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Accounting Systems and Technology / By David J Hoare MSA / 11/04/2018 01/21/2021

Journals and Ledgers

This site is dedicated to the investment strategy known as Value Investing. There are over 580 articles on this site about business tenets, principles and standards. During 2020, this site’s Value Investment Fund earned a 35.46% return. All of it was documented in the Value Investing Section. If you want to learn about value investing, click on the Value Investing tab in the header above.

Accounting is the process of recording economic activity and organizing this information in a format to inform owners about financial results. It all begins with the journals and ledgers. The initial entry is recorded in one of many journals and then transferred to the respective ledgers where the data is summed and reported to the management team. This article explains how journals and ledgers relate to each other and how the end results are organized.

The first section below explains journals and why economic activity is recorded to the journal.  From there, the information is transferred to the ledgers. In the second section below, ledgers are described in more detail and how information is organized within the ledger. The final section explains how the journals and ledgers work together to create a set of reports for the owners that provide them with financial feedback for their respective business.

Journals

Similar to a diary, the journal is the original source of record for economic activity related to the business. The entries are customarily recorded in chronological order. To assist in speeding up data entry, most businesses use several journals based on the respective type of transaction. The four core journals are:

  1. Sales – records the transaction associated with customers.
  2. Purchases – this journal is used to enter data related to buying materials or administrative items to conduct business.
  3. Payroll – anything related to employees and compliance is written in this journal.
  4. General – the catch-all book that is used if one of the other journals doesn’t seem like the correct fit.

Larger business operations have many more journals based on functions. For businesses that purchase materials on account, an additional journal known as the disbursements journal is used to record actual payments made for those purchases. On the flip side, when the customer has an account, upon collection of the money the receipts journal is used to record this activity. I’ve seen journals for taxes, owner activity and so forth.  But the above four are pretty much universal for all businesses. However, for really small business operation, you only need one journal (general journal) because the level and volume of activity is relatively limited.

Most accounting software programs have these journals built-in as a sub-routine of the program. For example, when you receive payment from a customer the entry is posted to the receipts journal. Just remember, the four journals above are built into every accounting software program available on the market today.

All entries are made under the dual entry accounting system. Thus, both the debit and credit are recorded together in the journal. For example, suppose a customer comes into the store and buys an item and pays cash to the clerk. This entry is recorded to the sales journal as follows:

Sales Journal
Date       Trans #        Ledger ID       Description                      DR           CR
Today     123456        Sales               Sold 1 Widget                                10.00
               123456        Cash               Sold 1 Widget                10.00

Notice the debit equals the credit. The entry is made in accordance with the customary posting of debits and credits related to the type of account. Also, notice something really critical to the system, there is a ledger ID column that identifies which ledger will receive this line of entry. This is the connection between journals and ledgers. This is similar in the ledger as the data is transferred to that particular book.

Ledgers

Right up until the 1980’s, bookkeeping was a manual activity for almost every company in the world. Only the large publicly traded companies could afford accounting technology to assist in recording the thousands of transactions each day. Each day, the accountant would take each journal one by one and transfer the lines of entry to the respective ledgers. For the entry above, the bookkeeper would record in the sales ledger one line for the sale of that widget. The entry would look like this:

Sales Ledger
Date      Journal     Trans #                DR                      CR
Today   Sales          123456                                        10.00

For most companies, there will be tens or possibly hundreds of lines of credits each day. They would be summed up each day and then summed again at month’s end to determine total sales for that accounting period.

On the flip side, the cash ledger would receive the debit value. And just like the sales ledger, the day’s activity is summed and again at month’s end.

Thus, unlike a journal which records data in chronological order and has both sides of the entry, the ledger records one side of the entry based on the type of account. For example, revenue ledgers will have credit entries, asset ledgers will have debit entries.  Please don’t think this rule is pure, it is possible for the sales journal to have a debit line entry in its activity. Why? Think about a customer returning the item, the journal records the entry in reverse; thus the ledger will have a debit line entry in its register. By the way, there’s a new term for you to understand. Those lines of activity in the ledger are often referred to as a register.

How is this information finally relayed to the financial statements? The next section will explain how the journals and ledgers come together to get information reported to the financial statements.

Value investing utilizes a buy low, sell high tenet of systematic processing with buying and selling stock investments. Along with patience, value investors reap substantially greater returns than most of the market measurment indices (DOW, Russell 2000, S&P, etc.). During 2020, this investment fund earned a 35.5% return while the DOW generated a 6.0% return. To date, the Investment Fund is 2.8X the return of the DOW and 2.5X the S&P 500 and the Composite 1500 Index. When you subscribe, you receive access to all existing articles, books, lessons, webinars and reports explaining how value investing works. For more information, click here: Membership Program.

In addition, each week, the subscriber receives additional articles, reports and buy/sell points for high quality stock purchases. Follow along as the fund updates regularly and discover how to invest like a pro and earn excellent returns on your investment.

Subscription ($99.99) is for one year of access to the value investing pool of information and formulas.

REGISTER NOW!

Journals and Ledgers – Working Together

Above it was explained how the ledgers are summed each day and this value is then added to the starting balance that day for that respective ledger and an ending balance is determined. The accountant takes those balances from all the ledgers for that day and places them on a worksheet called the trial balance. It is merely a list of the accounts in groups and the values are placed in their respective columns. Look at this example:

Trial Balance
Today
Ledger ID                                    DR                          CR
Cash                                           1,345.10
Inventory                                    6,491.42
Fixed Assets                             14,200.00
Accounts Payable                                                     2,304.18
Equity                                                                      17,365.49
Sales                                                                        17,208.40
Cost of Sales                               9,821.15
Expenses                                     5,020.40                   -0-     
Totals                                        36,878.07               36,878.07

Notice how all debits combined equals all credits combined?

Once the trial balance reconciles (debits equals credits), the information can be formatted and transferred to the respective financial statements. The income statement will report sales, offsetting cost of sales and overhead expenses for a net profit of $2,366.85.

The balance sheet will look like this:

                                    Balance Sheet
                                         Today
Assets
Cash                                                         $1,345
Inventory                                                  6,491
Fixed Assets                                            14,200
Total Assets                                                            $22,036
Liabilities
Accounts Payable                                                        2,304
Equity
Retained Earnings                                   17,365
Current Earnings                                       2,367
Sub-Total Equity                                                         19,732
Total Liabilities and Equity                                       $22,036

Per the accounting formula, total equity equals assets minus liabilities. Another way to say this is that the two halves of the balance sheet are equal. All of this information started in the journals and via transfers to the ledgers then to the trial balance ends up reported in the financial statements.

Modern day technology does this automatically. Every entry made automatically adjusts the ledgers and the respective financial reports.

Some final thoughts for you to consider. A set of journals and ledgers is referred to as a set of books for a company. There is a set of books for every accounting year for a business. Thus, now you understand where these terms originated and why they are still used today. You will hear them used among bookkeepers and accountants mostly, but at least now it makes sense. ACT ON KNOWLEDGE.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.4% and year-to-date for the second year it is tracking well over 34%. Lifetime to date, the Fund is 2.8X the return for the DOW and 2.5X the S&P 500.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.46%. The investment fund outperformed the DOW by a factor of 2.8X, 2.5X the S&P 500 and 2.5X the S&P Composite 1500.

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