AMC-ttl.doc, printed on 02/13/98, at 12:21 PM. Last saved on 02/13/98 12:20 PM.
AMC-ttl.doc, printed on 02/13/98, at 12:21 PM. Last saved on 02/13/98 12:20 PM. ® © Copyright 1998 ACCPAC INTERNATIONAL, INC. All rights reserved. ACCPAC INTERNATIONAL, INC., Publisher No part of this documentation may be copied, photocopied, reproduced, translated, microfilmed, or otherwise duplicated on any medium without written consent of ACCPAC INTERNATIONAL.
Amctoc.doc, printed on 12/05/97, at 4:30 PM. Last saved on 12/05/97 4:30 PM. Contents Chapter 1: Listing the Things a Business Owns and Owes Starting a Business ............................................................. 1–1 Chapter 2: The Balance Sheet Assets, Liabilities and Equity .................................................... 2–1 Changes in Assets, Liabilities and Equity ......................................... 2–2 Chapter 3: Changes in Equity Changes Caused by Withdrawals .................
Amctoc.doc, printed on 12/05/97, at 4:30 PM. Last saved on 12/05/97 4:30 PM. Chapter 6: A Separate Income Statement Why and How ................................................................ 6–1 Debits and Credits Affect Both Statements ....................................... 6–2 Chapter 7: The Journal Why and How ................................................................ 7–1 National Construction's Journal ................................................. 7–3 Chapter 8: The Ledger Why and How ..
Amctoc.doc, printed on 12/05/97, at 4:30 PM. Last saved on 12/05/97 4:30 PM. Use of Supplies ............................................................... 11–3 Bad Debts .................................................................... 11–3 Depreciation .................................................................. 11–4 Accrued Expenses............................................................. 11–5 Accrued Revenues ............................................................
Amctoc.doc, printed on 12/05/97, at 4:30 PM. Last saved on 12/05/97 4:30 PM. Chapter 17: Open Invoice Accounting for Payables and Receivables Late Payment Charges ........................................................ 17–1 Discounts .................................................................... 17–1 Bad Debts .................................................................... 17–2 Prepayments .................................................................
Amctoc.doc, printed on 12/05/97, at 4:30 PM. Last saved on 12/05/97 4:30 PM. Chapter 19: Inventory Accounting Accounting Control of Inventory ............................................... 19–3 General Ledger Accounts in Inventory Accounting............................... 19–4 Tax Considerations in Accounting for Inventory ................................. 19–8 Goods and Services Tax .................................................... 19–8 Provincial Sales Tax ............................................
Amc1.doc, printed on 12/05/97, at 11:55 AM. Last saved on 12/05/97 10:05 AM. Chapter 1 Listing the Things a Business Owns and Owes This chapter discusses starting a company, and the relationship between the things a company owns and the money it owes. Starting a Business Jim Brown quits his job and starts his own company to do small construction contracts. The company is called National Construction and is a proprietorship.
Amc1.doc, printed on 12/05/97, at 11:55 AM. Last saved on 12/05/97 10:05 AM. Starting a Business National Construction February 2, 1995 Things Owned: Cash in Bank Truck $40,000 10,000 Claims Against Things Owned: Jim Brown $50,000 Brown gets his first contract, but to complete it he needs to buy another truck. It costs $12,000, and on February 3 he convinces his banker to lend National Construction the money to buy it. The loan is for a five-year term.
Amc1.doc, printed on 12/05/97, at 11:55 AM. Last saved on 12/05/97 10:05 AM.
Amc2.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 10:30 AM. Chapter 2 The Balance Sheet This chapter discusses a company's assets, liabilities, and equity, and shows how changes in any one of these affect the other two. Assets, Liabilities and Equity Things owned by the company are called assets. Claims by others are called liabilities. If the owner wants to get back his investment, he must sell the assets and pay off the liabilities.
Amc2.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 10:30 AM. Changes in Assets, Liabilities and Equity Changes in Assets, Liabilities and Equity Since assets equal liabilities plus equity, we know that if assets increase, then liabilities plus equity must increase by the same amount. The accounting equation can also be used to say that changes in assets equal changes in liabilities plus changes in equity.
Amc2.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 10:30 AM.
Amc3.doc, printed on 12/05/97, at 12:07 PM. Last saved on 12/05/97 10:32 AM. Chapter 3 Changes in Equity There are two ways for equity to change. They are investments or withdrawals by the owner, and earnings or losses by the company. We have already covered investments by the owner, so this section will now cover withdrawals, earnings, and losses.
Amc3.doc, printed on 12/05/97, at 12:07 PM. Last saved on 12/05/97 10:32 AM. Changes Caused by Earnings The client paid for the gas, so the hauling contract didn't cost National anything except Brown's time. This means that National doesn't owe any of the money to anyone else, and therefore earned the entire $5,000. Now Brown has to decide where to record the money that the company earned.
