Definition: A compound journal entry is one that affects three or more accounts. In other words, it’s an entry that debits or credits at least three accounts in the general ledger.
Most business transactions only affect two accounts in the ledger. Take the purchase of inventory for example. If the merchandiseis paid for on account, the inventory account is debited and the account payable account is credited. Only two accounts are affected in this transaction.
What Does Compound Journal Entry Mean?
A compound journal entry involves a business event where more than two accounts are changed. Take a music store for example. When a parent pays for his or her kid’s music lessons, there is often a lesson charge and a lesson room rental fee attached to the payment.
Example
Let’s assume Paul pays $20 for his child’s guitar lessons each week. The $20 is split between a $15 lesson charge and a $5 lesson room rental fee. When the store receives the payment from Paul, it would debit cash for $20, credit lesson income for $15, and lesson room rental income for $5.
This business event involves three different accounts because the two revenue streams are tracked separately. The same is true for many other transactions.
Take a loan payment for example. When a business makes a payment on its loan, the payment is split between principle and interest. The interest portion reduces the outstanding balance of the loan on the balance sheet and the interest is expensed on the income statement.
So a company might record a $500 loan payment by debiting interest for $50, debiting the liability account for $450, and crediting cash for $500. The three accounts that are affected in this transaction are an asset (cash), liability (the loan account), and equity (expense) account.
