What Is a Journal?
A journal is a detailed account that records all the financial transactions of a business,聽to be used for the future reconciling of accounts and the transfer of information to other official accounting records, such as the general ledger. A journal states the date of a transaction, which accounts were affected, and the amounts, usually in a double-entry bookkeeping method.
- A journal is a detailed record of all the transactions done by a business.
- Reconciling accounts and transferring information to other accounting records is done using the information recorded in a journal.
- When a transaction is recorded in a company's journal, it's usually recorded using a double-entry method, but can also be recorded using a single-entry method of bookkeeping.
- The double-entry method reflects changes in two accounts after a transaction has occurred; an increase in one and a decrease in the corresponding account.
- Single-entry bookkeeping is rarely used and only notes changes in one account.
- A journal is also used in the financial world to refer to a trading journal that details the trades made by an investor and why.
Understanding a Journal
For accounting purposes, a journal is a physical record or digital document kept as a book, spreadsheet,聽or data within accounting software. When a business transaction is made, a聽bookkeeper enters the financial transaction as a journal entry. If the expense or income affects one or more business accounts, the journal entry will detail that as well.
Journaling is an essential part of objective record-keeping and allows for concise reviews and records-transfer later in the accounting process. Journals are often reviewed as part of a trade or audit process, along with the general ledger.
Typical information that is recorded in a journal includes sales, expenses, movements of cash, inventory, and debt. It is advised to record this information as it happens as opposed to later so that the information is recorded accurately without any guesswork at a later date.
Having an accurate journal is not only important for the success of a business, by spotting errors and budgeting correctly, but is also imperative when taxes are filed.
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Double-entry bookkeeping is the most common form of accounting. It directly affects the way journals are kept and how journal entries are recorded. Every business transaction is made up of an exchange between two accounts.
This means that each journal entry is recorded with two columns. For example, if a business owner purchases $1,000 worth of inventory聽with cash, the bookkeeper records two transactions in a journal entry. The cash account decreases by $1,000, and the inventory account, which is a current asset, increases by $1,000.
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Single-entry bookkeeping is rarely used in accounting and business. It is the most basic form of accounting and is set up like a checkbook, in that there is only a single account used for each journal entry. It is a simple running total of cash inflows and cash outflows.
If, for example, a business owner purchases $1,000 worth of inventory with cash, the single-entry system records a $1,000 reduction in cash, with the total ending balance below it. It is possible to separate income and expenses into two columns so a business can track total income and total expenses, and not just the aggregate ending balance.
The Journal in Investing and Trading
A journal is also used in the investment finance sector. For an individual investor or professional manager, a journal is a comprehensive and detailed record of trades occurring in the investor's own accounts, which is used for tax, evaluation, and auditing purposes.
Traders use journals to keep a quantifiable chronicle of their trading performance聽over time in order to learn from past successes and failures. Although past performance is not a predictor of future performance, a trader can use a journal to learn as much as possible from their trading history, including the emotional elements as to why a trader may have gone against their chosen strategy.
The journal typically has a record of profitable trades, unprofitable trades, watch lists, pre- and post-market records, notes on why an investment was purchased or sold, and so on.