It can be difficult to keep your bookkeeping straight if you don't know the difference between a journal and a ledger. The difference is one of the most common questions asked by those who are unfamiliar with accounting, so we'll try to break it down as simply as possible: a journal is a document that records financial data and activity for individual accounts on an ongoing basis. Whereas a ledger is a summary of the transactions in each account over a period of time.
What is a Journal?
A journal is a book of original entries where financial transactions are recorded chronologically. The names and the amounts in individual entries must be equal on both sides of an account, or it can cause confusion. This characteristic makes sure that there isn't any overstatement or understatement on one side of the ledger (the "debit" and "credit").
A journal is used to record all transactions, whether they're from a business or personal standpoint. This means that you'll have one book where you track your income, expenses, assets, and liabilities regardless of their source.
What is a Ledger?
A ledger is a book of final entries where the balances in individual accounts are summarized into two columns: "debits" and "credits". The following are characteristics of ledgers:
A ledger only contains information about specific accounts (assets, liabilities, etc.), not every transaction that has ever taken place. In fact, most ledgers will only contain information for a particular fiscal year or month. For example, if we were looking at the ledger for December 2016, we wouldn't see any information about what happened in November 2016, and we certainly wouldn't want to include all of the transactions that took place between January 2017 and December 2017.
Summarizing information from individual journals into a single ledger is what allows us to create financial statements (e.g. an income statement, balance sheet, cash flow statement). These reports are used to provide insights into a company's overall financial position and performance over a specific time period.
Key differences between a Journal & Ledger
The difference in characteristics
The journal is a chronological record of all transactions that have taken place. This means that once an entry has been made, it cannot be changed without creating another entry (an "offsetting" transaction). For this reason, journals are also called "original documents". When you're reconciling your bank statement each month, for example, you'll be looking to see if the balance shown on the statement matches up with the sum total of your individual journal entries for that month. If there's a discrepancy, then you know that something was either entered incorrectly into your journal or else was missed altogether (and needs to be added).
The accounts contained within a ledger are classified as either balance sheet or income statement accounts. A balance sheet account represents an economic quantity owned by someone (an asset), while an income statement account records how much money has been earned over some period of time (a revenue) or how much it cost to run a business for that same period (a loss). For this reason, ledgers only contain entries made from one side of the "debit"/"credit" equation: each entry is drawn from either the expense/loss column on the left ("debits") OR else the revenue/asset column on the right ("credits").
The difference in purpose
The purpose of a journal is to provide an accurate, sequential record of all financial transactions that have taken place over a given period of time. The primary benefit of using a journal is that it allows you to track every individual transaction in order to ensure that your book balance (i.e., the total debits equals the total credits).
The purpose of a ledger, on the other hand, is to summarize account information into two key categories: balance sheet accounts and income statement accounts. Balance sheet accounts represent an economic quantity owned by someone (an asset), while income statement accounts record how much money has been earned over some period of time (a revenue) or how much it cost to run a business for that same period (a loss).
The difference in importance
In terms of importance, a Journal is more important than a ledger. The journal is the original document, and all other financial documents (ledger, bank statement, etc.) are derived from it. As such, the journal should be kept in a safe place and updated on a regular basis. Ledgers may be kept for record-keeping purposes, but their primary benefit is that they can be used to generate financial statements (i.e., balance sheet and income statement).
The difference in labeling
Journal is often used interchangeably with the term “daybook”. It is also often called the "book of original entry" while the ledgers are called the "book of final entry".
Comparison Chart: Journal Vs Ledger
|Labelled||Original entry||Second entry|
|Importance||More important||Less important|
So which one should you use?
The short answer: it depends. If you're just starting out as a small business owner then it might be best to begin by tracking everything in a journal and then later move to create ledgers once things have settled down and become more routine. However, if you're already familiar with bookkeeping practices then using a ledger would be best.
A journal is a book where you record all the transactions of your business on a daily basis. Once these transactions are recorded, they're summarised and transferred to the ledger for further analysis. If you want to keep track of your company's finances in an organized way, it's important that you maintain both journals and ledgers. This blog post has gone over how this can be done with no fuss! Do any of our tips work for your business? Let us know by commenting!