Complex Compound/Combined Journal Entry

A complex compound/combined Journal Entry is a journal entry involving more than 3 Account Heads (elements) in which there are multiple debits and multiple credits.

Illustrative Explanation

Consider a person starting business by bringing in his personal assets and liabilities into the business.

Based on the separate entity concept, the owner is alien to business and therefore can give or take from the business.

Mrs. Raju Commenced business by bringing in the following assets and liabilities of hers into the firm as her capital contribution.

• Cash 50,000.
• Motor Car 1,00,000
• Furniture 20,000
• Bank Loan (payable) 50,000

There are 4 transactions in all

Combining the Transactions

The 4 transactions can be combined for the purpose of recording a complex/combined journal entry for which we need to ascertain the amount of capital brought in by Mrs. Raju.

The net benefit given by Mrs. Raju would be her capital contribution. This can be ascertained based on the value of assets and liabilities brought in.

Value of Assets brought in

= 50,000 (Cash) + 1,00,000 (Motor Car) + 20,000 (Furniture)
= 1,70,000

Value of Liabilities brought in

= 50,000 (Bank Loan)

Value of Net Assets brought in

= Value of Assets brought in − Value of Liabilities brought in
= 1,70,000 − 50,000
= 1,20,000
= Capital Contribution

Complex Analysis

In analysing a transaction to arrive at the simple journal entry, it should be possible to support both the debit as well as credit with reasoning. However in some cases, the reasoning trying to support both the debit and credit becomes too complex a thought. Even in such cases explaining one (either the debit or credit) would be simple.

In such situations, after identifying the two elements (Account Heads) effected by the transaction, we analyse only the element whose analysis is simple and decide whether it should be debited or credited. Since it is a simple transaction we are considering, the second element is debited if the first is credited or vice versa.

Recording & Posting - Simple Journal Entries

Analysis of the four transactions

• Brought in Cash 50,000 towards Capital.

Capital a/c

Personal a/c

Credit
[Credit the benefit giver]
Cash a/c

Real a/c

Debit
[Debit what comes in]
• Contributed Motor Car worth 1,00,000 towards Capital

Capital a/c

Personal a/c

Credit
[Credit the benefit giver]
Motor Car a/c

Real a/c

Debit
[Debit what comes in]
• Contributed Furniture worth 20,000 towards Capital

Capital a/c

Personal a/c

Credit
[Credit the benefit giver]
Furniture a/c

Real a/c

Debit
[Debit what comes in]
• The business accepted to take over the responsibility of paying up Mrs. Rajus Bank Loan 50,000

Capital a/c

Personal a/c

Debit
[Debit the benefit receiver]
Bank Loan a/c

Personal a/c

Credit
[Credit the benefit giver]

Since the responsibility of paying up Mrs. Raju's loan is being assumed by the organisation, Mrs. Raju stands (represented by Capital a/c) in the position of the benefit receiver and the organisation stands in the position of the benefit giver.

These transactions can be recorded using simple journal entries as:

Journal in the books of __ for the period from __ to __
Particulars Amount
(Dr)
Amount
(Cr)
Cash a/c
To Capital a/c
Dr
50,000
50,000
[For the cash brought in by Mrs. Raju towards her capital contribution]
Motor Car a/c
To Capital a/c
Dr
1,00,000
1,00,000
[For the value of Motor Car brought in by Mrs. Raju towards her Capital contribution.]
Furniture a/c
To Capital a/c
Dr
20,000
20,000
[For the value of Furniture brought in by Mrs. Raju towards her Capital contribution.]
Capital a/c
To Bank Loan a/c
Dr
50,000
50,000
[Being the value of personal Bank Loan of Mrs. Raju taken over]

Ledger Posting

The postings relating to the entries would be as follows in the relevant accounts.

Cash a/c
Dr Cr
Particulars Amount Particulars Amount
To Capital a/c 50,000
Motor Car a/c
Dr Cr
Particulars Amount Particulars Amount
To Capital a/c 1,00,000
Furniture a/c
Dr Cr
Particulars Amount Particulars Amount
To Capital a/c 20,000
Bank Loan a/c
Dr Cr
Particulars Amount Particulars Amount
By Capital a/c 50,000
Capital a/c
Dr Cr
Particulars Amount Particulars Amount
To Bank Loan a/c 50,000 By Cash a/c
By Motor Car a/c
By Furniture a/c
50,000
1,00,000
20,000

Recording & Posting - Complex Compound/Combined Entries

The same transactions can be recorded using a complex compound/combined journal entry as:

Journal in the books of __ for the period from __ to __
Particulars Amount
(Dr)
Amount
(Cr)
Cash a/c
Motor Car a/c
Furniture a/c
To Bank Loan a/c
To Capital a/c
Dr
Dr
Dr
50,000
1,00,000
20,000

50,000
1,20,000
[Being the value of assets and liabilities of Mrs. Raju brought into the business towards her capital contribution.]

Ledger Posting

Posting complex compound/combined entries in the relevant accounts would be a bit complex too. The complexity will be with regard to the Ledger account shown in the particulars column and not with regard to the amounts. The amounts posted would be the same whether you are posting the simple journal entries or the complex compound/combined entry

The problem arises from the fact that it would not be possible to attribute each specific debit to a specific credit as in the case of posting a simple compound/combined entry.

Cash a/c
Dr Cr
Particulars Amount Particulars Amount
To Capital,
Bank Loan a/c's

50,000

Instead of listing out all the ledger accounts on the credit part of the entry, we write Miscellaneous Liabilities indicating that there are more than one credits involved in the transaction.