Amc4.doc, printed on 12/05/97, at 12:13 PM. Last saved on 12/05/97 10:34 AM. Chapter 4 Recording How Earnings Were Made This chapter tells you how to record the money a company takes in for the goods and services it provides for its customers, and the money it spends to provide those goods and services. Revenues and Expenses Brown completes an excavating contract on March 1 for which National is paid $6,000 cash.
Amc4.doc, printed on 03/09/98, at 2:54 PM. Last saved on 03/09/98 1:45 PM. Revenues and Expenses the hauling contract and $6,000 for the excavating contract. Its total revenues are therefore $11,000. Expenses are the amount a company spends to provide goods or services to its customers. National's only expenses for the contracts are $2,000 in wages. Earnings are what is left over after expenses are deducted from revenues.
Amc4.doc, printed on 12/05/97, at 12:13 PM. Last saved on 12/05/97 10:34 AM. When to Record Revenues and Expenses When to Record Revenues and Expenses Revenue is recorded in the financial records at the time the title or ownership of the goods or services passes to the customer. For a company that provides services, this usually means when the services or the contract for the services are completed.
Amc4.doc, printed on 03/09/98, at 2:54 PM. Last saved on 03/09/98 1:45 PM. When to Record Revenues and Expenses because he has already recorded revenue, and wants to match the expenses for the contract with the revenue for the contract. At the same time, he decreases Cash in Bank by $2,000 (to $40,000) to record the payment of the wages.
Amc5.doc, printed on 12/05/97, at 12:11 PM. Last saved on 12/05/97 11:42 AM. Chapter 5 Recording Changes to the Balance Sheet In this chapter, you will learn why you record revenues and expenses when they are earned, rather than when they are actually received and paid. You will also learn how to use debits and credits to record changes to the balance sheet. Recording Transactions Brown can use the version of the balance sheet in Chapter 4 to record any changes caused by transactions.
Amc5.doc, printed on 03/09/98, at 2:50 PM. Last saved on 05/12/97 11:42 AM. Recording Transactions expenses now because he wants to match them to the revenue that he has already recorded.
Amc5.doc, printed on 03/09/98, at 2:51 PM. Last saved on 05/12/97 11:42 AM. Recording Transactions National's earnings. Do not confuse the collection of cash with the earnings earned by providing the goods or services. This method of accounting for revenue and expenses when they are earned or incurred, rather than when the cash is actually received or paid, is called the accrual method. It is one of the main principles of accounting.
Amc5.doc, printed on 03/09/98, at 2:52 PM. Last saved on 05/12/97 11:42 AM. Debits and Credits On the same day, he gets an invoice for a truck tune-up ($200) and a telephone bill ($100), and interest on National's bank loan is taken out of the company's bank account by the bank ($400).
Amc5.doc, printed on 12/05/97, at 12:11 PM. Last saved on 12/05/97 11:42 AM. Debits and Credits The system involves using the words debit and credit, which we will now define. First, it is important to know that any of the accounts can be on the left or right side of the balance sheet. Because this is true, the account names could be put in one vertical column, and the account balances that pertain to each could be placed on the left or right side of the balance sheet beside them.
Amc5.doc, printed on 12/05/97, at 12:11 PM. Last saved on 12/05/97 11:42 AM. Debits and Credits National Construction Trial Balance March 6, 1995 Debit Balance 37,100 22,000 1,000 2,000 20,000 3,000 Cash in Bank Trucks Maintenance Supplies Furniture Construction Equipment Accounts Receivable Accounts Payable Bank Loan Jim Brown Earnings Credit Balance 300 27,000 48,000 9,800 85,100 .
Amc5.doc, printed on 03/09/98, at 2:52 PM. Last saved on 05/12/97 11:42 AM. Debits and Credits Similarly, to decrease the account balance of an account that has a credit balance, we would debit it. Debits and Credits on the Balance Sheet On March 7, National Construction receives $3,000 cash which was receivable for its first contract.
Amc5.doc, printed on 12/05/97, at 12:11 PM. Last saved on 12/05/97 11:42 AM. Debits and Credits Revenues and Expenses The debit and credit system also works for revenues and expenses, but since we place these accounts vertically on the balance sheet instead of on the left and right, more explanation is required. As explained earlier, to increase the balance of an equity account (invested capital or earnings) we credit it.
Amc5.doc, printed on 03/09/98, at 2:52 PM. Last saved on 05/12/97 11:42 AM.
