Thursday, October 18, 2012

JE for Implied promise to safeguard the proprietary interest in consideration for money or property received

Implied promise to safeguard the proprietary interest in consideration for money or property received

Illustrative example for money received:
On June 22, 20x2, AAA Company received cash from Alec A. Agustin, the proprietor, P100,000.00 as additional capital of the business.  
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 7
When the value parted with is the implied promise to safeguard the owner's interest, the capital or proprietorship account is increased.
Therefore, debit the capital / proprietorship account with the amount of increase
Step 2
Analyze the business transaction or economic event
  • What is the value received  - money
  • What is the value parted with - implied promise to safeguard proprietary interest
  • Assign the account title for the value received - Cash
  • Assign the account title for the value parted with - Capital, A.A. Agustin
  • 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 - Increase in Capital
  • Measure the amount equivalent of the value received - P100,000.00
  • Measure the amount equivalent of the value parted with - P100,000.00  
Step 3
Record the journal entry
  • Record the date of the transaction
Date of transaction:   June 22, 20x2
  • Record the debit with the amount of the value received
Debit the value received :  Cash  P100,000.00 
  • Record the credit with the amount of the value parted with
 Credit the value parted with : Capital, A.A. Agustin  P100,000.00 
  • Write the explanation of the transaction or events.
Brief Explanation: To record additional cash capital from the proprietor, A.A. Agustin
The finished journal entry of the above transaction

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Illustrative example for property received:
On June 13, 20x2, AAA Company received a second hand elf truck worth P400,000.00 from Alec A. Agustin, the proprietor, for use in the business.
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 7
When the value parted with is the implied promise to safeguard the owner's interest, the capital or proprietorship account is increased. 
Therefore, debit the capital / proprietorship account with the amount of increase 
Step 2
Analyze the business transaction or economic event
  • What is the value received  - property 
  • What is the value parted with -  implied promise to safeguard proprietary interest
  • Assign the account title for the value received - Delivery Truck
  • Assign the account title for the value parted with - Capital, A.A. Agustin
  • 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 - Increase in Capital
  • Measure the amount equivalent of the value received - P400,000.00
  • Measure the amount equivalent of the value parted with - P400,000.00
Step 3
Record the journal entry
  • Record the date of the transaction
Date of transaction: June 13, 20x2
  • Record the debit with the amount of the value received
Debit the value received : Delivery Truck   P400,000.00
  • Record the credit with the amount of the value parted with
 Credit the value parted with :  Capital, A.A. Agustin  P400,000.00
  • Write the explanation of the transaction or events.
Brief Explanation: To record additional capital from the proprietor, A.A. Agustin in the form of Second Hand Elf Delivery Truck.
The finished journal entry of the above transaction


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