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Understanding Journals

The basic flow of information about business transactions follows this sequence of events:

  1. A business transaction occurs—for example, a sale, a purchase, a receipt of funds, or an expenditure of funds.

  2. Information about the transaction is recorded in a journal. The journal usually retains the information about the transactions in chronological order: so, one record might contain data on a sale that took place on March 1, the next record might describe a purchase that was made on March 2, the next record might have data on a payment due on March 3, and so on.

  3. Information about the transactions is copied (or posted) from the journal to a ledger. This ledger has different sections: one for each type of account, such as Accounts Receivable or Notes Payable. Within each of these sections, information is usually recorded chronologically. The main difference between the journal and the ledger is that the ledger categorizes the information from the journal into specific accounts.

  4. Information in the ledger is summarized, to obtain a total for each account at the end of an accounting period. These totals are used to prepare financial statements such as the Income Statement and the Balance Sheet.


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