Wednesday, October 10, 2012

JE for An oral promise (from an individual or entity) to pay is the value received in exchange for the hire (or use) of the property

An oral promise (from an individual or entity) to pay is the value received in exchange for the hire (or use) of the property

Illustrative example:
On June, 8, 20x2, AAA Trucking Services Company sent a bill, P15,000.00, to KES Engineering Services for the hire of delivery truck which they promised to pay on 20th of the 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 3
When the value received is an oral promise to pay from a debtor, an asset is increased.
Therefore, debit the debtor's account / asset account title with the amount of increase. 
Rule 9
When the value parted with is the use, or hire, of (our) property or services, the capital / proprietorship account is increased.
Therefore, credit the income account title with the amount of increase.
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.
Step 2
Analyze the business transaction or economic event
  • What is the value received  - oral promise to pay 
  • What is the value parted with - hire or use of property
  • Assign the account title for the value received - Accounts Receivable
  • Assign the account title for the value parted with - Rental Income
  • 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 - 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 8, 20x2
  • Record the debit with the amount of the value received
Debit the value received :  Accounts Receivable  P15,000.00  
  • Record the credit with the amount of the value parted with
 Credit the value parted with :  Rental Income  P15,000.00 
  • Write the explanation of the transaction or events.
Brief Explanation: To record an oral promise to pay from KES for the use of delivery truck.
The finished journal entry of the above transaction


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