Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

The ledger record presents an analysis of transactions into their component elements, each transaction being classified and recorded, usually, in at least two ledger accounts, and frequently in more. Consequently, in order to learn the nature of a given transaction, to see it in its entirety, it may be necessary to refer to a number of separate ledger accounts. This process, even if the ledger is small, is not always easy; and when the ledger contains a large number of accounts, it becomes practically impossible. Accordingly, another kind of record is needed.

The Book of First Record.—This other record shows in one place the transaction in its entirety; it gives a complete statement of the conditions and all other data relating to the transaction. It also shows the fundamental analysis of the transaction into its debit and credit elements under appropriate titles. It is called the original or first record. Usually it is not the very first record made of the transaction but it is the first record made in the books of account. The book in which this record is kept is called the “Journal.” The record as kept in the ledger is a secondary record based on the original or first record in the journal. Because of its secondary nature, courts will not accept the ledger as evidence without verification.

Posting to the Ledger.—The act of transferring the original entry from the journal into the ledger is called posting to the ledger. In order not to lose sight of the original record in the journal it is important that the ledger entry show by letter and number the book and page where the original entry can be found. This index is entered in what is called the reference column of the ledger account, which is just to the left of the money column. In this manner every entry in a ledger account has a reference to the original entry pertaining thereto.

The Journal.—A journal may be defined as a diary or log in which the happenings or transactions of a business are recorded in chronological order; that is, consecutively day by day as they arise. Formerly it was sometimes called a day-book or blotter. As usually operated, however, the day-book or blotter contained a rough record giving all the essential data relating to each transaction without regard to accounting terminology, i.e., without regard to the formulation of the debit and credit of each transaction. The day-book entry was a sort of memorandum from which a formal record was made in the journal. This day-book or blotter, though still in use in some places, has very largely been discarded and only the formal journal is used. This latter was originally a single book but in modern accounting practice it has become separated into many special journals.

Characteristics of the Journal.—1. Being of the nature of a diary, the journal shows each day’s transactions in consecutive order with little regard to grouping. The first characteristic, therefore, of the journal is that it is a book of chronological entry, a record of each transaction just as it took place, with the entries made according to the dates of the transactions.

2. Another characteristic of the journal entry is that it is an analytical and classifying record. Before the entry is made, the transaction is analyzed into its two elements of debit and credit, determined according to the effect the transaction has in increasing and decreasing assets, liabilities, or proprietorship. The account titles used in the journal are the same as those used in the ledger and are selected on the basis of a detailed subclassification of the three fundamental groups of accounts. The degree of detail in classification depends on the desired minuteness of the information required. The guiding principle in giving these titles is to use such names as will tell truthfully and accurately what kind of information is recorded under each head. A journal entry is therefore an analytical record as to debit and credit, which classifies the different elements of the transaction under such titles as will later be used in the ledger.

3. A final and a very essential characteristic of the journal is that every entry should carry in addition to account titles, with their debit and credit amounts, a brief but complete summary of all the conditions and data relating to the transaction, so that, if referred to in the future, the journal record will call to mind the essentials of the entire transaction.

Because of these three characteristics, and particularly the last two, the journal record is of prime importance.

Equilibrium of the Journal Entry; Compound Entries.—As explained in a preceding chapter, the debit and credit elements of all transactions must be equal in amount. Since the journal entry is an analysis of the transaction, it must obviously show equal amounts in the debit and credit columns. In case the analysis and classification require an entry consisting of more than one debit and one credit item, the total of the several debit items must equal the total of the several credit items. Such an entry is called a compound journal entry.

Standard Form of Journal.—The standard form of journal provides spaces for the following information: date, classification as to debit and credit, ledger index column, money columns to show both the debit and credit amounts, and full record of the essentials of the transaction. The following form illustrates a complete journal entry: