Journal Entry Involving Bank

1

It appears there is no way to do a journal entry using the bank on one side, let me explain the scenario and maybe someone can help…

a) I have cash going into the bank from sales
b) I am using expense claims to record items paid out of pocket

At the moment, the Bank shows too much money, and the Expense Claims account has a balance which means it thinks there is money owing to me

The goal is to reduce the bank balance to the correct amount, and zero out the expense claims account, which are two different amounts, therefore I was going to do two journal entries to make this happen, but I’m stuck

I also should say that I am operating as a sole proprietor, and I am wondering which account the money goes to when reducing the bank balance (if this is even possible)

Any advice would be great

2

A few software updates ago, bank and cash transaction capabilities were removed from the Journal Entries tab. Now, you must Spend Money or Receive Money from the Bank Accounts or Cash Accounts tab. Same process. Financially equivalent. Different place.

There are two ways to clear Expense Claims as a sole proprietor:

  1. Reimburse yourself from a cash or bank account. To do this, use the Spend Money function as mentioned above. Debit the transaction to Expense Claims and the appropriate Payer (which will be yourself unless you have employees authorized to make claims).

  2. Use a journal entry to clear Expense Claims to an equity account. A method I use, and which @lubos has started recommending to others as the most elegant for sole proprietors, is to rename Retained Earnings as Owner Equity. After all, the retained earnings belong to you as the owner. Then you can do away with capital accounts entirely. You will have no need for an owner’s drawing account. The action of drawing money from the company can be handled by spending money from a cash/bank account. Under this scheme, clearing Expense Claims is equivalent to a contribution of capital. But you don’t have to put the money in and then turn around and spend it. I’ve been doing this for about a year, and it works very well. Personally, I clear Expense Claims at the end of every month, but you really only need to do it when you want a good, clean balance sheet, such as at the end of the accounting year. You may need to redo a few prior transactions or reassign their debits/credits if you’ve previously been using capital accounts. But I’ve found that to be well worth the small effort.

3

Thank you very much for the insightful reply, unfortunately I get the same result when trying either of these options, the expense claims balance does not change, and a new entry appears in the Equity section of the main dashboard with the amount I am trying to adjust beside an account called Suspense

4

Aaaaaaahhhhh…Suspense is a default account that is always present, but only appears when mistakes have been made in other entries. Manager is a rigorous double-entry accounting system, so in every entry, debit and credit totals must match. Some accounting systems let you make mistakes and ignore the consequences. Manager never forgets the need to balance. When debits do not equal credits, Manager allocates the difference to Suspense, waiting for you to correct the problem. Click on the blue account balance in the Summary and you will see a list of transactions contributing to the problem. Review them to find where the mismatch is. One of the reasons to avoid journal entries is that it is easier to make those mistakes. A Spend or Receive Money entry sorts it out for you.

You may discover you have debited something you should have credited. Or you simply left out the balancing entry. As annoying as Suspense balances can be, they actually point you more directly toward a solution.

If you are relatively new to accounting, have a look at the web site accountingcoach.com. It’s got great, free information that tells most of what you’d ever need to know about accounting, including which accounts to debit and credit in what situations. But to get you started, I find it helpful to remember that when money goes out of the company, you must credit a cash or bank account. That terminology may seem weird to you, but it’s true. That means the balancing entry must be a debit. So to clear Expense Claims, you debit Expense Claims and credit the bank/cash account.

If you have more specific questions, please ask.

5

Hi again, I would like to think I have made a mistake, at least this would give me the hope it is fixable, but I just can’t see where, let me explain the steps I took to get this point and maybe something will jump out…

a) I paid for things out of pocket, then used the Expense Claims option to record them, thereofore if Manager is strict about double entry accounting, I should have no worries that something went wrong while using the Expense Claims feature, correct?

b) Below “Less Other liabilities” I can see an accumulation of these expenses for Jan/15 to Today which looks fine (I want to clear Jan/1 to Mar/31), to be more specific there is $3,685.51 in the expense claims account, and i want to clear out $3,221.08

c) Using the very first option you suggested, I used the Bank > Spend Money option and entered 3,221.08 for Jan/1 to Mar/31 and then saved it

d) At this point I would expect the Expense Claims account to be reduced to $464.43, which is not happening, I see the Spend transaction amount appear in Suspense (in the Equity section) as a negative amount leaving me thinking there is a program bug

e) Nevertheless, I click on the blue link representing this new negative amount and it simply takes me back to the entry I created a few minutes ago (there is no list of problems)

I have also tried using your other suggested method by changing Retained Earnings to Owner Equity and doing a journal entry and the end result is identical, a negative amount in Suspense

I really appreciate you taking the time to help me, and I feel bad bothering you again, but I don’t know how else to get support

6

Try this. Go back and look at your ‘Spend Money’ entry. You have the line on that coded to the Expense Claims account.

