Net effect, in the context of recording journal entries, implies a single journal entry that would bring in the effect of multiple entries. This may result in eliminating the use of some ledger accounts and minimise the effort involved in recording the transactions.

The choice between recording the multiple entries and the net effect is dependent on the organisational information needs.

The journal entry representing the net effect may be a simple entry, a simple compound entry or a complex compound entry.

Eg: While being loaded at the consignor's place, there was a normal loss of stock which is sold for 450. The consignor was recording normal loss at the realised rate.

Normal Loss a/c To Consignment a/c	Dr	450	450
Cash a/c To Normal Loss a/c	Dr	450	450

Net Effect

Assessment of net effect

	Normal Loss	Consignment	Cash
1) 2)	+450 −450	−450	+450
Net	0	−450	+450
Dr(+)/Cr(−)

Journal

A simple entry represents the net effect in this case.

Cash a/c To Consignment a/c

Dr

450

450

Ledger

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Cash a/c	450

It would not be possible to ascertain the reason for the credit from the postings.

Greater information with separate entries

If the distinct entries for recording the value of loss and its realisation are recorded, then the posting in consignment account would give the information as to why the credit is being made, in addition to the presence of a ledger account relating to loss.

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Normal Loss a/c	450

Normal Loss a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c	450	By Cash a/c	450
	450		450

Consider the transactions relating to Abnormal loss (in storage).

1. value of abnormal loss in storage 6,450
2. sale of abnormal loss (in storage) stock for 4,200 by consignee. Proceeds received in cash.
3. received 2,000 from the insurer for the abnormal loss (in storage) stock by the consignor
4. Profit transferred to Profit and Loss account 250

Assume that a distinct ledger account was maintained for the loss and all the transactions relating to the loss stock are settled.

Loss in Storage a/c To Consignment a/c	Dr	6,450	6,450
Consignee a/c To Loss in Storage a/c	Dr	4,200	4,200
Bank a/c To Loss in Storage a/c	Dr	2,000	2,000
Profit and Loss a/c To Loss in Storage a/c	Dr	250	250

Net Effect

Assessment of net effect

	Loss in Storage	Consignment	Consignee	Bank	P/L
1) 2) 3) 4)	+6,450 −4,200 −2,000 −250	−6,450	+4,200	+2,000	+250
Net	0	−6,450	+4,200	+3,000	+250
Dr(+)/Cr(−)

Journal

A simple compound entry represents the net effect in this case.

Consignee a/c Bank a/c Profit and Loss a/c To Consignment a/c

Dr Dr Dr

4,200 2,000 250

6,450

Ledger

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Consignee a/c By Bank a/c By Profit and Loss a/c	4,200 2,000 250

It would not be possible to ascertain the reason for the credits from the postings.

Greater information with distinct entries

If the distinct entries for recording the transactions relating to the loss are recorded, then the posting in consignment account would give the information as to why the credit is being made, in addition to the presence of a ledger account relating to loss giving the detailed information relating to the loss.

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Normal Loss a/c	6,450

Normal Loss a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment a/c	6,450	By Consignee a/c By Bank a/c By Profit & Loss a/c	4,200 2,000 250
	6,450		6,450

Consider the transactions relating to Abnormal loss (in transit) in the books of the consignor.

1. value of abnormal loss in transit 5,675
2. expenditure incurred on the abnormal loss (in transit) stock by the consignor 150.
3. sale of abnormal loss (in transit) stock for 2,000 by consignee. Proceeds received by cheque.
4. commission on sale of abnormal loss (in transit) stock to the consignee 150
5. received 1,000 from the insurer for the abnormal loss (in transit) stock by the consignor
6. Loss transferred to Profit and Loss account 2,975

Assume a distinct ledger account is being maintained for the loss and all the transactions relating to the loss stock are completed.

Loss in Transit a/c To Consignment a/c	Dr	5,675	5,675
Loss in Transit a/c To Cash a/c	Dr	150	150
Consignee a/c To Loss in Transit a/c	Dr	2,000	2,000
Loss in Transit a/c To Consignee a/c	Dr	150	150
Bank a/c To Loss in Transit a/c	Dr	1,000	1,000
Profit and Loss a/c To Loss in Transit a/c	Dr	2,975	2,975

Net Effect

Assessment of net effect

	Loss in Transit	Consignment	Cash	Bank	Consignee	P/L
1) 2) 3) 4) 5) 6)	+5,675 +150 −2,000 +150 −1,000 +2,975	−5,675	−150	+1,000	+2,000 −150	+2,975
Net	0	−5,675	−150	+1,000	+1,850	+2,975
Dr(+)/Cr(−)

Journal

A complex compound entry represents the net effect.

Bank a/c Consignee a/c Profit and Loss a/c To Consignment a/c To Cash a/c

Dr Dr Dr

1,000 1,850 2,975

5,675 150

Ledger

Posting this into the ledger poses a problem in the form of difficulty in associating debits and credits.

