Let's say that MACS sold a custom-built PC. In addition to the base price of the PC, MACS is required to collect five percent sales tax and pay it to the state. You can immediately recognize that it is not a simple 2-account transaction. How will we enter this check for $840, consisting of $800 towards sale price, and $40 towards state sales tax, in GnuCash?
- Preparatory Exercise: Now that you know how to create accounts, go ahead and create a new account VA Sales Tax of type Liability with Liabilities as the parent account. You can refer to Chapter 1, Getting started with GnuCash for the specific steps to create a new account.
- Open the Checking account register. GnuCash will start a new transaction and put the focus on the date field with today's date as the default. If not, start a new transaction by selecting Transaction | Enter Transaction from the menu. Alternatively, you can click on the Enter Transaction button on the toolbar.
- Click on the small button on the right side of the Date field to drop down the calendar and select the previous day's date. Once you have selected the date, click on Tab to set that in the Date field and move to the Num field.
- In the Num field, enter the check number 5096 and click on Tab to move to the Description field.
- Enter Custom built PC in the Description field.
- Click on the small button on the right side of the Transfer field to drop down the list of Accounts. Select Income:Sales and click on Tab to the Deposit field.
- Enter 840 in the Deposit field.
This is the point of departure for a split transaction. If we were entering a simple 2-account transaction, we would have clicked on Enter at this point to complete the transaction.
- Click on the Split button on the toolbar or from the menu, select Actions | Split Transaction.
- The display will expand. The first line contains the description and the amount of the transaction. This amount in the transaction line is merely a summary of the transaction's effect on the current account. The partial lines below the transaction line are the split lines. The second line contains the currently opened account name in the Account field and the amount of the transaction. The third line contains the transfer account name in the Account field. Because the amount is not balanced, GnuCash indicates this by placing gray checkboxes in the amount columns with the unbalanced amount in a blank fourth row, as shown in the following screenshot:
- When one of the short lines is selected, the column titles will change to indicate that you are now in a split line. The very first and last (Date and Balance) columns will have blank titles. Num will change to Action, Description to Memo, the Transfer column will change to Account.
- Skip filling the Action and Memo columns for now. Move to the missing Withdrawal amount field on the third line and fill in the amount 800. Click on the Tab key to move the cursor to the next line. GnuCash will subtract this 800 from the total, re-calculate the remaining amount, and change the Withdrawal amount in the next line from 840 to 40.
- Click on the small button on the right side of the Account column, scroll down, select Liabilities:VA Sales Tax, and Tab out. Tab a couple of more times.
- The gray checkboxes will disappear and the last blank line will not have an amount, if the transaction is balanced.
- The disappearance of the gray boxes is your cue to complete this transaction. Go ahead and click on Enter to finish up successfully, as shown in the following screenshot:
"Hmmm, that was not all that bad. I need to find whoever it was who said that entering split transactions is like going through root canal surgery messy and painful. And re-educate them."
The need for three or more account transactions occurs when you need to split either the "from" or the "to" account or both in a transaction into multiple accounts.
Tip
Balancing the transaction
We said earlier that the left-column amounts must equal the right-column amounts for each transaction. In the example shown previously, the total of the left-column amounts is 840 and the total of the right-column amounts is also 800 + 40 = 840. This is what we mean when we say that the transaction is balanced.
As a business owner, you know that business is never that simple. Sometimes, multiple accounts may form part of either the source or use side of a transaction. The sales tax example we worked on earlier in the tutorial is one such complex transaction. In Virginia, for example, by the 20th of the following month, you have to file your monthly sales tax return in form ST-9 and pay all the tax collected during that month to the state sales tax department.
Let us try to apply our divide and conquer approach to this example. We can visualize the source of funds being split into Sales and Sales Tax and the use of funds going towards increasing our cash balance, as shown in the following diagram:
In the preceding diagram, the dashed lines show the entire transaction between your business and the customer. This transaction consists of two equal parts the source of funds and the use of funds. The source funds on top, in turn, consist of Sales and Sales Tax. The use of funds, at the bottom, is cash that goes towards increasing your cash balance. In other words, you had sales income, your sales tax liability increased, and you received cash.
Let us look at some more examples of complex or split transactions.
The business delivers a custom product and receives $199 balance payment in cash after adjusting the sales advance of $300 previously received.
- By delivering this product, your sales account should record an income of $499.
- Your cash account should show a receipt of cash of $199.
- What happened to the other $300? Remember our rule that the 'source' side and 'use' must be equal? Your Sales Advance account should now show a decrease of $300.
You write a check for a loan payment of $450 to the bank.
- Of this amount, $380 goes to repayment of principal. The $380 principal repayment is not an expense, but it decreases the balance in your Loans Payable liability account.
- The balance $70 loan interest is an expense.
- Your bank account will show a withdrawal of $450.
Some transactions may have many splits. One example is combining the sales tax example that we saw earlier with the adjustment of sales advance example above. However, the humdinger of a split transaction is Employee Payroll. You will have a gross salary or wages and several deductions for federal income tax, state income tax, health insurance, dental, vision, social security, 401(k), and others. You may also have incentive payments, company contribution to 401(k), leave without pay, and other adjustments.
Isn't it comforting to know that all you have to do is create one such payroll transaction for one employee for the first month? After that you can duplicate that and adjust the names and amounts. We will see, later in this chapter, how you can duplicate a transaction. However, it is good to follow these tips, from experienced users of GnuCash, for those very few occasions when you do create these multiple split transactions from scratch:
- Use the Tab and -> keys to move from field to field and finish the transaction. When you do so, the suggested entry is selected, and you merely have to type over it. If you use the mouse, and type without looking at the screen, it can result in error messages because the figures may contain an odd mixture of commas and periods. Sometimes using the mouse may also end up causing the transaction to either be saved or cancelled prematurely, because you inevitably click somewhere you shouldn't have. Once you are done, use the Enter key to complete the transaction.
- There should be a "remaining balance" split at the end of the transaction, which is computed as the difference in the balance of the existing right and left column fields.
- The main point to keep in mind is that the first split line is the "current account" split. However, you don't have to put a number in right away. What you can do is leave the number empty and then add all the rest of the splits. GnuCash will compute the total on the "blank split" line which, when you're done, you can copy back to the first "current account" split.
- When you are entering splits, you never run out of lines. There is always one more blank line until you balance the transaction and click Enter.
- For every transaction, the total of the amounts on the right side must be equal to the total of the amounts on the left side.
a. True
b. False
c. Only under certain conditions
d. Only in special cases
- Where do we enter a split transaction?
a. Using the Transfer Funds window or from the account register.
b. Only from the account register.
c. Only from the Transfer Funds window.
d. Only from the Account Tree window