Compound/combined Journal Entry

A journal entry involving more than 2 Account Heads (Elements) is called a compound/combined journal entry. Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) June 15th – Machinery (Old) a/c Bank a/c       To Machinery (New) a/c       To Profit and Loss a/c [Towards the value of old machinery exchanged for a new machine and the balance being paid by a cheque and the profit on disposal of the old machine] Dr Dr – – – – 84,000 2,46,000 3,24,000 6,000 • Isn't it a violation of the dual entity concept? The compound/combined entries should not be interpreted to mean that more than 2 elements are effected in a single/simple accounting transaction. A compound/combined entry is a journal entry derived by combining two or more simple journal entries. Theoretically a compound/combined entry can always be broken down into the constituent simple journal entries. However such a breakdown would be a bit difficult in case of complex compound entries. Writing a compound/combined entry in place of two or more simple entries reduces the task involved in recording the transactions.

Complex Compound/Combined Journal Entry

A complex compound/combined Journal Entry is a journal entry involving more than 3 Account Heads (elements) in which there are multiple debits and multiple credits. • Illustrative Explanation Consider a person starting business by bringing in his personal assets and liabilities into the business. [The separate entity concept says that the owner is alien to business. Thereby the owner can give or take from the business.] Mrs. Raju Commenced business by bringing in the following assets and liabilities of hers as her capital contribution. Cash Rs. 50,000. Motor Car Rs. 1,00,000 Furniture Rs. 20,000 Bank Loan (payable) Rs. 50,000 Based on the value of assets and liabilities contributed, we would be able to assess his capital contribution. • Value of Assets brought in = Rs. 50,000 (Cash) + Rs. 1,00,000 (Motor Car) + Rs. 20,000 (Furniture) = Rs. Rs. 1,70,000 • Value of Liabilities brought in = Rs. 50,000 (Bank Loan) • Value of Net Assets brought in = Value of Assets brought in − Value of Liabilities brought in = Rs. 1,70,000 − Rs. 50,000 = Rs. 1,20,000 The amount of Capital contributed by Mrs. Raju is nothing but the value of Net Assets brought in by her. The transaction relating to the assets and liabilities brought in by Mrs. Raju can be broken up into 4 simple transactions. Brought in Cash Rs. 50,000 towards Capital. [Cash a/c and Capital a/c are the two elements effected] Contributed Motor Car worth Rs. 1,00,000 towards Capital [Motor Car a/c and Capital a/c are the two elements effected] Contributed Furniture worth Rs. 20,000 towards Capital [Furniture a/c and Capital a/c are the two elements effected] The business accepted to take over the responsibility of paying up Mrs. Rajus Bank Loan Rs. 50,000 [Capital a/c and Bank Loan a/c are the two elements effected] "accountancy,basic,financial,accounting,process" In the first three transactions, Mrs. Raju stands in the position of benefit giver. Therefore, Capital a/c (which represents the owner i.e. Mrs. Raju) is to be credit. In case of Bank Loan, which is a liability, the benefit is derived by Mrs. Raju, since the responsibility of her liability is being taken over by the organisation. Therefore, Capital a/c (which represents the owner i.e. Mrs. Raju) is to be debited. » Complex Analysis In analysing a transaction to arrive at the simple journal entry, it should be possible to support both the debit as well as credit with reasoning. However in some cases, the reasoning trying to support both the debit and credit becomes too complex a thought. Even in such cases explaining one (either the debit or credit) would be simple. In such situations, after identifying the two elements (Account Heads) effected by the transaction, we analyse only the element whose analysis is simple and decide whether it should be debited or credited. What should be done with the second element is thereafter decided automatically without thinking of analysis.

Recording & Posting » Simple Journal Entries

The above transactions can be recorded using simple journal entries as: Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) June 15th – Cash a/c       To Capital a/c [For the cash brought in by Mrs. Raju towards her capital contribution ] Dr – – 50,000 50,000 June 15th – Motor Car a/c       To Capital a/c [For the value of Motor Car brought in by Mrs. Raju towards her Capital contribution. ] Dr – – 1,00,000 1,00,000 June 15th – Furniture a/c       To Capital a/c [For the value of Furniture brought in by Mrs. Raju towards her Capital contribution. ] Dr – – 20,000 20,000 June 15th – Capital a/c       To Bank Loan a/c [Being the value of personal Bank Loan of Mrs. Raju taken over ] Dr – – 50,000 50,000 • Ledger Posting The postings relating to the entries would be as follows in the relevant accounts. Dr Cash a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital a/c – 50,000                         Dr Capital a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                 15/06/05 To Bank Loan a/c – 50,000 15/06/05 15/06/05 15/06/05 By Cash a/c By Motor Car a/c By Furniture a/c – – – 50,000 1,00,000 20,000                 Dr Motor Car a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital a/c – 1,00,000                         Dr Furniture a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital a/c – 20,000                         Dr Bank Loan a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                           By Capital a/c – 50,000

Recording & Posting » Complex Compound/Combined Entries

The same transactions can be recorded using a complex compound/combined journal entry as: Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) June 15th – Cash a/c Motor Car a/c Furniture a/c       To Bank Loan a/c       To Capital a/c [Being the value of assets and liabilities of Mrs. Raju brought into the business towards her capital contribution. ] Dr – – – – – 50,000 1,00,000 20,000 50,000 1,20,000 • Ledger Posting Posting complex compound/combined entries in the relevant accounts would be a bit complex too. The complexity will be with regard to the Ledger account shown in the particulars column and not with regard to the amounts. The amounts posted would be the same whether you are posting the simple journal entries or the complex compound/combined entry The problem arises from the fact that it would not be possible to attribute each specific debit to a specific credit as in the case of posting a simple compound/combined entry. Dr Cash a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital, Bank Loan a/c's – 50,000                         Dr Capital a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                         15/06/05 By Cash, Motor Car, Furniture a/c's – 1,20,000                 Dr Motor Car a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital, Bank Loan a/c's – 1,00,000                         Dr Furniture a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                   To Capital, Bank Loan a/c's – 20,000                         Dr Bank Loan a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs)                         15/06/05 By Cash, Motor Car, Furniture a/c's – 50,000

Author Credit : The Edifier

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