Journalizing

Updated on January 3, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Journalizing?

Journalizing refers to the process of documenting financial transactions in an organization’s accounting records. Its purpose is to digitally or physically record all business transactions accurately and in an organized manner. Moreover, it makes it easier for individuals to spot accounting errors.

Journalizing

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Organizations record all their financial transactions chronologically in an accounting journal. Businesses initiate this process every time a transaction occurs. Generally, the information recorded in the journal includes the amount, the date, the accounts involved, the amount, and a short description of the transaction. Only businesses using the double-entry bookkeeping system carry out this process.

Key Takeaways

  • Journalizing meaning refers to an accounting procedure involving accurately recording business tractions in appropriate journals. It enables individuals to spot accounting errors easily. Moreover, it provides financial transparency. For example, tax authorities can determine whether a business follows accounting principles.
  • There are various types of journals fulfilling different purposes. Examples of such journals are sales, purchase, and cash receipt journals. 
  • Journalizing in accounting applies to the double-entry system of accounting only.
  • Posting is carried out after journalizing.

Journalizing Explained

Journalizing meaning refers to a process businesses perform to record all their financial transactions correctly for their financial records. It enables individuals to track transactions in chronological order and spot accounting errors. Moreover, this process allows businesses to prepare their financial statements, which auditors analyze to check the transactions’ impact on the business.

This process carried out by companies results in entries in a general ledger or subsidiary ledgers. Organizations make entries to subsidiary ledgers when high-volume transactions are involved.

Since businesses are diverse in terms of service and size, various kinds of journals serve different purposes. Let us look at some of the different types of journals organizations use to record financial transactions.

  • Cash Receipts Journal: Businesses record every cash receipt during an accounting period here. So, it includes bank withdrawals, deposits, cash receipts, and payments. 
  • Purchase or Sales Return Journal: Traditionally, businesses use such a journal to document the returns of goods. They also record the reason for the return for future reference. 
  • Purchase Journal: Companies use this journal to record the purchases of stock made on credit. 
  • Journal Proper or General Journal: Organizations utilize this journal to record transactions not recorded in any other journal. 
  • Sales Journal: Businesses use it to record only the sale of goods on credit.  

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Steps

The journalizing process involves the following steps. 

Step 1 – Identify The Transaction Type

In the first step, individuals must determine the type of business transaction that has taken place. Every transaction involves two accounts. One of them is debited, while the other one is credited. One must note that purchases, payments, sales, and receipts fall under different categories. The classification depends on the situation.

Step 2 – Analyze The Transaction

Organizations must analyze the transactions and identify the account type accurately. A few common types of accounts are liability, expense, asset, and revenue.

Step 3 – Apply The Basic Accounting Equation To The Transactions

Businesses must balance every financial transaction, ensuring the sum of the credits is always the same as the sum of the debits. In other words, they must ensure that they debit the corresponding account every time they credit one.

Step 4 – Journalize the Transaction

Businesses must record the financial transaction correctly in the right journal to complete the journalizing procedure. Also, they must ensure to enter the date and provide a short transaction description.

Examples

Let us look at a few journalizing examples to understand the concept better.

Example #1

Suppose SRS Automotives, a manufacturer of automobile parts, agrees with CBZ Solutions, a maintenance contractor. According to the clauses in the contract, the former will pay the latter $5,000 every quarter in return for preventive maintenance services. As a result, every three months, the accountant of SRS Automotives must debit the maintenance expense account with $5,000 and credit the accounts payable account with the same amount.

Journalizing this recurring transaction ensures that the company does not miss out on any quarterly payments to CBZ Solutions while preparing financial statements at the end of the accounting cycle.

Example #2

Suppose The Burger Shop, Inc. purchased a delivery motorcycle for $5,000 on April 1, 2022. First, the business analyzed the transaction to determine which accounts were impacted. Since The Burger Shop purchased a new vehicle in cash, its vehicle and cash accounts were affected.

Second, the company analyzed the changes in both accounts. While the vehicle account surged owing to the addition of a new vehicle, the company’s cash account decreased as the payment was made in cash.

Third, The Burger Shop recorded the transaction in its accounting journal. Both accounts had a debit balance as they were asset accounts. The business debited the vehicle account to record an increase and credited its cash account to record a decrease.

Importance

One can go through the following points to understand the importance of journalizing:

  • Journalizing in accounting offers full financial transparency, helping tax authorities and shareholders determine whether the business adheres to accounting principles.
  • It helps creditors and investors decide whether the organization is creditworthy and investible.
  • This process helps spot accounting errors. Moreover, it minimizes the possibility of mistakes.
  • Since it involves recording every transaction chronologically with a description, one can easily know when and why a transaction occurred.
  • Accountants record financial transactions with the support of a bill or receipt. This allows one to check the authenticity of the journal entries.

Difference Between Journalizing And Posting

The meaning and purpose of journalizing and posting can be confusing for individuals new to accounting. That said, knowing their distinct characteristics is essential to eliminate any confusion. In that regard, let us look at some key differences between them.

JournalizingPosting
It records a business’s financial transactions in the correct accounting journals. Posting transfers the data recorded in accounting journals to the correct ledger accounts. 
Businesses complete the journalizing process before posting.Posting is the next step to journalizing.  

Frequently Asked Questions (FAQs)

What are the features of journalizing?

Some features of this process are as follows:
– It involves recording transactions chronologically. 
– Organizations carry out this process whenever a business transaction occurs.
– It involves writing a brief description of the transaction with the amount and accounts involved for future reference. 
– This serves as the base for other books of accounts, for example, ledgers.  
– Only businesses using the double-entry accounting system perform this process.

What are the 3 rules in journalizing?

The rules are as follows:
– The date column in the accounting journal must include the transaction date.
– Accounts to be credited and debited must be mentioned in the second column. 
– In the third column, businesses must record the page number of the ledger in which they posted the entry. 
– The fourth column is for recording the amount to be debited. 
– In the fifth column, businesses record the amount to be credited. 
Accountants must ensure to enter a short description of the transaction in the second column.

What is the difference between journal and journalizing?

A journal or the Book of Original Entry, where companies record financial transactions. That said, journalizing is the process of correctly recording transactions in the right accounting journals.

This article has been a guide to what is Journalizing in Accounting. Here, we explain it in detail with its examples, steps, importance, and differences with posting. You may also find some useful articles here –

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