Learn the difference between a general journal and a general ledger in simple terms. Essential reading for small business owners and accounting newbies.
I often get asked about the basics of accounting, especially by small business owners. One common question is about the difference between a general journal and a general ledger. These two terms are fundamental to accounting, but they can be a bit confusing for those new to the field. Let’s break them down in simple terms.
What is a General Journal?
Small business owners typically maintain four key books of accounts: the Cash Receipts Journal, the Cash Disbursements Journal, the General Journal, and the General Ledger.
Think of the General Journal, along with the Cash Receipts and Cash Disbursements Journals, as the diaries of your business. These are where you first record all your financial transactions as they happen. Every time your business makes or receives money, you record the transaction in one of these three journals, depending on the nature of the transaction.
Where to Record What Transactions
Cash Receipts Journal
The Cash Receipts Journal is where you record all the money your business receives. This includes sales revenue, customer payments, and any other incoming cash. Think of it as the logbook for tracking all the cash inflows.
Cash Disbursements Journal
The Cash Disbursements Journal is used to record all the money your business pays out. This includes expenses like rent, supplies, and salaries. It’s the place where you track all the cash outflows.
General Journal
The General Journal is where you record any financial transactions that don’t fit into the Cash Receipts or Cash Disbursements Journals. This includes things like adjusting entries, correcting errors, or any other transactions that need special attention. It’s the catch-all journal for everything else.
1. Date: When the transaction took place.
2. Accounts Affected: Which accounts are involved (e.g., cash, sales, expenses).
3. Amount: How much money is involved.
4. Description: A brief note explaining the transaction.
5. Debits and Credits: Indicating the increase or decrease in the accounts.
For example, if you sell a cup of coffee for P25 in your cafe, using the Cash Receipts Journal, your entry might look like this:
1. Date: June 21, 2024
2. Accounts Affected: Cash and Sales Revenue
3. Amount: P25
4. Description: Sale of coffee
5. Debits and Credits: Debit Cash P25, Credit Sales Revenue P25
What is a General Ledger?
Now, let’s talk about the general ledger. If the general journal is the diary, the general ledger is the storybook. It takes all the entries from the general journal and organizes them by account. This helps you see the big picture of your business’s finances.
Each account in the general ledger has its own page or section. So, all the transactions involving cash go into the cash account, all the sales transactions go into the sales account, and so on. This way, you can see at a glance how much money is in each account and how it got there.
Continuing with our coffee sale example, after recording the sale in the Cash Receipt Journal, you’d also update your General Ledger. You’d add P25 to your cash account and P25 to your sales revenue account.
Key Differences : General Journal vs. General Ledger
Let’s summarize the key differences between the general journal and the general ledger:
1. Purpose
General Journal: The first place where transactions are recorded.
General Ledger: Summarizes and organizes transactions by account.
2. Detail Level
Gen. Journal: Contains detailed entries for each transaction.
Gen. Ledger: Contains summarized information for each account.
3. Usage
Gen. Journal: Used for initial recording of all transactions.
Gen. Ledger: Used for reviewing and summarizing account balances.
Why They Matter
Understanding how the books of accounts are used is crucial for maintaining accurate financial records. The general journal ensures every transaction is recorded correctly and promptly. The general ledger provides a clear and organized overview of your business’s financial health.
For small business owners, keeping all the books of accounts up-to-date helps you track your finances, prepare for taxes, and make informed decisions. It’s like having a detailed map and a summary guidebook of your financial journey.
How to use the Books of Accounts
Want a simple guide on how to use and record transactions in your Books of Accounts? Send me an email or follow my Facebook account here.
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This is going to help so many people with their own businesses, especially those who are just starting out. It’s SO important to keep a detailed accounting of your finances.
Exactly, Beth. Better to know basic bookkeeping to avoid penalties.
Great post! I have a general journal but not a ledger, after reading your post I think it’s important for me to grab one. I didn’t think it was a big of a difference but now I see it is. Thanks for sharing this.
Ah, I wasn’t aware of all of these differences. This is really useful information, especially for me, as someone who owns a small business.
The difference between two similar sounding and similar functioning terms is important for every business owner!
Now I understand why I didn’t do as well as expected in my college accounting test. You would think the answer is obviously in the form of the terms ‘Journal’ and ‘Ledger’. Thank you for sharing.
two accounting terms for business owners to know to get their financial records correctly.
This post is very helpful in understanding the difference between a general journal and a general ledger. These are confusing terms because they are so similar, but your explanations make the terms easier to understand. The examples you provided are especially useful.
You took me back to Middle school Accounting. Indeed, this is one of the first things I ever learned in Accounting class. They are there basis for all financial analysis.
I am glad you still remember these basic Accounting concepts.
I had no idea there was a difference between both, I thought they’re the same. Amazing information, i love it and very helpful.
This two different things that are needed to have in a business transactions are badly needed in different ways that can help you to easily compute all of the things that are needed to compute.
What an informative post and definitely learned something new reading it. It’s good to know the differences between the two to avoid further confusion.