What Is the Purpose of Having a Ledger & a Journal in an Accounting System? (2024)

In general, a business accounting system is designed to keep track of where money comes from and where it goes. Usually, businesses will keep both a journal and a ledger for accounting purposes. The purpose of the ledger is to track broad trends and overall shifts in funds while the importance of the general journal in accounting is to keep track of each individual event. In many modern businesses, both the journal and ledger are actually digital files, not physical books.

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The journal stores records of transactions as they happen and the ledger tallies up overall changes in business accounts over time.

Logging Transactions in Your Books

The money your business receives does not appear out of thin air; it comes from an action you took. For example, if you operate a retail establishment, your customers pay you for the goods you sell them. If you repair computers, payments cover the services you provided. The principle is the same for money you pay out, such as when you issue an employee paycheck, purchase inventory or pay your phone bill.

Double-Entry Bookkeeping Principles

Every transaction affects at least two accounts. The first relates to the reason for the income or expense. For example, if you sell a crib, you might record the income in an account labeled baby furniture; if you pay to have the oil changed in your company vehicle, you might enter the cost in an automobile maintenance expense account.

The second part of the entry requires you to explain the payment method that applies to the transaction. For instance, if you issue an invoice to your customer for the purchase of the crib, the offsetting entry for that transaction would be to accounts receivable. If you wrote a company check to pay for the oil change, the offset would be to your cash account.

Purpose of the Journal

The terms "journal" and "diary" apply to a record of events that is maintained on a regular basis. As it pertains to bookkeeping, a journal is a record of transactions listed as they occur that shows the specific accounts affected by the transaction. For example, your journal for Monday might contain entries for the sales of Widget A, Gadget B and Widget C.

The journal can tell you how much your total sales were for Monday, which might be handy if you want to compare Monday sales with Wednesday sales. However, if you want to know how much of your monthly income was derived from Widget C sales, you would have to locate every sale of that item in your journal and total them.

Accounting Ledger Basics

For monthly reporting, businesses rely on ledgers. The purpose of the ledger is to take the entries made in the journal and logs and tallies up all transactions that affect a specified account. It shows your total monthly sales of Widget A, your total payroll expenses or your total postage expenses that month.

Certain detail is lost, however. The ledger does not show you the offsetting account. For example, although it shows your monthly sales for Widget A, you do not know whether a specific customer paid cash or charged the purchase. To locate that information, you need to refer to the journal.

Original Entry Vs. Final Entry

A journal is the original source of the information contained in your financial reports. It sometimes is referred to as the book of original entry. After entries are posted to the journal, your accounting system transfers the information to the ledger, which then is used to produce your income statements and balance sheets. The ledger is referred to as the book of final entry.

If the journal is incorrect or incomplete, the ledger will be too, since it reflects data initially drawn from the journal.

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