Compound entry

Compound entry
See also
Bills Payable Direct lease Gift letter Swingline loan Shipping guarantee Cash and cash equivalents Customer deposits External sources of finance Progress billings

Compound entry is an entry involving three accounts or more. If there are only two accounts, one debit and one credit then it is called a simple entry. Nevertheless, many payments require more than two journalizing accounts. Compound entry is also called compound journal entry. In compound entry fundamental requirement is to have all debits ahead of credits. Quantity of debits needs to correspond to amount of credits (J. Weygandt., P. Kimmel., D. Kieso 2018, p. 2-9), (M. Hanif., A. Mukherjee 2018, p. 3-12).

Example of compound entry

Land and office building bought for $300,000 plus GST (tax 10%). The terms of the agreement called for a $90,000 check deposit, a reminder that 8 percent p.a. would be financed with a 20-year loan bearing interest. The purchase price is given to land $120,000 and to the house $180,000. Land and construction are both heightened and subsequently debited property. The GST(tax) paid shall be debited to the account of GST Outlays. The bank account money is cut down by credit. A lawsuit against the company is the unpaid part of the purchase price. Therefore, a loan raises a risk. While this exchange includes more than two accounts (a combined entry), the sum of the debited dollar amounts is the total of the credited dollar amounts. In conclusion we have on the side of debit: Land for $120000, Building for $180000 and GST(tax) for $30000. Total of debit is $300000. On the credit side we have: Cash at Bank for $90000 and Mortgage Payable for $240000. Total of credit is $300000. Sum of debit equals credit (J. Hogget., J. Medlin., L. Edwards., M. Tilling., E. Hogg 2012, p. 84).

Recording the compound entry

There are three ways that you can record a compound entry (P. C. Tulsian., B. Tulsian 2014, p. 22):

• First of all you can debit at least two accounts and credit one account
• Secondly there is a possibility to record compound entry by debiting a couple of accounts and to credit some accounts
• Last but not least there is a formula of crediting at least two accounts and debiting one account

History of compound entry

Professor Federigo Melis found a compound entry in a 1399 Pisan paper and concluded that, by the second half of the fourteenth century, these entries were a regular feature of Tuscan bookkeeping. In his ledger of 1436-1440, the Venetian Jachomo Badoer included a compound entry. It seems likely that by the sixteenth century, the use of compound entries had become quite common in Italian practice. In comparison, the majority of bookkeeping textbooks of the sixteenth century only illustrated basic journal entries, one debit and one credit. Early researchers preferred to break complicated transactions into two or more basic entries. Yet clearly this was a teaching tool, not the product of ignorance. In Heinrich Schreiber's earliest published German bookkeeping document, "Ayn New Kunstlich Buech" (1518), compound entries are illustrated. The first textbook in English to describe compound entries was "A Breffe Instruction" (1567) by John Weddington. In Holland, in "Hyponmemata Mathematica" (1608), Simon Stevin gave an early and widely imitated exhibition of compound entries. Such textbooks are valuable for examples of compound entities because they represent a shift from the need to provide simple double entry instruction to a concern for consistency in bookkeeping and a desire to reduce clerical work (M. Chatfield., R. Vangermeersch 2014, p. 144).

Advantages of Compound entry

Compound entry presents several advantages when it comes to bookkeeping. Some of the key benefits are:

• It helps to maintain clear and accurate records in the accounting books, as more than two accounts are involved in one transaction.
• It enables the business to track the movement of money from one account to another.
• It helps to identify any mistakes or discrepancies in the accounts, as all the accounts affected in the transaction are present in the same entry.
• It is also helpful in understanding the financial position of the company, as the entries are recorded in the same place.
• Compound entries make it easier to track the transactions and report them in a timely manner.

Limitations of Compound entry

Compound entries have the following limitations:

• They can be more difficult to create and understand. Compound entries require the user to have a greater understanding of accounting principles, as more than one debit and credit account is involved.
• If one account is incorrect, it can be difficult to identify and correct the error as multiple accounts are involved.
• Compound entries are more prone to errors, as the user must be careful to ensure the total debits equal the total credits.
• Compound entries must be carefully reviewed and approved to ensure accuracy.

Other approaches related to Compound entry

A compound entry is an entry involving three accounts or more. Other approaches related to compound entry include:

• Analyzing the transaction - This involves breaking down the compound transaction into its component parts, and then recording each part as a separate entry.
• Using a compound journal entry - This involves recording two or more transactions that are related to each other in a single entry.
• Using a T-account - This involves illustrating the effect of a compound transaction on two or more accounts by using a T-account format.

In summary, compound entry is an entry involving three accounts or more, and other approaches related to compound entry include analyzing the transaction, using a compound journal entry, and using a T-account.

References

• Chatfield M., Vangermeersch R. (2014), The History Of Accounting (RLE Accounting): An International Encylopedia, Routledge, New York & London
• Cunningham B., Nikolai L., Bazley J., Kavanagh M., Slaughter G., Simmons S. (2014), Accounting: Information For Business Decisions, Cengage Learning Australia pty limited, p. 186
• Hanif M., Mukherjee A. (2018), Financial Accounting - I, Revised Fourth Edition, Mcgraw-Hill Education (India) private limited, Chennai
• Hogget J., Medlin J., Edwards L., Tilling M., Hogg E. (2012), Financial Accounting, John Wiley & Sons, Australia
• Rajasekaran V., Lalitha R. (2011), Financial Accounting, Pearson, p. 93
• Tulsian P.C., B. Tulsian. (2014), Financial Accounting For B.Com. (Programme), S. Chand Group, New Delhi
• Weygandt J., Kieso D., DeFranco A., Kimmel P. (2005), Hospitality Financial Accounting, John Wiley & Sons, p. 104
• Weygandt J., Kimmel P., Kieso D. (2018), Accounting Principles, John Wiley & Sons, USA

Author: Wiktor Woźny