Amc6.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:43 AM. Chapter 6 A Separate Income Statement This chapter introduces the income statement, telling you why it is necessary and how it works. Why and How A statement which shows revenues, expenses, and the resulting net income for a business over any particular period of time is called an income statement. Net income is total revenues minus total expenses for a particular period of time.
Amc6.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:43 AM. Debits and Credits Affect Both Statements National Construction Income Statement Feb 1 - Mar 15, 1995 Revenues Hauling Excavating Expenses Wages Subcontracts Telephone Maintenance Interest – Bank Loan $ 8,000 16,000 $ 24,000 5,500 7,000 100 200 400 13,200 Net Income $ 10,800 Note that the Net Income on the income statement equals the Earnings on the balance sheet.
Amc6.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:43 AM. Debits and Credits Affect Both Statements Except for adding more accounts (for extra information or new transactions) and perhaps reorganizing accounts so that they are grouped into summaries (we might break down Subcontracts Expense by types, each one with its own account), the balance sheet and income statement (the financial statements) provide the basic financial information on the company.
Amc7.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:46 AM. Chapter 7 The Journal In this chapter, you will learn how a company uses the journal to keep track of all its business transactions. Why and How Brown's statements provide financial information in a useful and understandable way, but he still has a problem. If he compares his balance sheet of February 1 with his current balance sheet, he sees that Accounts Payable has increased by $5,100.
Amc7.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:46 AM. Why and How description of the transaction being recorded, which might reference an invoice number or another document related to the transaction (this is sometimes called a source document). A journal entry covering, for example, Brown's initial injection of capital into the company, might look like this: National Construction Journal No.
Amc7.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:46 AM.
Amc7.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:46 AM. National Construction's Journal National Construction Journal No.
Amc7.doc, printed on 12/05/97, at 12:14 PM. Last saved on 12/05/97 11:46 AM. National Construction's Journal National Construction Journal No.
Amc8.doc, printed on 12/05/97, at 12:15 PM. Last saved on 12/05/97 11:44 AM. Chapter 8 The Ledger This chapter tells you why you use a ledger, and how it keeps track of detailed account information. Why and How Brown is now able to determine exactly how the Accounts Payable balance got to its current level of $5,100 by looking through the journal.
Amc8.doc, printed on 12/05/97, at 12:15 PM. Last saved on 12/05/97 11:44 AM. Posting Posting The "reference" provides the journal number where the journal entry which uses this account may be viewed in its entirety. The process of transferring information from the journal to the applicable ledger account is called posting.
Amc9.doc, printed on 12/05/97, at 12:16 PM. Last saved on 12/05/97 11:45 AM. Chapter 9 Manual Accounting Systems Standard manual accounting systems follow the same basic flow of information as the system used by National Construction, except that journal entries are posted to the ledger accounts in batches, usually at the end of every month.
Amc10.doc, printed on 12/05/97, at 11:56 AM. Last saved on 12/05/97 10:06 AM. Chapter 10 Classified Financial Statements National Construction continues in business and at the end of its first year in business, its transactions have resulted in a longer balance sheet and a longer income statement. Each statement has more accounts on it and the accounts are categorized by types. Because of this categorization of accounts they are called classified statements.
Amc10.doc, printed on 12/05/97, at 11:56 AM. Last saved on 12/05/97 10:06 AM. The Balance Sheet creditors and deal with an unexpected situation that requires lots of cash quickly. Fixed Assets — Fixed assets are assets such as land, buildings, equipment, and trucks that are used in operating the business and which have a long life. They are generally not converted into cash in the ordinary course of business.
Amc10.doc, printed on 12/05/97, at 11:56 AM. Last saved on 12/05/97 10:06 AM. The Income Statement National Construction is set up as a proprietorship. Partnerships and corporations have different equity sections than the National Construction example and will be covered later. They still have the same general categories as below, but with different names: 1. Money invested in the company, and 2. Money earned by the company.
Amc10.doc, printed on 12/05/97, at 11:56 AM. Last saved on 12/05/97 10:06 AM. The Income Statement Revenues Revenues are categorized by the type of goods or services provided. This categorization is important because the relative sizes of the different types of revenue show where and how a company generates its revenue. Expenses Expenses are the amounts that a company spends to provide goods and services to its customers or to carry on its business, except amounts spent to acquire its assets.
