Bookkeeping – Complex Entries Expanded (Lesson 66)
A journal entry with multiple lines of entry affecting several different ledgers (accounts) is commonly referred to as a complex entry. Many bookkeepers shy away from them as they feel intimidated by the difficulty involved and do not want to make an error. This lesson helps the bookkeeper understand how to break the complex entry down into a series of standard entries. Once this basic concept is understood, complex entries become easy to create and there is strong sense of achievement once mastered. This is one of the core differences between accountants and bookkeepers. Accountants enter complex entries regularly.
This lesson explains how a complex entry is nothing more than a series of standard entries combined together as one. I illustrate how to break it down into standard entries. Next, I provide several illustrations of this method with common economic transactions. Once done, you will feel greater confidence in your ability to tackle more complicated economic transactions.
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Breaking Down a Complex Entry into Standard Entries
A standard entry is a dual entry with two-line items. Each line item is either a debit or a credit. Once completed all debit values must equal credit values. A complex entry is simply three or more line items of data. With three lines, two of them are debits or credits and the third is a single line for the balance as either a full debit or credit. Look at a simple entry for a retail store for the sale of a single product and the associated sales tax.
Sales Journal
Date ID Ledger Description DR CR
05/18/16 20160518042 Sales – Cones 2-Scoops Cone w/Nuts 2.80
20160518042 Sale Tax Payable 6% Sales Tax on Cone .17
20160518042 Cash Total on Sale 2.97 -0-
$2.97 $2.97
Notice that this complex entry is really two simple entries. One is for the sale of the ice cream cone and the other is for the collection of sales tax. Look at the two standard entries below:
Sales Journal
Date ID Ledger Description DR CR
05/18/16 20160518042 Sales – Cones 2-Scoop Cone 2.80
20160518042 Cash Sale of Ice Cream Cone 2.80 -0-
2.80 2.80
20160518042 Sales Tax Payable 6% Tax on Sale .17
20160518042 Cash 6% Tax on Sale .17 -0-
.17 .17
Notice that with this transaction the cash is combined as one line item in the complex entry? This same concept exists with a multiple product sale. Look at this transaction when a family buys their ice cream at the shop.
Sales Journal
Date ID Ledger Description DR CR
05/18/16 20160518043 Sales – Sundaes Chocolate Sundae 3.40
20160518043 Sales – Cones 3-Scoop Cone w/Choc Dip 3.20
20160518043 Sales – Kids 1 Scoop Cup 1.10
20160518043 Sales – Sundaes Monster Combo 4.20
20160518043 Sale Tax Payable 6% on Total Sales .71
20160518043 Cash Debit Card Payment 12.61 -0-
12.61 12.61
This complex entry is merely five standard entries combined as one. All complex entries can be broken down into a standard two-line entry (dual entry). To illustrate this, the next section shows several regular complex entries and how they are merely a combination of standard entries.
Regular Complex Entries
A common entry that is complex and customarily program generated is payroll. To prepare for this illustration, please reread the following lessons:
Payroll Structure – Lesson 30
A Simple Payroll – Lesson 31
Payroll Cycles – Lesson 32
Payroll Compliance and Documentation – Lesson 33
A basic single employee transaction consists of three distinct functions:
1) The employer owes money to the employee;
2) The employee must pay taxes to the government; AND
3) The employer owes taxes to the government too.
Let’s set-up a single employee payroll and then present all three distinct functions in their own entry form. Once done, I’ll combine all three into one master complex entry.
ACME Corporation
ACME hired Mary as the office manager and pays her $600 per week for her services.The payroll is processed on Wednesday and the check is physically printed on Friday morning for delivery at lunch time. While waiting to get cut, the net check is suspended in a checking account, contra account, called ‘Payroll Prep’. The contra account temporarily holds a credit value. When the final check is printed the debit is to the contra account and the credit is against the checking account (remember checks are customarily credits in cash accounts).
Step 1 – Employer owes money to the employee in this case ACME owes Mary $600.
Payroll Journal
Date ID Ledger Control ID Description DR CR
04/06/16 20160416PR14 Mngmnt/Salary Mary Mary’s Regular Pay 600.00
20160416PR14 Payroll Prep Mary Mary’s Regular Pay -0- 600.00
$600.00 $600.00
Step 2 – Employee must pay taxes.
