Using Journals to record transactions

As I have always expected from the Corporate Financial Accounting course, I learned a new terminology from a recent class. It is an interesting terminology and I have added it to my glossary of new terminologies and concepts. Let me share my latest learning with you.

I learned that Accountants use a particular record when documenting transactions. They call the record a Journal. I learned that Journal is a chronological of a company’s transactions. The records are chronological because of the dates of the transactions.

The process of recording transactions in a journal is called Journalizing. I learned this new terminology too and I have added it to my glossary of new terminologies. I also learned that journalizing is the third stage in recording transactions but it begins with the analysis. The entire process is as follows:

A company performs a transaction (example buys an asset or performs a service)

1. The accountant analyzes the transaction; He specifies the accounts that was affected by the transaction and classifies them by their type.
2. Next, he determines whether the transaction increased or decreased the account
3. Afterward, he records the transaction in a journal and includes a brief explanation.

We can also call the third step, “making a journal entry”.

The flow of accounting data, includes a final step in the process. Here, the accountant posts the amounts from the transaction into Ledger accounts.

A ledger account is a group of T-accounts with their balances. To put it simply, we combine individual accounts to make up a ledger account. Some examples of accounts that we can combine are cash, accounts payable and common stock.

I also learned that Accountants do not record their company’s cash and accounts receivables in the journal. They record the amounts in the ledger accounts. Accountants also populate the ledger account with the data in the journal. The process of copying data from the journal to the ledger is called Posting; another new word added.

When we attempted some exercises, I struggled with journalizing. The most confusing part was determining the right column for an asset. I needed to understand this so I did some further reading. I learned something that was very helpful.

When you want to analyze a transaction, the first thing is to ask if the transaction has any effect on cash. The question to ask is, did cash increase or decrease? After this, you can check the effect of the transaction on other accounts.

The rule of transaction analysis states that:

When an asset reduces, it is recorded as credit; when it increases, you record it as debit. The other side of the accounting equation does the opposite. When liability increases, you record it as credit; when it reduces, you record it as debit.

Accountants also apply these rules when they journalize. This was the difficulty I had initially with the exercises. I would need to always remember the rules because other lessons revolve around them.

Here is an example of a journal entry:

Transaction: A company sells a plot of land for $5000.

The journal entry would look like this