Compound Journal Entries. Definition and Types

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Compound Journal Entries. Definition and Types

2 Heads of Account

Every business transaction always affects 2 heads of account. Each debit account must have a corresponding credit account. Credit and debit must be equal. This is referred to as the Accounting Equation or as the Double-entry accounting system. For example, if a businessperson sells a product for cash, we will record the entry according to the double-entry system as Cash debit and Inventory credit. But what if MORE than 2 accounts are affected by a single business transaction?

Compound journal entries

A Compound Journal Entry (CJE) is an entry involving more than two accounts. In a CJE, there are two or more debits, credits, or both. Rather than making separate journal entries for the same transaction, we combine the debits and credits under one entry. CJEss are made when there is more than one credit, more than one debit, or more than one of both being recorded having the same nature in the same day. Compound entries are a combination of multiple simple journal entries. Nevertheless, also in CJEs, the total of credits and debits must be equal.

One major example of a CJE is the recording of a payroll entry which affects multiple debits and credits. It is recorded as Salaries expense and Tax expense debit, while Cash and Other deductions credit.

CJEs are also used to aggregate related transactions in a single compound entry. Examples:

• Salaries payable of multiple employees in a single entry.
• Depreciation of all fixed assets in a single entry.
• The closing entry at the end of the period.
• A bank reconciliation entry for offsetting the difference in business books and bank records.

Types of Compound Journal Entries

There are 2 main types of compound journal entries: The Simple Compound Entry and the Complex Compound Entry.

1. SIMPLE COMPOUND ENTRY
   A simple CJE is an accounting entry that affects three or more accounts head and has either multiple credits OR multiple debits (but does not have both in multiple).
   Example:
   Assume ABC Company purchases a piece of equipment costing €5000 on May 20, 2021. The company pays €3000 in cash and agrees to pay the remaining balance after one month.
   
   • The first step for recording the transaction is to find the affected account heads and their respective amount. In this transaction, three accounts are affected: the cash account, the asset account, and the accounts payable account. The asset account must increase by €5000 due to buying the new equipment. To reflect the payment of €3000, the cash account will decrease. Finally, the accounts payable will increase by the remaining amount of €2000, as the liability increases.
   • The next step is to find out the nature of accounts and translate them into credit and debit.
     Equipment will be debited by €5000, as asset increases and cash will be credited by €3000, as asset decreases. Accounts payable will be credited by €2000, as liability increases.
   • The last step is to record the transaction in the general journal. The transaction can be recorded using two entry methods: 2 simple journal entries or 1 compound journal entry.
   Simple journal entry
   Simple Compound journal entry
   In above example, we can see that the CJE is simpler, more organized, and provides a better understanding of the event, by combining all related transactions in a single accounting transaction, instead of making 2 separate entries for the same accounting events.
   
   
2. COMPLEX COMPOUND ENTRY
   A complex CJE is an accounting entry that affects three or more accounts and has multiple credits and multiple debits.
   
   Example:
   Assume that Mr. Ahmed starts a new business on May 20, 2021, by making available some assets and liabilities including cash €3000, equipment €6000, furniture €5000, and a bank loan €1000. To record the transaction, the same steps will be followed as discussed above.
   
   We could have recorded the above transaction by using multiple simple journal entries, but that would not only increase the number of entries in the general journal, but also depict scattered and unorganized information. Thus, the complex CJE is more efficient as compared to several simple journal entries.

Sources
"Basic Accounting Concepts & Procedures" (2006).
Mitchell Franklin, Patty Graybeal, Dixon Cooper (2019), "Principles of Accounting Volume 1 - Financial Accounting".
Article: "Compound Entry Definition" (2021), Accountingtools