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Accounting Manual

ACCPAC INTERNATIONAL
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AM.

Copyright 2003 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, Inc.

Use of the software programs described herein and this documentation is subject to the
ACCPAC International License Agreement enclosed in the software package.

ACCPAC, the ACCPAC logo and Simply Accounting are either registered trademarks or
trademarks of ACCPAC International, Inc. or its affiliates in the United States and/or other
countries. All other marks are trademarks or registered trademarks of their respective
companies.

ACCPAC INTERNATIONAL
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ACCPAC International, Inc.

End User License Agreement for Indicated
Evaluation, Demonstration or Retail Software

THIS END USER LICENSE AGREEMENT APPLIES TO THESE ACCPAC SOFTWARE PRODUCTS:
z z
z
 ACCPAC Advantage Series  Simply Accounting  BitWare
z z
z
 ACCPAC Exchange  ACCPAC Pro Series  Simply BitWare
z
z
 ACCPAC Options Small Business Edition  FAXserve
z z
z
 ACCPAC Warehouse  ACCPAC VisionPoint  Simply BitFax
z
Management System SBA Edition  ACCPAC Messenger
z z
z
 BPI Accounting II  ACCPAC Plus  Simply Messenger

IMPORTANT READ CAREFULLY BEFORE YOU INSTALL OR USE THIS SOFTWARE: This End User License Agreement
(EULA) is a legal agreement between You (You and Your includes a person and/or an individual entity) and ACCPAC
International, Inc. (ACCPAC) concerning the specified evaluation, demonstration and/or retail software products(s) (hereinafter
respectively referred to as Evaluation Product, Demonstration Product and Retail Product; and collectively referred to as
Software). The Software includes all component parts, the associated media, any printed materials, any updates, and any online
or electronic documentation, as applicable. By accessing, installing, copying or otherwise using the Software, You agree to be
bound by the terms of this EULA. If You do not agree to the terms of this EULA, ACCPAC is unwilling to license the Software to You.
In such event, You may not access, use or copy the Software, and You should promptly contact ACCPAC for instructions on
returning the Software. WRITTEN ASSENT IS NOT A PREREQUISITE TO THE VALIDITY OR ENFORCEABILITY OF THIS EULA.
___________________________________________________________________________________________________________________________________

1. License.
a. License Grant.
(i) Retail Product. If You licensed a Retail Product, subject to the payment of all applicable license fees, and the
terms and conditions of this EULA, ACCPAC hereby grants to You a limited, non-sublicensable, non-exclusive, non-transferable
right to install and run one copy of the specified version of the Software and the accompanying documentation, solely for Your
individual use. This EULA authorizes You to make one copy of the Retail Product solely for backup or archival purposes, provided
that the copy You make contains all of the proprietary notices set forth in or on the original version of the Software.
(ii) Demonstration Product. If You licensed a Demonstration Product, subject to the payment of all applicable license
fees, and the terms and conditions of this EULA, ACCPAC hereby grants to You a limited, non-sublicensable, non-exclusive, non-
transferable and revocable right to install and run copies of the Demonstration Product and the accompanying documentation, solely
on computer(s) owned or controlled exclusively by You, for Your individual use and for demonstration, marketing, promotional, end
user support, training and/or development purposes, each to the extent permitted and/or required under the applicable ACCPAC
Solution Provider, Certified Consultant, Development Partner, Professional Accountant Recommender, Online Referral Partner,
Hosting Partner, Recognized Training Center, Distribution Agreement or other applicable agreements between You and ACCPAC
(collectively the Other ACCPAC Agreement). Use of the Demonstration Product is limited to not more than the number of
concurrent users and/or seats as specified in the Other ACCPAC Agreement, multi-user license, product packaging or
accompanying documentation. This EULA authorizes You to make one copy of the Demonstration Product solely for backup or
archival purposes, provided that the copy You make contains all of the proprietary notices set forth in or on the original version of the
Software. You may have additional rights as may be set forth in the applicable Other ACCPAC Agreement.
(iii) Evaluation Products. If You licensed an Evaluation Product, subject to the terms and conditions of this EULA,
ACCPAC hereby grants to You a limited, non-sublicensable, non-exclusive, non-transferable and revocable right to install and run
one copy of the Evaluation Product and the accompanying documentation, solely for Your individual use for evaluation purposes.
(iv) All Software. Upon receipt of the appropriate Software registration information, ACCPAC will provide You an
alphanumeric key (the Activation Code or PAC Code) to enable You to use the Software pursuant to the terms of this EULA.
Documentation shall include, but not be limited to, any printed materials, online or electronic data provided by or obtained from
ACCPAC with regard to this Software (Documentation). The Software and Documentation are licensed, not sold. Even though
copies of the Software may be provided on media of different formats, copies of the Software on different media formats do not
constitute multiple licenses to the Software. If the Software is licensed as a suite or bundle with more than one specified Software
product, this EULA applies to all such specified Software products, subject to any restrictions or usage terms specified on the
applicable product packaging or accompanying documentation that applies to any of such Software products individually.
b. Single-User. If this Software is licensed as a single user product, You may use only one copy of the Software, by not
more than one user at a time, on a total of one computer or workstation, or personal digital assistant, or pager, or smart phone, or
one such other electronic device for which the Software was designed (Client Device), unless otherwise set forth herein. The
component parts of the Software may not be used individually or jointly in full or in part on more than one Client Device, unless
otherwise set forth herein. The Software is in use on a computer when it is loaded into the temporary memory (i.e., random-
access memory or RAM) of that Client Device.
c. Multi-User. If the Software is licensed with multi-user or networked license terms, You may use the Software on one
server computer, or a greater number as specified in the applicable multi-user license, product packaging or accompanying
documentation, within a multi-user or networked environment for connecting, directly or indirectly, to not more than the maximum
number of Client Devices, concurrent users and/or seats, as specified in the applicable multi-user license, product packaging or
accompanying documentation. Use of software, hardware or services that bypass any Software license restrictions and/or reduce
the number of Client Devices, concurrent users and/or seats, as may be applicable, accessing or utilizing the Software (e.g.,
multiplexing, pooling, or third party add on software or hardware) expressly does not reduce the number of licenses required (i.e.,
the required number of licenses would equal the number of distinct inputs to the multiplexing or pooling software or hardware front

ACCPAC International, Inc. Confidential

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end). If the number of Client Devices, concurrent users and/or seats that can potentially connect to the Software exceeds or has the
potential to exceed the number of licenses You have obtained, then You must have a reasonable self-enforcing automatic
mechanism in place to ensure that Your use of the Software does not exceed the use limits specified for the license You have
obtained.
2. Term. Regardless of the location of the Software, You are responsible for strict compliance with any and all of the terms and
conditions of this EULA. This EULA will terminate automatically if You fail to comply with any of the limitations or other requirements
described herein, and such termination shall be in addition to and not in lieu of any criminal, civil or other remedies available to
ACCPAC. When this EULA terminates, You must immediately cease using the Software and destroy all copies of the Software and
the Documentation. You may terminate this EULA at any point by destroying all copies of the Software and the Documentation.
a. Retail Product. If You licensed a Retail Product, this EULA is effective unless and until You or ACCPAC terminates the
EULA earlier, in accordance with the terms set forth herein.
b. Demonstration Product. If You licensed a Demonstration Product, this EULA is effective unless and until You or
ACCPAC terminates the EULA earlier, in accordance with the terms set forth herein or the terms set forth in Your Other ACCPAC
Agreement or upon the earlier termination or expiration of Your Other ACCPAC Agreement.
c. Evaluation Product. If You licensed an Evaluation Product, this EULA is effective for a period commencing on the
earliest date this Evaluation Software is downloaded, installed or first run and thereafter continuing for the period specified in the
product packaging or accompanying documentation, unless sooner terminated by You or ACCPAC in accordance with the terms set
forth herein, but in no event shall such term exceed one hundred and eighty (180) days.
3. Updates. ACCPAC may, at its sole discretion, make bug fixes, updates and/or service packs available. ACCPACs
maintenance service, if applicable and offered, is available for Retail Product at an additional cost to You, as Licensee, under a
separate written agreement. ACCPACs maintenance service is not available for Evaluation Product.
4. Ownership Rights.
a. Ownership of Software. The Software and Documentation are protected by United States patent, copyright laws and
other intellectual property laws, and international treaty provisions. ACCPAC and its third party licensors, if any, retain all title to and,
except as expressly and unambiguously licensed herein, all rights and interest in (a) the Software, including, but not limited to, all
copies, versions, customizations, compilations and derivative works thereof (by whomever produced) and all related Documentation;
(b) the ACCPAC trademarks, service marks, trade names, icons and logos; (c) any and all copyright rights, patent rights, trade
secret rights and other intellectual property and proprietary rights throughout the world in the foregoing; and (d) all Confidential
Information (as defined in Section 14 below). You acknowledge that Your possession, installation, or use of the Software does not
transfer to You any ownership, title, or registrable interest of any kind to the intellectual property in the Software, and that You will not
acquire any rights to the Software except as expressly set forth in this EULA. You agree that all backup, archival, or any other type of
copies of the Software and Documentation will contain the same proprietary notices that appear on and in the Software and
Documentation.
b. Submissions. Should You decide to submit any materials to ACCPAC via electronic mail, through or to ACCPAC
website(s), or otherwise, whether as feedback, data, questions, comments, ideas, concepts, techniques, suggestions or the like,
You agree that such submissions are unrestricted and shall be deemed non-confidential upon submission. You grant to ACCPAC
and its assigns a non-exclusive, royalty-free, worldwide, perpetual, irrevocable license, with the right to sublicense, to use, copy,
transmit, distribute, create derivative works of, commercialize, display and perform such submissions.
5. Restrictions. You may not rent, lease, sublicense, loan, sell, distribute, market or commercialize any portion of the Software or
its components. You may only install and use the Software on hardware which is (a) under Your exclusive control and (b) in the
case of hardware performing any server functions, located at premises where You normally conduct day-to-day business operations.
Notwithstanding the foregoing, if the Software is hosted under the auspices of an authorized ACCPAC Hosting Partner, it may be
installed on server hardware located at premises under the exclusive or primary control of such Hosting Partner or its agent. You
may not permit any parent, affiliate, subsidiary or any other third parties to benefit from the use or functionality of the Software, either
directly or via a facility management, timesharing, service bureau or any other arrangement; provided, however, that You may use
the Software, as provided herein, to process the data of an affiliate or subsidiary of which You own more than fifty percent (50%);
provided, however, You may not exceed the number of datasets specified on the applicable product packaging or accompanying
documentation. You may not use the Software as part of a facility management, timesharing, or service bureau arrangement. You
may not transfer any or all of the rights granted to You under this EULA. To the maximum extent this restriction is permitted under
applicable law, You may not rename files of, modify, translate, localize, decompile, disassemble, decrypt, reverse engineer, attempt
to derive source code from, remove any proprietary notices from, or create derivative works based upon the Software, in whole or in
part. You may not duplicate or copy any portion of the Software or Documentation, unless otherwise set forth herein. You may not
remove any proprietary notices or labels on the Software, including, but not limited to, the ACCPAC and product names wherever
they may appear. All rights not expressly set forth hereunder are reserved by ACCPAC. ACCPAC reserves the right to periodically
conduct audits upon advance written notice to verify compliance with the terms of this EULA.
6. Warranty and Disclaimer.
a. Limited Warranty. ACCPAC warrants that for ninety (90) days from the date of original purchase the media on which the
Software is contained will be free from defects in materials and workmanship.
b. Customer Remedies. ACCPACs entire liability and Your exclusive remedy shall be replacement of the defective media.
To receive replacement of defective media, You must receive a return authorization number from ACCPAC and return the defective
media to ACCPAC at Your expense with a copy of Your receipt. This limited warranty is void if the defect has resulted from
accident, abuse, or misapplication. Any replacement media will be warranted for the remainder of the original warranty period. This
remedy is not available to the extent it is prohibited under United States export control laws and regulations.
c. Warranty Disclaimer. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AND EXCEPT FOR THE
LIMITED WARRANTY SET FORTH HEREIN, THE SOFTWARE (AND ACCOMPANYING DOCUMENTATION) IS PROVIDED ON
AN AS IS BASIS WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED. WITHOUT LIMITING THE FOREGOING

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PROVISIONS, YOU ASSUME SOLE RESPONSIBILITY FOR SELECTING THE SOFTWARE TO ACHIEVE YOUR INTENDED
RESULTS, AND SOLE RESPONSIBILITY FOR THE INSTALLATION OF, USE OF, AND RESULTS OBTAINED FROM THE
SOFTWARE. WITHOUT LIMITING THE FOREGOING PROVISIONS, ACCPAC MAKES NO WARRANTY THAT THE SOFTWARE
WILL BE ERROR-FREE, VIRUS FREE, OR FREE FROM INTERRUPTIONS OR OTHER FAILURES OR THAT THE SOFTWARE
WILL SATISFY YOUR SPECIFIC REQUIREMENTS. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ACCPAC
DISCLAIMS ALL WARRANTIES AND CONDITIONS, EITHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING BUT NOT
LIMITED TO ANY (IF ANY) IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY, OF FITNESS FOR A
PARTICULAR PURPOSE, OF LACK OF VIRUSES, OF LACK OF ACCURACY OR COMPLETENESS OF RESPONSES, OF
RESULTS, AND LACK OF NEGLIGENCE OR LACK OF WORKMANLIKE EFFORT, ALL WITH REGARD TO THE SOFTWARE
AND ASSOCIATED DOCUMENTATION. THERE IS NO WARRANTY OR CONDITION OF TITLE, QUIET ENJOYMENT, QUIET
POSSESSION, CORRESPONDENCE TO DESCRIPTION, OR NON-INFRINGEMENT WITH REGARD TO THE SOFTWARE. THE
ENTIRE RISK OF THE QUALITY OF OR ARISING OUT OF USE OR PERFORMANCE OF THE SOFTWARE, IF ANY, REMAINS
SOLELY WITH YOU. SOME STATES AND JURISDICTIONS DO NOT ALLOW LIMITATIONS ON IMPLIED WARRANTIES, SO
THE ABOVE LIMITATION MAY NOT APPLY TO YOU. THE FOREGOING PROVISIONS SHALL BE ENFORCEABLE TO THE
MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW.
d. Indemnification. You agree to defend, indemnify and hold harmless ACCPAC and its directors, officers, employees,
affiliates, sublicensees, and agents from and against all claims, defense costs (including reasonable expert and attorneys fees),
judgments and other expenses arising out of or on account of any negligent act, omission, or willful misconduct by You or on Your
behalf in (i) the installation or use of the Software or (ii) your compliance or failure to comply with this EULA.
e. Data. YOU ACKNOWLEDGE THAT ANY DATA ENTRY, CONVERSION OR STORAGE IS SUBJECT TO THE
LIKELIHOOD OF HUMAN AND MACHINE ERRORS, MALICIOUS MANIPULATION, OMISSIONS, DELAYS, AND LOSSES,
INCLUDING, BUT NOT LIMITED TO, INADVERTENT LOSS OF DATA OR DAMAGE TO MEDIA THAT MAY RESULT IN LOSS
OR DAMAGE TO YOU AND/OR YOUR PROPERTY, AND/OR YOUR DETRIMENTAL RELIANCE ON MALICIOUSLY
MANIPULATED DATA. ACCPAC SHALL NOT BE LIABLE FOR ANY SUCH ERRORS, OMISSIONS, DELAYS, OR LOSSES.
YOU ARE RESPONSIBLE FOR ADOPTING REASONABLE MEASURES TO LIMIT THE IMPACT OF SUCH PROBLEMS,
INCLUDING BACKING UP DATA, ADOPTING PROCEDURES TO ENSURE THE ACCURACY OF INPUT DATA, EXAMINING AND
CONFIRMING RESULTS PRIOR TO USE, ADOPTING PROCEDURES TO IDENTIFY AND CORRECT ERRORS AND
OMISSIONS, REPLACING LOST OR DAMAGED MEDIA, AND RECONSTRUCTING DATA. YOU ARE ALSO RESPONSIBLE
FOR COMPLYING WITH ALL LOCAL, STATE, AND FEDERAL LAWS PERTAINING TO THE USE AND DISCLOSURE OF ANY
DATA. IF YOU LICENSED AN EVALUATION PRODUCT, YOU ACKNOWLEDGE AND UNDERSTAND (I) THAT THE
EVALUATION PRODUCT MAY BE USED FOR EVALUATION PURPOSES ONLY, (II) THAT THE EVALUATION PRODUCT
SHALL BE OPERABLE ONLY FOR A LIMITED TIME AND (III) THAT, UPON EXPIRATION OF THE EVALUATION PERIOD, ANY
DATA OR OTHER INFORMATION USED WITH, PROCESSED BY AND/OR STORED IN CONJUNCTION WITH THE
EVALUATION PRODUCT MAY BE IRRETRIEVABLE, UNRECOVERABLE AND/OR OTHERWISE UNUSABLE.
f. Authorized ACCPAC Solution Providers and Certified Consultants. ANY AUTHORIZED ACCPAC SOLUTION
PROVIDER, CERTIFIED CONSULTANT, RESELLER, INSTALLER OR CONSULTANT IS NOT AFFILIATED WITH ACCPAC IN
ANY CAPACITY OTHER THAN AS A RESELLER, INSTALLER OR CONSULTANT OF ACCPACS PRODUCTS AND HAS NO
AUTHORITY TO BIND ACCPAC OR MODIFY ANY LICENSE OR WARRANTY. ACCPAC MAKES NO REPRESENTATIONS,
WARRANTY, ENDORSEMENT OR GUARANTEE WITH RESPECT TO THE SKILLS OR QUALIFICATIONS OF ANY
AUTHORIZED ACCPAC SOLUTION PROVIDER, CERTIFIED CONSULTANT, RESELLER, INSTALLER OR CONSULTANT AND
YOU ARE ENCOURAGED TO INDEPENDENTLY INVESTIGATE THE SKILLS AND QUALIFICATIONS OF ANY AUTHORIZED
ACCPAC SOLUTION PROVIDER, CERTIFIED CONSULTANT, RESELLER, INSTALLER OR CONSULTANT WITH WHOM YOU
ASSOCIATE.
7. Limitation of Liability. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, WHETHER IN TORT,
CONTRACT, OR OTHERWISE, SHALL ACCPAC BE LIABLE TO YOU OR TO ANY OTHER PERSON OR ENTITY FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER WHATSOEVER (INCLUDING,
WITHOUT LIMITATION, DAMAGES FOR LOSS OF PROFITS, LOSS OF GOODWILL, LOSS OF CONFIDENTIAL OR OTHER
INFORMATION, FOR BUSINESS INTERRUPTION, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTION, FOR
PERSONAL INJURY, LOSS OF PRIVACY, FOR FAILURE TO MEET ANY DUTY INCLUDING A DUTY OF GOOD FAITH OR OF
REASONABLE CARE, FOR NEGLIGENCE (WHETHER ACTIVE OR PASSIVE), AND FOR ANY OTHER PECUNIARY OR OTHER
LOSS WHATSOEVER) ARISING OUT OF OR IN ANY WAY RELATED TO THE USE OR INABILITY TO USE THE SOFTWARE,
OR OTHERWISE UNDER OR IN CONNECTION WITH ANY PROVISION OF THIS EULA, EVEN IN THE EVENT OF FAULT, TORT
(INCLUDING NEGLIGENCE, AND GROSS NEGLIGENCE), STRICT LIABILITY, BREACH OF CONTRACT, OR BREACH OF
WARRANTY BY ACCPAC, AND EVEN IF ACCPAC HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO
EVENT WILL ACCPAC BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE LIST PRICE ACCPAC CHARGES FOR A LICENSE
TO THE SOFTWARE. THIS LIMITATION OF LIABILITY SHALL NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL
INJURY TO THE EXTENT THAT APPLICABLE LAW PROHIBITS SUCH LIMITATION. FURTHERMORE, SOME STATES AND
JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO
THIS LIMITATION AND EXCLUSION MAY NOT APPLY TO YOU. THE FOREGOING PROVISIONS SHALL BE ENFORCEABLE
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW.
8. Entire Agreement. This EULA expressly supersedes and completely replaces any and all prior end user license agreements.
ACCPAC shall not be bound by or liable to You for any pre-existing or contemporaneous written or oral representations or
warranties, made by anyone, with respect to the Software Product, including any authorized Solution Provider, Certified Consultant,
distributor or reseller or their respective agents, employees, or representatives, nor shall You be deemed a third party beneficiary of
any obligations of ACCPAC to any such Solution Provider, Certified Consultant, distributor or reseller.
9. Attorneys Fees. If any party employs attorneys to enforce any rights arising out of or relating to this EULA, the prevailing party
shall be entitled to recover its reasonable attorneys fees, costs, and other expenses.

