Net effect of two or more journal entries

Notes 26

Net effect of two or more entries

Net effect of two or more entries is a combined entry that can be obtained by combining or adding up all the debits and all the credits to the same account distinctly and then setting off the total debits and total credits.

Net effect may be assessed by making up a working note in the following format.

Account 1 Account 2
Dr Cr Dr Cr
1)
2)

–
 –

 –


–
Total – – – –
Net – –

OR

Account 1 Account 2
1)
2)
 –
–

 –
–

Net – –
Dr(+)/Cr(−)

The net effect of a number of journal entries can also be recorded i.e. brought into the books of accounts through a journal entry.

The Journal entry representing the net effect would minimise the information available through all the journal entries whose net effect it represents.

However, recording the net effect would put the organisation in the same position as recording all the individual entries that the net effect represents.

Utility

Net effect would be useful in cases where it is important to bring the effect of a number of transactions into books and showing the information relating to each transaction is not of importance. This would be the case in error rectifications and preparation of final accounts which you will come to know as you move along the accountancy learning path.

This has very little to no utility in the regular recording of accounting transactions.

Simple Journal entry as the net effect

Consider the following transactions

  1. Cash paid into Bank 5,000
  2. Withdrawn from Bank 2,000
  3. Cash paid into Bank 8,000
  4. Withdrawn from Bank 2,400

The journal entries for recording these transactions would be

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Bank a/c
To Cash a/c
Dr
 5,000
5,000
Cash a/c
To Bank a/c
Dr
 2,000
2,000
Bank a/c
To Cash a/c
Dr
 8,000
8,000
Cash a/c
To Bank a/c
Dr
 2,400
2,400

Calculating the net effect

Cash Bank
Dr Cr Dr Cr
1)
2)
3)
4)

2,000

2,400
 5,000

8,000

 5,000

8,000


2,000

2,400
Total 4,400 13,000 13,000 4,400
Net 8,600 8,600

OR

Cash Bank
1)
2)
3)
4)
 −5,000
+2,000
−8,000
+2,400 		+5,000
−2,000
+8,000
−2,400
Net −8,600 +8,600
Dr(+)/Cr(−)

The Journal entry representing the net effect

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Bank a/c
To Cash a/c
Dr
 8,600
8,600

Simple Compound Journal entry as the net effect

Consider the following transactions relating to Evlon Traders

  1. Cash paid 4,920 in full settlement of a debt of 5,000. Discount not recorded.
  2. Purchased stock returned 12,000
  3. Old Vehicle valued at 3,900 handed over
  4. Cheque issued for 12,350 in settlement of a due of 12,500, but discount was not recorded

The journal entries for recording these transactions would be

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Evlon Traders a/c
To Discount Received a/c
Dr
 80
80
Evlon Traders a/c
To Purchase Returns a/c
Dr
 12,000
12,000
Evlon Traders a/c
To Vehicle a/c
Dr
 3,900
3,900
Evlon Traders a/c
To Discount Received a/c
Dr
 150
150

Calculating the net effect

Evlon
Traders 		Purchase
Returns 		Discount
Received 		Vehicle
Dr Cr Dr Cr Dr Cr Dr Cr
1)
2)
3)
4)
 80
12,000
3,900
150









12,000






 80


150






3,900

Total 16,130 12,000 230 3,900
Net 16,130 12,000 230 3,900

OR

Evlon
Traders 		Purchase
Returns 		Discount
Received 		Vehicle
1)
2)
3)
4)
 +80
+12,000
+3,900
+150

−12,000

 −80


−150

−3,900
Net +16,130 −12,000 −230 −3,900
Dr(+)/Cr(−)

The Journal entry representing the net effect

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Evlon Traders a/c
To Purchase Returns a/c
To Discount Received a/c
To Vehicle a/c
Dr
 16,130
12,000
230
3,900

This is similar to a simple compound journal entry. Whereas simple compound entries are made out of similar transactions and are generally used in regular transactions, journal entries representing net effect may be made even out of dissimilar transactions and are used in error rectification and final accounting.

Complex Compound Journal entry as the net effect

Consider the following transactions relating to Chayan

  1. Cash received 8,900 in full settlement of a debt of 9,000. Discount not recorded.
  2. Sold stock returned 5,500
  3. Old Machinery valued at 12,500 handed over in exchange for a new machine worth 75,000 the balance being payable in the due course.
  4. Cheque received for 15,000 in settlement of a due of 14,800, not recorded
  5. Razak a debtor and chayan agreed that Razak would take over a due of 50,000

The journal entries for recording these transactions would be

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Discount Allowed a/c
To Chayan a/c
Dr
 100
100
Sales Returns a/c
To Chayan a/c
Dr
 5,500
5,500
Chayan a/c
To Machinery a/c
Dr
 12,500
12,500
Machinery a/c
To Chayan a/c
Dr
 75,000
75,000
Bank a/c
Discount Allowed a/c
To Chayan a/c
Dr
Dr
 14,800
200

15,000
Chayan a/c
To Razak a/c
Dr
 50,000
50,000

Calculating the net effect

Discount
Allowed 		Chayan Sales
Returns 		Machinery Bank Razak
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
1)
2)
3)
4)
5)
6)
7)
 100




200







12,500



50,000
 100
5,500

75,000
14,800
200

5,500









75,000


12,500






14,800














50,000
Total 300 62,500 95,600 5,500 75,000 12,500 14,800 50,000
Net 300 33,100 5,500 62,500 14,800 50,000

OR

Discount
Allowed 		Chayan Sales
Returns 		Machinery Bank Razak
1)
2)
3)
4)
5)
6)
7)
 +100




+200

 −100
−5,500
+12,500
−75,000
−14,800
−200
+50,000
+5,500




−12,500
+75,000




+14,800






−50,000
Net +300 −33,100 +5,500 +62,500 +14,800 −50,000
Dr(+)/Cr(−)

The Journal entry representing the net effect

Journal
Particulars Amount
(Dr) 		Amount
(Cr)
Discount Allowed a/c
Sales Returns a/c
Machinery a/c
Bank a/c
To Chayan a/c
To Razak a/c
Dr
Dr
Dr
Dr
 300
5,500
62,500
14,800



33,100
50,000

This is similar to a complex compound journal entry.

Whereas complex compound entries are made out of similar transactions and are generally used in regular transactions, journal entries representing net effect may be made even out of dissimilar transactions and are used in error rectification and final accounting.

Author : The Edifier
Notes 28