Mary must pay her share of taxes to the government including income taxes, Social Security, Medicare and state income taxes. All taxes are withheld and owed to the respective governmental authorities. The offset is a debit to her $600 contra balance in payroll prep which is payable by ACME.
Payroll Journal
Date ID Ledger Control ID Description DR CR
04/06/16 20160416PR14 P/R Taxes Due 941-FED Mary’s Fed W/H 81.00
20160416PR14 P/R Taxes Due 941-SS Mary’s SS W/H 37.20
20160416PR14 P/R Taxes Due 941-Med Mary’s Medi W/H 8.70
. 2016041PR14 P/R Taxes Due AL 17.40
20160416PR14 Payroll Prep Mary Total W/H Offset to Net 144.30 -0-
$144.30 $144.30
This particular entry is really four standard dual line entries. Each entry consists of a debit to payroll prep with the control ID of ‘Mary’ and a credit to payroll taxes due with different control ID’s.
A couple of interesting items so far, first Mary’s net paycheck is now the $600 for her gross wages less $144.30 for various taxes. Her check on Friday is $455.70. Secondly, the taxes are legally mandated taxes owed. Remember in payroll the employer must match Social Security and Medicare. In addition employers are responsible to pay unemployment taxes to both the state (SUTA) and the federal government (FUTA). This brings us to Step 3.
Step 3– Employer must match and pay taxes.
The employer’s payment or responsibility has nothing to do with Mary’s check balance. It is just like a bill, debit expense, in this case payroll taxes in the management section of the income statement, and credit payroll taxes due with appropriate control ID’s for the respective tax items. Here is the entry:
Payroll Journal
Date ID Ledger Control ID Description DR CR
04/06/16 20160416PR14 Mngmnt/Taxes Mary SS Match (Mary) 37.20
20160416PR14 Mngmnt/Taxes Mary Medi Match (Mary) 8.70
20160416PR14 Mngmnt/Taxes Mary FUTA (Mary) 3.24
20160416PR14 Mngmnt/Taxes Mary SUTA (Mary) 7.92
20160416PR14 P/R Taxes Due 941-SS SS Match (Mary) 37.20
20160416PR14 P/R Taxes Due 941-Med Medicare Match (Mary) 8.70
20160416PR14 P/R Taxes Due 940 FUTA (Mary) 3.24
20160416PR14 P/R Taxes Due SUTA SUTA (Mary) -0- 7.92
$57.06 $57.06
Again the entry consists of four standard entries. Each entry has a debit to payroll taxes under management costs in the expenses section of the income statement; the credit is entered to the payroll taxes due, a current liabilities account.
Notice that two of the three sets are complex entries anyway? Now let’s combine all three as one master complex entry.
Payroll Journal
Date ID Ledger Control ID Description DR CR
04/06/16 20160416PR14 Mngmnt/Salary Mary Mary’s Weekly Pay $600.00
20160416PR14 P/R Taxes Due 941-FED Mary’s Fed W/H 81.00
20160416PR14 P/R Taxes Due 941-SS Mary’s SS W/H 37.20
20160416PR14 P/R Taxes Due 941-Medi Mary’s Medi W/H 8.70
20160416PR14 P/R Taxes Due AL Mary’s Alabama I/C T 17.40
20160416PR14 Mgmnt/PR Taxes Mary SS Match (Mary) 37.20
20160416PR14 Mgmnt/PR Taxes Mary Medi Match (Mary) 8.70
20160416PR14 Mgmnt/PR Taxes Mary FUTA (Mary) 3.24
20160416PR14 Mgmnt/PR Taxes Mary SUTA (Mary) 7.92
20160416PR14 P/R Taxes Due 941-SS SS Match (Mary) 37.20
20160416PR14 P/R Taxes Due 941-Medi Medi Match (Mary) 8.70
20160416PR14 P/R Taxes Due 940 FUTA (Mary) 3.24
20160416PR14 P/R Taxes Due SUTA SUTA (Mary) 7.92
20160416PR14 Payroll Prep Mary Mary’s Net Check Amount -0- 455.70
$657.06 $657.06
Debits equal credits as required under the dual entry principle used with bookkeeping. Can you make out the three distinct functions of the payroll for Mary’s paycheck? Instead of two entries to the payroll prep account, there is one net amount owed to her.
The next illustration is a common fixed asset purchase. This economic transaction occurs more frequently than most bookkeepers want to admit. It is the purchase of a vehicle.
