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. ® Contents Chapter 1: Listing the Things a Business Owns and Owes Starting a Business ............................................................. 1­1 Chapter 2: The Balance Sheet Assets, Liabilities and Equity....................................................2­1 Changes in Assets, Liabilities and Equity .........................................2­2 Chapter 3: Changes in Equity Changes Caused by Withdrawals................................................3­1 Changes Caused by Earnings....................................................3­1 Chapter 4: Recording How Earnings Were Made Revenues and Expenses ........................................................ 4­1 When to Record Revenues and Expenses .........................................4­3 Chapter 5: Recording Changes to the Balance Sheet Recording Transactions ......................................................... 5­1 Debits and Credits ............................................................. 5­4 Debits and Credits on the Balance Sheet ......................................5­7 Revenues and Expenses ..................................................... 5­8 Accounting Manual iii Chapter 6: A Separate Income Statement Why and How ................................................................ 6­1 Debits and Credits Affect Both Statements ....................................... 6­2 Chapter 7: The Journal Why and How ................................................................ 7­1 National Construction's Journal................................................. 7­3 Chapter 8: The Ledger Why and How ................................................................ 8­1 Posting ....................................................................... 8­2 Chapter 9: Manual Accounting Systems Chapter 10: Classified Financial Statements The Balance Sheet ............................................................ 10­1 Assets ................................................................... 10­1 Liabilities ................................................................ 10­2 Equity ................................................................... 10­2 The Income Statement ........................................................ 10­3 Revenues................................................................. 10­4 Expenses ................................................................. 10­4 Net Income............................................................... 10­4 Chapter 11: Adjusting Entries When and Why............................................................... 11­1 Prepaid Expenses............................................................. 11­2 iv Simply Accounting Use of Supplies ...............................................................11­3 Bad Debts .................................................................... 11­3 Depreciation..................................................................11­4 Accrued Expenses.............................................................11­5 Accrued Revenues ............................................................11­7 Chapter 12: The Finished Financial Statements Chapter 13: Starting the Next Accounting Period Closing the Books .............................................................13­1 Opening the Books ............................................................13­3 Chapter 14: Summary of Financial Statement Preparation Chapter 15: Other Types of Legal Organizations Partnerships ..................................................................15­1 Corporations .................................................................15­3 Chapter 16: Subsidiary Ledgers Why and How ................................................................16­1 Accounts Receivable ..........................................................16­2 Accounts Payable .............................................................16­2 Payroll .......................................................................16­3 Inventory.....................................................................16­3 Accounting Manual v Chapter 17: Open Invoice Accounting for Payables and Receivables Late Payment Charges ........................................................ 17­1 Discounts .................................................................... 17­1 Bad Debts.................................................................... 17­2 Prepayments ................................................................. 17­3 Chapter 18: Payroll Accounting Determining an Employee's Gross Earnings..................................... 18­3 Regular Pay .............................................................. 18­4 Overtime Pay............................................................. 18­4 Salary.................................................................... 18­5 Commission .............................................................. 18­5 Taxable Benefits .......................................................... 18­6 Vacation Pay ............................................................. 18­6 Determining the Employee's Deductions........................................ 18­8 CPP Contribution ......................................................... 18­9 EI Premiums ............................................................ 18­10 Registered Pension Plan Contributions..................................... 18­12 Union................................................................... 18­13 Income Tax.............................................................. 18­13 Medical ................................................................. 18­14 GST Payroll Deductions .................................................. 18­15 Calculating the Employer's Associated Expenses ............................... 18­16 CPP and EI Expenses..................................................... 18­16 Employer's WCB Expenses ............................................... 18­17 Updating the Employee's Payroll Record ...................................... 18­17 Creating the Journal Entries .................................................. 18­19 Remitting Funds to the Receiver General and Other Agencies ................... 18­19 Ontario Employer Health Tax ................................................ 18­20 Payroll Accounting in the Province of Quebec .................................. 18­22 vi Simply Accounting Chapter 19: Inventory Accounting Accounting Control of Inventory ...............................................19­3 General Ledger Accounts in Inventory Accounting...............................19­4 Tax Considerations in Accounting for Inventory .................................19­8 Goods and Services Tax....................................................19­8 Provincial Sales Tax ......................................................19­10 Chapter 20: Cost Accounting Project Costs..................................................................20­1 Profit Centres .................................................................20­2 Chapter 21: Accounting for the GST and PST Preparing for Tax Accounting ..................................................21­1 Setting Up General Ledger Accounts ........................................21­1 Accounting for Purchases ......................................................21­2 Accounting for Sales ..........................................................21­3 GST Payroll Deductions .......................................................21­4 Adjustments ..................................................................21­4 Clearing the Tax Accounts .....................................................21­5 Glossary Index Accounting Manual vii 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: Accounting Manual 1­1 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. 1­2 Simply Accounting 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. Accounting Manual 1­3 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 ...