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10. Severability. If any provision of this EULA is held to be unenforceable, the enforceability of the remaining provisions shall in no
way be affected or impaired thereby.
11. United States Government. The Software and accompanying Documentation are deemed to be commercial computer
software and commercial computer software documentation, respectively, pursuant to DFAR Section 227.7202 and FAR Section
12.212, as applicable. Any use, modification, reproduction, release, performance, display or disclosure of the Software and
accompanying Documentation by the United States Government shall be governed solely by the terms of this EULA and shall be
prohibited except to the extent expressly permitted by the terms of this EULA.
12. Export Controls. You acknowledge that the Software may be subject to export controls imposed by U.S. laws and regulations.
During the term of this EULA, You agree to comply with the U.S. Foreign Corrupt Practices Act and with all export laws and
restrictions and regulations of the United States Department of Commerce or other United States or foreign agency or authority, and
not to knowingly export, re-export, download, or allow the export, re-export or downloading of the Software or Documentation and any
underlying information or technology in violation of any such restrictions, laws or regulations, to Afghanistan, Cuba, Iran, Iraq, Libya,
North Korea or to any Group D:1 or E:2 country (or to any national of such countries), specified in the then current Supplement No. 1
to Part 740, or in violation of the embargo provisions in Part 746 of the U.S. Export Administration Regulations (or any successor
regulations or supplement), except in compliance with all licenses and approvals required under applicable export laws and
regulations, including, without limitation, those of the United States Department of Commerce. By accessing, installing,
downloading or using the Software You are agreeing to the foregoing and You are certifying that You are not located in, under the
control of, or a national or resident of any such country or on any such list.
EXPORT OF THE SOFTWARE MAY BE SUBJECT TO COMPLIANCE WITH THE RULES AND REGULATIONS PROMULGATED
FROM TIME TO TIME BY THE BUREAU OF EXPORT ADMINISTRATION, UNITED STATES DEPARTMENT OF COMMERCE,
WHICH RESTRICT THE EXPORT AND RE-EXPORT OF CERTAIN PRODUCTS AND TECHNICAL DATA. YOU
ACKNOWLEDGE AND AGREE THAT IF THE EXPORT OF THE SOFTWARE IS CONTROLLED UNDER SUCH RULES AND
REGULATIONS, THEN YOU SHALL NOT CAUSE THE SOFTWARE TO BE EXPORTED OR RE-EXPORTED, DIRECTLY OR
INDIRECTLY, (A) WITHOUT ALL EXPORT OR RE-EXPORT LICENSES AND UNITED STATES OR OTHER GOVERNMENTAL
APPROVALS REQUIRED BY ANY APPLICABLE LAWS, OR (B) IN VIOLATION OF ANY APPLICABLE PROHIBITION AGAINST
THE EXPORT OR RE-EXPORT OF ANY PART OF THE SOFTWARE. SOME COUNTRIES HAVE RESTRICTIONS ON THE USE
OF ENCRYPTION WITHIN THEIR BORDERS, OR THE IMPORT OR EXPORT OF ENCRYPTION EVEN IF FOR ONLY
TEMPORARY PERSONAL OR BUSINESS USE. YOU ACKNOWLEDGE THAT THE IMPLEMENTATION AND ENFORCEMENT
OF THESE LAWS IS NOT ALWAYS CONSISTENT AS TO SPECIFIC COUNTRIES. YOU ACKNOWLEDGE THAT IT IS YOUR
ULTIMATE RESPONSIBILITY TO COMPLY WITH ANY AND ALL GOVERNMENT EXPORT AND OTHER APPLICABLE LAWS
AND THAT ACCPAC HAS NO FURTHER RESPONSIBILITY AFTER THE INITIAL LICENSE TO YOU WITHIN THE ORIGINAL
COUNTRY OF LICENSE.
13. High Risk Activities. The Software is not fault-tolerant and is not designed or intended for use in hazardous environments
requiring fail-safe performance, including without limitation, in the operation of nuclear facilities, aircraft navigation or
communication systems, air traffic control, weapons systems, direct life-support machines, or any other application in which the
failure of the Software could lead directly to death, personal injury, or severe physical or property damage (collectively, High Risk
Activities). ACCPAC expressly disclaims any express or implied warranty of fitness for High Risk Activities.
14. Confidentiality. You agree that the Software, including, but not limited to, all source and object code components, screen
shots and displays, graphical user interfaces, algorithms, formulae, data structures, scripts, application programming interfaces and
protocols, and the Documentation (collectively the Confidential Information) are trade secrets of ACCPAC and are owned by
ACCPAC or, where applicable, its third-party licensors. You agree to retain all Confidential Information in strict confidence at least
with the same amount of diligence that You exercise in preserving the secrecy of Your most-valuable information, but in no event
less than reasonable diligence. You agree to: (i) only disclose Confidential Information to Your employees and agents to the extent
required to use the Software under the terms of this EULA and not to disclose or disseminate the Confidential Information to any
third party without the prior written consent of ACCPAC, (ii) use the Confidential Information solely for Your benefit as provided for
herein and not to allow any third party to benefit from the Confidential Information, and (iii) bind Your employees and agents, by
terms no less restrictive than those set forth herein, to maintain the confidentiality of such Confidential Information, and not use or
disclose such information except as permitted under this EULA. Notwithstanding the disclosure of any Confidential Information for
any reason, such Confidential Information shall continue to be owned by ACCPAC or its licensors. Nothing contained herein shall
be deemed to prevent You from disclosing or disseminating Your data, in any format or any report, to whomever You so choose.
Notwithstanding anything else to the contrary in this Section 14, and only with respect to Demonstration Product, You are permitted
to use the Demonstration Product to demonstrate and promote the functionality and benefits of the Product.
15. Miscellaneous. This EULA is exclusively governed by the laws of the United States and the State of California, without
reference to conflicts of law principles. In the event of a dispute or legal action between the parties, they agree to waive any
objections to personal jurisdiction, and agree to service of process and exclusive venue in the Federal District Court for Northern
California or the California Superior Court of Alameda County. The application of the United Nations Convention of Contracts for the
International Sale of Goods is expressly excluded. This EULA sets forth all of Your rights and is the entire agreement between the
parties. This EULA supersedes any other communications with respect to the Software and/or Documentation. This EULA may not
be modified except by a written addendum issued by a duly authorized representative of ACCPAC. No provision hereof shall be
deemed waived unless such waiver shall be in writing and signed by a duly authorized representative of ACCPAC. You hereby
acknowledge a breach of this EULA would cause irreparable harm and significant injury to ACCPAC that may be difficult to ascertain
and that a remedy at law would be inadequate. You agree that ACCPAC shall have the right to seek and obtain immediate injunctive
relief to enforce the obligations under this EULA in addition to any other rights and remedies it may have. If any provision of this
EULA is held invalid, the remainder of this EULA shall continue in full force and effect. The controlling language of this EULA is
English. If You have received a translation into another language, it has been provided for Your convenience only.
16. ACCPAC Customer Contact. If You have any questions concerning these terms and conditions, or if You would like to contact
ACCPAC for any other reason, please call (925) 461-2625, or write to us at: ACCPAC International, Inc., 6700 Koll Center Parkway,
Third Floor, Pleasanton, California 94566, USA. You may also find us on the Web at http://www.accpac.com or
http://www.accpaconline.com.

ACCPAC INTERNATIONAL, INC. Confidential

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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

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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

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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

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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

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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

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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: Claims Against Things Owned:

Cash in Bank $50,000 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: Claims Against Things Owned:

Cash in Bank $40,000 Jim Brown $50,000
Truck 10,000

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: Claims Against Things Owned:

Cash in Bank $40,000 Bank Loan $12,000
Trucks 22,000 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: Claims Against Things Owned:

Cash in Bank $40,000 Accounts Payable $ 1,000
Trucks 22,000 Bank Loan 12,000
Maintenance Supplies 1,000 Jim Brown 50,000
63,000 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: Claims Against Things Owned:

Cash in Bank $ 40,000 Accounts Payable $ 1,000
Trucks 22,000 Bank Loan 12,000
Maintenance Supplies 1,000 13,000
$ 63,000 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 Sheet
February 4, 1995

Assets: Liabilities:
Cash in Bank $ 40,000 Accounts Payable $ 1,000
Trucks 22,000 Bank Loan 12,000
Maintenance Supplies 1,000 13,000
$ 63,000 Equity:
Jim Brown 50,000
$ 63,000

Our statement "Things Owned = Claims Against Things

Owned" can now be rewritten:

Assets = Liabilities + Equity

This statement is the basis of accounting and is accounting's

single most important concept. It is called the accounting
equation.

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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.

Here are some more examples so we can see how assets,

liabilities, and equity are related.

On February 5, National Construction buys some furniture

costing $2,000 for the office Jim Brown has set up in his home.
The supplier gives National 30 days to pay the bill. Our updated
balance sheet has a new asset called furniture, and accounts
payable has increased by the amount of the supplier's bill:

National Construction
Balance Sheet
February 5, 1995

Assets: Liabilities:
Cash in Bank $ 40,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 12,000
Maintenance Supplies 1,000 15,000
Furniture 2,000 Equity:
$ 65,000 Jim Brown 50,000
$ 65,000

On February 7, National buys a front-end loader which costs

$20,000, but this time the bank will only lend $15,000 and the
company must make a down payment of $5,000. Because Brown
expects to buy more equipment related to construction, he
categorizes the front-end loader as Construction Equipment and
puts a value of $20,000 beside it.

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Changes in Assets, Liabilities and Equity

He also records the decrease in Cash in Bank of $5,000 (to

$35,000) and the increase in the Bank Loan of $15,000 (to
$27,000):

National Construction
Balance Sheet
February 7, 1995

Assets: Liabilities:
Cash in Bank $ 35,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 50,000
$ 80,000 $ 80,000

You are now ready to go to Chapter 3 to find out more about

changes in withdrawals, earnings, and losses.

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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.

Changes Caused by Withdrawals

On February 22, Brown needs $2,000 to repair the family car
and takes it out of the company's bank account because he
doesn't have enough money personally. When a proprietor
takes money out of his business, it is called a withdrawal.

The Cash in Bank category goes down by $2,000 (to $33,000)

and the equity category goes down by $2,000 (to $48,000):

National Construction
Balance Sheet
February 22, 1995

Assets: Liabilities:
Cash in Bank $ 33,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
$ 78,000 $ 78,000

Changes Caused by Earnings

Brown completes his first gravel hauling contract on February
27 and National Construction is paid $5,000 cash. The Cash in
Bank category therefore increases by $5,000 to $38,000.

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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.

Since assets increased by $5,000 (cash was received), and the

amount of liabilities didn't change (National doesn't owe
anyone anything extra as a result of earning the $5,000), we
know that equity must increase by $5,000 in order to keep the
accounting equation in balance.

This increase in equity was earned by the company, not

invested by the owner, so we show it as a separate category of
equity called Earnings.

National Construction
Balance Sheet
February 27, 1995

Assets: Liabilities:
Cash in Bank $ 38,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
$ 83,000 Earnings 5,000
53,000
$ 83,000

If the company lost money in the future, the losses would

reduce the amount of the earnings by the amount of the loss.

For the same reasons that earnings has its own category,
withdrawals could also have its own category. It has not been
added at this point, though, in order to keep the balance sheet
relatively uncluttered.

You are now ready to go to Chapter 4 to find out about

revenues and expenses.

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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. This time he has to pay an
equipment operator $2,000 in wages, which is paid in cash on
March 1.

National took in $6,000 cash and paid out $2,000 in cash. Cash
in Bank therefore increases by $4,000 (to $42,000). Again,
liabilities didn't increase as a result of the contract, so the
earnings section of equity on the balance sheet increases by
$4,000 (to $9,000) to keep it balanced.

Brown can now update his balance sheet for the increase of
$4,000 in Cash in Bank (to $42,000) and the $4,000 increase in
earnings (to $9,000) and be correct, but he will have left out
some very useful and important information. He will not be
able to see on the balance sheet how much cash was received
and spent in order to earn the $4,000.

To show this on the balance sheet, he breaks the earnings

category into two parts, revenues, and expenses; which he uses
to show how much money the company took in and paid out in
order to earn the total of $9,000.

Revenues are the money a company is paid, or expects to be

paid, for goods or services it provides to its customers. The
word Sales is sometimes used in its place for a company that
sells products instead of services. National was paid $5,000 for

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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.

Brown can now update his balance sheet to show the increases
in Cash in Bank and Earnings, as well as show how the earnings
were earned.

