When to combine
Whenever a single cash activity involve multiple accounts, combine them.
A primary example of this occurs whenever we sell Land, which can be represented through the following journal entry:
| Transaction | Debit | Credit |
|---|---|---|
| Cash | 1000 | |
| 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.
Because Gains...
| Transaction | Debit | Credit |
|---|---|---|
| Cash | 1000 | |
| Land | 800 | |
| Gain | 200 |
...are filed under Net Income, which is filed under Retained Earnings!
Therefore, we need to combine Gain and Land under the single activity of "Sale of Land".
To do that, 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 combine it into Land...
...resulting in the Sale of Land activity equating to a $1,000 Source of Cash!
That last part there, where the two Sources of Cash are stacked on-top of each other, that's the combining occurring!