This post shows how you can record audio using the soundcard (speakers, as they say) in both Windows 7 and Windows 8.1.
This was a chance discovery. I was disappointed by Windows 7 not providing auxiliary input in the Volume control "Recording" tab. I thought it will come back in Windows 8.1 but it didn't. While I was using the workaround that involved putting Microphone at the speakers, it was muddy recordings unfit for processing and mixing songs.
You can still record audio using the soundcard (speakers, as they say) in both Windows 7 and Windows 8.1. All you need to do is to right click the audio system tray icon and select soundcard instead of microphone. In most cases, it won't be visible. So you will have to open Device Manager (WInKey+BREAK) and then go to the sound card and update driver. If it updates the driver, know that your sound card is ready to record whatever passes through it.
By default, Microphone is selected in recording devices. You have to right click the speaker icon in system tray, go to the recordings tab and then select sound card. Then click on OK. Now you can record via sound card using any of your favorite audio recording software. When you again want to record using microphone, you just change to microphone using the same technique.
If the device driver fails to update or even after updating, you can't see the sound card option in the audio tray icon right click menu, your sound card might not be supporting recording via speakers/soundcard.