this. Eg. Ram A/c, Mohan A/c, Creditors A/c, Debtors A/c, Drawings A/c Etc.
- Artificial Personal Account: These accounts do not have the physical existence of a human being but a group of human beings working together is considered to be an Artificial Personal Account. Eg. Company A/c, Partnership Firm A/c, Bank A/c, Club A/c Etc.
- Representative Personal Account: When an account represents a particular person or group of persons then it is called a Representative Personal Account.
Rule: Debit the Receiver, Credit the Giver
2. Real Account
All the accounts whose value can be measured in monetary terms whether tangible or intangible which belong to the business are called Real Accounts. There are two types of real accounts:
- Tangible Real Accounts: The real accounts which can be touched, felt, measured, purchased, sold, etc. Eg. Cash A/c, Stock A/c, Furniture A/c, Machinery A/c, Etc.
- Intangible Real Accounts: The real accounts which can not be touched but their value can be measured in terms of money. Eg. Goodwill A/c, Patent A/c, Copyright A/c, Trademark A/c Etc.
Rule: Debit What Comes in, Credit What Goes out
3. Nominal Account
All the expenses and losses as well as all the incomes and gains come under Nominal Account. Expenses include Salaries Paid, Rent Paid, Discount Allowed Etc. and Incomes include Commission Received, Interest Received, Discount Received Etc.
Rule: Debit all the Expenses and Losses, Credit all the Incomes and Gains
Types of Journal entries
1.Opening journal entries: These are passed at the start of a new accounting period to bring forward the closing balances of assets, liabilities, and equity from the previous period into the current books
2.Compound journal entries: Used when a single transaction affects more than two accounts — it involves multiple debits and/or multiple credits in one entry
3.Adjusting journal entries: These are recorded at the end of an accounting period to update account balances for accruals, deferrals, depreciation, or other items so the financial statements are accurate.
4.Transfer journal entries: These entries move amounts from one account to another within the books — such as transferring balances between accounts without affecting total assets or liabilities.
5. Closing journal entries: Passed at the end of an accounting period to close temporary accounts (like revenues and expenses) by transferring their balances to permanent accounts
6.Reversing journal entries: Optional entries made at the beginning of the next period to reverse certain adjusting entries from the prior period, making routine recurring transactions easier to record.
Needs of journal entries
1.To record all financial transactions accurately – They ensure every business transaction must recorded in the books.
2.Maintain organized records – Transactions are kept in order, making it easy to find and review them.
3.Support double-entry bookkeeping – Each entry shows both debit and credit effects, keeping accounts balanced.
4.To provide a basis for the ledger – Journal entries are later transferred to the ledger accounts for classification.
5.Help to prepare financial statements – The data from journal entries is used to create reports like the balance sheet.
6.Create audit trail – They give auditors a clear history of transactions to check accuracy and validity.
7.To ensure compliance – Proper entries help meet accounting standards and regulatory requirements.