He does not have to record the fact that he earned $4,000 for
this last contract directly ($6,000 revenues minus $2,000
expenses), because after expenses are subtracted from revenues
within the earnings category of the balance sheet, this increase
of $4,000 in earnings will have been taken into account
automatically:

National Construction
Balance Sheet
March 1, 1995
Assets: Liabilities:
Cash in Bank $ 42,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
$ 87,000 Earnings
Revenues:
Hauling $ 5,000
Excavating 6,000
11,000
Expenses:
Wages 2,000
Earnings 9,000
57,000
$ 87,000

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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.

This means that National doesn't actually have to be paid for

the revenue in order to record the revenue on its balance sheet.
It just has to complete the contract and bill the customer. The
amount receivable from a customer for goods or services is an
asset (it is actually a promise to pay in cash) called an account
receivable.

Expenses are recorded in the financial records either at the time

they are incurred (for example, advertising), or if they can be
matched to a certain good or service provided (for example,
wages for a particular contract). The matching of expenses with
the revenues that they helped generate is called the matching
concept.

This means that National doesn't have to pay for an expense to

be able to record the expense on its balance sheet. It just has to
incur the expense and then record the amount owed to someone
for the expense as an account payable.

Brown completes another hauling contract on March 3 for

which National will be paid $3,000 within 30 days. His expenses
are $2,000 in wages which he pays on March 3 out of cash.

The $3,000 owed to National by the customer is an account

receivable, so Brown sets up an asset category with that name
and assigns it $3,000. At the same time, he increases Hauling
Revenue by $3,000 (to $8,000) because it is the source of the
account receivable.

He records revenue now, even though National hasn't yet been

paid, because for service contracts, revenue is recorded when
the contract is completed.

His expenses for the contract are $2,000 in wages so he increases

Wage Expense by this amount (to $4,000). He records it now

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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.

National Construction
Balance Sheet
March 3, 1995

Assets: Liabilities:
Cash in Bank $ 40,000 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Accounts Receivable 3,000 Earnings
$ 88,000 Revenues:
Hauling $ 8,000
Excavating 6,000
14,000
Expenses:
Wages 4,000
Earnings 10,000
58,000

$ 88,000

You are now ready to go to Chapter 5 to learn more about

recording changes to the balance sheet.

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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. A transaction is the
exchange of something of value (cash, a service) for something
else of value (a truck, a promise to pay). All the changes
recorded between February 1 and March 3 have been due to
transactions.

National Construction's next completed project is an excavation

contract. On March 5, Brown bills the customer the full amount
of $3,000 and pays $2,000 cash to the subcontractor who did the
work and $500 cash for wages to his employee who supervised
the work. These are two transactions. The first bills the
customer and the second pays the subcontractor and employee.

To record these transactions, he deals with each one separately.

Brown increases Accounts Receivable by $3,000 (to $6,000) and

increases Excavating Revenue by $3,000 (to $9,000). He records
the revenue now because the job is complete.

He decreases Cash in Bank by $2,500 (to $37,500), increases

Wage Expense by $500 (to $4,500), and sets up a new category
called Subcontracts Expenses for $2,000. He records the

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Recording Transactions

expenses now because he wants to match them to the revenue

that he has already recorded.

Finished recording, he totals the balance sheet again, with the

following result:

National Construction
Balance Sheet
March 5, 1995

Assets: Liabilities:
Cash in Bank $ 37,500 Accounts Payable $ 3,000
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 30,000
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Accounts Receivable 6,000 Earnings
$ 88,500 Revenues:
Hauling $ 8,000
Excavating 9,000
17,000
Expenses:
Wages 4,500
Subcontracts 2,000
6,500
Earnings 10,500
58,500
$ 88,500

On March 6, National receives the $3,000 owed from the hauling

contract completed on March 3. Brown had accounted for the
money owed to National by increasing Accounts Receivable by
$3,000. Now that National has been paid, Brown must reduce
Accounts Receivable by $3,000 (to $3,000), and increase Cash in
Bank by $3,000 (to $40,500).

Notice that National was paid the $3,000 that it was owed for
the contract, but that no revenue or earnings were recorded as a
result of this payment. This is because the revenue was
recorded at the time the contract was completed.

National is now simply recording the payment of an amount

owed to it. The act of collecting cash owed reduces Accounts
Receivable and increases Cash in Bank, but does not increase

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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. The goal of the accrual method is
to accurately match earnings with the events that resulted in the
earnings. These events are the generation of revenue and the
incurring of expenses, not the collection of accounts receivable
and the payment of accounts payable.

This is why revenues and expenses are recorded when they are
earned or incurred, rather than when they are received or paid.

The categories under Assets, Liabilities, Equity, Revenues and

Expenses are called accounts, and that word will be used from
now on. The value assigned to any account (such as Furniture
$2,000) is called the account balance, or balance for short.

Also, on March 6, Brown pays for the maintenance supplies ($1,000)

and furniture ($2,000) purchased earlier on credit. He therefore
reduces the balance of the Cash in Bank account by $3,000 (to
$37,500) and the Accounts Payable account by $3,000 (to zero):

National Construction
Balance Sheet
March 6, 1995
Assets: Liabilities:
Cash in Bank $ 37,500 Bank Loan $ 27,000
Trucks 22,000
Maintenance Supplies 1,000 Equity:
Furniture 2,000 Jim Brown 48,000
Construction Equipment 20,000 Earnings
Accounts Receivable 3,000 Revenues:
$ 85,500 Hauling 8,000
Excavating 9,000
17,000
Expenses:
Wages 4,500
Subcontracts 2,000
6,500
Earnings 10,500
58,500
$ 85,500

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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).

He increases Accounts Payable by $300 (to $300), decreases

Cash in Bank by $400 (to $37,100), and at the same time sets up
a Maintenance expense account for $200, a Telephone expense
account for $100 and an Interest expense account for $400.

Finished recording, he now totals the balance sheet again:

National Construction
Balance Sheet
March 6, 1995
Assets: Liabilities:
Cash in Bank $ 37,100 Accounts Payable $ 300
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 27,300
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Accounts Receivable 3,000 Earnings
$ 85,100 Revenues:
Hauling 8,000
Excavating 9,000
17,000
Expenses:
Wages 4,500
Subcontracts 2,000
Telephone 100
Maintenance 200
Interest 400
7,200
Earnings 9,800
57,800
$ 85,100

Debits and Credits

Over time, an easy-to-use and logical system has developed to
record any changes to a balance sheet. It will be used from now
on to explain how to record changes to National's balance sheet.

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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. Accounts then
can have either a left or right balance.

Debit refers to the left side of an account and credit refers to the
right side of an account. Similarly, accounts which have
balances on the left side of a balance sheet have debit balances,
and accounts which have balances on the right side of a balance
sheet have credit balances.

Do not place any additional meanings on these words. In the

practice of accounting, these two words refer only to the left
(debit) and right (credit) sides of an account.

Asset accounts are on the left side of a balance sheet and

therefore have debit balances. Liability and equity accounts are
on the right side of a balance sheet and therefore have credit
balances.

The statement on the next page is National's balance sheet, but

we have set up each account so that it can have either a left
(debit) or right (credit) balance.

For each account, we have put its balance on either the debit or
credit side of the account, whichever is correct for that
particular account. Because we usually rank revenues and
expenses vertically, we have left them out temporarily and only
show Earnings in their place.

Notice that the total of the debit balances equals the total of the
credit balances. We expect this, since this is just another way of
saying that assets equal liabilities plus equity. It is also true then
that if we make any changes to a balance sheet, the total amount
of the debit changes equals the total amount of the credit
changes.

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Debits and Credits

National Construction
Trial Balance
March 6, 1995

Debit Balance Credit Balance

Cash in Bank 37,100
Trucks 22,000
Maintenance Supplies 1,000
Furniture 2,000
Construction Equipment 20,000
Accounts Receivable 3,000
Accounts Payable 300
Bank Loan 27,000
Jim Brown 48,000
Earnings . 9,800
85,100 85,100

Notice that it is possible for asset accounts to have credit

balances (as long as the balance sheet still balances). For
instance, if Cash in Bank had a credit balance of $3,000, it would
mean that you were overdrawn at the bank by $3,000. Cash in
Bank would still be shown as an asset, but the account balance
displayed beside it would have a negative sign beside it.

The act of increasing the account balance of an account that has

a debit balance is called debiting. Instead of saying "debiting
the account," we could say "debit the account."

The act of increasing the account balance of an account that has

a credit balance is called crediting. Instead of saying "crediting
the account," we could say "credit the account."

To decrease the account balance of an account that has a debit

balance, we would do the opposite of what we would do to
increase it, and therefore credit the account.

Summary of Debit and Credit Theory

Assets = Liabilities + Equity
Asset Accounts Liability Accounts Equity Accounts

Debit to Credit to Debit to Credit to Debit to Credit to

+ - - + - +

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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. To record this, Brown debits
the Cash in Bank account by $3,000 to record the increase (to
$40,100) and credits the Accounts Receivable account by $3,000
to record the decrease (to zero).

On the same day, he pays his truck tune-up bill of $200. To

record this, he debits the Accounts Payable account by $200 to
record the decrease (to $100) and credits the Cash in the Bank
account by $200 to record the decrease (to $39,900).

Finished recording, he totals the balance sheet again.

National Construction
Balance Sheet
March 7, 1995
Assets: Liabilities:
Cash in Bank $ 39,900 Accounts Payable $ 100
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 27,100
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
$ 84,900 Earnings
Revenues:
Hauling 8,000
Excavating 9,000
17,000
Expenses:
Wages 4,500
Subcontracts 2,000
Telephone 100
Maintenance 200
Interest 400
7,200
Earnings 9,800
57,800
$ 84,900

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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. Increases in
revenue increase the company's earnings, and therefore increase
the equity in the company. Additional revenues should
therefore be recorded as credits to revenue accounts, and
revenue accounts would normally have credit balances.

Similarly, to decrease the balance of an equity account (invested

capital or earnings) we debit it. Increases in expense decrease
the company's earnings, and therefore decrease the equity in the
company. Additional expenses should therefore be recorded as
debits to expense accounts, and expense accounts would
normally have debit balances.

Here is an example. On March 15, Brown completes another

excavating contract for $7,000, for which National Construction
will be paid in 30 days. His expenses are a subcontractor
($5,000, payable in 30 days) and his crew supervisor's wages
($1,000, paid in cash on March 15).

To record the completion of this contract and the related

transactions, Brown first debits Accounts Receivable by $7,000
to record the increase (to $7,000) and credits Excavating
revenue by $7,000 to record the increase (to $16,000), since it
was the source of the account receivable.

He then debits Subcontracts expenses by $5,000 to record the

increase (to $7,000) and credits Accounts Payable by $5,000 to
record the increase (to $5,100).

He then debits Wage expense by $1,000 to record the increase

(to $5,500) and credits Cash in Bank by $1,000 to record the
decrease because the wages have been paid.

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Debits and Credits

Finished recording, he totals the balance sheet again with the

following result:

National Construction
Balance Sheet
March 15, 1995

Assets: Liabilities:
Cash in Bank $ 38,900 Accounts Payable $ 5,100
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 32,100
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Accounts Receivable 7,000 Earnings
$ 90,900 Revenues:
Hauling $ 8,000
Excavating 16,000
24,000
Expenses:
Wages 5,500
Subcontracts 7,000
Telephone 100
Maintenance 200
Interest 400
13,200
Earnings 10,800
58,800
$ 90,900

You are now ready to go to Chapter 6 to learn more about the

income statement.

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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. For instance, if
someone says that a job provides an income of $6,000, it is
important to know if that is the monthly income or the annual
income. Income is also called net income, profit and net profit.

The reason for having a separate income statement is that it

provides information on how the earnings on the balance sheet
were arrived at and over what period of time.

As National Construction has only been in business for a short

time, the earnings on the balance sheet reflect exactly the net
income from the income statement for the year to date.

National Construction
Balance Sheet
March 15, 1995

Assets: Liabilities:
Cash in Bank $ 38,900 Accounts Payable $ 5,100
Trucks 22,000 Bank Loan 27,000
Maintenance Supplies 1,000 32,100
Furniture 2,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Accounts Receivable 7,000 Earnings 10,800
$ 90,900 58,800

$ 90,900

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Debits and Credits Affect Both Statements

National Construction
Income Statement
Feb 1 - Mar 15, 1995

Revenues
Hauling $ 8,000
Excavating 16,000
$ 24,000
Expenses
Wages 5,500
Subcontracts 7,000
Telephone 100
Maintenance 200
Interest Bank Loan 400
13,200
Net Income $ 10,800

Note that the Net Income on the income statement equals the
Earnings on the balance sheet.

Debits and Credits Affect Both Statements

Each time a debit or credit is made to a revenue or expense
account, net income for the year must be recalculated and this
new income figure must be put into the balance sheet. As long
as changes that are recorded to the balance sheet and income
statement have debits and credits of equal value, the balance
sheet will always balance and the Net Income/Earnings figures
on the two statements will be the same.

After the business year is over, the Earnings section of the

balance sheet will have two accounts: Previous Years' Earnings;
and Current Year's Earnings.

The Current Year's Earnings will be the same as the Net Income
on the income statement for the business year to date. Previous
Years' Earnings will be the total of all Earnings since the
business was started, except for the portion shown as Current
Year's Earnings. The debits and credits necessary to implement
this change at the end of a business year will be covered later.

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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.

You are now ready to go to Chapter 7 to learn more about the

journal.

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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.

He doesn't know when it increased, how large the balance got,

how fast it increased, or if he's ever paid any of his suppliers.
He also doesn't have any of the historical data (past transactions
that were recorded) on any of the other accounts.

This being the case, he sets up a book in which to list by date all
the transactions he has recorded in his financial statements.
Such a book is called a journal or general journal.

The journal is a company's primary record of all its business

transactions. Transactions are recorded in the journal before
they are recorded on the financial statements. This is to ensure
that there is a record of the cause of any changes to the financial
statements before the financial statements are prepared, after
which the cause might not be traceable.

For each transaction to be recorded in the journal Brown needs

to know the date, who is involved (customer, employee, and so
on), if money was received, paid or earned, and the activity that
resulted in the transaction.

Then he can determine the amount of the debits and credits,

which accounts got debited and credited, and a short

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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. Date Particulars # Debit Credit

1 Feb 1, 95 Cash in Bank 1020 50,000

Jim Brown 3300 50,000
Owner invested money in
company

Such an entry is called a journal entry. As mentioned earlier,

but using different words, for each journal entry the total value
of the debits must equal the total value of the credits, otherwise
the financial statements will not balance. When making a
journal entry, it is common practice to list all the debits above
the credits and leave the dollar signs out.

The numbers 1020 and 3300 in the "#" column are account
numbers, which have been assigned to reduce errors such as
debiting or crediting accounts with similar names. A chart of
accounts is a list of all the accounts by their account number. It
functions like an index for a book.

For National Construction, asset accounts are assigned account

numbers from 1000-1999, liability accounts are assigned
numbers from 2000-2999, equity accounts are assigned numbers
from 3000-3999, revenue accounts are assigned numbers from
4000-4999 and expense accounts are assigned numbers from
5000-5999.

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National Construction's Journal

Here is National Construction's chart of accounts:

National Construction
Chart of Accounts
March 15, 1995

1020 Cash in Bank

1200 Accounts Receivable
1400 Maintenance Supplies
1600 Trucks
1650 Construction Equipment
1700 Furniture
2080 Accounts Payable
2500 Bank Loan
3300 Jim Brown's Invested Capital
3600 Current Earnings
4100 Hauling Revenue
4200 Excavating Revenue
5020 Wage Expense
5040 Subcontracts Expense
5080 Maintenance Expense
5160 Interest Expense
5220 Telephone Expense

National Construction's Journal

Here is the complete journal for National Construction from
February 1 to March 15. Revenues and expenses are recorded
when they were actually earned or incurred, not added as a
breakdown of income as they were earlier when we developed
the model. To make it easy to refer to specific journal entries,
the entries are numbered sequentially as they are made.

