Compound journal entry definition
/What is a Compound Journal Entry?
A compound journal entry is an accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits. It is essentially a combination of several simple journal entries; they are combined for either of the following reasons.
Bookkeeping Efficiency
It is more efficient from a bookkeeping perspective to aggregate the underlying business transactions into a single entry. Examples of aggregation that may involve compound journal entries are:
Depreciation for multiple classes of fixed assets
Accruals for multiple supplier deliveries at month-end for which no invoices have yet been received
Accruals for the unpaid wages of multiple employees at month-end
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Single Accounting Event
All of the debits and credits relate to a single accounting event. Examples of accounting events that frequently involve compound journal entries are:
Record all payments and deductions related to a payroll
Record the account receivable and sales taxes related to a customer invoice
Record multiple line items in a supplier invoice that relate to different expenses
Record all bank deductions related to a bank reconciliation
Example of a Compound Entry
An example of a compound journal entry is a payroll entry, where there is a debit to salaries expense, another debit to payroll taxes expense, and credits to cash and a variety of deduction accounts. A sample entry appears next.
Compound Journal Entry Templates
Standard journal entry templates are routinely constructed for compound journal entries, so that they can be consistently generated in each reporting period. Otherwise, there would be a high risk of creating an incorrect entry if it were to be developed “from scratch” each month.
Compound Journal Entry Documentation
Compound journal entries can be quite complex, so use the following best practices to ensure that you are handling them correctly:
Break down into simpler entries where possible. Whenever possible, replace a compound entry with several simpler entries. This makes it easier to understand the nature of the underlying transactions.
Fully document each entry. It can be difficult to understand the reason for a compound journal entry after the fact, so be sure to document each one as thoroughly as possible, and attach the documentation to a copy of the journal entry.
Best Practices for Compound Journal Entries
There are several best practices you can use to ensure that compound entries are properly formulated and entered into your accounting system. They are as follows:
Use clear and concise descriptions. Include a detailed narrative that explains the nature and purpose of the entry to provide clarity for reviewers and auditors.
Group related transactions logically. Combine related transactions that occur simultaneously (e.g., payroll, depreciation) into a single compound entry for efficiency and accuracy.
Maintain proper supporting documentation. Attach or reference source documents (e.g., invoices, calculations) that support each component of the entry to ensure auditability.
Review for accuracy and completeness. Double-check all amounts, dates, and account numbers before posting to avoid errors that can affect financial reporting.
Use compound entries only when appropriate. Avoid over-complicating entries; use compound entries for related transactions, but separate unrelated ones to maintain clarity.
Maintain chronological order. Record compound entries in the correct accounting period to ensure accurate timing of financial effects.
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