Bookkeeping – Complex Entries Expanded (Lesson 66)

Complex Entries

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.

 

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.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

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