The Process of Journalizing A Guide for Beginners
The Process of Journalizing: A Guide for Beginners
Journalizing is a fundamental aspect of accounting, crucial for accurately recording financial transactions. Though it may seem straightforward at first, understanding the process requires attention to detail and the application of common sense. In this blog post, we’ll explore the key elements of journalizing, provide examples, and explain how to approach this important task.
What is Journalizing?
Journalizing is the process of recording a financial transaction in a company’s accounting records. It involves determining what occurred in the transaction, identifying which accounts were affected, and deciding whether these accounts should be debited or credited. While this sounds simple, it can become complex as you dive into the details.
Understanding the Basics
When you journalize, the first step is to understand what actually happened in the transaction. Which accounts are involved? For example, if the transaction affects cash, you'll need to determine whether cash was increased or decreased. As a rule of thumb, it's helpful to start with what you know and work backward.
The Role of Common Sense
One of the key elements of journalizing is using common sense. When examining a transaction, consider what happened. Avoid overcomplicating the process, and remember that common sense plays a significant role in figuring out the flow of the transaction.
Key Steps in Journalizing
Here are the essential steps for recording a transaction:
- Record the Date : Every transaction is time-sensitive, so start by noting the date.
- Reference the Transaction : Include a reference number, such as a check number or deposit number, for easy tracking.
- Identify the Accounts Involved : Use the correct account numbers and account names. While accountants may know what the account numbers represent, clarity is essential for anyone reviewing the journal.
- Debit and Credit Entries : Make sure to enter the debit and credit amounts, ensuring that the total debits equal the total credits. This balance is crucial for accuracy.
- Provide a Description : Document the transaction's details. Include the “who, what, and why” so that anyone reviewing the journal entry can understand the transaction.
Example 1: Recording Utility Expenses
Let's consider a straightforward example: writing a check to pay the utility bill.
What Happened?
- Cash Decreased : Writing the check reduces the cash balance. A decrease in cash is recorded as a credit.
- Utility Expense Increased : Paying the utility bill increases the utility expense. An increase in expense is recorded as a debit.
Journal Entry
- Date : Record the transaction date.
- Reference : The check number.
- Accounts Affected : Account 590 for utilities (debit) and account 100 for cash (credit).
- Amounts : Debit utilities by $340 and credit cash by $340.
By ensuring that the debit to utilities and the credit to cash are equal, we confirm that the journal entry is balanced.
Example 2: Purchasing Equipment with a Credit Card
Let’s now examine a more complex scenario: buying a new laptop using a credit card.
What Happened?
- Equipment Increased : The laptop purchase adds to the company’s equipment. An increase in assets is recorded as a debit.
- Credit Card Liability Increased : The liability on the credit card increases because the laptop was purchased on credit. This increase in liability is recorded as a credit.
Journal Entry
- Date : Record the transaction date.
- Reference : Include a reference number (this may not be directly linked to a check number).
- Accounts Affected : Account 590 for equipment (debit) and account 240 for credit card liability (credit).
- Amounts : Debit equipment by $770 and credit the credit card liability by $770.
In this case, the debit to equipment matches the credit to the credit card liability, ensuring the entry is balanced and accurate.
Conclusion
Journalizing is an essential practice in accounting, and while it may seem daunting at first, using a systematic approach makes it manageable. Start with what you know, use common sense, and ensure that every transaction is properly documented with the correct debits and credits. By following these steps, you’ll be well on your way to mastering the art of journalizing.