In a simple asset purchase the transaction involves a single price for the asset and the exchange of cash. But modern-day purchases of vehicles involve much more. There is government involvement by the division or bureau of motor vehicles, sales tax, licensing and insurance too. Complicating this entire transaction is the fact that a loan is used to complete the purchase. Thus, there are three distinct functions within this one economic transaction:
1) Purchase of a Fixed Asset
2) Governmental Compliance
3) Use of a Loan to Fund the Sale
Here is the background and the actual distinct transactions.
ACME Company
ACME needs to expand its service fleet and decides to purchase a 2017 cube truck for $43,000. ACME has enough excess working capital to put a down payment of $17,000 on the cube truck. The balance of the purchase price, taxes and insurance requirements must be funded with a loan. The following is the deal presented by the dealership:
2017 Cube Truck
Purchase Price $43,000.00
Sales Tax @ 3.25% 1,397.50
Revenue Tax (Local Government) @ .211% 90.73
DMV Title 75.00
Registration 125.00
Tags 45.00
Commercial Sticker (2 Years) 185.00
Delivery Fee 299.00
Prepaid Insurance (3 Months by Law) 419.30
Service Warranty Contract 1,235.00
Service Warranty Contract Sales Tax @6% 74.10
One (1) Doggie Bobble-Head Ornament Free
Total Cash Purchase Price $46,945.63
Down Payment (17,000.00)
Financing Required $29,945.63
Step 1 – Record Purchase of Fixed Asset
Fixed Assets Journal
Date ID Ledger Control ID Description DR CR
10/18/16 201610189642 F/A – Trucks ZZX-1776 F450-Cube #9116 43,000.00
201610189642 F/A – Trucks ZZX-1776 Sales Tax #9116 1,397.50
201610189642 F/A – Trucks ZZX-1776 Delivery Fee #9116 299.00
201610189642 F/A – Trucks ZZX-1776 Rev Tax #9116 90.73
201610189642 F/A – Trucks ZZX-1776 Title #9116 75.00
201610189642 A/P Ford Dlrshp F450 Cube Truck -0- 44,862.23
$44,862.23 $44,862.23
Take note that the sales and revenue tax are a state and local government tax to purchase a long-life asset. This entitles ACME to own the asset. The $75.00 title fee provides them with a title – proof of ownership. The other governmental items are operational based and allows ACME to legally use the truck on the road for a given period of time; therefore, those other fees are not a fixed asset value but are recorded differently. Here is the entry:
Step 2 – Governmental Compliance to Operate the Vehicle
Fixed Assets Journal
Date ID Ledger Control ID Description DR CR
10/18/16 201610189642 Trans/Licenses ZZX-1776 F45040116 Regist 125.00
201610189642 Trans/Licenses ZZX-1776 F450 #9116 Tags 45.00
201610189642 Prepaid Expense F450 #9116 Com Stckr 185.00
201610189642 Prepaid Expense F450 #9116 3 Mnts In 419.30
201610189642 Warranties ZZX-1776 #9116 Srv Warranty 1,309.10
201610189642 A/P Ford Dlr F450 Cube Truck #9116 -0- 2,083.40
$2,083.40 $2,083.40
Combined, the two entries equal $46,945.63 which is the dollar value of the deal. Step 2’s entry also includes the warranty item which is a long-term protection agreement. Notice the warranty cost and its sales tax ($74.10) are combined? It saves another line of data entry. Customarily the warranty is located in the ‘Other’ assets section of the balance sheet.
A pause for the cause is necessary at this point. There are four items requiring allocation over an operational period of time.
1) Fixed Asset – Depreciation is used to allocate the entire $44,862 over the expected life of the cube truck.
2) Commercial License – The $185 fee is amortized (the license is not a tangible asset; therefore it is amortized) over the two years of application.
3) Prepaid Insurance – The insurance premium is amortized over three months.
4 ) Warranty – The warranty premium is amortized over the period of coverage found in the warranty agreement.
Some accountants will include the first month’s allocation in this complex entry. I do not endorse this method. The entry is focused on the purchase of the asset. Create separate entries for each of the four allocation items above and use the recurring entry feature to save time in the future.