Amc10.doc, printed on 12/05/97, at 11:56 AM. Last saved on 12/05/97 10:06 AM. The Income Statement 12-month accounting period. National Construction's fiscal year ends January 31. A company's owners want to know whether or not the company has a reasonable income so that they can decide whether or not to continue operating the company. Creditors also want to be sure that a company has a reasonable income before lending it money.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Chapter 11 Adjusting Entries In this chapter, you will learn how to make adjustments to the financial statements at the end of the year to make the income figures for the year as realistic and accurate as possible. When and Why The financial statements shown on the previous pages are correct in that they account for every transaction, but they need to be adjusted for changes related to accruals.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Prepaid Expenses The adjusting entries are recorded in the journal in the same way as any other journal entry and the same rules apply. With a manual accounting system, adjusting entries are usually done after the trial balance is prepared and proven to be correct. After the adjusting entries are posted to the ledger accounts, an adjusted trial balance is prepared to ensure that no posting or adding mistakes have been made.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Use of Supplies Use of Supplies Maintenance supplies are used up throughout the year. It is therefore necessary to record their use as an expense. The way to determine the amount of the expense is to physically take an inventory of what is left at the end of the accounting period.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Depreciation We set up an account on the balance sheet called Allowance for Doubtful Accounts which is then subtracted from Accounts Receivable on the balance sheet, like this: Current Assets Accounts Receivable Less: Allowance for Doubtful Accounts Net Accounts Receivable 38,000 2,000 36,000 The Allowance for Doubtful Accounts has a credit balance, which is what we expect since it is subtracted from Accounts Receivable.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Accrued Expenses Rather than simply reduce the balance of the Trucks, Construction Equipment and Buildings accounts on the balance sheet, more information is provided if we create accounts called Accumulated Depreciation for each, which have credit balances for the same reasons as the Allowance for Doubtful Accounts account.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Accrued Expenses The adjusting entries to record these unpaid, but accrued, expenses are: Jan 31, 96 Wage Expense Wages Payable Adjusting entry for accrued wages 5020 2060 1,000 Jan 31, 96 Interest Expense – Mortgage Interest Expense – Bank Loan Interest Expense – Operating Loan Interest Payable.
Amc11.doc, printed on 12/05/97, at 11:57 AM. Last saved on 12/05/97 10:08 AM. Accrued Revenues Accrued Revenues Some revenues have been earned by year end even though National hasn't invoiced a customer or received payment. A good example is interest accrued on the company's cash in the bank. Brown's banker tells him that National's bank deposits have earned interest of $600 by January 31, 1996, but that the bank won't pay the interest until the middle of the next month.
Amc12.doc, printed on 12/05/97, at 11:58 AM. Last saved on 06/05/97 3:24 PM. Chapter 12 The Finished Financial Statements The financial statements will now more accurately reflect the income earned during the accounting period of February 1, 1995 to January 31, 1996 and the true financial position of the company on January 31, 1996.
Amc12.doc, printed on 12/05/97, at 11:58 AM. Last saved on 06/05/97 3:24 PM. National Construction Balance Sheet January 31, 1996 Assets Current Assets Cash in Hand $ 100 Cash in Bank 60,000 Interest Receivable 600 Accounts Receivable $ 38,000 Less: Doubtful Accounts 2,000 Net Receivables 36,000 Maintenance Supplies 300 Prepaid Insurance 1,000 Total Current Assets 98,000 Fixed Assets Land 70,000 Buildings 40,000 Less: Accumulated Dep. 4,000 Buildings: Net 36,000 Trucks 32,000 Less: Accumulated Dep.
Amc13.doc, printed on 12/05/97, at 11:59 AM. Last saved on 12/05/97 10:10 AM. Chapter 13 Starting the Next Accounting Period The financial statements are now complete for the fiscal year ended January 31, 1996 and Brown can now proceed to do the accounting for the next accounting period. He has two choices for where to post his new accounting data after entering it in the journal: he can continue to use his current ledger; or, he can buy a new ledger and start posting in it.
Amc13.doc, printed on 12/05/97, at 11:59 AM. Last saved on 12/05/97 10:10 AM. Closing the Books information. In Corporations, the Previous Years' Earnings account is called Retained Earnings.
Amc13.doc, printed on 12/05/97, at 11:59 AM. Last saved on 12/05/97 10:10 AM. Opening the Books Opening the Books If Brown wants to use a new ledger, he can leave the old ledger and all its account balances as they were at January 31, 1996. He must now set up a new ledger so that the asset, liability and equity account balances are the same as those of the old ledger on January 31, 1996. This is called opening the books.
Amc13.doc, printed on 12/05/97, at 11:59 AM. Last saved on 12/05/97 10:10 AM. Opening the Books After this entry is posted, revenue and expense accounts still have a zero balance and the balance sheet accounts will have the same balances that they did at January 31, 1996, except that there is a new account called Previous Years' Earnings.
Amc14.doc, printed on 12/05/97, at 12:00 PM. Last saved on 06/05/97 3:57 PM. Chapter 14 Summary of Financial Statement Preparation Chapter 13 concludes the instructions on how to prepare financial statements. The rest of this manual deals with specific situations for companies of different legal forms than a proprietorship, or in different industries. The process of preparing financial statements is summarized below, going from the beginning of an accounting period to the end of an accounting period.
