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However, there can be other ways of doing a compound entry as well. We’ve covered simple accounting concepts many times on Appvizer. 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.

what is compound entry

Beyond just the overall boost in productivity, compound entries lead to a simpler presentation that’s beneficial for all readers and users of accounting and financial reports. 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. The liability is then the amount of the loan, which is equally $15,000.

Single-entry accounting vs. double-entry accounting

Businesses should define these accounts beforehand — otherwise, you could end up with quite a complicated mess. This declaration is called a “chart of accounts.” Some examples might include cash, rent and supply accounts. When you debit an account, you need to credit another account (and vice versa). Because of this, debits and credits oppositely affect the different types of accounts in accounting.

what is compound entry

First, let’s say you have machines, and general capital that is depreciating, obviously that depreciation needs to be recorded on the balance sheet. Add compound entry to one of your lists below, or what is compound entry create a new one. The only precaution is that the total debits should be equal to total credits. You might be wondering when and if you would need to use a compound entry in your small business.

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Notes payable would also be credited for the balance owed on the building. Real property or, specifically, buildings would be debited for the full purchase price, equaling the amount paid, plus the amount due. Because more than one credit was entered, this would be an example of a compound journal entry. A simple journal entry has a debit and credit of equal value.

Not all journal entries are as easy as simple accounting entries. Most business transactions only affect two accounts in the ledger. If the merchandiseis paid for on account, the inventory account is debited and the account payable account is credited. Keep in mind that your debits and credits must be equal in a compound journal entry.