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What is a Compound journal entry?
Whenever two or more transaction of the same nature (i.e. transactions where either the account to be debited or the account to be credited is common) take place on the same date a composite/ compound/ combined journal entry may be passed for them instead of passing separate journal entry for each of them.For example: suppose on 31st January 2017 Rs 5,000 is paid for Rent, Rs 2,000 is paid for salaries and Rs 3,000 is paid for wages.
Now let’s see how many accounts are involved? By observing the example you can say there are four accounts (i.e. rent, salaries, wages and cash) are involved instead of two what we learned earlier right, but can you see nature of these four accounts? Well if you observe carefully you will see rent, salaries and wages are common in nature means they are all expenses which come under nominal account debit side. So a compound journal entry can be passed for all three transactions i.e. rent, salaries and wages can be debited one by one. And you know cash account is real account, all of the expenses are paid in cash that means cash is going out so instead of crediting three times we can credit cash account once with sum amount of all three expenses for Rs. 10,000.
Here how you will pass compound journal entry for this example:
Rent A/c-------------------------------Dr 5,000 -Salaries A/c---------------------------Dr 2,000 -
Wages A/c----------------------------Dr 3,000 -
To cash A/c - 10,000
(Being rent, salaries, and wages paid in cash)
Instead of pass three different entries like
Rent A/c---------------------------Dr 5,000To cash A/c 5,000
(Being rent paid)
Salaries A/c----------------------Dr 2,000
To cash A/c 2,000
(Being salaries paid)
Wages A/c------------------------Dr 3,000
To cash A/c 3,000
(Being wages paid)
Now let me show some more examples for your better understanding, I will distribute these examples into two articles i.e. part 1 and part 2:
Part 1
1. Commenced business with cash Rs 1, 00,000 building valued at Rs 5, 00,000 and stock Rs 40,000.
Here is the compound entry for this transactions:
Cash A/c-------------Dr 1,00,000Building A/c---------Dr 5,00,000
Stock A/c-------------Dr 40,000
To Capital A/c 6,40,000
(Being business commenced with cash, building and stock)
Note: cash, building and stock are brought by businessman so all three assets are debited and his capital account is credited with the sum amount of all three assets.
2. Purchase machinery of Rs 40,000, payment made by cheque, carriage Rs 2,000, wages Rs 3,000 for installation paid in cash
Here is the compound entry for this transactions:
Machinery A/c ------------Dr 45,000
To Bank A/c 40,000
To cash A/c(2000+300) 5,000
(Being purchase machinery and paid installation charges in cash)
Note: installation charges and wages are paid for machinery so machinery account is debited with sum amount of both cost of machinery and installation charges and wages for that machinery i.e., 45,000, but as the payment is made by cheque and cash so bank is paying the amount of machinery so bank account is credited with 40,000 and installation charges and wages are paid in cash so cash account is credited with only 5,000.
3. Purchase goods from Mahesh on credit Rs 12,000
Here is the compound entry for this transactions:
Purchase A/c---------------Dr 12,000To Mahesh A/c 12,000
(Being purchase goods from Mahesh on credit)
4. Sold gods to Rajesh on credit Rs 10,000
Here is the compound entry for this transactions:
Rajesh A/c-----------------Dr 10,000To Sales A/c 10,000
(Being goods Sold to Rajesh on credit)
5. Issued cheque to Mahesh of Rs 11,500 in full settlement of his account.
Here is the compound entry for this transactions:
Mahesh A/c-----------------Dr 12,000To Bank A/c 11,500
To Discount Received A/c 500
(Being issued cheque to Mahesh in full settlement of his account)
Note: cheque is issued to Mahesh in full settlement for his earlier transaction on 3 January so Mahesh account is debited with full amount of goods purchased i.e. 12,000, but in this transaction cheque is issued for Rs 11,500 that means discount of Rs 500 is received so bank account is credited with 11,500 and discount received account is also credited with 500 as a gain.
6. Received cheque from Rajesh of Rs 9500 in full settlement of his account and deposited into bank.
Here is the compound entry for this transactions:
Bank A/c------------------Dr 9,500Discount Allowed A/----Dr 500
To Rajesh/c 10,000
(Being Cheque received from Rajesh in his full settlement)
Note: cheque is received from Rajesh in full settlement for his earlier transaction on 4 January so Rajesh account is credited with full amount of goods sold i.e.10,000, but in this transaction cheque is received for Rs 9,500 that means discount of Rs 500 is allowed or given to Rajesh so bank account is debited with 9,500 and discount allowed is also debited with 500 as a loss.
7. Cheque received from Rajesh dishonored.
Here is the compound entry for this transactions:
Rajesh A/c --------------Dr 10,000To bank A/c 9,500
To Discount Disallowed A/c 500
(being Rajesh cheque dishonored and discount disallowed)
Note: cheque received from Rajesh on 6 January is dishonored so complete entry made on 6 January is reversed.
