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Simply Accounting
Accounting Manual
Canadian Version
© 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. Use of the software programs described herein and this documentation is subject to the ACCPAC INTERNATIONAL License Agreement enclosed in the software package. This software and its documentation are intended to provide guidance in regard to the subject matter covered. They are sold with the understanding that the author and publisher are not herein engaged in rendering legal, investment, tax, or other professional services. If such services are required, professional assistance should be sought. All product names referenced herein are trademarks of their respective companies.
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Contents
Chapter 1: Listing the Things a Business Owns and Owes
Starting a Business
............................................................. 1Â1
Chapter 2: The Balance Sheet
Assets, Liabilities and Equity....................................................2Â1 Changes in Assets, Liabilities and Equity .........................................2Â2
Chapter 3: Changes in Equity
Changes Caused by Withdrawals................................................3Â1 Changes Caused by Earnings....................................................3Â1
Chapter 4: Recording How Earnings Were Made
Revenues and Expenses ........................................................ 4Â1 When to Record Revenues and Expenses .........................................4Â3
Chapter 5: Recording Changes to the Balance Sheet
Recording Transactions ......................................................... 5Â1 Debits and Credits ............................................................. 5Â4 Debits and Credits on the Balance Sheet ......................................5Â7 Revenues and Expenses ..................................................... 5Â8
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Chapter 6: A Separate Income Statement
Why and How ................................................................ 6Â1 Debits and Credits Affect Both Statements ....................................... 6Â2
Chapter 7: The Journal
Why and How ................................................................ 7Â1 National Construction's Journal................................................. 7Â3
Chapter 8: The Ledger
Why and How ................................................................ 8Â1 Posting ....................................................................... 8Â2
Chapter 9: Manual Accounting Systems Chapter 10: Classified Financial Statements
The Balance Sheet ............................................................ 10Â1 Assets ................................................................... 10Â1 Liabilities ................................................................ 10Â2 Equity ................................................................... 10Â2 The Income Statement ........................................................ 10Â3 Revenues................................................................. 10Â4 Expenses ................................................................. 10Â4 Net Income............................................................... 10Â4
Chapter 11: Adjusting Entries
When and Why............................................................... 11Â1 Prepaid Expenses............................................................. 11Â2
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Use of Supplies ...............................................................11Â3 Bad Debts .................................................................... 11Â3 Depreciation..................................................................11Â4 Accrued Expenses.............................................................11Â5 Accrued Revenues ............................................................11Â7
Chapter 12: The Finished Financial Statements Chapter 13: Starting the Next Accounting Period
Closing the Books .............................................................13Â1 Opening the Books ............................................................13Â3
Chapter 14: Summary of Financial Statement Preparation Chapter 15: Other Types of Legal Organizations
Partnerships ..................................................................15Â1 Corporations .................................................................15Â3
Chapter 16: Subsidiary Ledgers
Why and How ................................................................16Â1 Accounts Receivable ..........................................................16Â2 Accounts Payable .............................................................16Â2 Payroll .......................................................................16Â3 Inventory.....................................................................16Â3
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Chapter 17: Open Invoice Accounting for Payables and Receivables
Late Payment Charges ........................................................ 17Â1 Discounts .................................................................... 17Â1 Bad Debts.................................................................... 17Â2 Prepayments ................................................................. 17Â3
Chapter 18: Payroll Accounting
