Journalizing is the process of recording a business transaction in the accounting records. This activity only applies to the double-entry bookkeeping system. The steps involved in journalizing are as follows:
- Examine each business transaction to determine the nature of the transaction. For example, the receipt of a supplier invoice means that an obligation has been incurred. Or, throwing out obsolete inventory means that the inventory asset will be reduced.
- Determine which accounts will be affected. This calls for the identification of the general ledger accounts that will be altered as a result of the transaction. For example, recording a supplier invoice could mean that the office supplies expense account will be increased, as well as the offsetting accounts payable account.
- Prepare a journal entry. This involves not just entering the transaction in the accounting system, but also documenting it sufficiently so that someone reviewing the entry later will understand why it was created. Ideally, the entry should note the impacted accounts, the debits and credits entered, a journal entry number, and a narrative comment.
Journalizing can result in entries to the general ledger or to subsidiary ledgers. An entry is made to a subsidiary ledger when it involves a high-volume transaction that management has decided to summarize separately from the general ledger.
As an example of the journalizing process, ABC International has just signed a contract with a maintenance contractor to pay it $1,000 per month in exchange for routine preventive maintenance services. The nature of the transaction is a recurring obligation. The affected accounts will be a debit of $1,000 to the maintenance expense account, and a credit of $1,000 to the accounts payable account. This will be a recurring monthly entry. The journal entry is created as just noted, and flagged to recur automatically at the beginning of each subsequent month.