Amc15.doc, printed on 12/05/97, at 12:01 PM. Last saved on 12/05/97 10:11 AM. Chapter 15 Other Types of Legal Organizations There are two other principal forms of companies: partnerships and corporations. The accounting for them is exactly the same as for a proprietorship (National Construction) except that the equity section is set up a little differently for each. Partnerships Each partner who invests money in a company has an Invested Capital account in his name.
Amc15.doc, printed on 12/05/97, at 12:01 PM. Last saved on 12/05/97 10:11 AM. Partnerships The same day he takes on a partner who invests $78,000 cash in the company.
Amc15.doc, printed on 12/05/97, at 12:01 PM. Last saved on 12/05/97 10:11 AM. Corporations Corporations A corporation (also called a limited company), unlike a proprietorship or partnership, is a business that has a legal existence of its own. It is legally separate from its owners. It has the right to sue and be sued by others. The owners have limited liability in that they can only lose what they invested in the corporation.
Amc15.doc, printed on 12/05/97, at 12:01 PM. Last saved on 12/05/97 10:11 AM.
Amc15.doc, printed on 12/05/97, at 12:01 PM. Last saved on 12/05/97 10:11 AM. Corporations Let's assume that National Construction Limited has $100,000 of retained earnings and pays a dividend of $1 per share to its preferred shareholders' (28,000) shares on Jan. 31, 1997.
Amc16.doc, printed on 12/05/97, at 12:01 PM. Last saved on 06/05/97 5:11 PM. Chapter 16 Subsidiary Ledgers This chapter tells you how to use subsidiary ledgers to keep information that will help you make decisions about your company. Why and How Subsidiary ledgers are a system in which a particular ledger account (such as Accounts Receivable) has its own ledger called a subsidiary ledger. There is generally an account in the subsidiary ledger for each customer (or supplier or employee).
Amc16.doc, printed on 12/05/97, at 12:01 PM. Last saved on 06/05/97 5:11 PM. Accounts Receivable Accounts Receivable This subsidiary ledger keeps track of who your customers are, what their addresses are, and how much money they owe you. It also breaks down the money they owe you by current receivables, overdue 30 - 60 days and any other period that you might decide to follow. It keeps track of the date you invoiced a particular customer, when the customer paid, and how much was paid.
Amc16.doc, printed on 12/05/97, at 12:01 PM. Last saved on 06/05/97 5:11 PM. Payroll Payroll This subsidiary ledger allows management to keep track of employee wages and all the deductions that must be collected and paid out, such as Unemployment Insurance, Canada Pension Plan, Workers' Compensation, and union dues. In addition, it keeps track of names, addresses, social insurance numbers, rates of pay, and normal hours per pay period.
Amc17.doc, printed on 12/05/97, at 12:02 PM. Last saved on 12/05/97 10:12 AM. Chapter 17 Open Invoice Accounting for Payables and Receivables This chapter describes a method of accounting known as the open invoice method. Instead of merely keeping track of the outstanding balance of each vendor and customer, open invoice accounting keeps track of each individual invoice, together with each partial payment made against it.
Amc17.doc, printed on 12/05/97, at 12:02 PM. Last saved on 12/05/97 10:12 AM. Bad Debts revenue (for example: Discounts Taken Revenue) or as a reduction in the expense associated with the original invoice. Similarly, if you offer a discount for early payment to your customers, you may receive less than your original invoices to your customers. These discounts can be considered as negative invoices to reduce the amount of prior invoices.
