Recording financial transactions is one of the most critical activities in accounting. Every business, whether small or large, must keep accurate records of its operations, and this begins with the journal. The journal serves as the foundation of the accounting process, where all financial transactions are first recorded in a chronological manner. But for a journal to be accurate and meaningful, it must be written on the basis of specific and reliable sources. These sources ensure that every entry is verifiable and can be traced back to an original document or event. Understanding what the journal is written on the basis of is essential for maintaining transparency and ensuring proper accounting standards are followed.
Understanding the Purpose of a Journal
The journal is often called the book of original entry because it is the first place where business transactions are recorded. Before transactions make their way into ledgers and eventually financial statements, they are captured in the journal. The process of journalizing includes noting down the date, accounts involved, debit and credit amounts, and a brief description.
For this process to be accurate, the entries must be backed by valid data. Without a proper basis, journal entries would lack reliability and may result in financial discrepancies. Therefore, journals are always written based on specific, authentic, and often legal documentation.
Primary Basis for Journal Entries
1. Source Documents
The most fundamental basis for writing journal entries is the source document. These documents provide the proof that a financial transaction actually took place. They are essential in audit processes and help prevent fraudulent activities. Common examples include:
- Invoices for sales or purchases
- Receipts and payment vouchers
- Bank statements
- Debit and credit notes
- Payroll slips
Each source document contains essential details such as the amount, parties involved, date, and purpose of the transaction. These are used to prepare accurate and traceable journal entries.
2. Double Entry System
Journal entries are also written on the basis of the double entry system, a fundamental principle in accounting. According to this system, every transaction affects at least two accounts: one is debited, and the other is credited. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
For example, when a company buys office supplies in cash, the journal will show a debit to the office supplies account and a credit to the cash account. This dual effect ensures the integrity of financial records.
3. Accounting Principles and Standards
Journals are also based on established accounting principles such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards), depending on the country and organization. These standards provide guidelines on how transactions should be recorded and disclosed.
- Matching principle: Ensures expenses are matched with related revenues.
- Revenue recognition principle: Guides when and how to record income.
- Conservatism principle: Encourages caution when making estimates or recognizing revenues.
Adhering to these principles ensures consistency and comparability in financial reporting across periods and entities.
4. Internal Accounting Policies
Organizations also create their own internal accounting policies that guide how journals are written. These policies may specify the format of journal entries, who is authorized to prepare them, and the frequency of recording certain types of transactions.
For example, a company may decide to record petty cash expenses weekly rather than daily. Such policies ensure uniformity within the organization and help in internal control and auditing processes.
Types of Transactions Recorded in the Journal
1. Cash Transactions
These include payments and receipts of cash and are usually supported by cash vouchers or bank deposit slips. Examples:
- Cash sale of goods
- Payment of rent
- Withdrawal of cash for office use
2. Credit Transactions
When goods or services are purchased or sold on credit, entries are made based on invoices or bills. These entries are important for accounts payable and accounts receivable tracking.
3. Adjusting Entries
Adjusting entries are made at the end of an accounting period to reflect accrued revenues or expenses, depreciation, and other adjustments. These are usually based on internal calculations and estimations rather than external documents.
4. Non-Cash Transactions
Some journal entries are made for events that do not involve cash flow, such as asset revaluation, provision for bad debts, or depreciation. These are based on internal assessments and accounting standards.
Importance of Writing Journals on a Proper Basis
Writing journals on the correct basis ensures that financial records are:
- Accurate: Reflecting true and fair value of transactions.
- Reliable: Verifiable through documentation.
- Compliant: In line with applicable accounting standards.
- Auditable: Easy for external or internal auditors to assess.
Neglecting to base journal entries on solid documentation or principles can lead to misstatements, financial penalties, or reputational damage for an organization.
Examples of Journal Entries Based on Documents
Below are a few examples of how source documents translate into journal entries:
Example 1: Sales Invoice
On January 5, ABC Corp sold goods worth $2,000 on credit to XYZ Ltd.
Journal Entry:
- Accounts Receivable (XYZ Ltd) Debit $2,000
- Sales Revenue Credit $2,000
Based on sales invoice #452
Example 2: Payment Voucher
On January 10, ABC Corp paid $500 in rent.
Journal Entry:
- Rent Expense Debit $500
- Cash Credit $500
Based on rent voucher dated Jan 10
A journal is written on the basis of authentic, verifiable, and structured information. Whether it’s a receipt, an invoice, a contract, or an accounting standard, each source ensures that journal entries reflect the true nature of business transactions. The reliability and integrity of financial statements depend heavily on the accuracy of the journal, making it imperative for businesses to follow systematic and compliant methods of journalizing. Understanding the basis of journal writing not only strengthens record-keeping but also builds trust among stakeholders, auditors, and regulatory bodies.