Now onto the last step. Notice that in both entries I used the accounts payable to indicate that ACME owes the Ford Dealership $46,945.63 combined. To pay for the truck, ACME got a loan from its bank for the balance after depositing $17,000. Here is the entry to pay for the truck:
Step 3 – Final Payment
Fixed Assets Journal
Date ID Ledger Control ID Description DR CR
10/18/16 201610189642 Accounts Pay Ford Dlrshp Payoff F450 #9116 46,945.63
201610189642 Cash 10471 Ck #10471 F450 17,000.00
201610189642 Cube Truck Note Main St. Bank Note -0- 29,945.63
$46,945.63 $46,945.63
Just like warranties, the principal amount is amortized over the life of the loan. Typically banks provide an amortization schedule with the loan documents.
The purchase of the cube truck has three distinct entries, the purchase/ownership of the actual asset, the governmental compliance and finally, financing of the purchase. All three entries are complex; but here is the master entry.
Fixed Assets Journal
Date ID Ledger Control ID Description DR CR
10/18/16 201610189642 F/A – Trucks ZZX-1776 F450 Cube #9116 43,000.00
201610189642 F/A – Trucks ZZX-1776 F450 #9116 Sales Tax 1,397.50
201610189642 F/A – Trucks ZZX-1776 F450 #9116 Delivery 299.00
201610189642 F/A – Trucks ZZX-1776 F450 #9116 Rev Tax 90.73
201610189642 F/A – Trucks ZZX-1776 F450 #9116 Title 75.00
201610189642 Trans/Licenses ZZX-1776 F450 #9116 Registra 125.00
201610189642 Trans/Licenses ZZX-1776 F450 #9116 Tags 45.00
201610189642 Prepaid Expenses F450 #9116 Com Stckr 185.00
201610189642 Prepaid Expenses F450 #9116 3 Mnths In 419.30
201610189642 Warranties ZZX-1776 F450 #9116 Srvc War 1,309.10
201610189642 Cash ZZX-1776 F450 #9116 CK#10471 17,000.00
201610189642 Cube Truck Note F450 #9116 Note #40051 -0- 29,945.63
46,945.63 $46,945.63
Notice the doggie bobblehead is not included in the economic record? When something is free, accountants don’t record the information :).
In reality these types of complex entries are further compounded by banking requirements. In real estate transactions banks demand several due diligence documents including surveys, engineering reports, plat documentation, appraisals and a host of other costs. The above complex entry is simple in comparison to other types of entries. But just like the above, the entry can be broken down into core components.
If interested in reviewing a real estate complex entry, Read: Amortization of Financing Costs in the accounting section of this website.
Other Types of Complex Entries
Most complex entries are not as convoluted as an asset purchase or real estate closing. Most are straight forward with several entry lines for either debits or credits with a single offset to the opposite side. All of them will require some thought input to make sure the entry is error free. The following are examples of some more common complex entries.
* Loan Payments – Loan payments typically have three lines of information:
. 1) the interest for the period,
. 2) principle portion of the debt payment and
. 3) the credit to checking for the payment.
* Asset Sales – When a fixed asset is sold several items of data require entry including sales price, cash received, removal of the fixed asset and elimination of the accumulated depreciation taken to date.
* Discounted Payments – Many small businesses offer discounts on early payments for client accounts. Naturally the cash account is debited for the cash received (less than the invoice amount); the accounts receivable is credited for the full amount of the invoice and the difference (a third line of data) is a debit to a discounts account in the capital section of expenses. This is explained in great detail in the advanced section of bookkeeping.
* Job/Project Accounting – Each bill is broken out into several line items with phase codes assigned. The construction industry uses a work in process (progress) costing concept and a corresponding percentage of completion or completed contract method to account for revenue and costs assigned to the income statement. In effect, this type of cost accounting utilizes complex entries on a daily basis.
* Payroll Tax Payments – A standard 941 payment comprises the tax components of five different taxes:
1) Income taxes withheld from the employee;
2) Social Security taxes withheld from the employee;
3) Medicare taxes withheld from the employee;
4) Employer matching taxes for Social Security; AND
5) Employer matching taxes for Medicare.
There are many others and this could continue for pages, but you get the idea.
Summary – Complex Entries
When multiple lines of information are required for an entry and the lines affect different accounts or control ID’s the entry is referred to as a complex entry. To prevent being overwhelmed by the complexity, break the entry down into its core components. Once the bookkeeper understands the core entries it becomes easier to understand and appreciate the sophistication of a complex entry. ACT ON KNOWLEDGE.
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