8. Cheque received from Anita Rs 14,500, Discount allowed Rs 500, cheque deposited in bank.
Here is the compound entry for this transactions:
Bank A/c --------------------Dr 14,500Discount allowed A/c----Dr 500
To Anita A/c 15,000
(Being cheque received from Anita deposited into bank and discount allowed to her)
Note: there is no earlier transaction of sales made to Anita but all the details are given in this transaction itself, cheque is for amount 14,500 so bank account is debited as bank is receiving the cheque, discount is allowed for Rs 500 so discount allowed is also debited. As this cheque is given by Anita so Anita account is credited with sum amount of cheque and discount i.e. 15,000
9. Cheque issued to Ashish Rs 11,800, Discount received Rs 200.
Here is the compound entry for this transactions:
Ashish A/c -----------------Dr 12,000To Bank A/c 11,800
To Discount received A/c 200
(Being cheque issued to Ashish and discount received.)
Note: there is no earlier transaction of purchase from Ashish but all the details are given in this transaction itself, cheque is for amount 11,800 so bank account is credited as bank is receiving the cheque, discount is received for Rs 200 so discount allowed is also credited. As this cheque is received by Ashish so Ashish account is debited with sum amount of cheque and discount i.e. 12,000.
10. Old Furniture appearing in the books at Rs 12,000 is exchanged for new furniture of Rs 24,000. The old Furniture has been valued for new furniture of Rs 24,000. The old Furniture has been valued at Rs 8,000 for exchange purpose.
Here is the compound entry for this transactions:
Furniture A/c (new)--------Dr 24,000Profit & Loss A/c (loss)---Dr 4,000
To Furniture (old) 12,000
To supplier of Furniture A/c 16,000
(Being old Furniture exchanged for new furniture)
Note: new furniture is exchange with old furniture, new furniture is coming in the business so new furniture account is debited and old furniture is going out of business so it should be credited with their original amounts i.e. 24,000 for new furniture and 12,000 for old furniture. Next, because the supplier value the old furniture at 8,000 that means is it is less than the original amount of 12,000 so you are getting a loss of 4,000, that why loss on exchange is debited to profit and loss account. Lastly new furniture is costing 24,000 and as old furniture is valued at 8,000 then remaining amount i.e. 16,000 is credited to supplier account as he is giving the furniture on credit.
11. Sold goods to Suresh Rs 6000
Here is the compound entry for this transactions:
Suresh A/c---------------Dr 6,000To Sales A/c 6,000
(Being goods sold to Suresh on Credit)
12. Suresh become insolvent only Rs 2000 is received from his estate as full and final payment.
Here is the compound entry for this transactions:
Cash A/c-------------------Dr 2,000Bad debt A/c--------------Dr 4,000
To Suresh A/c 6,000
(Being Suresh become insolvent and Bad debts written off)
Note: In earlier transaction on 11 Jan goods are sold to Suresh amounting 6,000 on credit but now he become insolvent and can’t pay in full and you can recover only 2,000 from his estate as full and final payment, so cash is received i.e. 2,000 but Suresh taken goods worth of 6,000 so you didn’t recover 4,000 from him so it is a bad debt that means loss so it should be debited as well. And finally Suresh account is closed by crediting 6,000.
13. Goods destroyed by fire Rs 5,000. How would you deal:
(i)If the goods are uninsured (ii) insurance co., accepted full claim
(iii) Insurance company accepted the claim to the extent of 3,000.
Here is the compound entry for these transactions:
i) Loss of goods A/c ---------Dr 5,000
To Purchase A/c (stock) 5,000
ii) Insurance co. A/c---Dr 5,000
To Loss of goods A/c 5,000
iii) Insurance company A/c-----Dr 3,000
Profit and loss A/c (loss)----Dr 2,000
To loss of goods A/c 5,000
(Being loss of goods, insurance company accepted the claim fully as well as partly)
Note:
For i) goods are destroyed by fire and goods are not insured means loss to business so loss of goods should be debited, and as stock of goods are lost means going out so purchase account is credited with the same amount.
For ii) goods are destroyed and insurance co., accepted full claim, means loss is bear by the insurance company so company is receiving the loss so insurance company account is debited with full amount of loss and the business is receiving the gain so loss of goods account is credited.
For iii) goods are destroyed and insurance co., accept claim for 3,000 only so insurance co account accept the loss of 3,000 so its account is debited with 3,000 but the loss of goods is of Rs 5,000 that means business has to bear loss of 2,000 so loss of goods should be debited to profit and loss account.
14. Goods costing Rs 2000 given as charity, good costing Rs 3000 is distributed as samples and Rs 800 distributed among employees.
Here is the compound entry for this transactions:
Charity A/c---------------Dr 2,000Samples A/c--------------Dr 3,000
Employees A/c-----------Dr 800
To Purchase A/c 5,800
(Being goods given to charity, as samples and to employees.)
Note: charity, samples and employees are receiving goods so they all are debited as they all are common in nature. goods are recorded into purchase account and goods are distributed that means going out of business in the form of charity, samples and to employees so purchase account is credited with sum amount of all three. Rs 5,800.
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