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National Construction's Journal

National Construction
Journal

No. Date Particulars # Debit Credit

1 Feb 1, 95 Cash in Bank 1020 50,000 50,000

Jim Brown 3300
Owner invested in company

2 Feb 2, 95 1600 10,000 10,000

Trucks 1020
Cash in Bank

3 Feb 3, 95 Bought TR39 Dump Truck 1600 12,000 12,000

Trucks 2500
Bank Loan

4 Feb 4, 95 Bought TR41, bank financed 1400 1,000 1,000

Maintenance Supplies 2080
Accounts Payable

5 Feb 5, 95 For trucks, from Apollo Auto. 1700 2,000 2,000

Furniture 2080
Accounts Payable

6 Feb 7, 95 For office, Western Furniture 1650 20,000 15,000

Construction Equipment 2500 5,000
Bank Loan 1020
Cash in Bank

7 Feb 22, 95 Front end loader, loan with bank 3300 2,000 2,000
Jim Brown 1020
Cash in Bank

8 Feb 27, 95 Owner took cash out of company 1020 5,000 5,000
Cash in Bank 4100
Hauling Revenue

9 Mar 1, 95 Pool contract completed. Paid. 1020 6,000 6,000

Cash in Bank 4200
Excavating Revenue
Basement: invoice #1002

10 Wage Expense 5020 2,000

Cash in Bank 1020 2,000
Basement, Jones paid

11 Accounts Receivable 1200 3,000

Hauling Revenue 4100 3,000
Tunnel: invoice #1003

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National Construction's Journal

National Construction
Journal

No. Date Particulars # Debit Credit

12 Mar 3, 95 Wage Expense 5020 2,000 2,000

Cash in Bank 1020
Tunnel, Jones paid
13 Mar 5, 95 Accounts Receivable 1200 3,000 3,000
Excavating Revenue 4200
House: invoice #1004
14 Mar 5, 95 Subcontracts Expense 5040 2,000
Wage Expense 5020 500 2,500
Cash in Bank 1020
House: invoice #1004

15 Mar 6, 95 Cash in Bank 1020 3,000 3000

Accounts Receivable 1200
Invoice #1003 paid

16 Mar 6, 95 Accounts Payable 2080 3,000 3,000

Cash in Bank 1020
Paid for furniture, supplies

17 Mar 6, 95 Maintenance Expense 5080 200

Telephone Expense 5220 100
Interest Expense-Bank Loan 5160 400 400
Cash in Bank 1020 300
Accounts payable 2080

18 Mar 7, 95 Bills received, interest paid 1020 3,000

Cash in Bank 1200 3,000
Accounts Receivable
Payment for invoice #1001

19 Mar 7, 95 Accounts Payable 2080 200

Cash in Bank 1020 200
Truck tune-up paid

20 Mar 15, 95 Accounts Receivable 1200 7,000

Excavating Revenue 4200 7,000
Apartment, invoice #1000

21 Mar 15, 95 Subcontracts Expense 5040 5,000

Wage Expense 5020 1,000
Accounts Payable 2080 5,000
Cash in Bank 1020 1,000
Apartment, Jones paid

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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. This could take a lot of time, and he can
find this information more quickly if he sets up another book
called the ledger, in which each page is a detailed record of one
account (for example, Accounts Payable).

For each account (sometimes called a ledger account) he

records the debits and credits that were recorded in the journal
and affect the account, the date of the debits and credits, and
the ending account balance. Now, each time he makes a journal
entry, he also records the debits and credits that he entered into
the journal into the ledger accounts that were affected.

A ledger account might look like this for Accounts Payable:

ACCOUNT: ACCOUNTS PAYABLE #2080

Date Reference Debits Credits Debit Credit

Balance Balance

Feb 4, 95 J4 1,000 1,000

Feb 5, 95 J5 2,000 3,000
Mar 6, 95 J16 3,000 0
Mar 6, 95 J17 300 300
Mar 6, 95 J19 200 100
Mar 15, 95 J21 5,000 5,100

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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.

Between National Construction's financial statements, journal

and ledger, Brown can very quickly determine National's
position, and the history behind any value summarized on the
income statement or balance sheet.

Now when a transaction occurs and Brown wants to update his

financial statements, he makes an entry in his journal to record
the transaction, posts the debits and credits to the correct
accounts in the ledger, and prepares National Construction's
balance sheet and income statement by using the account
balances in his ledger.

Then, after determining income on the income statement, he

adds it to the Earnings section of equity on the balance sheet
where it causes the balance sheet to balance.

Obviously, this is a lot of work to do each time a transaction is

recorded. That's why we have computers.

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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.

The debit and credit balances of all the accounts in the ledger
are then totalled and compared to ensure that there have been
no posting or adding mistakes and that total debits equal total
credits. This is called a trial balance.

Income is determined and moved to the earnings section of the

balance sheet (to cause it to balance) on a worksheet. This is a
large sheet of paper that vertically ranks every account in the
ledger, to make the determination of income and the adjustment
of the earnings section of the balance sheet easy to follow.

The account balances on the worksheet are then used to prepare

the balance sheet and income statement.

With manual accounting systems, you can only get current

financial statements by posting all the journal entries made since
the last financial statements, preparing a trial balance and
completing the worksheet. Since this is a lot of work (manually)
it is usually only done at the end of every month.

With a computerized accounting system based on the system

used in the National Construction example, your financial
statements are as current as your last journal entry.

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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. The purpose of classified
statements is to group accounts into sets that give similar
information.

The Balance Sheet

The balance sheet categories include current and fixed assets,

current and long-term liabilities, and equity.

Assets

Assets are all the physical things and other items of value
owned by a company. They are listed on the left side of the
balance sheet.

Current Assets Current assets are assets which are converted

into cash in the ordinary course of business and in less than one
year. They are listed in the order in which the assets may most
easily be converted into cash. This category is very important
because it is a measure of how quickly the company can pay its

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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. This category is
important because it is a measure of the amount of physical
assets that the company needs to allow it to earn revenue.

Liabilities

Liabilities are all the debts and money owed to others by the
company. They are listed on the right side of the balance sheet.

Current Liabilities The term current liabilities generally

refers to liabilities due to be paid within a year or less. If
possible, they are listed in the order that they are to be paid.
This category is very important because it is a measure of how
much money the company owes to others that must be paid
relatively soon. If it is more than the amount of current assets,
the company may have problems paying creditors quickly and
regularly.

Long-Term Liabilities Long-term liabilities are liabilities that

are not due to be paid within the next year after the balance
sheet date. A loan payable in two years and a mortgage payable
in 25 years are examples. This category is important because
when compared to the total amount of equity, it is a measure of
how risky further loans to the company might be.

Equity

This category is important because it provides information

about how much money was invested in the company and how
much money was earned by the company.

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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.

National Construction
Balance Sheet
January 31, 1996

Assets: Liabilities:
Current Assets Current Liabilities
Cash in Hand $ 100 Accounts Payable $ 20,000
Cash in Bank 60,000 Operating Loan 10,000
Accounts Receivable 38,000 Total Current Liabilities 30,000
Maintenance Supplies 1,000 Long Term Liabilities
Prepaid Insurance 2,000 Mortgage 95,000
Total Current Assets 101,100 Bank Loan 40,000
Fixed Assets Total Long Term Liabilities 135,000
Land 70,000 Total Liabilities 165,000
Buildings 40,000
Trucks 32,000 Equity:
Construction Equipment 20,000 Jim Brown 48,000
Furniture 2,000 Current Earnings 52,100
Total Fixed Assets 164,000 Total Equity 100,100
Total Assets $ 265,100
Total Liabilities & Equity $ 265,100

The Income Statement

The income statement categories include revenues, expenses,
and income.

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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.

Operating Expenses Operating expenses are expenses that

are incurred while providing the goods or services that the
company sells. In general, these expenses would no longer be
incurred if the company stopped providing the goods or
services. It is important to know how much operating expenses
are so that a company can see what it costs to provide the goods
or services.

Administrative Expenses These are expenses incurred in the

administration of the business, and don't particularly relate to
providing particular goods or services. In general, these
expenses would still be incurred if the company stopped
providing the particular goods or services. It is important to
separate these expenses from operating expenses prior to
deducting them so that a company can determine whether or
not it is making a profit on its operations.

Net Income

This can be called income, profit, or net profit and is the income
or loss for the period referred to at the top of the Income
Statement. Income, year-to-date means the income from the
start of the company's fiscal year to the current date. Fiscal year
end is the date that the company selects to use for the end of its

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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.

National Construction
Income Statement
Feb 1, 1995 - Jan 31, 1996

Revenues Expenses
Hauling $ 128,000 Operating
Excavating 64,000 Wages $ 36,000
Total Revenue 192,000 Subcontracts 77,600
Gas and Oil 8,000
Maintenance 6,000
Total Operating 127,600
Administrative
Interest Mortgage 5,000
Interest Bank Loan 2,500
Interest Oper. Loan 700
Professional Fees 1,300
Telephone 800
Insurance 1,500
Utilities 500
Total Administrative 12,300
Total Expenses 139,900

Net Income $ 52,100

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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.

The accrual method of accounting says that we should try to

match revenues and expenses at the time we record revenues. It
also says that we should try to match revenues and expenses
(and hence income) to an accounting period. An accounting
period is the period of time over which income is calculated.

National Construction has an accounting period of one year.

This means that we should make adjustments to the financial
statements at the end of the year to try and make the income
figure as realistic and accurate as possible for that one year. For
instance, Brown knows that he owes some interest on his loans,
but this has not been recorded yet because he hasn't received a
statement from the bank. This interest expense should be
recorded at the end of his current year, or the income calculated
for the year will be larger than it should be, and smaller the next
year when the interest expense is finally taken into account.

If Brown had wanted accurate monthly income figures, he

would have had to choose an accounting period of one month
and would have had to adjust the financial statements at the
end of every month. Most companies actually do choose an
accounting period of one month.

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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. The financial statements are
then prepared.

Prepaid Expenses
Prepaid expenses are assets that have been paid for but which
will become expenses over time. Insurance is a good example.
An insurance policy is an asset. It is paid for in advance, will
last for a period of time, and expires on a fixed date. You buy
insurance to cover you for the whole year, so you should
allocate its cost evenly over the year.

When National Construction bought one year of truck insurance

on August 1, 1995 Brown made this journal entry to record it:

Aug 1, 95 Prepaid Insurance 1450 2,000

Cash in Bank 1020 2,000
Truck Insurance expiring 31 July 96

At his year end he must make an adjusting entry to expense the

amount of insurance used up between Aug. 1, 1995 and Jan. 31,
1996. Six months of insurance has been used, so the expense is
6/12 x $2,000 = $1,000. The adjusting entry to record this
requires an Insurance Expense account and reduces the balance
of the Prepaid Insurance account:

Jan 31, Insurance Expense 5240 1,000

96 Prepaid Insurance 1450 1,000
Adjustment for prepaid insurance

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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.

Since the balance of the Maintenance Supplies account tells us

how much should be there, we can subtract the ending
inventory and determine how much was used.

Brown takes an inventory of National's maintenance supplies on

January 31, 1996 and finds that what is left is worth $300. He
then knows that he used up $700 worth of supplies because the
account balance told him that there should have been $1,000
worth of supplies there. This is because he had debited the
account for $1,000 when he purchased the supplies.

His journal entry to expense the supplies and reduce the

Maintenance Supplies account balance to what is really left is:

Jan 31, Truck Maintenance Expense 5080 700

96 Maintenance Supplies 1400 700
Adjustment for supplies used

Bad Debts
National's Accounts Receivable of $38,000 is probably
overstated by $2,000 because a company that owes it $2,000 is
almost bankrupt, and it is very unlikely that National will ever
collect the money. Because we don't know for sure that the
money will ever be paid, we can reveal this fact on the financial
statements, and at the same time adjust the year's income to
reflect the probable bad debt.

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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 38,000
Less: Allowance for Doubtful Accounts 2,000
Net Accounts Receivable 36,000

The Allowance for Doubtful Accounts has a credit balance,

which is what we expect since it is subtracted from Accounts
Receivable.

Since revenue of $2,000 was recorded when the contract was

completed, income must be reduced by $2,000 since National
may never receive the money owed from the contract. Rather
than simply reduce one of the revenue accounts by $2,000, we
create an expense account called Bad Debts since the problem
wasn't earning the money, it was collecting it.

The adjusting entry to record this is:

Jan 31, Bad Debt Expense 5120 2,000

96 Allowance for Doubtful Accounts 1210 2,000
Invoice #1387 likely uncollectable

Depreciation
Equipment deteriorates during use and therefore loses value
each year. Part of the cost of the equipment should be allocated
as an expense to each year's operation benefiting from its use.
This allocation of the cost of a piece of equipment over its useful
life is called depreciation.

Brown determines a fair allocation of the cost of his equipment

over its useful life and determines these depreciation figures for
the year ended January 31, 1996: Trucks $8,000; Construction
Equipment $5,000; and Buildings $4,000.

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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.

On the balance sheet the Trucks account would look like this:

Fixed Assets
Trucks 32,000
Less: Accumulated Depreciation 8,000
Trucks: net 24,000

Here the "net" means net of depreciation.

The journal entries to adjust the statements for the depreciation

expense are:

Jan 31, 96 Depreciation Expense 5100 8,000

Accumulated Depreciation Trucks 1610 8,000
To record '95's depreciation

Jan 31, 96 Depreciation Expense 5100 5,000

Accumulated Depreciation Eqpt. 1660 5,000
To record '95's depreciation

Jan 31, 96 Depreciation Expense 5100 4,000

Accumulated Depreciation Bldgs. 1560 4,000

Accrued Expenses
Some expenses have accrued (been incurred even though
National hasn't yet received a bill or invoice from the supplier
of the goods or services) by year end. National owes its
employees wages of $1,000 because it is one week before
payday, and Brown's banker tells him that by January 31, 1996
National's loans had accumulated unpaid interest as follows:
Mortgage $600; Bank Loan $300 and Operating Loan $100.

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Accrued Expenses

The adjusting entries to record these unpaid, but accrued,

expenses are:

Jan 31, 96 Wage Expense 5020 1,000

Wages Payable 2060 1,000
Adjusting entry for accrued wages

Jan 31, 96 Interest Expense Mortgage 5140 600

Interest Expense Bank Loan 5160 300
Interest Expense Operating Loan 5180 100
Interest Payable. 2020 1,000
Adjusting entry for accrued interest

When these accrued expenses are actually paid (for instance,

National pays its $2,000 payroll on February 7) Brown must
consider the amount that he has already expensed in an
adjusting entry ($1,000 wage expense on January 31) to be sure
that he doesn't count it twice.

In this case the journal entry to record the actual payment of

wages would be:

Feb 7, 96 Wage Expense 5020 1,000

Wages Payable 2060 1,000
Cash in Bank 1020 2,000
Wage expense and payment after
Jan. 31

Another option is to reverse the adjusting entry and then enter

the wage transaction as if the adjusting entry had never been
made. Such an entry (like the first one below) is called a
reversing entry.

Feb 7, 96 Wages Payable 2060 1,000

Wage Expense 5020 1,000
To reverse adjusting entry of Jan 31

Feb 7, 96 Wage Expense 5020 2,000

Cash in Bank 1020 2,000
Wages to Feb. 7, 1996

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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.

The adjusting entry to record this earned, but unpaid, interest

is:

Jan 31, 96 Interest Receivable 1100 600

Interest Earned on Deposits 4300 600
Adjusting entry on accrued interest
earned

When, on February 15, National is paid interest of $700,

including the $600 that has already been recorded as Interest
Earned and Interest Receivable, the journal entry is:

Feb 15, 96 Cash in Bank 1020 700

Interest Receivable 1100 600
Interest Earned on Deposits 4030 100
Interest earned, receivable and paid

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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. Here are the financial statements
updated with the adjusting entries:

National Construction
Income Statement
Feb 1, 1995 - Jan 31, 1996

Revenue Expenses
Hauling $ 128,000 Operating
Excavating 64,000 Wages $ 37,000
Interest 600 Subcontracts 77,600
Total Revenue 192,600 Gas and Oil 8,000
Maintenance 6,700
Total Operating 129,300
Administrative
Depreciation 17,000
Bad Debts 2,000
Interest Mortgage 5,600
Interest Bank Loan 2,800
Interest Oper. Loan 800
Professional Fees 1,300
Telephone 800
Insurance 2,500
Utilities 500
Total Administrative 33,300
Total Expenses 162,600

Net Income $ 30,000

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National Construction
Balance Sheet
January 31, 1996

Assets Liabilities
Current Assets Current Liabilities
Cash in Hand $ 100 Interest Payable $ 1,000
Cash in Bank 60,000 Wages Payable 1,000
Interest Receivable 600 Accounts Payable 20,000
Accounts Receivable $ 38,000 Operating Loan 10,000
Less: Total Current Liabilities 32,000
Doubtful Accounts 2,000 Long-Term Liabilities
Net Receivables 36,000 Mortgage 95,000
Maintenance Supplies 300 Bank Loan 40,000
Prepaid Insurance 1,000 Total Long-Term Liabilities 135,000
Total Current Assets 98,000 Total Liabilities 167,000
Fixed Assets
Land 70,000 Equity
Buildings 40,000 Jim Brown 48,000
Less: Current Earnings 30,000
Accumulated Dep. 4,000 Total Equity 78,000
Buildings: Net 36,000
Trucks 32,000 Total Liabilities & Equity $245,000
Less:
Accumulated Dep. 8,000
Trucks: Net 24,000
Construction Equip. 20,000
Less:
Accumulated Dep. 5,000
Equipment: Net 15,000
Furniture 2,000
Total Fixed Assets 147,000
Total Assets $ 245,000

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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.

