A compound journal entry is the journal entry in the accounting system where more than one account is debited or credited, i.e., when a transaction affects more than the three accounting heads.
Compound Journal Entry Definition
A compound journal entry means a combination of two or more debits and credits in a single accounting entry Accounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. . It means it is a journal entry with the following combinations: –
- One debit and two or more credits, or
- One credit and two or more debits, or
- Two or more debits and credits
As per the debits Debits Debit represents either an increase in a company’s expenses or a decline in its revenue. & credits, the rules include having a minimum of 2 accounts (1debit & at least 1 credit), listing debits before credits, & debit amounts always being equivalent to credit amounts. Professionals can merge different journal entries based on their professional judgment and experience. Combination journal entries may include depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. , payroll, various items in a particular invoice, bank reconciliation ReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction., a single transaction involving multiple components, etc.
Table of contents
- A compound journal entry is an accounting entry that consists of a combination of two or more debits and credits in a single accounting entry.
- In an accounting system, compound journal entry saves time, provides better presentation, and gives a bird’s eye view of the analysis while presenting the data as a summary.
- To frame the compound entries for all tasks, one requires expertise to ensure that the applicable standards, rules, and guidelines are followed.
- Considerable risk of data misreporting arises if the compound journal entry criterion is not fulfilled, which could also violate the applicable standard’s disclosure requirement.
Compound Journal Entry Examples
Let us understand the compound entry with examples: –
ABC Ltd., on 31st March, has the following list of assets with depreciation amount to be charged in the books of account:
Please pass the compound journal entry individually and in a compound format.
The above data shows that compound entry saves time and energy, as more data can be presented concisely with better presentation.
Mr. ABC admitted his son to a B-school for management studies and paid $90,000, including all the components. The list of the element of the same are as given below: –
Please pass compound journal entries in the books of B-school individually and compounded ones.
- Saves time – Entries like payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits., depreciation, fees, etc., for individual employees or students lead to many entries. However, it saves time and energy for other productive tasks when presented in compounded form.
- Better presentation – Compound entries present the data in a better manner as compared to separate entries.
- Data available in summarise form – Compound entries present the data in summary, which gives a bird’s eye view of the analysis.
- Requires expertise – To frame compound entries for all the tasks is not a cup of tea for all individuals. Many items like leasesLeasesLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”, etc., require a high level of professional expertise. It is not easy to frame such entries in compound form.
- Chances of misreporting – While framing compounding entries, one must ensure that applicable standards, guidelines, and rules are followed. If not taken care of, there are high chances of data misreporting and may breach the applicable standard’s disclosure requirement.
Compound entry is a more efficient form of accountancy, enhancing the accountant’s productivity and leading to a better accounting presentation. Moreover, according to the standard and guidelines in a particular nation, the accountant can frame compound journal entries and optimize time and effort.
Frequently Asked Questions (FAQs)
Credit card transactions, multiple petty cash purchases, business loan payments, payroll, and sales tax are some compound journal entry examples.
One must fulfill the two conditions to record a compound journal entry: the compounded transaction date must be the same, and the nature of these transactions must also be the same.
In the accounting system, in a simple journal entry, one needs a debit account and the corresponding account to credit. In contrast, a compound journal entry includes more than two accounts.
This article is a guide to Compound Journal Entry. Here, we discuss the Compound Journal Entry examples and their meaning, advantages, and disadvantages. You can learn more about financing from the following articles: –