Journalizing in accounting is the process of recording financial transactions in the journal, which is also known as the book of original entry. It involves documenting transactions in chronological order so that every business activity is accurately captured for later analysis and reporting. Below, we’ll explain how to journalize a transaction, how journalizing fits into the accounting cycle, and how to avoid common errors.

What’s in this article?

• How do you journalize a transaction?
  
• What are the common types of journals?
  
• How does journalizing fit into the accounting cycle?
  
• Can Stripe help with journalizing?
  
• What are the common errors in journalizing and how can you avoid them?
  

How do you journalize a transaction?

Journalizing a transaction involves documenting a financial event in the accounting journal in a clear, organized way. Here’s are the steps:

• Begin by understanding what the transaction is about. For instance, is the business paying rent, earning revenue, or buying something?

• Determine which accounts the transaction impacts. If you’re buying supplies, for example, that will probably affect an expense or asset account (e.g., “Office supplies”) and either reduce your cash or increase what you owe if the purchase is on credit.

• Decide what’s debited and credited in the transaction. In other words, what’s increasing or decreasing in it? If you’re using double-entry accounting, you always debit one account and credit another. For example, paying rent increases your expenses (a debit) and reduces cash (a credit).

• Record the entry, starting with the debit. List the account name and the amount. Then, with a slight indent, add the credit line with the corresponding amount.

• Write down when the transaction happened and add a short description of what the transaction is about (e.g., “Paid office rent for December”).

Before you move on, ensure the total debits match the total credits, as they need to balance out. If they don’t, reexamine your calculations and retrace your steps.

What are the common types of journals?

In accounting, journals are where transactions are initially recorded. You use different types of journals to organize entries based on the nature of the transactions. Specialized journals are used for repetitive transactions (e.g., sales, purchases, cash receipts), while general journals are used for less frequent, more complex, or one-off transactions.

Here are the most common types of journals.

General journal

This is the default journal for transactions that don’t fit neatly into a specialized journal. It’s flexible and allows for detailed descriptions, which makes it helpful for unique or irregular entries. You might use it to adjust entries, corrections, or rare transactions (e.g., recording depreciation or bad debt write-offs).

Sales journal

This tracks all credit sales of goods or services. It records only sales made on credit (not cash sales). Each entry shows the customer, amount, and other details. You use this journal when your business sells inventory or services on account.

Cash receipts journal

This records all cash inflows. It includes only cash sales (not sales made on credit). Each entry shows the customer, amount, and other details. You use this journal for payments received from customers, loans taken, or cash from the sale of assets.

Cash payments (or disbursements) journal

This tracks all cash outflows. It records all instances where the business spends cash. You use this journal when you pay suppliers, rent, wages, or other expenses.

Purchases journal

This logs all credit purchases of goods or services. It includes only credit purchases, not cash. You use this journal when you buy inventory, equipment, or services on account.

Sales returns and allowances journal

This tracks returns of goods sold on credit and any allowances granted to customers. It tracks credits issued to customers. You use this journal when a customer returns defective products or receives a discount on a purchase due to an issue.

Purchase returns and allowances journal

This logs returns of goods purchased on credit and allowances received from suppliers. It helps monitor reductions in what your business owes to vendors. You use this journal when you return damaged inventory to a supplier or receive a price adjustment.

How does journalizing fit into the accounting cycle?

Whenever a financial transaction happens (e.g., paying rent, selling a product, buying inventory), the first thing to do is record it. Journalizing is the act of capturing the details of a transaction—such as the date, which accounts are affected, and whether those accounts are increasing or decreasing (debits and credits)—in a journal to keep track of it.

The financial activities in the journal are used for the following:

• The ledger: The ledger sorts the activities into specific buckets (e.g., “Rent expense,” “Sales revenue”). This enables you to create a trial balance to check that all your debits and credits align.

• Adjustments: Adjustments, such as accounting for depreciation or accrued expenses, rely on the transactions recorded in the journal.

• Financial statements: The quality of reports such as income statements and balance sheets depends on the accuracy of journal entries.

When journalizing is done correctly, it’s easier to tell the full financial story of the business.

Can Stripe help with journalizing?

Yes, Stripe can integrate with accounting software. By using apps from the Stripe App Marketplace, you can integrate with popular accounting software such as QuickBooks and Xero so all the financial activities that happen through Stripe—customer payments, refunds, fees, and payouts—can sync automatically with your books.

What are the common errors in journalizing and how can you avoid them?

Mistakes happen, but catching them early can save you time and stress later. Take your time; regularly review your entries for accuracy; and keep all your receipts, invoices, and other documents in one place so you can verify each transaction more easily. Consider using accounting software to automate aspects of the journalizing process and flag errors before they become bigger problems. Among top-performing organizations, on average, 58% of monthly journal line items are automated.

Here are some common errors businesses might make when they record transactions, and some practical ways to avoid them.

Mixing up debits and credits

You might accidentally debit the account that should be credited or vice versa. For example, a customer pays an invoice, but instead of debiting “Cash” and crediting “Accounts receivable,” you do the reverse. Now your cash account is incorrect and your receivables don’t reflect the payment.

To avoid this, double-check which accounts should increase or decrease. If you’re ever unsure, think through the basic rules: expenses and assets get debited when they increase, while liabilities, equity, and revenue get credited.

Forgetting to record a transaction

A transaction might not make it into your journal at all. For instance, you pay for office supplies with cash, but you forget to record the purchase.

To ensure all of your transactions are properly recorded, make a habit of tracking everything. Take actions such as saving all your receipts and reconciling regularly with your bank account to catch anything you might have missed.

Using the wrong account

You might record the transaction but classify it under the wrong account. For example, you buy new furniture for the office and record it as “Office supplies” instead of “Office equipment” or a fixed asset account. Now, your records don’t reflect the true value of your long-term assets.

Make sure to familiarize yourself with your chart of accounts. If you’re unsure where something belongs, check or create a quick reference document for common transactions.

Entering the wrong amount

You might make a data entry error when you log a transaction amount. For instance, you invoice a client for $5,000, but when you record the payment, you accidentally type $500. Now your receivables appear way too high.

To avoid this scenario, always double-check amounts against the source document—whether it’s an invoice, receipt, or contract. Doing so up front can save hours of fixes later.

Recording the same transaction twice

You might accidentally journalize a transaction twice. (This can happen when you’re multitasking or using duplicate records.) For example, you record a customer’s payment today and then see the same email notification tomorrow, so you record it again.

To avoid any duplication, keep a system that marks transactions as “entered.” Accounting software often flags duplicate entries, which can be a big help.

Skipping descriptions

You might record the transaction without including a brief explanation. For instance, an entry just says “Adjustment” with no details. When someone else reviews it (or you revisit it months later), they might not understand what it means and you might not remember it.

Make sure to always add a short note about what the transaction is—just enough to remind you or anyone else why it’s there.

Missing adjusting entries

You might forget to adjust entries for depreciation, accruals, or prepayments. For example, you pay for a year of insurance up front but forget to allocate the expense over 12 months. At the end of the first month, your insurance expense looks way too high.

To avoid this inaccuracy, create a checklist for end-of-month or end-of-year tasks. Include common adjustments, so you don’t overlook anything.

Ignoring the supporting documents

You might record something that doesn’t match the actual transaction because you didn’t check the details in the source document. For instance, you record a sale for $1,000 because that’s what you remember, but the invoice actually says $1,050.

Ensure you always have the supporting document in front of you when you journalize. It can be easy to guess or operate from memory, but that’s how errors occur.