Closing the Books

If he wants to continue to use the current ledger, he must make
the balances of all the revenue and expense accounts zero so
that his new accounting period doesn't reflect any of last year's
revenues or expenses.

He does this because he is going to do the accounting for a new

period, and doesn't want income for this period to reflect any
revenues or expenses from the period that has just ended. He
leaves the balance sheet accounts unaltered because they pertain
to a particular date, not a period of time, the way income does.
This process is called closing the books.

To close the books, a very simple but lengthy journal entry is

made which makes the revenue and expense account balances
go to zero, takes what's left over (the year's income) and makes
it a new account under equity on the balance sheet called
Previous Years' Earnings.

In proprietorships like National Construction, what's left over is

generally credited directly to the Owner's Investment account,
but it is shown separately here because it gives us more

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Closing the Books

information. In Corporations, the Previous Years' Earnings

account is called Retained Earnings.

The journal entry looks like this, and it debits revenue accounts
by the amount of their credit balance and credits expense
accounts by the amount of their debit balance:

Jan 31, 96 Hauling Revenue 4100 128,000

Excavating Revenue 4200 64,000
Interest Earned on Bank Deposits 4300 600
Wage Expense 5020 37,000
Subcontracts Expense 5040 77,600
Gas and Oil Expense 5060 8,000
Maintenance Expense 5080 6,700
Depreciation Expense 5100 17,000
Bad Debt Expense 5120 2,000
Interest Mortgage 5140 5,600
Interest Bank Loan 5160 2,800
Interest Operating Loan 5180 800
Professional Fees 5200 1,300
Telephone 5220 800
Insurance 5240 2,500
Utilities 5260 500
Previous Years' Earnings 3600 30,000
To close revenue and expense
accounts

After this entry is posted, revenue and expense accounts will

have zero balances and the balance sheet will be the same as
before the closing entry, except that the balance of what had
been called the Current Earnings account has been transferred
to an account called Previous Years' Earnings:

Equity

Jim Brown 48,000

Previous Years' Earnings 30,000
Total Equity 78,000

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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. He
doesn't have to open the revenue and expense accounts with
their old balances because he wants them to have a zero balance
in his new ledger. This ensures that only revenues and expenses
for the upcoming accounting period are reflected in the income
statement for the upcoming period.

To open the books, a journal entry is made which simply

assigns the new ledger accounts the same balances as those in
the old ledger, and sets up a new account called Previous Years'
Earnings, which is assigned the balance shown beside Current
Earnings on the January 31, 1996 balance sheet:

Feb 1, 96 Cash in Hand 1010 100

Cash in Bank 1020 60,000
Interest Receivable 1100 600
Accounts Receivable 1200 38,000
Allowance for Doubtful Accounts 1210 2,000
Maintenance Supplies 1400 300
Prepaid Insurance 1450 1,000
Land 1500 70,000
Buildings 1550 40,000
Accumulated Depreciation Bldgs 1560 4,000
Trucks 1600 32,000
Accumulated Depreciation Trucks 1610 8,000
Construction Equipment 1650 20,000
Accumulated Depreciation Eqpt. 1660 5,000
Furniture 1700 2,000
Interest Payable 2020 1,000
Wages Payable 2060 1,000
Accounts Payable 2080 20,000
Operating Loan 2100 10,000
Mortgage Payable 2400 95,000
Bank Loan 2500 40,000
Jim Brown 3300 48,000
Previous Years' Earnings 3600 30,000
To open Ledger accounts for '96

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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.

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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.

Old Balance Ensure it accurately reflects the financial position of the

company and that:
left side = right side

Ledger Accounts Account balances from the balance sheet are entered in
the new journal (the opening entry) and posted to the
ledger, and for the opening entry:
left side = right side
debits = credits

Transactions All transactions are entered in the journal and

immediately posted to the ledger and, for each
transaction:
left side = right side
debits = credits

Trial Balance Ledger accounts are reviewed at the end of an

accounting period to form a basis for adjusting entries
and to ensure that:
debits = credits
Adjusting Entries
Financial statements are adjusted to more accurately
reflect true income for the accounting period, and for all
adjusting entries:
debits = credits
New Financial
Statements The financial statements for the accounting period now
represent fairly the financial position of the company and:
debits = credits

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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. Let's look at an example where we
assume that Jim Brown takes on a partner in National
Construction.

Brown's equity in the company is $78,000 ($48,000 invested plus

$30,000 earned). Because he is about to take on a partner, he
adjusts the accounts so that Previous Years' Earnings are now
shown as part of his investment.

The journal entry for this is:

Feb 1, 96 Previous Years' Earnings 3600 30,000

Jim Brown, Invested Capital 3300 30,000
To close P.Y.E. into Brown's Capital

The equity section of the balance sheet now looks like this:

Equity
Jim Brown 78,000

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Partnerships

The same day he takes on a partner who invests $78,000 cash in

the company. The journal entry to record this is:

Feb 1, 96 Cash in Bank 1020 78,000

Mike Wood, Invested Capital 3320 78,000
Partner's initial investment

The equity section of the balance sheet now looks like this:

Equity
Jim Brown 78,000
Mike Wood 78,000
Total 156,000

When Brown and Wood became partners, they agreed to

equally share the profits earned by National Construction. If we
assume that at the end of the year the company has earned
$100,000, and it is recorded in the Current Earnings account.

A journal entry like this would be made to allocate each partner

his share of the year's income:

Jan 31, 97 Current Earnings 3620 100,000

Jim Brown 3300 50,000
Mike Wood 3320 50,000
To allocate income to partners

The equity section of the balance sheet now looks like this:

Equity
Jim Brown 128,000
Mike Wood 128,000
Total 256,000

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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. They cannot be sued for the debts of the
corporation, except as provided in law.

The Equity section of sole proprietorships and partnerships is

known as Shareholders' Equity for corporations.

The equity of a corporation belongs to the shareholders.

Shareholders are persons who bought shares (stock) of the
company, which are certificates that indicate ownership of a
part of a company. There are two types of shares usually issued
by a corporation to its owners:

Preferred Shares Preferred shares may pay to its owners a

dividend (a payment made to shareholders by a corporation out
of after-tax earnings) that is usually fixed in amount or percent.
Preferred shareholders have preference. If there are any
dividends declared, the preferred shareholders get their
dividends before the common shareholders are entitled to any
dividends.

Common Shares Common shares have no preference to

dividends and no fixed rate of return. It is the most common
kind of share and normally has voting rights attached to it.
Since common shares are usually the only type of shares with
voting rights, the shareholders who control the common shares
also control the company. Since a corporation is a separate legal
entity from its owners, it must keep its own accounting records.

The equity section of the balance sheet shows each type of share
issued (subscribed for), and how much money was received for
it by the company. It does not show who owns the shares or
how much they own because this is something that the
company does not control. Shareholders are generally free to
sell their shares to each other or others who are currently not
shareholders.

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Corporations

If National Construction was organized as National

Construction Limited, and Jim Brown and Mike Wood each
bought 5,000 common shares for $20 per share and 14,000
preferred shares for $2 per share, the equity (sometimes called
Stockholders' Equity or Shareholders' Equity for a corporation)
section of the balance sheet would look like this:

Equity
Paid in Capital
Common Shares 200,000
Preferred Shares 56,000
Total Paid in Capital 256,000

When balance sheets are more formally prepared, it is standard

practice to show beside each type of share how many shares
were authorized and how many are issued and outstanding.

The journal entry in the corporation's journal to record the

issuance of the above shares is:

Feb 1, 96 Cash in Bank 1020 256,000

Common Shares 3800 200,000
Preferred Shares 3850 56,000
Issued 10,000 common @ $20; and
28,000 preferred @ $2

At the end of the year, National Construction Limited, like

National Construction the proprietorship, would transfer the
balance of the Current Earnings account to the Previous Years'
Earnings account. For corporations, this is called the Retained
Earnings account, because the earnings have been retained by
the company rather than paid out to the shareholders as
dividends.

Even though the corporation has an account called Retained

Earnings, it may not be able to pay this amount out to its
shareholders quickly because it may not have that much cash in
the bank. It may have to convert some assets into cash (by
selling them, or if they are receivables, collecting them) before it
can distribute the retained earnings to its shareholders.

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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. The
journal entry to record this is:

Jan 30, 97 Retained Earnings 3900 28,000

Cash in Bank 1020 28,000
Paid $1 dividend on 28,000 preferred
shares

The Shareholders' Equity section of the balance sheet adjusted

for the above transaction is:

Equity
Paid in Capital
Common Share 200,000
Preferred Shares 56,000
Total Paid in Capital 256,000
Retained Earnings 72,000
Total Equity 328,000

Accounting for the shares of corporations can get extremely

detailed and involved. If transactions other than the types
explained above are contemplated or have actually been done, a
reference book that covers share transactions more thoroughly
should be consulted.

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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).

The purpose of subsidiary ledgers is to keep the main ledger

uncluttered of details and provide management with useful and
necessary information. A company should start to use
subsidiary ledgers when it finds its general ledger is getting too
cluttered, or that its financial records don't contain enough
information for the management to make decisions.

When an entry is made in the subsidiary ledger to record, say,

one particular customer paying a bill, the main ledger only has a
debit to Cash and a credit to Accounts Receivable, while the
subsidiary ledger contains all the details (when the customer
paid, how he or she paid, how much is still outstanding, etc.).

Depending on the type of subsidiary ledger, the summary of the

transactions in the subsidiary ledger need only be transferred to
the main ledger periodically. This is always done before income
for a period is determined and may be done more often if
desired.

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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. If all the data is entered into the ledger, it is an easy-
to-use and accurate system for determining whom you might
extend more credit to and whom you need to concentrate your
collection efforts on.

Following is an example of how particular customer records

might be kept in an Accounts Receivable subsidiary ledger:

Customer Current 31-60 61-90 91+ Total

Western Wholesaling Corp. $500 $50 $550

1143 Boardwalk Avenue
Vancouver, B.C.

Johnson Enterprises Ltd. $700 $700

2532 Park Place
Vancouver, B.C.

The company's management can now very clearly see that they
should not extend more credit to Johnson Enterprises Ltd. until
they improve their payment record.

Accounts Payable
This subsidiary ledger accomplishes many of the same things as
the Accounts Receivable subsidiary ledger and provides a
record of who is owed money and for how long. This allows a
company to maintain a good credit rating by not overlooking
bills that must be paid.

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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. It also
summarizes the deductions for each employee, the employer's
associated expenses, and to whom the amounts are owed.

Inventory
This subsidiary ledger allows management to keep track of
what is in stock and how much it costs. The ledger must be
updated frequently in order to keep accurate information as to
how much inventory has been sold or is in stock. It keeps track
of supplier names, their addresses, stock numbers, quantities
normally ordered, price discounts available and of course the
amount and value of stock in inventory right now.

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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. When fully paid, it becomes optional whether
the invoice and its payments are retained or purged.

Late Payment Charges

The open invoice method provides sufficient detail to allow
calculations of interest charges on overdue receivables.
Similarly you may have to pay interest charges on your overdue
payables.

Consider the interest charge as an invoice which should

subsequently be paid along with other invoices. When you enter
these late payment invoices the matching entry would either be
to Interest Expense (in the case of accounts payable) or to
Interest Revenue (in the case of accounts receivable).

Discounts
The open invoice method provides sufficient detail to allow you
to take advantage of discounts offered by suppliers for early
payment of their invoices. These discounts can be considered as
negative invoices from your suppliers to reduce the amount of
prior invoices. You can consider negative invoices either to be a

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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. You can
consider negative invoices either to be an expense (for example:
Discounts Taken Expense) or as a reduction to the revenue
associated with the original invoice.

Bad Debts
An invoice in receivables which is not collectable may have to
be written off as a bad debt. When you decide that an invoice is
uncollectable, you can process it in one of two ways.

You could consider the invoice to be fully paid. This would

serve the purpose of removing the invoice as an open invoice.
However, it would also debit the cash account. If you use this
method to remove the invoice as an open invoice, you would
have to make a second entry in the general journal to credit cash
and debit a Bad Debt Expense account.

Alternatively, to record the invoice as a bad debt an entry could

be made in the subsidiary journal to debit the bad debts expense
and credit the accounts receivable control account.

Debit Credit
5500 Bad Debts Expense 620
1200 Accounts Receivable 620

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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.

If you subsequently refund the prepayment, record it as a

negative invoice in the Accounts Receivable journal. Enter the
number of your refund check as an invoice number. Credit the
Cash in Bank account and debit the Accounts Receivable
account.

Record a prepayment to a vendor in the Accounts Payable

journal. When you enter the prepayment, use your check
number for an invoice number. Credit the Cash in Bank
account, and debit the Accounts Payable account.

If your prepayment is subsequently refunded, record the

transaction in the Accounts Payable journal. Debit the Cash in
Bank account and credit the Accounts Payable.

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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 Qubec).

In Canada, all provinces and territories except Quebec have

provincial or territorial Income Tax Acts that are administered
by Revenue Canada. The details presented in this chapter are
based on the regulations as specified by Revenue Canada. The
final section of this chapter briefly describes the variations
applicable to the province of Quebec.

While this chapter shows you how to prepare your payroll, it

is essential that it be read in conjunction with the
documentation on payroll deductions available from Revenue
Canada.

This chapter will not, for instance, tell you which benefits are
and are not taxable, how to fill in government forms, and when
to remit funds to the Receiver General. It does show you the
procedures for determining the amounts that will go on the
government forms, and the procedures for determining how
much money your company must remit to the Receiver General.

Note that rates and amounts in the examples in this chapter

may change. Check with the federal or provincial government
authorities for current rates.

You should obtain:

Revenue Canada Payroll Deductions Tables
Revenue Canada Employers' Guide to Payroll Deductions
Source Deductions and Employer Contributions Guide
(Province of Quebec)

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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.

The preparation of your company's payroll includes the

following:
1. Determining each employee's gross earnings for a pay
period.
2. Determining each employee's deductions.
3. Calculating the employer's associated expenses.
4. Updating the employee payroll records.
5. Creating the journal entries.
6. Remitting funds to the relevant governmental authority or
other applicable agencies.

The amount of an employee's paycheque for a particular pay

period is the employee's gross earnings for the pay period, less
any amounts deducted by the employer. The amounts deducted
by the employer are paid by the employer to the relevant
government authority or other applicable agency.

The difficult part of preparing the payroll is determining the

statutory deductions to be withheld each pay period from each
employee's paycheque and paid to the relevant government
authority. These amounts are called "source" deductions, since
they are withheld at the source of the payment to the employee.
Deductions that are payable to other agencies are simpler to
calculate, but they must also be accounted for on an employee-
by-employee basis.

Statutory source deductions comprise Canada Pension Plan

(CPP) contributions, Employment Insurance (EI) premiums, and
federal and provincial income tax. Calculating these amounts

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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. Therefore, the employer keeps records so that the
companys financial statements correctly account for the
amount paid, and to be paid to the employees.

Because the employer deducts money from the employees'

paycheques, they must keep fully detailed records of each
amount deducted from each employee's paycheque. The
employer needs the deduction information to be able to
complete and issue T4 slips to each employee at the end of each
calendar year, and to be able to answer any questions the
employees may have regarding the composition of their
paycheques. Both the employer's and the employees' records
should be updated each time a set of payroll transactions have
been completed.

Determining an Employee's Gross Earnings

An employee's gross earnings for a pay period are the total
amount of compensation that the employee receives during that
pay period; a pay period being the period of time between an
employee's paycheques. Revenue Canada restricts you to using
1, 10, 12, 13, 22, 24, 26, or 52 pay periods per year.

The most common components of gross earnings include:

Regular Pay
Overtime Pay
Salary
Commissions
Taxable Benefits
Vacation Pay paid out
_________
Gross Earnings

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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.

The following sections describe how each of these components

of gross earnings is determined, together with examples for
each.

Regular Pay

Regular pay for hourly paid employees is determined by

multiplying the employee's hourly rate of pay by the number of
regular hours worked by the employee during the pay period.
The employee's regular hourly rate of pay is available from their
employee record.

If an employee worked 60 regular hours at $10 per hour during

a two-week period, their regular pay would be $600.

