What Is the Purpose of Having a Ledger & a Journal in an Accounting System?
In a typical business accounting system, a bookkeeper records the day-to-day business transactions and organizes the books and documents for an accountant. The accountant will take the information provided, verify the data and prepare financial statements for the business. These financial statements are not only important for ongoing management, but they also help attract investors and satisfy creditors and suppliers. The journal and ledger are the starting points in a well-organized accounting system.
During the activities of daily business, a company may participate in thousands of transactions. Conversely, a small business--especially a service business--may undergo only one or two transactions per day. Either way, in an efficient accounting system, each transaction is recorded--often in a general or special journal. The journal contains information of the initial transaction and contains a minimum of two parts--a debit and a credit. For example, suppose a business purchases merchandise. The left, or debit side of the journal, is where an increase in a merchandise account would be recorded. The right or credit side of the journal is where the cash account would show the decrease.
Periodically, data from the journal is transferred to a general ledger. Information from the journal is organized and broken down into separate accounts, resulting in the ledger containing at least one page for each business account. Just as with the journal, debits are recorded on the left and credits on the right. The transference of the information from the journal to the ledger is called posting. Through this posting process, management can see which accounts have a debit balance and which ones have a credit balance.
Once the transaction information is transferred from the journal to the ledger, the person in charge of the books will do reconciliation. This process, known as creating a trial balance, determines if the debits equal corresponding credits in the business accounts. After the determination is deemed accurate, the books can go to the accountants.
An accountant can use the information in the general ledger to create important financial statements for the business. The account will ordinarily do a second trial balance and adjust any balances as necessary. For example, wages accrued but not yet paid or unearned revenue may require the balances to be adjusted accordingly. Once this process is complete, financial statements such as the balance sheet, income statement and statement of cash flows can be compiled. The end result depends on accurate recording in first a journal and then the ledger.