When you code a line to expense claims there will be an extra box appears titled ‘Payer’. You must select the name of the Payer, matching the name of the person you used on the expense claim. If you leave it blank it won’t know who’s expenses you are reimbursing and will put the entry to suspense to tell you something is wrong/incomplete/missing in the transaction.

So that’s my guess… I think you neglected to specify the ‘Payer’ on ‘Spend Money’ line. Hope that works.

7

I think that is the problem, and I have been wondering why there is no option to select the Payer, in other words on the Bank > Spend Money page there is no dropdown with a list payers, there is only a Payee textfield

When I create an expense claim, I select myself as the Payer, but when I spend money from the Bank I don’t understand why I cannot select a Payer, it only makes sense if I want to reimburse myself (or any other payer in the system)

8

The Payee field on the header is just the text name you’d want on the payment.

The payer field I am talking about will be at the line level on the spend money to the right of the account, not in the header. See picture below (please ignore the fact that I renamed the expense claims account to member expense claims reimbursable). This is specifying which expense claim ‘payer’ balance you are clearing in the expense claims account, not the ‘payee’ to whom you are writing the cheque. Though “typically” they’d be the same person.

9

Oh geez, I never saw that until you posted an image, thank you very much, hopefully now everything will work as expected

Assuming this solves the Expense Claim problem, do you have any idea how to reduce the bank down further? In other words by spending the equivalent of the expense claims through the bank function is a step in the right direction, but there will still be excess funds… should I simply use the spend feature again? And if so, what account should I spend the money to?

Just to be clear, the excess funds are gone from the bank simply because of personal withdraws

10

I am happy to try to help. Others have done it for me. Once you figure this out, you will be able to help somebody else.

Your additional information is helpful, because it will let me tell you what you should have done. But it is still incomplete, because it did not tell me exactly what you did. Specifically, you don’t mention which accounts you debited and credited at each step. But let me describe exactly how to use Expense Claims.

Before you can use Expense Claims, you must have defined Payers. These are all the people who are authorized to spend their own money on behalf of the company and expect to recover the expenditure in some fashion. Payers are set up under Settings. In addition to anyone you set up there, members with capital accounts will also appear in the list of authorized Payers. So if you have a capital account for yourself, don’t set yourself up as a payer. On the other hand, if you use my recommended approach to renaming Retained Earnings as Owner Equity, you will need to set yourself up as a Payer. (Forgive me here for stating anything obvious. I’m just trying to be complete.) From here on, I will assume everything applies to payments you made personally.

At your step (a), let’s say you spent $500 for a plane ticket. In the Expense Claims tab, initiate a New Expense Claim. Choose yourself as Payee. Describe what the expense is for in whatever detail makes you and/or your accountant happy. Select the expense account you want to apply the expense to, say Travel (or whatever you choose according to your chart of accounts). Create the claim. While you didn’t have to consciously make the choices, what you are doing is debiting Travel and crediting Expense claims.

At this point, your Expense claims liability account in the Summary will have increased by $500, because Manager believes the company owes you, as the Payer, $500. This corresponds to your comment at (b). Meanwhile, the Travel account has increased $500 because $500 was spent (it doesn’t matter for this account’s purposes by whom) on behalf of the company. Both accounts increased because debits increase expense accounts, which are income statement accounts, and credits increase liability accounts, which are balance sheet accounts.

Now we come to your step (c), where you want to clear Expense Claims of the cost of the plane ticket. As I said in my earlier post, there are two ways to do this. If you actually want your money back from the company (Method 1 above), go to either a bank or cash account, depending on where you will get the money from. Spend Money, listing yourself as the Payee, and allocating $500 to Expense Claims account. That immediately will add a box for subaccounts for all authorized Payers with balances in their names. Choose yourself. Enter $500. Create the payment. Note: you must actually take money from cash or pay yourself from the bank account. This represents a real monetary transaction.

At this point, your Expense claims liability account in the Summary will be reduced by $500, as will the cash or bank account you used. Again, you didn’t actively make the choices, but Manager has just credited the cash/bank account and debited Expense claims. This effectively reverses the earlier credit to Expense claims, with the result that the debit to Travel is now balanced instead by the credit to the cash/bank account. This is where you should be at your step (d)

The other approach (Method 2 in my earlier post) does not involve cash or bank accounts. To clear Expense claims of the $500, use a journal entry instead. In the Journal Entries tab, initiate a New Journal Entry. With this approach, you must actively choose which accounts to debit and credit. Remember that you initially credited Expense claims for the plane ticket, so now you must debit it for the same $500 amount. To balance, you must credit some account. In this case, credit Owner Equity. In this fashion, you’ve used Expense Claims as a conduit for an additional contribution of capital (equity) to your company. Equity accounts are increased by credits, so all is well.