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Bank, Consignee, Profit & Loss a/c	5,675

The problem in posting complex compound entries is at times overcome by splitting it into two simple compound entries taking the debits and credits separately with an intermediate account.

Bank a/c Consignee a/c Profit and Loss a/c To Miscellaneous Accounts a/c	Dr Dr Dr	1,000 1,850 2,975	5,825
Miscellaneous Accounts a/c To Consignment a/c To Cash a/c	Dr	5,825	5,675 150

The Miscellaneous accounts a/c that is used here gets debited and credited with the same amounts and thus gets settled with a nil balance.

Miscellaneous Accounts a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment To Cash	5,675 150	By Bank By Consignee By Profit and Loss	1,000 1,850 2,975
	5,825		5,825

This approach results in the entries in all the ledger accounts involved in the complex compound entry getting posted as To/By Miscellaneous accounts .

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Miscellaneous accounts	5,675

Consignee a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Miscellaneous accounts	1,850

Assuming their presence

Since the intermediate account would have a nil balance and its purpose is to simplify complex postings, we may use such accounts without actually creating them, if possible.

In problem solving

To reduce our efforts in problem solving, we may assume the presence of the intermediate account without creating it.

In practice

In practice, using the intermediate account assuming its presence, though may be possible in manual accounting, would not be possible in computerised accounting.

In computerised accounting, since we can only use the ledger accounts which have been created and are present in the list of ledger accounts called the chart of accounts, we have to create such accounts if we intend to make use of them.

Even in manual accounting, it may not be a good practice to use ledger accounts without creating them as that might lead to errors.

Defeats the purpose

The primary purpose of recording the net effect would be to reduce the efforts in recording individual transactions. By creating intermediate accounts for the purpose of simplifying the complexity in posting, additional burden is being taken up which defeats the purpose of choosing to record the net effect.

Moreover, recording the net effect requires calculation of the net effect which would also be an additional burden.

Better information can be derived when using intermediate accounts by using relevant names for the intermediate account.

Loss in Transit can be used in place of Miscellaneous accounts for recording transactions relating to abnormal loss. This would result in the postings appearing as To/By Loss in Transit a/c in all the ledger accounts involved in the complex compound entry.

Bank a/c Consignee a/c Profit and Loss a/c To Loss in Transit a/c	Dr Dr Dr	1,000 1,850 2,975	5,825
Loss in Transit a/c To Consignment a/c To Cash a/c	Dr	5,825	5,675 150

Loss in Transit a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignment To Cash	5,675 150	By Bank By Consignee By Profit and Loss	1,000 1,850 2,975
	5,825		5,825

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Loss in Transit	5,675

Consignee a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Loss in Transit	1,850

This would be almost equal to using a distinct account for recording the transactions relating to losses and recording the transactions separately, with the exception that the debits and credits to the various accounts are the net effects of multiple debits and credits in those accounts and not the actual transaction values.

We come across such usage in many areas of accounting, as in transferring and appropriating profits during final accounting.

Recording the net effect would result in the distinct ledger account relating to losses not appearing in the books of accounts, if we do not use the intermediate accounts with meaningful names.

If only the net effect of transactions is recorded, the effect of various transactions pertaining to the loss stock cannot be assessed individually.

Illustration

The consignee has received the sale proceeds of loss stock to the extent of 2,000 and has to be paid 150 towards commission on sale.

If these two transactions are recorded individually then the consignee and the ledger account providing information relating to the loss show the postings relating to these amounts.

Consignee a/c To Loss in Transit a/c	Dr	2,000	2,000
Loss in Transit a/c To Consignee a/c	Dr	150	150

Loss in Transit a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Consignee	150	By Consignee	2,000

Consignee a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Loss in Transit	2,000	By Loss in Transit	150

Where the net effect is recorded, only the net effect would be posted in place of the individual postings. Since the ledger account providing information relating to loss stock is not present, the relevant posting would now be in the consignment account and also the posted amount represents the net effect.

Bank a/c Consignee a/c Profit and Loss a/c To Consignment a/c To Cash a/c

Dr Dr Dr

1,000 1,850 2,975

5,675 150

Consignment a/c

Dr Cr
Particulars	Amount	Particulars	Amount
		By Miscellaneous accounts	5,675

Consignee a/c

Dr Cr
Particulars	Amount	Particulars	Amount
To Miscellaneous accounts	1,850

Recording the net effect of transactions relating to a loss might be resorted to, where all the transactions relating to the loss are being recorded at the same time and the information that is intended to be derived is minimal, which might be the case where the loss is not a frequent occurrence. The least distortion in information availability would be in case where the recording the net effect would result in a simple journal entry.

A good system of accounting should reflect the physical activity. This is possible only when the transactions are recorded as soon as they occur as well as in the chronological order of their occurrence.

In general, sale of salvaged stock, realisation of insurance etc., take time and there is every possibility for a time gap between the event of loss and the realisations from insurance and sale of salvaged loss stocks. Resorting to recording the net effect would result in the transactions going unrecorded till the net effect is recorded.