Monday, October 8, 2012

JE for An oral promise (by an individual or entity) to pay is the value parted with in consideration for the hire of services of another

An oral promise (by an individual or entity) to pay is the value parted with in consideration for the hire of services of another

Illustrative example:
On June 25, 20x2, AAA Trucking Services Company received Bill No. 2222, in the amount of P15,000.00 from BS Accounting Firm, for the tax services rendered which it promised to pay at the end of month.
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 10
When the value received is the use, or hire, of others property or services, the capital / proprietorship account is decreased.
Therefore, debit the expense account title with the amount of decrease.
Note that income and expenses are implicit components of an equity account. That the net income or loss forms part of equity and to get the net income or loss, deduct expenses from revenue or income.  
Rule 5
When the value parted with is an oral promise to pay a creditor, a liability is increased.
Therefore, credit the creditor's account / liability account title with the amount of increase.
Step 2
Analyze the business transaction or economic event
  • What is the value received  - hire of services of another
  • What is the value parted with - oral promise to pay
  • Assign the account title for the value received - Professional Services Expense
  • Assign the account title for the value parted with - Accounts Payable
  • What is the effect of the value received in the accounting equation - Decrease in Capital
  • What is the effect of the value parted with in the accounting equation - Increase in Liability
  • 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 25, 20x2
  • Record the debit with the amount of the value received
Debit the value received :
Professional Services Expense  P15,000.00
  • Record the credit with the amount of the value parted with
 Credit the value parted with :  Accounts Payable  P15,000.00  
  • Write the explanation of the transaction or events.
Brief Explanation: To record on-account tax services rendered by BS Accounting Firm to AAA.
The finished journal entry of the above transaction



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