When to combine
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Whenever a single cash activity involve multiple accounts, combine them.
Scenario: You sell land for $1,000 that you initially purchased for $800, resulting in a $200 gain.
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,000 | |
| Land | $800 | |
| Gain | $200 |
This journal entry represents one activity: "Sale of Land" (resulting in a SOURCE of Cash equating to $1000)...
...however, it's currently divided among two accounts: Land + Retained Earnings (as Gain).
We're going to remove the Gain (on Sale of Land) from Net Income (by USING that cash to subtract from it initially being a SOURCE in Net Income)...
...and add it back (as a SOURCE) next to Land.
This results in the single SOURCE for the Sale of Land activity!
This results in the Sale of Land activity equating to a $1,000 SOURCE of Cash.
...which aligns to the debit to Cash occurring in the journal entry!
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,000 | |
| Land | $800 | |
| Gain | $200 |
The Sale of Land activity would only consider the SOURCE of Cash from the Land account...
...which can be seen here in the journal entry!
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,000 | |
| Land | $800 | |
| Gain | $200 |
It wouldn't have considered the Gain as well!