What is a Journal?

A journal is a detailed account that records all the financial transactions of a business, to be used for future reconciling of and transfer to other official accounting records, such as the general ledger. A journal states the date of a transaction, which accounts were affected, and the amounts, usually in a double-entry bookkeeping method.

Understanding Journals

For accounting purposes, a journal is a physical record or digital document kept as a book, spreadsheet or data within accounting software. When a business transaction is made, a bookkeeper enters the financial transaction as a journal entry. If the expense or income affects one or more business accounts, the journal entry will detail that as well. Journaling is an essential part of objective record-keeping and allows for concise review and records-transfer later in the accounting process. Journals are often reviewed as part of a trade or audit process, along with the general ledger.

Key Takeaways

  • A journal is a detailed record of all the transactions done by a business.
  • When a journal entry is recorded into a company's journal, it's usually recorded using a double-entry method, but can also be recorded using a single-entry method of bookkeeping.
  • Journal is also used in the financial world to refer to a trading journal that details the trades made by an investor and why.

Using Double-Entry Bookkeeping in Journals

Double-entry bookkeeping is the most common form of accounting. It directly affects the way journals are kept and journal entries are recorded. Every business transaction is made up of an exchange between two accounts. This means that each journal entry is recorded with two columns. For example, if a business owner purchases $1,000 worth of inventory with cash, the bookkeeper records two transactions in a journal entry. The cash account decreases by $1,000, and the inventory account, which is a current asset, increases by $1,000.

Using the Single-Entry Method in Journals

Single-entry bookkeeping is rarely used in accounting and business. It is the most basic form of accounting and is set up like a checkbook, in that there is only a single account used for each journal entry. It is a simple running total of cash inflows and cash outflows.

If, for example, a business owner purchases $1,000 worth of inventory with cash, the single-entry system records a $1,000 reduction in cash, with the total ending balance below it. It is possible to separate income and expenses into two columns so a business can track total income and total expenses, and not just the aggregate ending balance.

The Journal in Investing and Trading

A journal is also used in the investment finance sector. For an individual investor or professional manager, a journal is a comprehensive and detailed record of trades occurring in the investor's own accounts, which is used for tax, evaluation and auditing purposes. Traders use journals to keep a quantifiable chronicle of their trading performance over time in order to learn from past successes and failures. Although past performance is not a predictor of future performance, a trader can use a journal to learn as much as possible from his trading history, including the emotional elements as to why a trader may have went against his or her chosen strategy. The journal typically has a record of profitable trades, unprofitable trades, watch lists, pre- and post-market records, notes on why an investment was purchased or sold, and so on.