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
regular pay.

Overtime Pay

Overtime pay for hourly paid employees is determined by

multiplying the employee's overtime rate of pay by the number
of overtime hours worked during the pay period. The
employee's overtime rate of pay is available from their
employee record.

If the example employee worked 10 overtime hours at $15 per

hour during the pay period, their overtime pay would be $150.

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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.

If the example employee was paid a salary of $100 during the

pay period in addition to their regular and overtime pay, this
amount should be entered as the salary component of gross
earnings for the pay period.

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
salary.

Commission

Commission is the performance-related amount paid to the

employee for the pay period in question.

If the example employee was paid a commission of $110 during

the pay period, this amount should be entered as the
commission component of gross earnings for the pay period.

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
commission.

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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.

If our example employee had use of a company car which

Revenue Canada regulations said provided the employee with a
taxable benefit of $120 per pay period, $120 must be included as
a component of the employee's gross earnings for the pay
period. When the paycheque is produced, it must show that the
employee received this amount as a taxable benefit, and the
employees record must be updated to reflect this non-cash
benefit.

The amount of this taxable benefit is not recorded as an increase

in the Wage Expense account because the expenses for the
company car have been incurred and accounted for separately.
However, the taxable benefits information must be entered as a
component of gross earnings so that the appropriate source
deductions can be determined.

If the taxable benefit was actually a payment of cash paid to the

employee at some prior time, the amount must be entered as a
taxable benefit in order to have the source deductions properly
calculated.

Vacation Pay

Depending on your provincial legislation, you can pay out

vacation pay on a paycheque, or retain it and pay it out later,
for example, when an employee goes on vacation.

Vacation Pay If vacation pay is paid out with each paycheque, you must
Paid Out multiply the employee's gross earnings (less taxable benefits in
most provinces) by the percentage vacation pay rate applicable
to the employee, and include the resulting amount as a
component of gross earnings, since the amount is subject to
source deductions.

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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.

The employee's gross earnings for the pay period would be:

Regular Pay $ 600.00

Overtime Pay 150.00
Salary 100.00
Commissions 110.00
Taxable Benefits 120.00
Vacation Pay 38.40
Gross Earnings $ 1,118.40

Vacation Pay On the other hand, if vacation pay is retained for future
Retained payment, you must make an entry in the employee's record that
increases the amount of vacation pay owed to the employee by
the amount retained ($38.40). At the same time, in the General
Ledger, increase both the Wage Expense account and the
Vacation Payable account by the amount retained.

The employee's gross earnings for the pay period would be:

Regular Pay $ 600.00

Overtime Pay 150.00
Salary 100.00
Commissions 110.00
Taxable Benefits 120.00
Gross Earnings $ 1,080.00

Retained When you pay out the retained vacation pay, you must make an
Vacation Pay entry in the employee's record that decreases the amount of
Paid Out vacation pay owed to the employee by the amount paid out. At
the same time, in the General Ledger, you must reduce both the
Vacation Payable account and the Cash in Bank account by the
amount paid out.

Vacation pay is only included in gross earnings when it is paid

out.

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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 $ 600.00

Overtime Pay 150.00
Salary 100.00
Commissions 110.00
Taxable Benefits 120.00
Vacation Pay 225.00
Gross Earnings $ 1,305.00

Determining the Employee's Deductions

After calculating gross earnings for the pay period, you must
determine the various amounts to be deducted from the
employee's paycheque.

The most common employee deductions are:

CPP Contribution
EI Premium
Income Tax
Registered Pension Plan Contribution
Union Dues
Medical Plan
_________
Total Deductions

The first three of these deductions are covered by statutory

regulations, and must be deducted by employers, while the
fourth deduction is an employee-elected option. All of the last
three deductions are deductions which are usually administered
by employers on behalf of their employees.

An employer must keep detailed records of the total of each of

these deductions for each employee. This will ensure that the

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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. You should study these booklets to get a
thorough understanding of the deduction procedures, the
documentation required, and the time limits for the deducted
funds to be remitted to Revenue Canada.

Here is how the amounts applicable to the above deductions are

determined:

CPP Contribution

Employers must deduct CPP contributions from each employee

if:
The employee is 18 years of age but not yet 70,
The employee has not yet reached the maximum
contribution per year ($632.50 for 1991),
The employee is taxed in any province or territory except
the Province of Quebec, which administers its own pension
plan separately from Revenue Canada.

Contributory Earnings per pay period, or the earnings on

which CPP contributions are based, are determined by
subtracting from gross earnings per pay period a Basic
Exemption per pay period.

This basic exemption is obtained by dividing a maximum yearly

basic exemption ($3,000 for 1991) by the number of pay periods
in the year.

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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 $ 1,305.00

Basic Exemption ($3,000 / 26) 115.38
Contributory Earnings $ 1,189.62

The CPP contribution can then be calculated by multiplying

these contributory earnings by the assessment rate (2.3% for
1991) to equal $27.36. If this CPP contribution, when added to
the employee's year-to-date CPP contribution from the previous
pay period, exceeds the yearly maximum ($632.50 for 1991),
then the CPP contribution is reduced so that the total does not
to exceed the yearly maximum.

The CPP contribution of $27.36 for the pay period can be

obtained directly from the Revenue Canada tables using the
employee's gross earnings, or can be obtained by calculating
contributory earnings and multiplying by the assessment rate.
Either method is acceptable.

You must deduct the above amount of CPP contribution from

the employee's paycheque, add it to the balance of the CPP
Payable account, and make an entry in the employee's payroll
record that this amount has been deducted from their
paycheque.

EI Premiums

Employers must deduct EI premiums from each employee's

paycheque if:
The employee's gross hours worked for the pay period
equal or exceed the Minimum Insurable Hours for the pay
period,
Or

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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.

Insurable Earnings per pay period, or the earnings on which EI

premiums are based, are obtained firstly by determining
whether the employee has earned more than the minimum
insurable earnings per pay period, or whether the employee has
worked more than the minimum insurable hours for the pay
period.

It is necessary for an employee to fall below both the minimum

earnings and the minimum hours worked to become EI exempt,
although an employee only has to exceed one of the minimum
conditions to become EI insurable.

The minimum insurable earnings per pay period are obtained

by dividing the yearly minimum insurable earnings ($7,072 for
1991) by the number of pay periods in the year. In the case of
our example employee, the minimum insurable earnings would
be $7,072 / 26 = $272 for the two-week period. Since the
employee earned $1,305 in the period, they are clearly EI
insurable.

Secondly, providing the employee earned more than the

minimum insurable earnings for the pay period or worked more
than minimum insurable hours for the pay period, then their
insurable earnings for the pay period are based on their gross
earnings for the pay period (no exemptions) up to the maximum
insurable earnings for the pay period.

The maximum insurable earnings per pay period are obtained

by dividing the yearly maximum insurable earnings ($35,360 for
1991) by the number of pay periods in the year. In the case of
our example employee, the maximum insurable earnings would
be $35,360 / 26 = $1,360 for the two-week period.

Since the employee earned $1,305 in the pay period, they pay EI
on the entire amount. The employees EI premium for the pay
period (assessable at the July to December 1991 rate of 2.8%) is
therefore 2.8% x $1,305 = $36.54.

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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.

You must deduct the above amount of EI premium from the

employee's paycheque, add it to the balance of the EI Payable
account, and make an entry in the employee's payroll record
that this amount has been deducted from their paycheque.

Registered Pension Plan Contributions

You must deduct from an employee's paycheque the amount (if

any) which they requested be deducted and paid into an
approved Registered Pension Plan (and/or an approved
Registered Retirement Savings Plan). You should read the
Revenue Canada booklets to obtain a definition of a Registered
Plan, and what the maximum allowable deductions are per year
for employees.

Assume that the employee asked their employer to deduct $120

from their paycheque for each pay period and pay it into their
Registered Pension Plan.

When a paycheque is produced, this amount is then deducted

from the employee's paycheque and recorded as an increase in
the Pension Payable account. The appropriate entry in also
made in the employee's record. The employer is then
responsible for paying the $120 to the company administering
the employee's Registered Pension Plan.

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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. The employer is then responsible for
paying the $30 to the union having jurisdiction.

Income Tax

Employers are required to deduct income tax from an

employee's paycheque each pay period and record the amount
as a liability in the Tax Payable account.

The income tax to be deducted from each employee's paycheque

covers the amounts assessable by both the federal government
and the applicable provincial government, the amount varying
and depending on:
The province in which the employee is taxed,
The number of pay periods per year,
The amount subject to tax, and
The employee's personal TD1 claim.

Every employee is required to file with an employer the

prescribed form TD1, Tax Exemption Return, certifying as to
the amount of income tax exemptions claimed. This form must
be filed when the employee starts employment with a new
employer or when a change in personal circumstances occurs
which affects the net claim.

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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 $ 1,305.00

Less: Registered Pension Plan Contribution 120.00-
Union dues 30.00-
Amount Subject to Tax $ 1,155.00

From the Income Tax Tables (assuming Claim Code 1), it can be
determined that the employer must deduct $234.80 from the
example employee's paycheque as the employee's income tax
for the pay period (if the employee is resident in British
Columbia).

When a paycheque is produced, the employer must deduct this

amount from the employee's paycheque, add it to the balance of
the Income Tax Payable account, and make an entry in the
employee's payroll record to record that this amount has been
deducted from their paycheque.

Medical

Assume that the employee pays $15 per pay period into a
company-administered medical plan.

When a paycheque is produced, this amount is deducted from

the employee's paycheque and recorded as an increase in the
Medical Payable account. The appropriate entry is also made in
the employee's record. The employer is then responsible for
paying the $15 to the company providing the medical plan.

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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.

The example employee has a taxable benefit of $120 (the use of a

company car). The GST on this amount is $8.40.

When a paycheque is produced, $8.40 is deducted from the

employee's paycheque and recorded as an increase in the GST
Payroll Deduction account.

The employee's total deductions for the pay period are

therefore:

CPP Contribution $ 27.36

EI Premium 36.54
Registered Pension Plan Contribution 120.00
Union 30.00
Income Tax 234.80
Medical 15.00
GST Payroll Deduction 8.40
Total Deductions $ 472.10

Assuming that the employee requests an advance of $100, the

amount of their paycheque can now be calculated as follows:

Gross Earnings $ 1,305.00

Less: Total Deductions 472.10-
Taxable Benefits 120.00-
Add: Advance 100.00
Net to Employee $ 812.90

The taxable benefits are deducted from the net because the
employee has already received the benefits.

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Calculating the Employer's Associated Expenses

Calculating the Employer's Associated Expenses

In addition to the gross earnings expense (less any taxable
benefits), the employer must pay the following additional wage-
associated expenses:

EI Expense
CPP Expense
WCB Expense
________________
Total Employer's Associated Expense

The first two of the above wage expenses are statutory expenses
and must be paid by all employers, while the third expense is
dependent upon the type of work being performed by the
employer.

CPP and EI Expenses

Revenue Canada requires employers, as well as employees, to

make CPP contributions and to pay EI premiums.

Specifically, in 1991, the employer must pay an amount equal to

each employee's CPP contribution and equal to 1.4 times each
employee's EI premium. Employers who have had a Wage Loss
Replacement Plan approved by Revenue Canada and
Employment and Immigration Canada, may pay less than 1.4
times each employee's EI premium.

If, as in our example, the employer is required to withhold

$27.36 from the employee's paycheque as the employee's CPP
premium and $36.54 from the employee's paycheque as the
employee's EI contribution, then in addition to these amounts,
the employer must pay a $27.36 CPP premium and a $51.16 EI
contribution (using a factor of 1.4). The employer's expenses are
therefore $78.52 ($27.36 + $51.16) and the amount payable to the
Receiver General by the employer is $142.42 ($27.36 + $36.54 +
$27.36 + $51.16).

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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 $27.36 and the EI Payable account by $51.16.

Employer's WCB Expenses

Some employers are required to make contributions to their

province's WCB plan. Contributions to WCB plans are 100%
employer paid. You must calculate the required contribution
each time an employee is paid by multiplying the employee's
assessable gross earnings for the pay period by the WCB
percentage listed in the employee's record. You must also
ascertain whether your province does or does not include
taxable benefits in assessable gross earnings.

If, for our example employee, the WCB rate is 2% and the
taxable benefits are assessable, the WCB expense is $26.10 (2%
of $1,305). When a paycheque is produced, you must increase
the WCB Expense by the calculated amount and increase WCB
Payable by the same amount. There is no entry in the
employee's record because nothing has been deducted from
their paycheque.

You must calculate WCB premiums on every paycheque an

employee receives until the employee's year-to-date gross
earnings reach the annual assessable limit in the province in
which the employee is assessed.

Updating the Employee's Payroll Record

An employer must keep records of how much each employee
was paid and how much was deducted from their paycheques.
This ensures that the employer can accurately complete T4 slips

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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.

Aside from keeping track of year-to-date totals for every

category of gross earnings and deductions, the employee's
record keeps track of:

Contributory Earnings
Insurable Earnings
Vacation Owed
Advances Paid

The contributory earnings and insurable earnings amounts are

figures that must be put on each employee's T4 slip at the end of
each calendar year.

The vacation owed amount is the total of all vacation pay which
an employee has earned and the employer has retained during
the year, but has not yet been paid out. For instance, if an
employee had cash earnings of $10,000 during a year, and
received vacation pay at the rate of 4% (which the employer
retained), the vacation pay retained during the year but not yet
paid out would total $400.

If the employee was actually paid out $100 of vacation pay

during the year, the vacation owed balance would be $300, and
the $100 actually paid would be recorded as vacation pay in the
section of the employee's record that keeps track of the various
categories of gross earnings. If the employee was actually paid
$600 vacation pay during the year, the vacation-owed balance
would be a negative balance of $200, and the $600 would be
recorded as vacation paid.

The advance paid amount is the total of all advances that have
been made to the employee, but have not yet been recovered.
For instance, if an employee received an advance of $300, and
the employer subsequently recovered $200 of the advance, the
advance paid would be $100.

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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.

The journal entry to account for the paycheque prepared for the
example employee is as follows:

National Construction Journal

Date Particulars # Debit Credit

Jul 26, 95 Wage Expense 5300 998.40

CPP Expense 5320 27.36
EI Expense 5310 51.16
WCB Expense 5330 26.10
Advances Receivable 1240 100.00
Vacation Payable 2320 186.60
CPP Payable 2330 54.72
EI Payable 2340 87.70
Income Tax Payable 2350 234.80
Pension Payable 2370 120.00
Union Payable 2380 30.00
Medical Payable 2390 15.00
WCB Payable 2400 26.10
GST Payroll Deduction 2675 8.40
Bank 1100 812.90

Remitting Funds to the Receiver General and Other

Agencies
Canada Pension Plan (CPP) contributions, Employment
Insurance (EI) premiums, and federal and provincial income tax
must be deducted from an employee's paycheque and remitted
to the Receiver General by the employer.

In general, the Receiver General requires a cheque from each

employer once per month. The amount of the cheque is for CPP
contributions, EI premiums, and income tax deductions for all
employees, for the pay period covered by the cheque. It also

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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.

To remit funds to the Receiver General, you prepare a cheque

and account for it with a journal entry in the General Journal.
The cheque should be for the total of the CPP, EI, and Tax
Payable, and must be accompanied by an explanation of how
much of the cheque is for each. The journal entry made to
account for the cheque should reduce the CPP, EI and Tax
Payable accounts for their outstanding balances at the previous
month's end and reduce the Bank account on which the cheque
is drawn, as shown in the following journal entry:

National Construction Journal

Date Particulars # Debit Credit

Jul 15, 95 CPP Payable 2330 54.72

EI Payable 2340 87.70
Income Tax Payable 2350 234.80
Bank 1100 377.22

Remitting your employees' and your company's funds to other

agencies should comply with the requirements of the relevant
agency.

Ontario Employer Health Tax

On January 1, 1990, the Employer Health Tax (EHT) replaced
OHIP premiums. Detailed information about EHT is available
from the Ontario Ministry of Revenue.

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Ontario Employer Health Tax

You calculate EHT premiums by multiplying each Ontario

employees 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. For example, a journal entry to account for the
paycheque prepared for an employee might appear as follows:

National Construction Journal

Date Particulars # Debit Credit

Jul 26, 95 Wage Expense 5300 998.40

CPP Expense 5320 27.36
EI Expense 5310 51.16
WCB Expense 5330 26.10
EHT Expense 5360 20.00
Advances Receivable 1240 100.00
Vacation Payable 2320 186.60
CPP Payable 2330 54.72
EI Payable 2340 87.70
Income Tax Payable 2350 234.80
Pension Payable 2370 120.00
Union Payable 2380 30.00
EHT Payable 2390 20.00
WCB Payable 2400 26.10
Bank 1100 836.30

At the end of each reporting period, you must remit the

premiums to the Ontario Ministry of Revenue. To remit funds,
you prepare a cheque and account for it with a journal entry in
the General Journal.

