JE for Cancellation of oral promise to pay is the value received in consideration for the money parted with

Cancellation of oral promise to pay is the value received in consideration for the money parted with

Illustrative example:

On June 29, 20x2, AAA Trucking Services Company paid cash, P15,000.00 to BS Accounting Firm in full payment of AAA account with BS.

How to record the above transaction

Step 1

Remember the guiding principle. 

DEBIT the Value Received

CREDIT the Value Parted With 

Applicable debit and credit rules 

Rule 6
When the value received is the cancellation of oral promise to pay a creditor, a liability is decreased.
Therefore, debit the creditor's account / liability account title with the amount of decrease. 

Rule 2 

When the value parted with is a thing of value, an asset is decreased. 

Therefore, credit the asset account title of that thing of value with the amount of decrease.

Step 2

Analyze the business transaction or economic event

• What is the value received  - cancellation of oral promise to pay
• What is the value parted with - money
• Assign the account title for the value received - Accounts Payable 
• Assign the account title for the value parted with - Cash
• What is the effect of the value received in the accounting equation - Decrease in Liability
• What is the effect of the value parted with in the accounting equation - Decrease in Asset
• Measure the amount equivalent of the value received - P15,000.00
• Measure the amount equivalent of the value parted with -  P15,000.00  

Step 3

Record the journal entry

• Record the date of the transaction

Date of transaction:   June 29, 20x2

• Record the debit with the amount of the value received

Debit the value received :  Accounts Payable  P15,000.00

• Record the credit with the amount of the value parted with

 Credit the value parted with :  Cash   P15,000.00

• Write the explanation of the transaction or events.

Brief Explanation:  To record payment of on-account tax services rendered by BS Accounting Firm.

The finished journal entry of the above transaction