Well, it took me so long to type this message, I see @alasdair may have already pointed you toward the solution. If you have more problems, let us know. :grinning:

11

A little more about the bank account balance, @sixaliens:

Do not just Spend Money to lower the bank account balance in Manager. Track down the source of the problem or you will simply create more trouble for yourself.

Now, it may be that you took money out of the bank, but did not make a corresponding entry in Manager. In that case, you need to go back and correct the oversight. When you withdraw money for personal use, you are making a draw against equity. The way to do that is to Spend Money from the bank account (which credits the bank account, reducing it) and allocate the transaction to Owner Equity (assuming you are following my recommendation in that regard). If you are not doing things with the renamed Retained Earnings account, but using a capital account, debit your capital account instead. The result of the draw is that the company now owes you less money, because you no longer have so much invested. That is, you previously put money in, but you’ve since taken it back out.

12

In my case I must reduce the bank balance twice:

a) to clear out (or balance) expense claims
b) to get the bank to match the true balance at a specific date

I think we have item a) solved thanks to both of you folks!

Regarding item b) is it a problem to reduce the bank by using a journal entry with the bank on one half and the owner equity account on the other half?

Using fake numbers to make this easier, here is the example;

Bank says: $1,000
Expense claims account says: $500
Bank should be: $100

Step 1: spend money or use journal entry to balance expense claims which will bring the bank down to $500

Step 2: spend money or use journal entry to bring the bank down to $100

This means in Step 2 I need to do a $400 entry, either by spending money or doing a journal entry (which seems to be the better method)

So, I will do a journal entry for $400 that credits the bank and debits what? The owner equity account?

Just to be clear, the reason the bank needs to go from $500 to $100 is because I personally took $400 from the bank via cash withdrawals, atm, used my debit card for personal etc.

UPDATE

This will not work the way I explained above, Step 1 has no affect on the bank (if done by journal entry) which means Step 2 cannot be a journal entry, it needs to be a Spend transaction for the full $900

Does this make sense folks?

I’m asking because after doing these two transactions, I ended up with a negative amount in the owner equity account

13

Not a conceptual problem, but Manager won’t let you do that. Presently, you can only make bank transactions through the Bank Accounts tab. That is exactly what I described (or tried to). But you should only enter such a transaction if that is what you did. In other words, if you took money out of a company account and kept it for your personal use, or spent company money on a personal purchase, you have effectively made a draw. Your accountant and the tax man will be happier if you describe this as a draw instead of tickets to a sports match. :wink: From your comments, it sounds like that is what happened. Note, this warning applies to both parts of your discrepancy. You need to have kept the money for the $500 expense claim and the money for the other $400. If you didn’t actually take money back for the plane ticket, but left the contribution in the company, you should clear that amount with a journal entry, which Manager will let you do.

Your equity balance could easily be negative if you never recorded a contribution of capital. It is perfectly possible to start a company with no investment. I’ve done it with a small service company. The first invoice was issued and paid before I had any expenses. So equity was exactly equal to the retained earnings amount until a draw was made to reduce it.

14

I think part of the problem is that I am not explaining the scenario correctly, that or I am just not able to grasp what you are (gracefully) trying to explain to me. Try not to loose your patience with me as I make one last attempt to define my situation…

a) I have a sole proprietorship

b) I use one bank account for personal and business

c) Sometimes I pay for things, related to the business, with cash I have withdrawn from the bank, or with a personal credit card

d) When I pay for business related products and services using either of the methods explained above, I create an Expense Claim and choose myself as the Payor

e) I also withdraw money (cash) from the same bank account for personal use, but when I do this I do not make entries in Manager

f) When I have sales, and money goes into the bank, I record it (receive it) thereofre my bank balance keeps going up

g) The income and expense section of Manager is bang on, no worries there, I am simply trying to make the necessary adjustments to create an accurate balance sheet

At the moment, there two issues:

  1. The bank balance is too high because I have never spent any money through the Bank Accounts tab, or have never done a journal entry affecting (reducing) the bank

  2. There is an amount in Expense Claims on the balance sheet which is not accurate, meaning it appears as a liability when it fact it is not

Using fake numbers again, here we go:

Reported bank balance: $1,000 (i.e. what is showing in manager)
Reported expense claims: $500 (i.e. what is showing in manager)
Real bank balance: $100

The goal is get the bank balance to show $100 and the expense claims to show $0 … if this were you, how would you achieve my goal?

Initially I thought I could simply do 2 journal entries but when I realized journal entries involving the bank are not possible, I became so thrown off track, I can’t make sense of this (and believe me I am trying) … can you dumb things down for me please, I would be more grateful than you know.

