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.
A journal is one of the so called ‘Books’ of financial records for a business. There are several journals in a set of books including sales, purchase, receipts and general. Journals contain chronological entries identifying the respective accounts for the debits and credits for transfer to the account ledgers. Journals are usually function based such as Purchases, Payroll, Cash Disbursement and so on.
The accounting profession uses various tools to generate accurate accounting information at the close of accounting cycles (monthly, quarterly and annually). The primary document is the working trial balance. It is very similar to the traditional trial balance except there are additional columns used to identify various adjustments and the corresponding source documents (work papers).
Up to this point in this series about bookkeeping I’ve only mentioned accounts (ledgers) by name. To speed up the process of entering information accountants converted names to numbers. This made it easier to enter information in the original journals. Instead of long hand written words for the particular ledger, you simply enter a number.
Debits and credits are two words that are the most recognized terms synonymous to bookkeeping and accounting. I have read over 30 different articles as to how other authors define debits and credits with bookkeeping. Several authors try to get the reader to visualize the terms as the left side and the right side of the ‘T’-Account (I also describe this in Lesson 2).