Which of the following statements is true regarding simple and compound entries?
a. Simple entries can be prepared by anyone whereas compound entries need to be prepared by a skilled accountant.
b. Simple entries are recorded on the income statement whereas compound entries are recorded on the statement of financial position.
c. Simple entries involve one account, whereas compound entries involve 2 or more accounts.
d. An example of a compound entry would be the purchase of a machine for $400 cash and a $2,000 note payable.
The correct answer and explanation is :
The correct answer is:
c. Simple entries involve one account, whereas compound entries involve 2 or more accounts.
Explanation:
In accounting, entries are made in the books of accounts to record financial transactions. These entries can either be simple or compound, depending on the number of accounts involved.
- Simple Entries: These are accounting entries that involve only one account being debited or credited. For instance, if a company receives cash from a customer, the entry would involve the “Cash” account being debited and the “Revenue” account being credited. A simple entry generally reflects a single aspect of a financial transaction. Simple entries are commonly used for basic transactions that don’t involve complex movements of assets, liabilities, or equity. Example:
- Debit: Cash
- Credit: Revenue This transaction involves only one account for each side (debit and credit), thus qualifying it as a simple entry.
- Compound Entries: These are more complex accounting entries where two or more accounts are involved. Compound entries are typically used for more complex transactions that affect multiple accounts simultaneously. For example, if a company buys a machine and finances part of it with a note payable and the rest with cash, two accounts would be debited (machine and cash) and two accounts would be credited (note payable and possibly cash). Compound entries help in recording multi-faceted transactions with greater accuracy. Example:
- Debit: Machine
- Debit: Cash
- Credit: Notes Payable As seen in this example, compound entries involve multiple accounts on both the debit and credit sides.
Why Other Options Are Incorrect:
- a. Simple entries can be prepared by anyone, whereas compound entries need to be prepared by a skilled accountant: This is misleading. Both simple and compound entries can be prepared by anyone familiar with basic accounting principles. Compound entries simply involve more complexity but do not require extraordinary skill beyond basic accounting knowledge.
- b. Simple entries are recorded on the income statement, whereas compound entries are recorded on the statement of financial position: This is incorrect. Whether an entry is simple or compound does not determine its placement on financial statements. The classification depends on the nature of the transaction (revenue, expense, asset, liability, etc.).
- d. An example of a compound entry would be the purchase of a machine for $400 cash and a $2,000 note payable: This description is partially correct, but the total transaction should be recorded in a compound entry, with the machine and cash accounts being debited, and the note payable being credited. However, the statement doesn’t fully explain the nature of a compound entry. It misses the clarity that multiple accounts must be affected, not just a combination of payment and financing.
Thus, option c is the most accurate and correctly explains the difference between simple and compound entries.