…

I forgot to say, I would like to do this at the end of every month (or shortly after) so that the balance sheet looks normal at any given time

…

I also forgot to mention that the credit card I am using is a prepaid card which is topped up with money from the bank, which in essence is pretty much the same thing as using cash from the bank, I thought I better clarify that before someone suggests creating a bank account for the credit card (amazingly enough, I know better than to use my regular card)

…

Let me explain what I did (with the help of others on this forum) and if you could confirm this is the same approach you would take, I may find peace after all

a) On bank accounts > spend money tab I created a transaction for $500 against the “expense claims” account, choosing myself as the payor, this reduced the expense claims account to zero, which is what I wanted

b) On bank accounts > spend money tab I created another transaction for $400 against the “retained earnings” account, this reduced the bank balance to $100, which is what I wanted

I guess the comments I didn’t and still don’t understand are:

a) why it is necessary to change the name of the retained earnings account to owner equity

b) what does it mean when the retained earnings account is a negative number (which mine is now after the two transactions above)

15

First and foremost, you absolutely must separate your personal and business banking. You cannot possibly hope to keep things straight when operating as you have described.

If you pay for business expenses with cash you have withdrawn from the bank account, you should have recorded spending money from the account in Manager. You either should have recorded the transaction as a transfer to a cash account, then recorded spending money from the cash account, or you should have recorded spending money directly from the bank account. Neither type of transaction should have been recorded as an Expense Claim.

Recording expenses paid with a personal credit card as expense claims is appropriate. But if you have been paying the credit card statement from the same account used for business, that payment should be used to clear the expense claim by spending money from the bank account.

When you withdraw money from the bank account for personal use, you should have made transactions in Manager. For a sole proprietor, these are draws and reduce equity in the company.

Your bank balance keeps going up in Manager because you are not properly recording your withdrawals.

You are mistaken in your belief that expense claims are not liabilities. They definitely are, because from an accounting perspective the company owes you money for having paid its expenses. You clear this liability through actual reimbursement or by converting the expense claim to a contribution of capital with a journal entry.

You definitely should create an account for the prepaid card. In this case, you can think of it as a cash account or a bank account, but you must do one or the other. This card is an asset and must be accounted for.

This transaction is legitimate only if you actually took money out of the account to pay yourself. “Faking” transactions to achieve predetermined account balances is horrible accounting and may be illegal in your jurisdiction. You might as well just make numbers up.

Same comment.

Technically, it isn’t required. But retained earnings is a phrase accountants usually reserve for corporations. It represents the net of all capital investments plus income less expenses and dividends since inception of the corporation. In other words, it shows the remaining capital still invested.

For sole proprietors, the equivalent phrase preferred by accountants is owner equity. Same concept, different terms. And because a proprietor owns everything, you can bypass using capital or stock accounts. It is simply easiest in Manager to use the Retained Earnings account as your owner equity account.

While it is possible to have negative retained earnings, even when accounting is totally correct, I believe in your case this is simply the result of cumulative mistakes. Because you have been operating with a mixed personal and company bank account, you now have no choice but to go back to the beginning and properly characterize everything.

Every time you deposited money into the account for company purposes, you must record that as a contribution to equity. Every time you spent personal funds from outside the account on a company expense, you should have an expense claim. (See how difficult things are if you combine the account? You spent your own money on a company expense, but that was indistinguishable from the company’s money.) Every time you took money out for personal use, you must characterize that as a draw. Every time the prepaid card was topped up, you must record a transfer between cash and/or bank accounts.

I understand this will be a tedious process. One possible approach would be to isolate all your business transactions as though they had come from a separate, notional account. Fix all the back transactions, then open a separate business account with the resulting balance. After that, forever keep you personal money separate. Unless you need to actually contribute more operating funds to run the company, the only interaction between personal and company finances should be via expense claims and draws.

16

Thank you again for helping me understand things.

The reason I was using Expense Claims is because that is what the Manager Guide says to do…

—Every expense claim requires the name of the payer. A payer is a person or organisation that paid for expenses on behalf of the business—

When I said Expense Claims are showing up as a liability, when if act they are not, I meant they shouldn’t be a liability because the business doesn’t really owe me for these because the business and me are one in the same, although I like your idea of not even using expense claims and spending the money from the bank, this seems more logical.

I wasn’t faking (or trying to fake) numbers, my goal was to achieve a “real” balance sheet, my approach may have been flawed but I certainly wasn’t being mischievous!

The bottom line is that unless I am prepared to separate personal and business banking, I probably shouldn’t use Manager for the purposes of a balance sheet, and I probably shouldn’t attempt any month end manual adjustments, which is fine. The income statement is really what I am after for tax purposes, I just thought it would be nice to have a clear picture of both.