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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 # Debit Credit

Jul 26, 95 EHT Payable 2390 20.00

Bank 1100 20.00

You must refer to information available from the Ontario

Ministry of Revenue to determine your remittance frequency
and the percentage rate to use. If your annual payroll falls
below $400,000 and your percentage rate changes during a
quarter, an adjustment to your amount of remittance may be
necessary.

Payroll Accounting in the Province of Quebec

The Government of Quebec collects its own Quebec Pension
Plan contributions and its own provincial individual income tax
for employees residing in the Province of Quebec. In addition,
the Government of Quebec collects Quebec Health Insurance
Plan contributions from employers.

All plans are designed not to overlap with their corresponding

plan as administered by Revenue Canada.

The following table summarizes some of the more important

differences between the payroll taxes and other deductions

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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. tax to Government of Quebec Federal government
Pay pension to Quebec Pension Plan (QPP) Canada Pension Plan (CPP)
Pay Workers' Commission de la sant et de Workers' Compensation
Compensation to la scurit du travail (CSST) Board
Pay health plan to Quebec Health Insurance Plan Provincial government
(QHIP)

Because of the special additional requirements for the Province

of Quebec, the journal entries will require the use of different
accounts as shown in the following table:

National Construction Journal

Date Particulars # Debit Credit

Jul 26, 95 Wage Expense 5300 998.40

EI Expense 5320 51.16
QPP Expense 5350 27.36
CSST Expense 5330 26.10
QHIP Expense 5340 41.98
Advances Receivable 1240 100.00
Vacation Payable 2320 186.60
QPP Payable 2330 54.72
EI Payable 2340 87.70
Income Tax Payable 2350 138.00
Q Income Tax Payable 2360 200.35
Pension Payable 2370 120.00
Union Payable 2380 30.00
Medical Payable 2390 15.00
CSST Payable 2400 26.10
QHIP Payable 2410 41.98
Bank 1100 717.75

Although union dues are deducted from the gross income

before federal taxes are calculated, union dues are included in
the gross income when calculating Quebec provincial taxes.

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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.

Inventory assets may be acquired by direct purchase from

suppliers. Ownership passes to the company at the point of
delivery or at the point where the goods are fob (free on board),
fas (free alongside ship), or cif (cost, insurance, and freight
prepaid).

When the goods arrive, a receiving report should be prepared,

a copy of which should be passed to the accounting department
for subsequent matching to the supplier's invoice.

Inventory assets may also be produced by manufacture. In this

case, new inventory items with higher value are created from
existing inventory items of lower value.

A manufacturing report should be prepared and a copy passed

to the accounting department to record the transfer of raw
materials inventory to value added inventory.

Inventory assets are consumed (and consequently become an

expense to the company) when they are sold. The revenue
associated with the sale is recorded in an invoice, a copy of
which is sent to the accounting department. The reduction in
inventory associated with the sale and the expense associated
with the original cost of the item would be accounted for
concurrent with recording the sale.

Inventory assets may also be reduced by using them on the

manufacture of new inventory assets. In this case, there is no

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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. If ownership of the project remains with the company,
then this type of transaction is similar to the prior example of
lower value items being transferred to higher value items
through manufacture.

In this case the project can be considered as an inventory item.

Where the project is not owned by the company, the use of
inventory on the project produces both a reduction in the
inventory asset, and an expense associated with the cost of the
item.

Inventory items being used on a project should be recorded by

requisitions, which indicate the transfer of inventory to the
project.

Inventory assets may also be reduced by loss arising from

damage, spoilage, theft or obsolescence. In this case a loss
report would be prepared and an accounting entry would be
made to reduce the inventory asset and show an expense equal
to the cost of the inventory item.

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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.

Average cost is a method of determining a unit cost for

inventory based on adding the purchase cost of new inventory
to the present cost of existing inventory, and then dividing this
amount by the combined number of items in inventory.

When an existing inventory item is first purchased, its average

cost is simply the purchase price divided by the number
purchased. For example: if National Construction purchased 20
widgets for $300, the average cost would be $15. When items
are removed from inventory they are removed at the average
cost.

For example: if four items are requisitioned for a project, then

the value of the remaining inventory is $240, but the average
cost is $15.

If more inventory is bought at a price different than the average

cost, the average cost of the new inventory total would be
changed. For example, if National Construction bought 16 more
widgets for $208, the new average cost would be:

16 units @ $ 15.00 = $ 240.00

16 units @ 13.00 = 208.00
448.00

$ 448.00 / 32 = $ 14.00 (new average cost)

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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. The unit price of
the remaining inventory is still $14.

An example of a Stock Control Card illustrating the above

valuation of inventory by the average cost method, is given
below.

National Construction
Stock Control Card

Inventory Item No: 6040 Location: B-6L-5

Description: Widgets Product Line: A
Supplier: Brown & Smith Normal Delivery: 5 days
Maximum Stock 32 Minimum Stock: 16

This Entry Stock

Date Comment Doc. # Units Cost Total Units Cost Total

01-08-95 Rec Report R2769 20 15.00 300.00 20 15.00 300.00

01-12-95 Req SR9274 -4 15.00 -60.00 16 15.00 240.00
01-23-95 P. Order P6339 16
01-28-95 Rec Report R2807 16 13.00 208.00 32 14.00 448.00
01-31-95 Stocktake -2 14.00 -28.00 30 14.00 420.00

General Ledger Accounts in Inventory Accounting

Manufacturers, wholesalers and retailers would typically want
to group their inventory asset accounts together in product
categories on the balance sheet. Similarly, they would want to
group revenue and expense associated with selling the
inventory along similar product categories.

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General Ledger Accounts in Inventory Accounting

A typical structure to accomplish this is:

Smith Retailing
Balance Sheet
January 31, 1996

Assets: Liabilities:
Current Assets Current Liabilities
Cash in Hand $ 10,000 Interest Payable $ 1,000
Cash in Bank 19,000 Wages Payable 1,000
Interest Receivable 600 Accounts Payable 20,000
Accounts Receivable 38,000 Operating Loan 10,000
Office Supplies 300 Total Current Liabilities 32,000
Prepaid Insurance 1,000
Total Current Assets 68,900 Long-Term Liabilities
Mortgage 95,000
Inventory Assets Bank Loan 40,000
Product Line A 9000 Total Long-Term Liabilities 135,000
Product Line B 12000
Product Line C 8000 Total Liabilities 167,000
Total Inventory Assets 29,000
Equity:
Fixed Assets Retained Earnings 48,000
Land 70,000 Current Earnings 30,000
Buildings 40,000 Total Equity 78,000
Shop Fittings 15,100
Warehouse Equip. 20,000 Total Liabilities & Equity $245,000
Office Furniture 2,000
Total Fixed Assets 147,100

Total Assets $245,000

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General Ledger Accounts in Inventory Accounting

Smith Retailing
Income Statement
Feb. 1, 1995 - Jan. 31, 1996

Revenue Expenses
Product Sales Cost of Goods Sold
Product Line A $133,000 Product Line A $ 79,300
Product Line B 69,000 Product Line B 42,800
Product Line C 600 Product Line C 400
Total Product Sales 202,600 Total Cost Goods Sold 122,500

Total Revenue $202,600 Administrative Expenses

Wages 27,000
Depreciation 7,000
Bad Debts 2,000
Interest Mortgage 5,600
Interest Bank Loan 2,600
Interest Optg Loan 800
Professional Fees 1,300
Telephone 800
Insurance 2,300
Utilities 700
Total Administration 50,100

Total Expenses 172,600

Income $ 30,000

A frequent convention on the income statements for

manufacturers, wholesalers and retailers is to show the Gross
Profit on Sales. This item is defined as follows:

Total Product Sales $ 202,600

Total Cost of Goods Sold 122,500
Gross Profit on Sales 80,100

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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. 31, 1996

Revenue Expenses
Sales Construction
Apartments $122,000 Material: Type A $ 39,000
Housing 64,000 Material: Type B 20,000
Office Building 600 Material: Type C 5,300
Total Sales 186,600 Rental: Excavators 4,000
Rental: Crane 2,500
Miscellaneous Sales Rental: Compressor 1,500
Engineering 2,000 Wages 30,000
Surveying 4,000 Wage Burden 10,000
Total Misc. Sales 6,000 Total Construction 112,300

Total Revenue $192,600 Administrative Expenses

Wages 27,000
Depreciation 7,000
Bad Debts 2,000
Interest Mortgage 5,600
Interest Bank Loan 2,800
Interest Optg Loan 800
Professional Fees 1,300
Telephone 800
Insurance 2,300
Utilities 700
Total Administration 50,300

Total Expenses 162,600

Income $ 30,000

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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). You should consult an accounting professional
and Revenue Canada for the latest GST information, and for
advice on the impact the tax will have on your particular
business.

The GST that you pay on purchases for use in your business or
for resale may qualify as an input tax credit. If it does, the GST
is not an expense or a cost of inventory. You account for it
separately and claim it back from the government.

When a company buys inventory, it pays GST (on GST-taxable

items). The seller can charge for the tax in one of two ways:
either included in the price of the item or excluded.

For example, if a company purchases an inventory item and

GST is included in the selling price, the invoice line looks like
this:

Widget 107.00 GST included

If the company purchases the same inventory item, but GST is

excluded from the selling price, the invoice looks like this:

Widget 100.00
GST 7.00
Total 107.00

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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:

Debit Credit
1160 Product Line A 100.00
2490 GST Paid on Purchases 7.00
1100 Cash 107.00

When your company sells inventory, the customer pays GST (on
GST-taxable items). As the seller, you must decide whether or
not to include GST in the selling price.

If the GST is included in the price, your revenue is less than the
selling price, since a portion of the selling price is tax you are
collecting on behalf of Revenue Canada. For example, if you sell
an item for $214 with the GST included, you can calculate the
"real price" by working backwards as follows:

Selling price 214.00

GST included 14.00
Real price 200.00

In all likelihood you arrived at the "selling price" by multiplying

your "real price" by the GST rate and adding it to the "real
price." This relationship:

Selling price = real price + (real price x GST rate)

can be turned around to allow you to determine the "real price"

as follows:

real price = selling price = 214 = 214 = $200

(1 + GST rate) (1 + 0.07) 1.07

The journal entry to record the sale of an item for $200 plus GST
is the same as the journal entry to record the sale of an item for
$214 with the GST included in the price. The only difference is

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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:

Debit Credit
1100 Cash 214.00
5220 Product A: Expense 100.00
4160 Revenue 200.00
2510 GST Charged on Sales 14.00
1120 Product A Inventory 100.00

Provincial Sales Tax

If you sell an item to a purchaser who is not exempt from

provincial sales tax (PST), then you must collect PST on all items
that are subject to this tax.

You should consult your provincial tax authorities to find out

whether your province requires you to charge provincial sales
tax on the price of an item including GST or excluding GST.

Assuming that the PST rate is 6 percent, that the item is also
GST taxable, and that your province requires you to charge PST
on the price excluding GST, the journal entry to record the sale
is:

Debit Credit
1100 Cash 226.00
5220 Product A: Expense 100.00
4160 Revenue 200.00
2140 PST Payable 12.00
2510 GST Charged on Sales 14.00
1120 Product A Inventory 100.00

For additional information on the GST and PST, see Chapter 21,
Accounting for the GST and PST.

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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.

If during February, an employee was paid $3,000, their wages

would be recorded in the ledger as follows:

Feb 14, 95 Wage Expense 5020 3,000

Cash in Bank 1020 3,000
Jones paid for March

During the month, the employee spent 50% of their time on

project A, 25% on Project B, and 25% on Project C. Therefore,
while making the above journal entry, the employer would
allocate $1,500 to Project A, $750 to Project B, and $750 to
Project C.

If the employer allocated expenses incurred during March to the

three projects in a similar manner, at the end of the month a
project cost report could be generated for the two month
period.

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Profit Centres

Projects
A B C
Wages $ 5,000 $ 7,000 $ 2,000
Supplies 1,000 700 3,000
Equipment Rental 3,000 1,000 2,000
Total Costs $ 9,000 $ 8,700 $ 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.

Profit Centres
Cost accounting can also be used to determine the profitability
of any profit centre such as a division, department, or region.

Here is an example in which a hotel determines which

departments are profitable. As revenue and expense
transactions are recorded in the journal, the revenues and
expenses are also allocated to the departments that are
responsible for them. Some expenses are shared between
departments in the same way that expenses were shared
between projects in the previous example.

At the end of every month, the reports on the departments are

prepared and summarized. Ordinarily, much more detail would
be presented, but this example only classifies revenue and
expenses into broad categories.

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Profit Centres

Westridge Hotel
Bar Dining Room Rooms
Revenues
Food $ 1,000 $ 12,000
Alcohol 8,000 6,000
Rental $ 20,000
Total 9,000 18,700 20,000

Expenses
Food and Beverages 4,000 6,000
Wages 4,000 6,000 8,000
Utilities and Supplies 500 2,000 2,000
Total 8,500 14,000 10,000
Profit $ 500 $ 4,000 $ 10,000

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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. You must remit to the government the amount
of GST you charge your customers, less any GST you pay on
business-related purchases that qualifies as an input tax credit.

Provincial sales tax is levied by the provincial government. You

charge your customers PST on goods you sell, and remit the tax
you collect to the government. Some provinces allow you to
retain a certain percentage of the provincial sales tax you collect
as "commission."

Preparing for Tax Accounting

Before you set up your accounting system, you should take
steps to prepare for tax accounting. If you have not already
done so, you should consult an accounting professional,
Revenue Canada, and your provincial tax authority, both for the
latest tax information, and for advice on the impact the taxes
will have on your particular business.

Setting Up General Ledger Accounts

You must set up accounts to keep track of the GST and PST.

In the General Ledger, create the following current liability

accounts for GST:
GST Charged On Sales

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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.)

By grouping all the GST accounts together you can easily see
how much you owe the government, or how much the
government owes you.

In the General Ledger, create the following accounts for PST:

PST Payable
PST Commission (if your province allows you to retain part
of the tax you collect as commission)

The PST Payable account is a current liability account. The PST

Commission account is a revenue account.

Accounting for Purchases

The GST that you pay on business-related purchases is not an
expense or a cost of inventory if it qualifies as an input tax
credit. You account for it separately and claim it back from the
government.

The PST that you pay on business-related purchases is an

expense.

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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 Credit
2490 GST Paid on Purchases 7.00
5645 Office Supplies 106.00
1100 Cash 113.00

Because the PST is an expense, it is included in the $106 amount

debited to the Office Supplies account.

Accounting for Sales

When you sell goods and services to customers, you must
account for the GST and PST.

The GST and PST you charge your customers must appear on
invoices. The GST can be charged either separately or included
in the selling price. If GST is included in the selling price, it
must be clearly indicated which items are taxed. PST is always
charged separately.

Note that not all items are subject to the Goods and Services
Tax. You should check the regulations to see which goods are
tax-exempt or zero-rated.

When you sell an item for cash, an example of the journal entry
to record the sale would be:

Debit Credit
1100 Cash 226.00
5220 Product A: Expense 100.00
1120 Product A Inventory 100.00
2140 PST Payable 12.00
2510 GST Charged on Sales 14.00
4160 Revenue 200.00

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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. When a paycheque is produced,
$8.40 is deducted from the employee's paycheque and recorded
as an increase in the GST Payroll Deduction account.

For more information, refer to GST Payroll Deductions in

Chapter 18, Payroll Accounting.

Adjustments
On occasion, you may have to record GST for transactions that
are not sales or purchases. Do not use the GST Charged On
Sales or GST Paid On Purchases accounts to make these
adjustments. Instead, make journal entries using the GST
Adjustments and ITC Adjustments accounts.

Use the GST Adjustments account to record GST you owe the
government for transactions that are not sales. For example:
The GST portion of a bad debt that has been recovered.
The portion of the input tax credit that Revenue Canada
recaptures when lease costs for a passenger vehicle exceed
the maximum allowed.

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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.

Clearing the Tax Accounts

When you remit the GST you owe (or receive your refund), post
the cheque against the GST accounts to prepare them for the
next reporting period.

