Journalize

To journalize means to record a business transaction in a journal by preparing a journal entry. Journalizing involves analyzing what happened, deciding which accounts are affected, determining whether each account increases or decreases, and then entering the amounts as debits and credits, together with the date and a short explanation. It is the first formal recording step in the accounting cycle, coming after a transaction is identified from a source document such as an invoice, receipt, bank statement or contract, and before the amounts are posted to the ledger.

Journalizing applies the rules of double-entry accounting: every transaction affects at least two accounts, and total debits must equal total credits. This keeps the accounting equation, assets equal liabilities plus equity, in balance after every entry.

Accountants usually follow a consistent sequence:

1. Identify the transaction and gather the supporting document.
2. Determine which accounts are affected, using the business's chart of accounts.
3. Decide whether each account increases or decreases, and whether that change is a debit or a credit.
4. Record the date, the account to be debited and its amount, then the account to be credited and its amount, indented.
5. Write a brief explanation, often with a reference such as the invoice number.
6. Check that debits equal credits before moving on.

The direction of each entry follows standard rules. Asset and expense accounts increase with a debit and decrease with a credit. Liability, equity and revenue accounts increase with a credit and decrease with a debit. Dividends or owner's drawings, which reduce equity, increase with a debit. A common memory aid groups the debit-increase accounts as dividends, expenses and assets.

A newly formed design studio journalizes its first week's transactions:

• On 1 May the owner invests $25,000 cash: debit cash $25,000, credit owner's capital $25,000.
• On 2 May the studio buys computers for $6,000 on account: debit equipment $6,000, credit accounts payable $6,000.
• On 4 May it completes a project and bills the client $3,500: debit accounts receivable $3,500, credit service revenue $3,500.
• On 6 May it pays rent of $1,800 for May: debit rent expense $1,800, credit cash $1,800.
• On 7 May it pays $2,000 toward the computers: debit accounts payable $2,000, credit cash $2,000.

After posting these entries to the general ledger, cash has a balance of $21,200, accounts payable $4,000 and accounts receivable $3,500. Transactions involving three or more accounts are journalized as a compound journal entry, such as a purchase paid partly in cash and partly on credit.

Not all journal entries come from external transactions. At period end, accountants journalize adjusting entries for items such as accrued wages, interest earned but not received, prepaid expenses that have been used up and depreciation, so that the financial statements follow accrual accounting. They also journalize closing entries to reset revenue and expense accounts to zero for the next period.

Frequent mistakes include reversing the debit and credit, recording the wrong amount, choosing the wrong account, such as expensing an item that should be capitalized, recording the same transaction twice and recording it in the wrong period. A trial balance catches entries where debits and credits differ, but not entries that are balanced yet wrong. Accounting software reduces arithmetic errors by refusing unbalanced entries, but judgment errors remain, which is why manual entries are reviewed and why auditors examine a sample of each period's journal entries.