Journalizing and Posting to Accounts

Transactions and other economic events are recorded in journals. A transaction recorded in the general journal made using double-entry accounting is known as a journal entry.

An accountant first looks at the details of the transaction and decides which accounts are best suited to reflect this economic event. In this case, one of the first entries in the company's general journal was to record the initial stock offering. The company issued common stock in exchange for cash. Cash was received, and common stock (ownership in the company) was given to investors in exchange. To record this event, cash was debited (increased), and common stock was credited (decreased).

Each journal entry is then transferred to the general ledger. This is done to make it is easier to see that each entry balances—that is, debits equal credits in each and every journal entry—in the general journal. Otherwise, one would have to search back and forth among pages in the general ledger. For a simple entry, that does not pose too much of a problem.

As a common example, payroll entries tend to be more complex. There may be a dozen accounts affected by a single entry. When processing payroll, it is necessary to keep track of federal income taxes, state income taxes, county income taxes in some places, Federal Insurance Contributions Act (FICA), Medicare, health benefits, and a few others. Searching back and forth in the general ledger would be cumbersome. To make sure the entries balance, separate notes can be made that closely resemble the entry in the general journal.

This system has evolved over many centuries. There is a logic to it, and it has worked well. The logic is built into the accounting software that is often utilized by businesses. What may appear tedious is not nearly so tedious when an accountant only has to make the journal entry and the entries in the general ledger are made by the computer automatically.

All the journal entries to cash have not been shown. Notice there is a reference back to the original journal entry, JE#1, in the case of recording the initial investment. The general ledger is cross-referenced to the source of the entry. There is also a running balance to the right of the entries. The short forms Dr for debit and Cr for credit quickly show what the net balance is in any given account. Cash is an asset, is increased with a debit, and normally has a debit balance. Common Stock is an equity account, is increased with a credit, and normally has a credit balance. Therefore when common stock was issued, the entry recorded an increase (debit) to cash and an increase (credit) in common stock.

Often, at the end of a reporting period, such as a month or quarter, just the balance is brought forward. This is usually done when opening the books for a new year. If an accountant were still using paper, they would not want to keep all the pages from years ago in the same book, so they would open a new book. Even with a computer, not bringing the balance forward might slow down processing if the company were very large and had millions of transactions.

A subsidiary journal is a book for extra journals that support the general ledger. For example, in the general journal there is a page for Account #4000-Mousetrap Sales. There might be many sales of the product and even many sales per day. That will take a lot of room on the general journal. Instead, it makes sense to have a new book called the sales journal. The sales journal is a journal devoted to recording sales. Rather than recording each sale in the general journal, an entry is made in the sales journal.

Entries from a subsidiary journal can be transferred to the general ledger at the end of a period, at the end of a page in the journal, or when a batch of sales has been posted. Once again, a reference is created to track where the entry originated. This helps isolate errors, which in turn may help with training new staff.

Other subsidiary journals include a purchase journal for buying goods and services and a payroll journal for recording payments to employees. There is also a cash receipts journal for recording cash received and a cash disbursements journal for recording payments.

There are also subsidiary ledgers, often called subledgers. While a journal is for recording transactions as they occur, a ledger keeps a running total of transactions that have occurred. An accounts receivable subledger keeps track of sales and payments by customers.

Following the logic of the subsidiary journals, an inventory ledger, usually known as a perpetual inventory record, keeps track of how many items of each type are available to sell to customers. A payroll ledger keeps track of payments made to employees and is used at tax time to issue W-2 forms to employees. A common stock ledger is used to keep track of who owns how many shares of a company stock.

None of these extra journals and ledgers may be necessary for a very small and simple business. More may be needed for a very large and complex business. What works well for one organization may be unnecessary or not enough for a different organization.

Once again, accounting software takes care of things in the background. Data-based software may not use the exact labels of subsidiary records but can create something that looks like a subsidiary record, such as a cash receipts journal, if necessary.