Thus Cash a/c would show up as

Cash a/c
Dr Cr
Particulars Amount Particulars Amount
To Miscellaneous
Liabilities a/c

50,000

Similarly with Motor Car a/c and Furniture a/c

Motor Car a/c
Dr Cr
Particulars Amount Particulars Amount
To Miscellaneous
Liabilities a/c

1,00,000
Furniture a/c
Dr Cr
Particulars Amount Particulars Amount
To Miscellaneous
Liabilities a/c

20,000
Bank Loan a/c
Dr Cr
Particulars Amount Particulars Amount
By Cash,
Motor Car,
Furniture a/c's

50,000

Instead of listing out all the ledger accounts on the debit part of the entry, we write Miscellaneous Assets indicating that there are more than one debits involved in the transaction.

Thus Bank Loan a/c would show up as

Bank Loan a/c
Dr Cr
Particulars Amount Particulars Amount
By Miscellaneous
Assets a/c

50,000

Similarly with Capital a/c

Capital a/c
Dr Cr
Particulars Amount Particulars Amount
By Miscellaneous
Assets a/c

1,20,000

Posting complex compound/combined entries in the relevant accounts would be a bit complex too. The complexity will be with regard to the Ledger account shown in the particulars column and not with regard to the amounts. The amounts posted would be the same whether you are posting the simple journal entries or the complex compound/combined entry

The problem arises from the fact that it would not be possible to attribute each specific debit to a specific credit as in the case of posting a simple compound/combined entry.

Simple Compound Entries to replace Complex Compound Entry

Consider the above set of transactions recorded using a complex compound entry, taking the case of the information provided by the Capital a/c.

Capital a/c
Dr Cr
Particulars Amount Particulars Amount
By Miscellaneous
Assets a/c

1,20,000

We can see that the posting does not reflect the facts of the transaction. It conceals the fact that there is a liability that was also taken over along with the assets.

In such cases, it would be appropriate to break down the complex compound entry into two or more simple compound entries.

• Assets brought into business towards Capital contribution

Cash 50,000, Motor Car 1,00,000, Furniture 20,000

• Liabilities taken over by business

Bank Loan (payable) 50,000

Journal in the books of __ for the period from __ to __
Particulars Amount
(Dr)
Amount
(Cr)
Cash a/c
Motor Car a/c
Furniture a/c
To Capital a/c
Dr
Dr
Dr
50,000
1,00,000
20,000

1,70,000
[Being the value of assets of Mrs. Raju brought into the business towards her capital contribution.]
Capital a/c
To Bank Loan a/c
Dr
50,000
50,000
[Being the value of liabilities of Mrs. Raju taken over by the business.]

Ledger Posting

Capital a/c
Dr Cr
Particulars Amount Particulars Amount
To Bank Loan a/c 1,20,000 By Miscellaneous
Assets a/c

1,70,000

Using additional ledger accounts to simplify Complex Compound Entry

Even when the complex compound entry is broken down into two or more entries there is some information that is missing and can be reflected in the journal entries.

Capital a/c
Dr Cr
Particulars Amount Particulars Amount
To Miscellaneous
Liabilities a/c

50,000
By Miscellaneous
Assets a/c

1,70,000

The reason for which the liabilities and assets are being credited and debited to the capital account is not revealed even by the simple compound entries into which the complex compound entry has been broken.

In such cases, using additional ledger accounts would help us derive additional information as well as paint the complete picture through the journal entries themselves.

• A ledger account by name 'Business Purchase' is assumed to exist.
• The assets are considered to be purchased by this.
• The liabilities are considered to be taken over by this.
• The net balance in this account, which would be the value of the net assets purchased is transferred to the capital account as the net capital value.
Journal in the books of __ for the period from __ to __
Particulars Amount
(Dr)
Amount
(Cr)
Cash a/c
Motor Car a/c
Furniture a/c
To Business Purchase a/c
Dr
Dr
Dr
50,000
1,00,000
20,000

1,70,000
[Being the value of assets of Mrs. Raju brought into the business towards her capital contribution.]
To Bank Loan a/c
Dr
50,000
50,000
[Being the value of liabilities of Mrs. Raju taken over by the business.]
To Capital a/c
Dr
1,20,000
1,20,000
[Being the capital value (net assets) of business purchased by the business.]

Ledger Posting

Cash a/c
Dr Cr
Particulars Amount Particulars Amount
To Business Purchase a/c 50,000
Motor Car a/c
Dr Cr
Particulars Amount Particulars Amount
To Business Purchase a/c 1,00,000
Furniture a/c
Dr Cr
Particulars Amount Particulars Amount
To Business Purchase a/c 20,000
Bank Loan a/c
Dr Cr
Particulars Amount Particulars Amount
By Business Purchase a/c 50,000
Capital a/c
Dr Cr
Particulars Amount Particulars Amount
By Business Purchase a/c 1,20,000

All the ledger accounts show information that would reveal the reason for the posting.

Dr Cr
Particulars Amount Particulars Amount
To Bank Loan a/c 50,000 By Cash a/c
By Motor Car a/c
By Furniture a/c
50,000
1,00,000
20,000

Manual Accounting

In general, in manual accounting, ledger accounts like Business Purchase a/c are not needed to be prepared as they show a nil balance. Their purpose is to reveal additional information and nothing else. However it is not a rule that they should not be prepared.

Mechanised Accounting

In mechanised accounting there is nothing to be done to prepare a ledger account and as such the information in this account is also readily available whenever needed.