Compound Entries- Complex and Sometimes Complicated Journal Entries
We’ve covered simple accounting concepts many times on Appvizer. However, in order to have a better overall understanding and grasp on business accounting, you need to look at more complex concepts, one of those being compound entries.
What Is a Compound Entry?
As we just said, a compound entry is a more complicated accounting concept, in which there are more than just one debit and one credit for one entry. It affects two or more accounting heads in the general ledger of the journal entry system. A journal entry is an original record of the day-to-day transactions, for which the data is used to produce general ledger entries.
If you have any previous knowledge about accounting, you know that a simple entry involves one debit in one account and one credit in another. Whereas a compound entry involves more than one debit and one credit for a single transaction. Furthermore, though it may be a mix of several debits and credits, the sum of all entered debits and credits shall be equal, respecting the double entry system.
In order to understand those two factors that are important in compound entries, a debit is recorded when assets (inventory, etc.) increase in value, and a credit is recorded when a liability (rent, wages, etc.) or interest expense augments in value
Compound Journal Entry Examples
Let’s take a look at an example of multiple entries to really hammer this concept in:
First, let’s say you have machines, and general capital that is depreciating, obviously that depreciation needs to be recorded on the balance sheet.
And this is what it would look like:
As you can see, there were multiple entries for the same transaction, in this case, one debit and three credits. However, there can be other ways of doing a compound entry as well.
Sometimes, when companies are mainly service-orientated, they invoice for multiple things at once. That would show up on the balance sheet like this:
|To repair services
|To tools used
|To labor hours
As you can see the company receives the money and deposits it into “bank”, just one entry, however, the specifics of what they invoiced are listed in the corresponding credits.
A company decides to purchase a car for $3,000 from a supplier and issued a check for $7,000. The $3,000 settles the full amount that the company owes to the supplier.
As you have a down pay of $7,000 including a payment of $3,000 for the car and the remaining $4,000 for past payable, this transaction can be recorded in two different journal entries. There would be:
- A debit Equipment and Credit Cash of $3,000 for each of them,
- a debit payable and Credit Cash of $4,000 for each of them.
For example, you decide to buy a car for your business and write a $5,000 check for the down payment on a new $20,000 car. You will be crediting cash for $5,000 and debiting the fixed asset $20,000. The effect of these debits and credits is a net asset change of $15,000. The liability is then the amount of the loan, which is equally $15,000.
Benefits & disadvantages of Compound Entries
Compound entries can save accountants a lot of time. Instead of listing every specific entry, and matching it with the corresponding debit or credit, accountants can lump multiple entries into one transaction. It saves them a lot of time and energy. Although it can save accountants time and energy, the risk of messing up on even one minute detail is a lot higher than just regular simple entries. Even a single error can completely skew the entire balance sheet and cause management to make decisions off of faulty financial information.
Compound Entries- A Bit Complex, But Necessary Accounting Tool
Overall, despite the potential for mistakes, compound entries are a more efficient way of journaling that allows accountants to save time and energy on financial reporting. Beyond just the overall boost in productivity, compound entries lead to a simpler presentation that’s beneficial for all readers and users of accounting and financial reports.