Compound entries
a. Would include an entry to record the purchase of a computer for cash.
b. Require at least one debit and one credit entry.
c. Require that all credits be listed before the debits for entries affecting the statement of financial position.
d. Should be broken into their component parts and recorded as simple entries.
The correct answer and explanation is :
The correct answer is b. Require at least one debit and one credit entry.
Explanation:
A compound entry is an accounting journal entry that involves more than two accounts. It is called a “compound” because it requires multiple accounts to be affected in the same transaction. This type of entry is common when a single transaction involves multiple accounts.
In double-entry bookkeeping, every transaction must involve at least one debit and one credit. The total debits must equal the total credits to keep the accounting equation (Assets = Liabilities + Equity) in balance. A compound entry fulfills this requirement by involving more than two accounts but still ensuring that debits and credits balance.
Let’s analyze the options:
- Option a: “Would include an entry to record the purchase of a computer for cash.”
- This is an example of a simple entry, not a compound entry. A single transaction like this can be recorded with one debit to the asset account (Computer or Equipment) and one credit to the cash account. Therefore, it doesn’t require a compound entry. A compound entry would be needed if the transaction involved multiple accounts, such as part of the payment being made on credit or involving other assets.
- Option b: “Require at least one debit and one credit entry.”
- This is the correct definition of a compound entry. Every accounting transaction, whether simple or compound, must follow the rule of double-entry accounting, where at least one debit and one credit entry are made. In a compound entry, multiple debits and credits may be involved.
- Option c: “Require that all credits be listed before the debits for entries affecting the statement of financial position.”
- This is incorrect. The order of credits and debits does not depend on whether the entry affects the statement of financial position. In accounting, there is no strict rule requiring credits to come before debits in journal entries. The focus is on ensuring that debits and credits balance.
- Option d: “Should be broken into their component parts and recorded as simple entries.”
- This is incorrect. Compound entries should not be broken down into simple entries unless necessary. Compound entries are useful when multiple accounts need to be adjusted in one transaction, and breaking them into simple entries would only create unnecessary complexity.
In summary, compound entries require at least one debit and one credit, and they may involve more than two accounts, but the key principle is ensuring balance in the debits and credits.