Amc17.doc, printed on 12/05/97, at 12:02 PM. Last saved on 12/05/97 10:12 AM. Prepayments Prepayments You or a customer may be required to make a prepayment for goods or services that will be received in the future. Record the prepayment from a customer in the Accounts Receivable Sales journal. Use the customer's check number for an invoice number. Debit the Cash in Bank account and credit Accounts Receivable.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Chapter 18 Payroll Accounting This chapter describes how to prepare your company's payroll in accordance with the requirements of Revenue Canada, Taxation (and in the Province of Quebec, in accordance with the requirements of Revenu Québec). In Canada, all provinces and territories except Quebec have provincial or territorial Income Tax Acts that are administered by Revenue Canada.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings You may also need to obtain Interpretation Bulletins on some of the subjects discussed in order to specifically interpret the regulations. After reading this chapter and the applicable sections of the Revenue Canada documentation, you should be able to categorize different types of compensation and benefits correctly, and be able to prepare the payroll for your company with confidence.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings manually requires the use of the tables in the applicable Revenue Canada booklets. An employer must keep two types of payroll records: their own and their employees'. The employer, of course, needs to know what their expenses and payables are as a result of paying their employees.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings An advance to an employee need not be included in gross earnings providing the advance is covered by later-earned remuneration or the employee is otherwise made legally obligated to repay the advance. Under these circumstances an advance can be treated as a loan and need not be included as a component of gross.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings When a paycheque is produced, you must record this amount as an increase in the Wage Expense account, and make an entry in the employee's record that they received this amount as overtime pay. Salary Salary is a fixed amount paid to the employee for the pay period in question. The employee's regular salary is available from their employee record.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings Taxable Benefits Any non-cash taxable benefits received by an employee in each or any pay period, must be entered as a component of the employee's gross earnings for the period.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining an Employee's Gross Earnings If the example employee received vacation pay at the rate of 4%, and has their vacation pay paid out with each paycheque, you would calculate their vacation pay for the period as 4% x ($600 + $150 + $100 + $110) = $38.40 and include this amount as a component of gross earnings.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions Assuming that in the prior example, there was already $186.60 in the Vacation Pay Owed account for this employee, and the employee decides to withdraw it together with the $38.40 vacation pay owing from the current pay period, their gross earnings for the pay period would be: Regular Pay Overtime Pay Salary Commissions Taxable Benefits Vacation Pay Gross Earnings $ $ 600.00 150.00 100.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions employer has the necessary information to complete T4 slips at the end of each year. T4 slips supply the government with detailed earnings and deduction information for each employee. The amount of CPP premiums, EI contributions and income tax are obtained by looking up the respective tables in the Revenue Canada booklets.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions Assuming gross earnings of $1,305 from the prior example and assuming a two-week pay period (26 pay periods per year), the contributory earnings for the pay period would be: Gross Earnings Basic Exemption ($3,000 / 26) Contributory Earnings $ $ 1,305.00 115.38 1,189.62 The CPP contribution can then be calculated by multiplying these contributory earnings by the assessment rate (2.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions • the employee's gross earnings for the pay period equal or exceed the Minimum Insurable Earnings for the pay period.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions The applicable EI premium for the pay period can be obtained directly from the Revenue Canada tables using the employee's gross earnings for the pay period and then comparing the results to the maximum premium for the pay period, or can be obtained by calculating insurable earnings for the pay period and multiplying by the assessment rate. Either method is acceptable.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions Union Assume that the example employee is covered by a collective agreement that requires the employer to deduct and pay to a union $30 from the employee's paycheque each pay period. When a paycheque is produced, this amount is then deducted from the employee's paycheque and recorded as an increase in the Union Payable account. the appropriate entry is also made in the employee's record.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions Income tax deduction is based on what Revenue Canada calls "the amount subject to tax". Using the case from the above examples where vacation pay is paid out, the amount is calculated as follows: Gross Earnings Less: Registered Pension Plan Contribution Union dues Amount Subject to Tax $ $ 1,305.00 120.0030.001,155.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Determining the Employee's Deductions GST Payroll Deductions If your employees receive benefits that are subject to the Goods and Services Tax (GST), you should set up a GST Payroll Deduction account in the General Ledger. GST for benefits provided to employees can be charged and reported annually when you print T4 slips, or you may choose to deduct the GST from each paycheque.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Updating the Employee's Payroll Record Each time a paycheque is produced, you must calculate and make the necessary journal entries to record the employer's share of the CPP contributions and the EI premiums. In the above example, the journal entries would increase the CPP Expense account by $27.36 and the EI Expense account by $51.16, while at the same time increasing the CPP Payable account by $27.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Updating the Employee's Payroll Record at the end of a calendar year, complete Record of Employment forms on an employee's termination, and answer any of the employee's questions about their compensation.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Creating the Journal Entries Creating the Journal Entries Each time you complete a payroll transaction, you must make a payroll analysis so that all the necessary journal entries to account for each paycheque produced can be made.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Ontario Employer Health Tax includes the employer's CPP contributions and EI premiums. With the cheque must be an explanation of how much is for CPP contributions, how much is for EI premiums, and how much is for income tax. It is not necessary to break down the amount of the cheque to the amounts deducted from each employee.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Ontario Employer Health Tax You calculate EHT premiums by multiplying each Ontario employee’s total remuneration during a pay period by a certain percentage. You need two General Ledger accounts to keep track of the tax: • EHT Payable • EHT Expense These two accounts are credited and debited with the premiums you calculate.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Payroll Accounting in the Province of Quebec The journal entry would clear the EHT Payable account, and reduce the Bank account on which the cheque is drawn, as shown in the following journal entry: National Construction Journal Date Particulars Jul 26, 95 EHT Payable Bank # 2390 1100 Debit Credit 20.00 20.