Determining an Employee's Gross Earnings..................................... 18Â3 Regular Pay .............................................................. 18Â4 Overtime Pay............................................................. 18Â4 Salary.................................................................... 18Â5 Commission .............................................................. 18Â5 Taxable Benefits .......................................................... 18Â6 Vacation Pay ............................................................. 18Â6 Determining the Employee's Deductions........................................ 18Â8 CPP Contribution ......................................................... 18Â9 EI Premiums ............................................................ 18Â10 Registered Pension Plan Contributions..................................... 18Â12 Union................................................................... 18Â13 Income Tax.............................................................. 18Â13 Medical ................................................................. 18Â14 GST Payroll Deductions .................................................. 18Â15 Calculating the Employer's Associated Expenses ............................... 18Â16 CPP and EI Expenses..................................................... 18Â16 Employer's WCB Expenses ............................................... 18Â17 Updating the Employee's Payroll Record ...................................... 18Â17 Creating the Journal Entries .................................................. 18Â19 Remitting Funds to the Receiver General and Other Agencies ................... 18Â19 Ontario Employer Health Tax ................................................ 18Â20 Payroll Accounting in the Province of Quebec .................................. 18Â22
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Chapter 19: Inventory Accounting
Accounting Control of Inventory ...............................................19Â3 General Ledger Accounts in Inventory Accounting...............................19Â4 Tax Considerations in Accounting for Inventory .................................19Â8 Goods and Services Tax....................................................19Â8 Provincial Sales Tax ......................................................19Â10
Chapter 20: Cost Accounting
Project Costs..................................................................20Â1 Profit Centres .................................................................20Â2
Chapter 21: Accounting for the GST and PST
Preparing for Tax Accounting ..................................................21Â1 Setting Up General Ledger Accounts ........................................21Â1 Accounting for Purchases ......................................................21Â2 Accounting for Sales ..........................................................21Â3 GST Payroll Deductions .......................................................21Â4 Adjustments ..................................................................21Â4 Clearing the Tax Accounts .....................................................21Â5
Glossary Index
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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. A proprietorship is a business which keeps accounting records separate from those of its owner but is not legally separate from its owner. On February 1, 1995, Brown deposits $50,000 in National Construction's bank account. The financial position of the company is a summary of what it owns and the claims against the things that it owns on the date of the summary. It can be compared to a snapshot that shows the position at a specific point in time.
National Construction February 1, 1995 Things Owned: Cash in Bank $50,000 Claims Against Things Owned: Jim Brown $50,000
On February 2, National Construction pays cash to buy a dump truck that costs $10,000. This makes the company's list of things owned and claims against things owned look like this:
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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. National Construction now has more trucks, but a new category is needed to describe the bank's claim:
National Construction February 3, 1995 Things Owned: Cash in Bank Trucks $40,000 22,000 Claims Against Things Owned: Bank Loan $12,000 Jim Brown 50,000
Everything the company owns was paid for with either the bank's money or the money invested by the owner. Notice that the value of the things owned equals the value of the claims against things owned. This relationship is always true, and is the basis for the entire accounting process:
Things Owned = Claims Against Things Owned
Let's look at another example. On February 4, National Construction buys $1,000 worth of maintenance supplies for the trucks and the supplier gives National 30 days to pay. Amounts owed to a supplier who has given you credit are called accounts payable.
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Starting a Business
Here is the updated summary:
National Construction February 4, 1995 Things Owned: Cash in Bank $40,000 Trucks 22,000 Maintenance Supplies 1,000 63,000 Claims Against Things Owned: Accounts Payable $ 1,000 Bank Loan 12,000 Jim Brown 50,000 63,000
"Things owned" still equal the "claims against things owned," and the changes which were made resulted in an increase of the same size to both the things owned and the claims against things owned. Because this summary always balances, we call this summary of things owned and claims against things owned a balance sheet. On the balance sheet, things owned are listed on the left, and claims against things owned on the right. The claims against things owned are made by two groups of people: the owner, and others. In law, the owner does not get his investment back until others have been paid back. For this reason, it makes sense to break the claims into two groups, with claims by others ranked first:
National Construction Balance Sheet February 4, 1995 Things Owned: Cash in Bank $ Trucks Maintenance Supplies $ 40,000 22,000 1,000 63,000 Claims Against Things Owned: Accounts Payable $ 1,000 Bank Loan 12,000 13,000 Claims by Owner: Jim Brown 50,000 $ 63,000
You are now ready to go to Chapter 2 to find out more about the balance sheet.
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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. What is left over is the owner's equity in the company. The balance sheet is now presented with the new words:
National Construction Balance S ...