One needs to understand the meaning of journal and ledger, and then move forward with the main differences. Generally, accounting practice has been a double-entry system. In a double-entry system, all transactions are recorded chronologically. A ledger also called a principal book, records all transactions in such a way that, for example, if in a business cash is used to purchase a building, then the cash balance of the business firm reduces.
Did you Know? A journal is often referred to as the book of original entries and a ledger is known as the second book of entries.
Concept of a Journal
According to accounting standards, a journal is a book of subsidiary accounts that records business transactions in monetary terms. Transactions are recorded in chronological order whenever they occur, and a detailed note is given on the effect of each business transaction called 'narration'. A short note called narration is also given to support every transaction, which clearly describes it. Journal books record day-to-day transactions and have five columns: date, particular, ledger folio (LF), debit, and credit.
Also Read: Prepaid Expenses Journal Entry - Meaning, Examples
Features of a Journal
A journal is also called the 'book of original entries' or 'primary entries', and the process of recording journal transactions is called journalising. Features of a journal book of accounting are mentioned below:
-
Double Entry System
Journal entries have a double-entry system. This means whenever a transaction is recorded, it has two effects first, on the debit side and second, on the credit side of an account. For example, when you sell a bike, your asset value goes down, and you receive money in return, increasing your cash balance. In this way, it has a double effect on recording the transaction.
-
Daybook
All journal entries are recorded on a day-to-day basis.
-
Chronology
In a journal, transactions are recorded regularly and date-wise which helps in checking transactions easily and quickly.
-
Compound Entry
When a transaction has more than one debit or credit entry or both in a single entry, it is called a compound entry. A compound journal entry is a type of accounting entry where two or more transactions are recorded together in a single journal entry. It is also known as a combined journal entry or a multiple-entry journal. For example, a sale transaction with GST on a cash basis. This transaction will be a compound entry.
-
Narration
The narration is a brief description of the transaction, which tells us its details. Narration is a brief description of a transaction that is recorded in the journal and ledger. The purpose of narration is to provide a clear understanding of the transaction being recorded. It usually includes the date of the transaction, the names of the accounts involved, and a brief description of the transaction.
Also Read: Accrued Expenses Journal Entry - How to Record Accrued Expenses With Example
Concept of Ledger
A ledger is a principal book in which transactions are taken from the journal and recorded systematically under separate account heads or names. It is also called the principal book of accounts or book of final entries, from which further accounting statements are prepared, like a trial balance.
The ledger has three types of accounts, namely real, personal, and nominal. New individual accounts need to be opened when posting individual entries to the ledger. A ledger book has a 'T' shape format with two sides: debit and credit.
At the end of a financial year, the balance of the ledger account is used to prepare final accounts. Suppose a ledger account has a debit balance on the credit side. 'By Balance c/d' is to be written to counterbalance the account's balance by writing the account's difference between the debit and credit sides. At the end of the financial or accounting year, the ledger account balance is used while preparing the final accounts.
Features of Ledger
Accounting is the practice of recording, classifying, and summarising financial transactions to provide information that is useful in making business decisions. It involves the use of financial statements, such as the balance sheet, income statement, and statement of cash flows, to report a company's financial position and performance. The features of a ledger account are given below:
-
Transaction
Every transaction posted in the ledger from the journal affects two or more accounts which depend upon the nature of the transaction.
-
Two Sides
Every ledger account is in a 't' shape format having two sides: credit and debit, debit on the left, and credit on the right side.
-
Balancing the Ledger
The total of both sides must always match or remain equal. There are times when the balance on one side is greater than on the other. To balance both sides, on the deficit side a balancing entry is added by the name of 'To Balance c/d' for the left, i.e. debit side or 'By Balance c/d' on the right, i.e. credit side.
-
Preparation of Accounting Statements
After posting journal entries into the ledger accounts, preparing accounting statements like a trial balance and final accounts begins.
Also Read: What is Journal Entries of Purchase Return? - Learn Purchase Return Journal Entry
Things to Consider for a Journal and a Ledger
To distinguish between a journal and a ledger clearly, you need to understand the meaning of the terms journal and ledger, which is given in the later section of the article.
- A journal is a book of subsidiary accounts. On the other hand, a ledger is a book of principal accounts.
- The journal is the first book in the accounting process where transactions are recorded for the first time. A ledger is a book where the transaction is posted into different individual accounts heading from the journal.
- In journal books, transactions are recorded in chronological order daily, whereas, in ledger books, transactions are recorded in analytical order.
- In journal books, transactions are recorded with a small description or explanation called 'Narration', but in the ledger, no description is given.
- In a journal, there are two columns, debit and credit, and in a ledger, there are two opposite sides, debit and credit.
- Journal transactions don't help prepare a trial balance, whereas a ledger helps prepare a trial balance.
- A journal doesn't have an opening balance and closing balance, but a ledger has both.
- In the ledger, we create different types of accounts based on the nature of the transaction, but a journal doesn't have an accounting nature.
- A journal can have a multi-effect transaction entry called compound entries, but a ledger entry has only one effect.
- In the ledger, new accounts need to be opened for transaction entry, but in a journal, no accounts need to be opened.
Conclusion
The key difference between a journal and a ledger is that a journal is used to record transactions in chronological order, while a ledger is used to organize and summarize transactions by account. The journal is used to document all transactions, while the ledger is used to keep track of the balance of each account. Both the journal and the ledger are essential tools in accounting, as they provide a clear and complete record of a company's financial transactions and help ensure accurate financial reporting.
Follow Khatabook for the latest updates, new blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