Amc18.doc, printed on 12/05/97, at 12:03 PM. Last saved on 12/05/97 10:24 AM. Payroll Accounting in the Province of Quebec applied in the Province of Quebec and those applied in all other provinces and territories in Canada: Table of Differences Item Province of Quebec All other provinces Pay fed. tax to Federal government Federal government Pay prov.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Chapter 19 Inventory Accounting The inventory of a company can be defined as the materials and supplies which it uses in its day to day operations. These materials and supplies may subsequently be sold, or used to produce new inventory assets, or simply consumed over a relatively short period of time, usually not exceeding one year. On this basis inventory is a current asset of a company.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Accounting Control of Inventory expense associated with the reduction of the raw material inventory because it adds a value equal to its cost to the new inventory item. The manufacturing report indicates both the number of new inventory items created as well as the number of existing inventory items used. Inventory assets may also be reduced by using them in a project.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Accounting Control of Inventory Accounting Control of Inventory Accounting control of inventory can be carried out by several methods: ■ First in, first out ■ Last in, first out ■ Average cost ■ Item by item Average cost is the simplest method and is the method discussed in the following paragraphs.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. General Ledger Accounts in Inventory Accounting Inventory sold or used after this purchase now comes out of inventory at the new average cost of $14 per widget. For example: if at stock-taking time the number of units in inventory was found to be 30, a write-off of $28 (2 units at the average price of $14) in the value of inventory would have to be made to account for the loss of the two units.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. General Ledger Accounts in Inventory Accounting A typical structure to accomplish this is: Smith Retailing Balance Sheet January 31, 1996 Assets: Current Assets Cash in Hand Cash in Bank Interest Receivable Accounts Receivable Office Supplies Prepaid Insurance Total Current Assets Inventory Assets Product Line A Product Line B Product Line C Total Inventory Assets Fixed Assets Land Buildings Shop Fittings Warehouse Equip.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. General Ledger Accounts in Inventory Accounting Smith Retailing Income Statement Feb. 1, 1995 - Jan.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. General Ledger Accounts in Inventory Accounting Construction companies and other companies who use inventory items but who do not explicitly sell inventory items would normally use a different structure for their income statement, although their balance sheet would remain unchanged from the previous example. For example: Universal Construction Income Statement Apr. 1, 1995 - Mar.
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Tax Considerations in Accounting for Inventory Tax Considerations in Accounting for Inventory This section tells you how to account for the goods and services tax (GST) and the provincial sales tax (PST), in the purchase and sale of inventory. Goods and Services Tax In 1991, the Goods and Services Tax (GST) replaced the Federal Sales Tax (FST).
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Tax Considerations in Accounting for Inventory Either way, the cost of the inventory is $100 and the GST paid on the purchase is $7. The journal entry to record the addition to inventory is: 1160 2490 1100 Debit 100.00 7.00 Product Line A GST Paid on Purchases Cash Credit 107.00 When your company sells inventory, the customer pays GST (on GST-taxable items).
Amc19.doc, printed on 03/06/97, at 4:15 PM. Last saved on 03/06/97 4:14 PM. Tax Considerations in Accounting for Inventory that when the tax is included in the price, you must first calculate the $200 revenue amount ($214 / (1 + 0.07). The journal entry to record the sale is: 1100 5220 4160 2510 1120 Cash Product A: Expense Revenue GST Charged on Sales Product A Inventory Debit 214.00 100.00 Credit 200.00 14.00 100.
Amc20.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 9:41 AM. Chapter 20 Cost Accounting Cost accounting is a system of allocating costs and/or expenses incurred to a particular division, department or project so that management can quickly determine if the division, department or project is meeting its budget or is earning the company any money. Project Costs Here is an example of how costs can be allocated to different projects.
Amc20.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 9:41 AM. Profit Centres Projects Wages Supplies Equipment Rental Total Costs A B $ 5,000 1,000 3,000 $ 9,000 $ 7,000 700 1,000 $ 8,700 C $ 2,000 3,000 2,000 $ 7,000 This information is useful to the employer because it shows how much each project has cost to date, and the breakdown of the costs. The employer is now in a better position to be able to control costs and make decisions regarding the projects.
