Tuesday, October 16, 2012

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

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

Illustrative example:
On June 19, 20x2, AAA Trucking Services Company received P15,000.00 cash from KES Engineering Services, as full payment of their account with AAA. 
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 1
When the value received is a thing of value, an asset is increased.
Therefore, debit the asset account title of that thing of value with the amount of increase. 
Rule 4
When the value parted with is the cancellation of debtor's promise to pay, an asset is decreased.
Therefore, credit the debtor's account / asset account title with the amount of decrease.
Step 2
Analyze the business transaction or economic event
  • What is the value received  - money
  • What is the value parted with - cancellation of oral to promise to pay  
  • Assign the account title for the value received - Cash  
  • Assign the account title for the value parted with - Accounts Receivable
  • What is the effect of the value received in the accounting equation - Increase in Asset
  • 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 19, 20x2
  • Record the debit with the amount of the value received
Debit the value received :  Cash   P15,000.00
  • Record the credit with the amount of the value parted with
 Credit the value parted with :  Accounts Receivable  P15,000.00
  • Write the explanation of the transaction or events.
Brief Explanation:  To record payment of receivable from KES. 
The finished journal entry of the above transaction




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