What is a Compound Journal Entry: A Clear Explanation

Compound journal entry is an accounting entry which affects three or more account heads. A simple journal entry has just two rows i.e. one debit and one credit, whereas a compound journal entry has three or more rows. The account can have debit or credit part, or it can have both debit and credit parts. But the sum of debit and credit parts should be equal to the amount of the account. Thus, in a compound journal entry, if there is more than one account involved then at least one of them will have more than one debit or credit part.

What is a compound journal entry and how is it different from a simple entry?

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. Most business owners are responsible for collecting sales tax from their customers and remitting it to their state. This is because you must remit these taxes to the appropriate agencies. And, the employees’ net wages are also a payable account because you have not yet paid the employees. You will need to create new journal entries when you pay the agencies and your employees.

Compound Journal Entry: Definition

A compound journal entry is a type of accounting entry that involves multiple debits or credits in a single transaction. It is different from a simple entry, which involves only one debit and one credit. An accounting entry that consists of three or more account names is known as a compound journal entry. In other words, one of the debit or credit parts of a compound entry essentially contains two accounts. A compound journal entry, in fact, is a combination of two or more simple journal entries.

Compound Journal Entry FAQs

We can certainly link two or more accounts when we make a compound journal entry. Linked accounts, if any, will be debited and credited in the same part of the entry. In this example accounts payable is credited $15,000 for the loan, and the service payment of $500 was added to the down payment of $2,000 to combine for a $2,500 cash payment. These withdrawals are both documented as a $2,500 and a $3,000 credit to cash. Accountants and managers are responsible for recording day-to-day transactions and use both single and multiple entries to record and prepare financial statements.

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The $3,000 down payment would be recorded as a $3,000 credit to the cash account, $12,000 credit to accounts payable, and a $13,000 debit to the equipment account. A compound journal entry in accounting is any entry which has more than one credit or debit, or more than one of both credits and debits. A compound journal entry may sound fancy, but it’s actually a pretty easy concept to master. Read on to learn about compound journal entries and see actionable examples. It is important to note that compound journal entries can be complex and require careful attention to detail.

Example 4: Interest Expense and Loan Payment

Journal entries are used to create sub-ledgers, general ledgers, quarterly or annual reports, and other reports and statements. 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.

At the minimum, a credit card transaction deals with Cash, Credit Card Expense, and Sales accounts. If the credit card company doesn’t pay you immediately, you also have to deal with additional accounts, but we’re not going to get into all of that. All transactions are first recorded here before they are posted to the general ledger. It is used to record transactions in chronological order and serves as a record of all transactions that have occurred.

A journal entry is a record of a financial transaction that is entered into the general ledger of an accounting system. It includes the date of the transaction, the accounts affected, and the amounts debited or credited. When logging a business transaction that affects several accounts, a compound entry is recorded in your accounting journal. The entry may be a combination of several debits and credits, but as per the double entry system in accounting, the sum of how to estimate bad debt expense all entered debits and the sum of all entered credits will be equal. To record the repayment of the loan along with interest, the company can pass either two separate simple journal entries (one for the principle amount and one for the interest) or a single compound journal entry. The frequently occurring daily transactions in a business, like sales, purchases, payments for utility bills, customers’ refunds, etc., are generally recorded through simple entries.

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. This event also involves two accounting entries – one for the payment of cash for a previous credit purchase and the other for receiving the cash discount. It can be journalized by making two separate simple entries or one compound journal entry. A simple entry is the best reflection of the underlying transaction and the rules of debit and credit working behind the entry.

Instructions Reproduce the journal entries for the transactions that occurred on October 1, 10, and 20, and provide explanations for each. Because you do not keep collected sales tax, you must record received funds in a Sales Tax Payable account. Regardless of the number of employees you have, payroll accounting involves a number of different accounts. Because when you run payroll, you need to withhold money for taxes and other deductions (e.g., health insurance premiums). If so, you may make multiple transactions when withdrawing money from the account.

• The UN peacekeeping force in southern Lebanon says Israeli tanks forced their way into one of its positions early on Sunday morning.
• While they offer several benefits, they also come with a few disadvantages.
• Compound means a thing that is composed of two or more separate components.
• The T-accounts below summarize the ledger of Daggett Landscaping Company at the end of the first month of operations.
• 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.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. On 1 June 2016, Sam started a business with $25,000 in cash, along with furniture costing $5,000.