Amc20.doc, printed on 12/05/97, at 12:05 PM. Last saved on 12/05/97 9:41 AM.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. Chapter 21 Accounting for the GST and PST This chapter discusses accounting for the Goods and Services Tax (GST) and provincial sales tax (PST). The GST is a tax levied by the federal government. You pay GST on goods you purchase, and charge your customers GST on goods you sell.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. Accounting for Purchases • GST Paid On Purchases • GST Adjustments (optional) • ITC Adjustments (optional) • GST Payroll Deductions (optional) • GST Owing (Refund) The GST Owing (Refund) account is a subtotal account. (The instructions in this chapter assume you classify these as liability accounts. Your accountant may suggest different classifications.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. Accounting for Sales If you purchase office supplies for $100, and pay PST at 6 percent and GST at 7 percent, the journal entry to record the purchase might look like this: Debit 2490 5645 1100 GST Paid on Purchases Office Supplies Cash Credit 7.00 106.00 113.00 Because the PST is an expense, it is included in the $106 amount debited to the Office Supplies account.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. GST Payroll Deductions GST Payroll Deductions If your employees receive benefits that are subject to the GST, you should set up a GST Payroll Deduction account in the General Ledger. GST for benefits provided to employees can be charged and reported annually when you print T4 slips, or you may choose to deduct the GST from each paycheque. For example, if an employee has a taxable benefit of $120, the GST on this amount is $8.40.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. Clearing the Tax Accounts Use the ITC Adjustments account to record GST the government owes you for transactions that are not purchases. For example: • The GST portion of a bad debt that is written off. • The GST rebate a builder pays or credits for new housing.
Amc21.doc, printed on 12/05/97, at 12:06 PM. Last saved on 12/05/97 9:53 AM. Clearing the Tax Accounts Similarly, when you remit PST to the government, the journal entry to record the remittance might appear as follows: Debit 2140 4060 1100 PST Payable PST Commission Cash Credit 90.00 2.70 87.30 The PST Commission amount should be included only if your province allows you to retain part of the provincial sales tax you collect as commission.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary Account — Each separate category of asset, liability, equity, revenue or expense for which transactions are recorded separately. An account can have a debit or credit balance. Account records are usually kept as separate pages in a book called a ledger. Accounts are sometimes called ledger accounts. Accounting Equation — The basis for the entire accounting process: Assets = Liabilities + Equity.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary Chart of Accounts — A list of the accounts in a ledger, arranged by account number. Classified Statements — Financial statements that group accounts into sets that give similar information. For example, typical classifications on a balance sheet would be current assets, long-term investments, plant and equipment, current liabilities, and longterm liabilities.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary to this account. Its balance is printed on the right side of the balance sheet. When you close the books at year end, the balance in the Current Earnings account is transferred to the Retained Earnings account. Current Liabilities — Debts that are payable within one year of the balance sheet date, and which will require the use of a current asset. Credit — A positive balance on the right-hand side of an account.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary Fixed Assets — Assets such as land, buildings, equipment, and trucks that are used in operating the business and which have a long life. Gross Profit on Sales — The profit made on selling inventory before the selling and general and administrative expenses are taken into account. It is the value of Sales less the Cost of Goods Sold. Income — See: Net Income.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary Opening the Books — The process of setting up a new set of books with the correct balance sheet account balances, and zero balances in the revenue and expense accounts. When this is done, the new books are ready to record the upcoming accounting year’s transactions. Owner Equity — The interest or stake the owners have in a company.
Amcglos.doc, printed on 12/05/97, at 12:17 PM. Last saved on 12/05/97 12:17 PM. Glossary Retained Earnings — The accumulated total of after-tax profits and losses over the life of a corporation. If a corporation had more losses than profits, the amount of retained earnings is negative. Any dividends paid are also subtracted from retained earnings. See also: Earnings. Revenues — The money that a company receives from selling products or services. Sales — See: Revenues.
Index A Account credit balance 5-5 crediting 5-6 debit balance 5-5 debiting 5-6 defined 5-3 numbering 7-2 Account balance defined 5-3 Accounting equation 2-1 Accounting period choosing 11-1 defined 11-1 starting 13-1 Accounts chart of 7-2 Accounts payable defined 1-2 subsidiary ledger 16-2 Accounts receivable defined 4-3 subsidiary ledger 16-2 Accrual method 11-1 defined 5-3 Accrued expenses recording 11-5 Accrued revenues recording 11-7 Adjusting entries 11-1 for bad debts 11-3 for depreciation 11-4 for pr
Amcindx.doc, printed on 01/16/98, at 11:31 AM. Last saved on 01/16/98 11:30 AM.
Amcindx.doc, printed on 01/16/98, at 11:31 AM. Last saved on 01/16/98 11:30 AM.
Amcindx.doc, printed on 01/16/98, at 11:31 AM. Last saved on 01/16/98 11:30 AM.
Amcindx.doc, printed on 01/16/98, at 11:31 AM. Last saved on 01/16/98 11:30 AM.
Amcindx.doc, printed on 01/16/98, at 11:31 AM. Last saved on 01/16/98 11:30 AM.