For example, if you owe GST to the government, the journal

entry to record the remittance might appear as follows:

Debit Credit

2510 GST Charged on Sales 180.00

2515 GST Payroll Deductions 30.00
2520 GST Adjustments 20.00
2490 GST Paid on Purchases 50.00
2525 ITC Adjustments 25.00
1100 Cash 155.00

If the government pays you a refund, the journal entry to record

the refund might appear as follows:

Debit Credit
1100 Cash 100.00
2510 GST Charged on Sales 100.00
2515 GST Payroll Deductions 25.00
2520 GST Adjustments 25.00
2490 GST Paid on Purchases 200.00
2525 ITC Adjustments 50.00

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Clearing the Tax Accounts

Similarly, when you remit PST to the government, the journal

entry to record the remittance might appear as follows:

Debit Credit

2140 PST Payable 90.00

4060 PST Commission 2.70
1100 Cash 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.

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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.

Accounting Period The period of time over which a company's business transactions
are recorded and at the end of which the company's financial statements are printed.
Most accounting systems have an accounting period of one month.

Accounts Payable Money owed by the company for goods and services provided by
its suppliers.

Accrual Method A method of stating income whereby revenues are recognized in the
accounting period in which they are earned, not when the payment is received. Most
businesses are required by law to use the accrual method of accounting.

Accrued Expenses Expenses which have been incurred but have not yet been paid
and recorded in the books because no invoice has been received.

Adjustments Journal entries to record accrued expenses, depreciation, accrued

revenues, bad debts, and other items which must be recorded at the end of the
accounting period in order to state income accurately. The journal entries to record
adjustments are called adjusting entries.

Assets All the physical things and other items of value owned by a company. They
are listed on the left side of the balance sheet. Assets include finished and unfinished
inventory, land, buildings, cash, and money owed to the company by customers.

Bad Debts The amounts not paid when a customer fails to pay all or part of what is
owed. You make an adjusting entry to record it as an expense.

Balance Sheet A summary of what a company owns and owes on a particular day. It
has three main categories: assets, liabilities, and equity.

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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 long-
term liabilities.

Closing the Books The process of posting closing entries to clear the revenue and
expense accounts and to transfer the net income to the Retained Earnings account at the
end of an accounting year. It is done to ensure that the books are ready to record the
next accounting years transactions. When you close the books, the balance of the
Current Earnings account is transferred to the Retained Earnings account.

Common Shares Shares that have no preference as to dividends and no fixed rate of
return. This is the most common type of share, and normally has voting rights attached
to it. Since common shares are typically the only type of shares with voting rights, the
shareholders who control the majority of the common shares usually control the
company.

Corporation A form of business organization which is legally separate from its

owners, and in which the owners (called shareholders) have limited liability. Owners
can only lose what they have invested in the corporation. A corporation has the right to
sue and be sued by others. A corporation is also called a limited company. See also:
Shareholders.

Cost Accounting A system of allocating costs or expenses to a particular job,

department, or project so that a companys management can quickly determine whether
the project is meeting its budget or earning the company any profits.

Cost of Goods Manufactured The cost of the raw materials, direct labour, and
factory overhead incurred in producing all the goods manufactured during a period.

Cost of Goods Sold The cost of the raw materials, direct labour, and factory
overhead incurred in producing all the goods sold during a period.

Current Assets Assets which can be converted to cash or realized in the ordinary
course of business, usually within one year.

Current Earnings The net difference between the revenue account totals and the
expense account totals. There is only one Current Earnings account on the balance sheet.
Every time a journal entry is made that affects revenue or expense accounts, the balance
in the Current Earnings account is recalculated. You cannot post journal entries directly

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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. Increasing the balance
of an account with a normal credit balance is called crediting, as is decreasing the
balance of an account which normally has a debit balance.

Debit A positive balance on the left-hand side of an account. Increasing the balance
of an account which normally has a debit balance is called debiting, as is decreasing the
balance of an account which normally has a credit balance.

Depreciation Allocation of the cost of a physical asset (such as a piece of equipment)

over its useful life. Depreciation transactions debit the depreciation expense account and
credit (reduce) the value of the asset.

Direct Labour Costs Wages paid to employees (labourers and supervisors) who
work directly on the product being manufactured.

Dividend A payment made to shareholders by a corporation, usually out of after-tax

profits. The directors of the company make the decision for the company to declare and
pay dividends.

Earnings See: Current Earnings, Retained Earnings.

Equity The worth of a business to its owner. It is shown on the right side of the
balance sheet. To calculate the owners equity, subtract the liabilities from the assets.

Expenses The amounts that a company spends to provide goods or services to its
customers or to carry on its business, excluding amounts spent to acquire assets.

Factory Overhead All costs incurred in the factory, other than the costs of raw
materials and direct labour. Included are costs such as management wages, janitorial
wages, and the costs of using and maintaining buildings, machinery, and equipment.

Financial Statements The balance sheet and income statement.

Fiscal Year The twelve-month period which a company chooses for accounting
purposes. It is not necessarily the same as a calendar year.

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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.

Income Statement A statement which shows the revenues, expenses, and net income
for a particular period.

Inventory The goods a business has for sale to its customers. For retailers or
wholesalers, the goods themselves are not modified in any major way from the time
they are received to the time they are sold. A manufacturing companys inventory
consists of raw materials, work in process, and finished products manufactured but not
yet sold.

Journal A companys primary record of business transactions. All transactions

recorded by a business are recorded first in a journal. See also: Journal Entry.

Journal Entry The record of a transaction in a journal.

Ledger A book in which each page contains the records of one account. See also:
Account.

Liabilities All the debts and money owed to others by a company. They are listed on
the right side of the balance sheet. Liabilities include loans from banks, loans from
shareholders, and unpaid amounts owed to suppliers and others.

Long Term Liabilities Liabilities that are not due to be paid within the year
following the balance sheet date.

Matching Concept A method of matching expenses with the revenues that they help
generate, and recording them at the time that revenues are recorded.

Net Income The amount left over after all the revenues for a period are accounted
for, and all costs and expenses for the same period are deducted. Net income is also
called income, profit, or net loss (if the income amount is negative).

Net Sales See: Revenues.

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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 years
transactions.

Owner Equity The interest or stake the owners have in a company. It is the owners
original investment plus the accumulation of all profits that have been retained in the
company since its conception. To calculate owner equity, subtract the liabilities from the
assets. See also: Shareholders Equity.

Partnership A form of proprietorship in which there is more than one owner. The
owners have unlimited liability, and any one of them could be sued separately for the
entire debts of the partnership. The partners usually agree to share the profits and losses
of the firm on an equitable basis. See also: Proprietorship.

Posting The process of transferring information from the journal to the applicable
ledger account.

Preferred Shares Shares that may pay their owners a dividend, which is usually fixed
in amount or percent. Preferred shareholders receive their dividends before the
common shareholders are entitled to any dividends. See also: Dividends.

Prepaid Expenses Expenses which are paid for in advance, such as insurance and
rent. Prepaid expenses are current assets.

Profit The amount left over after all the revenues for a period are accounted for, and
all costs and expenses for the same period are deducted. Profit is also called net profit,
income, or net income.

Profit Centre A department, sales region, project, or any other part of a company for
which revenues and expenses can be identified.

Proprietorship A form of business organization in which the owner and the company
are not legally separate, but keep separate accounting records. A proprietor (the owner)
has unlimited liability. He can be sued personally for the debts of his company.

Realization The recording of revenues or expenses. Revenue is realized when the

title to goods or services passes to the customer. Expenses are realized when they are
incurred, or, if they can be matched to a certain good or service provided, they are
recorded at the time the revenue for that particular good or service is recorded. See also:
Matching Concept.

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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.

Shareholders Persons or other companies that own shares (stock) issued by a

corporation. The shareholders own the corporation, but are legally separate from the
corporation. They have limited liability and can only lose what they originally invested
in the corporation.

Shareholders Equity The money originally invested in the company by the

shareholders, plus the retained earnings. See also: Retained Earnings; Owner Equity.

Shares Certificates that represent ownership of a portion of a firm. Shares are also
called stock. See also: Preferred Shares; Common Shares.

Stock See: Shares.

Source Document An invoice or a bill on which the transaction recorded by a journal

entry is based.

Subsidiary Ledger A ledger which contains the details for a General Ledger control
account. For example, the accounts receivable subsidiary ledger contains the details of
all amounts owed to the company by its customers. The total of these amounts is
summarized by the Accounts Receivable control account in the general ledger.

Trial Balance A list of all the debit and credit balances of all the accounts in the
general ledger. Use it to ensure that there have been no posting or adding mistakes, and
that the total debits equal the total credits.

Withdrawal The money taken out of a company by a proprietor or partner.

Worksheet A list of all the accounts in the ledger, used to work out the balance sheet
and income statement in a manual accounting system. The worksheet is created directly
from the trial balance.

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Index

A Administrative expenses 10-4

Advances
employee 18-4,18-15,18-18
Account Amount subject to tax 18-14
credit balance 5-5 Asset accounts 5-5
crediting 5-6 with credit balances 5-6
debit balance 5-5 Assets
debiting 5-6 changes in 2-2
defined 5-3 current 10-1
numbering 7-2 defined 2-1
Account balance fixed 10-2
defined 5-3 Average cost
Accounting equation 2-1 method of inventory accounting control
Accounting period 19-3
choosing 11-1
defined 11-1
starting 13-1
Accounts B
chart of 7-2
Accounts payable Bad debts
defined 1-2 accounting for 17-2
subsidiary ledger 16-2 adjusting entries for 11-3
Accounts receivable Balance
defined 4-3 defined 5-3
subsidiary ledger 16-2 Balance sheet 2-1
Accrual method 11-1 after adjusting entries 12-2
defined 5-3 defined 1-3
Accrued expenses left side 5-5
recording 11-5 recording changes to 5-1
Accrued revenues right side 5-5
recording 11-7 Benefits
Adjusting entries 11-1 taxable, employee 18-6
for bad debts 11-3
for depreciation 11-4
for prepaid expenses 11-2
for supplies 11-3 C
recording 11-2
Canada Pension Plan
see CPP

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Chart of accounts Depreciation

defined 7-2 adjusting entries for 11-4
sample 7-3 defined 11-4
Classified statements recording 11-5
defined 10-1 Discounts
Closing the books accounting for 17-1
defined 13-1 Dividends
journal entry 13-2 on preferred and common shares 15-3
Commission recording the payment of 15-5
employee 18-5
on provincial sales tax 21-1
Common shares 15-3
Corporation 15-3
E
Cost accounting 20-1
Costs Earnings 3-1
allocating to projects 20-1 at end of fiscal year 6-2,13-2
CPP recording 4-1
basic exemption 18-9 relationship to net income 6-2
contributions 18-9 sharing among partners 15-2
contributory earnings 18-9 EHT 18-20
employer expense 18-16 General Ledger accounts for 18-21
remitting to Receiver General 18-19 journal entry for 18-21
Credit remitting to Ministry of Revenue 18-21
defined 5-5 EI (Employment Insurance)
on balance sheet 5-7 employer expense 18-16
recording in journal 7-2 insurable earnings 18-11
Crediting premiums 18-10
defined 5-6 remitting to Receiver General 18-19
Current assets 10-1 Employee
Current liabilities 10-2 advances 18-4,18-15,18-18
Current year's earnings 6-2 benefits, taxable 18-6
Customer records 16-2 commission 18-5
deductions 18-8
gross earnings 18-3
overtime pay 18-4
D records
payroll information in 18-17
Debit regular pay 18-4
defined 5-5 salary 18-5
on balance sheet 5-7 vacation pay 18-6
recording in journal 7-2 Employee records 16-3
Debiting Employer expenses
defined 5-6 calculating 18-16
Deductions CPP 18-16
employee 18-8 EI 18-16
WCB 18-17

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Employer Health Tax adjustments 21-4

see EHT clearing accounts 21-5
Employment Insurance General Ledger accounts for 21-1
see EI input tax credit 21-2
Equity 10-2 on employee benefits 18-15,21-4
changes in 2-2,3-1 Payroll Deduction account 18-15,21-4
defined 2-1
Equity accounts 5-5
Expenses 10-4
accrued 11-5
H
administrative 10-4
allocating to profit centres 20-2 Historical data 7-1
debits and credits 5-8
defined 4-2
operating 10-4 I
prepaid 11-2
recording 4-1
when to record 4-3,5-3 Income 10-4
calculating 6-1
Income statement
after adjusting entries 12-1
F categories of 10-4
defined 6-1
Financial statements 10-1 Income tax 18-13
defined 6-3 calculating 18-14
making adjustments to 11-1 remitting to Receiver General 18-19
preparing (summary) 14-1 Input tax credit 21-2
Fixed assets 10-2 adjustments 21-5
Interest charges
accounting for 17-1
Inventory
G GST on 19-8
methods of accounting control 19-3
General journal provincial sales tax on 19-10
defined 7-1 records 16-3
General ledger accounts subsidiary ledger 16-3
in inventory accounting 19-4 Inventory accounting 19-1
Goods and Services Tax general ledger accounts 19-4
See GST Inventory control card
Gross earnings sample 19-4
calculating 18-3
Gross profit on sales
defined 19-6
GST
J
accounting for inventory 19-8
accounting for purchases 21-2 Journal
accounting for sales 21-3 defined 7-1

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sample 7-4 N
Journal entry
defined 7-2
sample 7-2 Net income 6-1,10-4
to account for a paycheque 18-19 relationship to earnings 6-2
to close the books 13-2 Net profit 6-1,10-4
to open the books 13-3

O
L
Open invoice
Late payment charges method of accounting 17-1
accounting for 17-1 Opening the books
Ledger defined 13-3
defined 8-1 journal entry 13-3
subsidiary 16-1 Operating expenses 10-4
transferring journal entries to 8-1,8-2 Overtime pay 18-4
Ledger account
defined 8-1
sample 8-1 P
Liabilities 10-2
changes in 2-2
Partnership 15-1
current 10-2
Pay
defined 2-1
overtime 18-4
long term 10-2
regular 18-4
Liability accounts 5-5
salary 18-5
Limited company 15-3
vacation 18-6
Long term liabilities 10-2
Paycheques
Loss report 19-2
deductions from 18-8
Losses 3-2
Payroll
advances 18-4,18-15,18-18
calculating deductions 18-8
M calculating gross earnings 18-3
commission 18-5
Manual accounting systems 9-1 employer expenses 18-16
Manufacturing report 19-2 in Quebec 18-22
Matching concept journal entries 18-19
defined 4-3 preparing 18-1
Medical plan subsidiary ledger 16-3
employee deduction 18-14 updating records 18-17
Pension plan
contributions 18-12
Posting
defined 8-2

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Preferred shares 15-3 Regular pay 18-4

Prepaid expenses Remitting funds
adjusting entries for 11-2 to government agencies 18-19
Prepayments Requisitions
accounting for 17-3 of inventory 19-2
Previous years' earnings 6-2,13-1,13-3 Retained earnings 13-2,15-4
Profit 6-1,10-4 Revenues 10-4
Profit centres 20-2 accrued 11-7
Projects allocating to profit centres 20-2
allocating costs to 20-1 debits and credits 5-8
Proprietorship defined 4-1
defined 1-1 recording 4-1
Provincial sales tax 21-1 when to record 4-3,5-2,5-3
accounting for purchases 21-2 Reversing entry
accounting for sales 21-3 defined 11-6
clearing accounts 21-5
commission 21-1
General Ledger accounts for 21-2
on inventory 19-10
S
PST
See provincial sales tax Salary 18-5
Purchases Sales
accounting for GST 21-2 accounting for GST 21-3
accounting for provincial sales tax 21-2 accounting for provincial sales tax 21-3
defined 4-1
Sales tax
provincial 19-10
Q Sales tax, provincial 21-1
Shareholders' equity 15-3
Quebec Shares
payroll accounting in 18-22 common 15-3
preferred 15-3
recording the issuance of 15-4
voting rights on 15-3
R Source document
defined 7-2
Receiver General Stock control card
remitting funds to 18-19 sample 19-4
Receiving report 19-1 Stock records 16-3
Recording Subsidiary ledger
payments received 5-2 accounts payable 16-2
transactions 5-1 accounts receivable 16-2
Reference defined 16-1
defined 8-2 inventory 16-3
Registered pension plan payroll 16-3
contributions 18-12

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Supplies
adjusting entries for 11-3

Tax
income 18-13
provincial sales 19-10
Tax, provincial sales 21-1
Taxable benefits, employee 18-6
TD1 forms 18-13
Transaction
defined 5-1
recording 5-1,7-1,8-2
Trial balance
adjusted 11-2
defined 9-1

Unemployment Insurance
see UI
Union dues 18-13

Vacation pay 18-6

WCB
employer expenses 18-17
Withdrawals
from a business 3-1
Workers' Compensation Board
see WCB
Worksheet
defined 9-1

Index6 Simply Accounting

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