Explain the objectives (purpose) of Journal and ledger?

 Are you curious to know the objectives or purpose of journal and ledger in accounting? Then, let's dive right in. We will look into it in simple terms.

What is Journal and Ledger in accounting?

Journal is the book of primary entry where the business transactions are recorded primarily in this book. The entry made in this book is called a journal entry. All the business transactions are first recorded in this book in chronological order or date-wise. It is the book of original entry where the business transactions are recorded in a format of debit and credit. 

        Journalising: All the business transactions are recorded in this book in chronological order. The process of recording transactions in the journal is called journalising. The transactions are recorded in this book as per the double-entry system of accounting which has dual aspect such as debit aspect and credit aspect.

A Ledger is a bound book containing all the different accounts such as cash account, sales & purchase account, etc. It is also called the book of secondary entry because all the business transactions are recorded in Ledger after they have been recorded in Journal primarily. It is also called the Principal book of accounts. It is also called the book of final entry.

What are the main objectives ( purpose) of Journal in Accounting?

1. The main objective is to record all the business transactions in chronological order or date wise. The first & foremost important objective of the Journal is recording all the financial transactions that occur in a business entity. All transactions that occur in any business are recorded in this daybook on daily basis in chronological order or date wise. Each transaction is recorded using the double-entry system of bookkeeping. Narration is used to explain the description or nature of the transaction in each entry.

2. Journal is the legal evidence that all the business transactions are recorded and required books of accounts have been maintained as per the legal requirements of the various laws. Maintaining this daybook implies that a business entity complies with the legal requirements and various laws of the state as well.

3. The basic purpose of preparing the Journal is to facilitate the preparation of the Ledger. A ledger is a bound book that contains all the relevant ledger accounts of debtors, suppliers, expenses, incomes, liabilities, assets, capital. Each ledger account has T shape where the left side is denoted as Dr (debit) and the right side as Cr (credit). All these ledgers accounts are balanced where all these balances are taken to trial balance and financial statements. Thus, it also helps in the preparation of Leger.

4. Journal gives the complete information of all the transactions that occurred in the business. All the transactions are accounted for and recorded in a systematic manner. We have supports, documents, invoices, bills for all the transactions that occurred in the business. We also use Narration for each transaction recorded as an explanation to the transaction.

5. The main purpose of preparing a Journal is to show that all the transactions are recorded by complying with the golden rules of the double-entry system of bookkeeping. This implies that all the transactions are recorded using a systematic and logical method of bookkeeping called the double-entry system. Under the Double Entry System of Accounting, all the business transactions are recorded as Debit and Credit. These are the two terms used as Debit and Credit. It means the business transactions are divided into two aspects as Debit and Credit. For every Debit, there is corresponding Credit. The sum of the Debit amount is equal to the Credit amount. The debit is receiving aspect and credit is the giving aspect and vice versa

What are the main objectives (purpose) of maintaining a Ledger?

The main objectives or purpose of preparing ledgers are as follows

1. To record the Business Transactions in books of accounts in a systematic manner.

The main objective of the ledger is record keeping of business transactions. Once the transactions are recorded in the journal, they are transferred to different ledger accounts. In this way, the books of accounts are maintained to ensure that all the business transactions are recorded in a systematic manner.

2. Ledger consists of  different types of accounts

It consists of different types of accounts such as cash a/c, bank a/c, debtors a/c, and creditors a/c. These accounts are totalled and balanced to find the balance of each account. The account has T shape where the right side is represented as Debit - Dr and left side is represented as Credit - Cr. The balances of assets, liabilities and capital are carried forward to next financial year. But the balance of an income and expense account is transferred to Profit and loss a/c, and not carried forward to next year.

3. Classification of accounts as Assets, Liabilities, Income, Expenses & Capital

Here, different accounts are mainly classified under Assets, Liabilities, Capital, Expense and Income. This is to make the classification easy and to record them easily in financial statements. For example, the balance of all assets, liabilities, and capital is taken to the Balance Sheet. Whereas the balance of expenses and incomes is to be taken into the Profit and loss account.

4. Helps to know the ledger account balances 

As we know, it helps us to know the different ledger account balances. This helps us to analyse the different accounts and make useful decisions. For example, Debtors' balance helps us to know the balance amount due from debtors, this helps to take steps to collect the amount due from debtors. Similarly, Cash balance helps us to know the amount available in liquid cash.

5. Assists in the preparation of Trial Balance

It also assists in the preparation of trial balance, once the accounts are balanced. The next step after posting and balancing is preparing a trial balance. The trial balance contains all the account balances. Trial balance is prepared to ensure the arithmetical accuracy of books of accounts. The total amount of debit balance must be equal to the total amount of credit balance in a Trial balance

6. Basis for preparation of Financial Statements

It also helps in the preparation of financial statements. As we know, the financial statements include the trading & profit and loss account, balance sheet with notes to accounts, and cash flow statement. The balance sheet depicts the financial position. The cash flow statement gives the picture of the cash position. The profit and loss statement helps to ascertain the financial performance i.e, profit earned or loss incurred during the period.

7. Provides reliable financial information to users of financial information

It provides reliable and useful information to the users of financial statements. The users would include debtors, creditors, competitors, government, credit rating agencies, investors, and shareholders. They are interested to know the financial information of the business enterprise. For example, Government is interested to know the sales account balance to levy tax on sales.

8. To reduce frauds, errors and omission of financial transactions

It helps to record all the business transactions without the omission of any transaction. This also helps to minimize the errors, frauds, and thefts in the business organisation. This helps to maintain the books of accounts without any errors or omissions.

9. Adhere to the double-entry system of bookkeeping

This is to comply with the double-entry system of bookkeeping to make record-keeping complete, reliable, and useful. Under the double-entry system of bookkeeping, both the aspects such as debit and credit are recorded. This system is reliable, scientific and authentic. The books of accounts are prepared by complying with the double-entry system.

10. To ascertain the effect of all business transactions 

One of the objectives of maintaining ledgers is to ascertain the effect of all transactions in the books of accounts. For example, assets recorded will give a debit balance and the asset balance is shown on the asset side of the balance sheet. Similarly, liabilities and capital is shown on the liability side of the balance sheet.

Conclusion

The main objective (purpose) of maintaining a journal and ledger is to record the business transactions in books of accounts in a systematic manner and to post them in their respective ledger accounts. The other objectives would include recording transactions as per the golden rules of the double entry system, ascertaining the effect of recorded transactions in the books of accounts and facilitating the preparation of financial statements