Basic bookkeeping: an office simulation [Eighth edition] 9780176721220, 9780176798758, 0176721223

Table of contents :
Cover......Page 1
TABLE OF CONTENTS......Page 7
PREFACE......Page 14
CHAPTER 1 AN INTRODUCTION TO BOOKKEEPING......Page 19
CHAPTER 2 RECORDING THE TRANSACTION......Page 31
CHAPTER 3 THE LEDGER......Page 53
CHAPTER 4 CORRECTING ENTRIES AND SALES TAXES IN CANADA......Page 70
CHAPTER 5 FREIGHT IN, DELIVERY EXPENSE, AND DUTY & BROKERAGE......Page 88
CHAPTER 6 USING SPECIAL JOURNALS......Page 96
CHAPTER 7 CREDIT NOTES, REFUNDS, AND DISCOUNTS......Page 127
CHAPTER 8 REMITTING GST AND HST......Page 146
CHAPTER 9 ACCOUNTING FOR CASH......Page 161
CHAPTER 10 PAYROLL......Page 191
CHAPTER 11 PARTNERSHIPS AND CORPORATIONS......Page 220
CHAPTER 12 ACCOUNTS RECEIVABLE AND BAD DEBTS......Page 235
CHAPTER 13 INTERIM PROFIT OR LOSS......Page 249
CHAPTER 14 AT YEAR-END: PREPARING TO CLOSE THE BOOKS......Page 264
CHAPTER 15 AT YEAR-END: CLOSING THE BOOKS......Page 283
APPENDIX A REAL-WORLD FINANCIAL STATEMENTS......Page 295
APPENDIX B ANSWERS TO THINK ABOUT IT!......Page 300
APPENDIX C CHART OF ACCOUNTS: KBC DECORATING CO.......Page 307
GLOSSARY......Page 311
INDEX......Page 321

Citation preview

EIGHTH EDITION

EIGHTH EDITION



on ti la mu Si e ic An Off

BROOKE C.W. BARKER

BASIC BOOKKEEPING An Office Simulation

BASIC BOOKKEEPING

EIGHTH EDITION

BARKER

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BASIC BOOKKEEPING

on ti la mu Si e ic An Off

nelson.com ISBN-13: 978-0-17-672122-0 ISBN-10: 0-17-672122-3

9 780176 721220

BROOKE C.W. BARKER

EIGHTH EDITION

BASIC BOOKKEEPING

on ti la mu Si e ic An Off

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

EIGHTH EDITION

BASIC BOOKKEEPING

on ti la mu Si e ic An Off

BROOKE C.W. BARKER

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit nelson.com to search by ISBN#, author, title, or keyword for materials in your areas of interest.

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Basic Bookkeeping: An Office Simulation, Eighth Edition by Brooke C.W. Barker

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Barker, Brooke C. W., author   Basic bookkeeping : an office simulation / Brooke C.W. Barker. — Eighth edition. Includes index. Issued in print and electronic formats. ISBN 978-0-17-672122-0 (softcover).—ISBN 978-0-17-679875-8 (PDF)   1. Bookkeeping—Textbooks. 2. Bookkeeping—Problems, exercises, etc. 3. Textbooks. I. Title. HF5636.B37 2018 657’.2 C2017-906966-7 C2017-906967-5 ISBN-13: 978-0-17-672122-0 ISBN-10: 0-17-672122-3

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TABLE OF CONTENTS PREFACExii

CHAPTER 1

CHAPTER 2

CHAPTER 3

AN INTRODUCTION TO BOOKKEEPING

1

Bookkeeping on a Personal Level Bookkeeping for Business Three Forms of Business Organization The Five Categories of Accounts Assets versus Expenses Generally Accepted Accounting Principles Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Supplementary Exercise Think About It!

2 4 6 7 8 10 10 11 11 12 12

RECORDING THE TRANSACTION

13

The Accounting Equation Practice Exercise 1 Balance Sheet Debits and Credits Basic Rules For Debit and Credit Practice Exercise 2 Practice Exercise 3 Double-Entry System of Bookkeeping Analyzing a Transaction Analyzing a Transaction (Cartier Window Coverings) Practice Exercise 4 Practice Exercise 5 The General Journal Practice Exercise 6 Practice Exercise 7 Practice Exercise 8 Supplementary Exercises Think About It!

14 15 15 16 17 18 18 19 19 22 28 28 29 31 32 33 33 34

THE LEDGER

35

The Ledger Account Chart of Accounts Practice Exercise 1

36 37 38

NEL

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v

vi

TABLE OF CONTENTS

Posting38 The Trial Balance 40 Practice Exercise 2 42 Practice Exercise 3 42 Practice Exercise 4 44 Practice Exercise 5 45 Locating Errors in a Trial Balance 46 Practice Exercise 6 47 Practice Exercise 7 48 Practice Exercise 8 48 Supplementary Exercises 48 Think About It! 49 Case Study: Introducing KBC Decorating Co. 50

CHAPTER 4

CHAPTER 5

CORRECTING ENTRIES AND SALES TAXES IN CANADA

52

Correcting Writing Errors Recording Correcting Entries Practice Exercise 1 Practice Exercise 2 Recording Reversing Entries Practice Exercise 3 Practice Exercise 4 Sales Taxes in Canada GST/HST on Sales GST/HST on Purchases Practice Exercise 5 Practice Exercise 6 Provincial Sales Tax Practice Exercise 7 Recording Sales with PST Practice Exercise 8 Practice Exercise 9 Recording Other Expenses with PST Practice Exercise 10 Remitting PST Practice Exercise 11 Calculating the Tax Included Practice Exercise 12 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

53 54 55 56 56 57 57 58 59 59 60 61 61 62 63 63 64 64 65 65 66 66 67 68 68 68

F REIGHT IN, DELIVERY EXPENSE, AND DUTY & BROKERAGE

70

Freight In Freight on Non-merchandise Items

71 72 NEL

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CHAPTER 6

CHAPTER 7

TABLE OF CONTENTS

vii

Delivery Expense Duty and Brokerage Practice Exercise 1 Practice Exercise 2 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

73 73 75 76 77 77 77

USING SPECIAL JOURNALS

78

Introducing Special Journals Sales Journal Posting from the Sales Journal Control Accounts Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Practice Exercise 4 Practice Exercise 5 Cash Receipts Journal Posting from the Cash Receipts Journal Cash or Plastic? Practice Exercise 6 Practice Exercise 7 Practice Exercise 8 Practice Exercise 9 Practice Exercise 10 Purchase Journal Posting from the Purchase Journal Practice Exercise 11 Practice Exercise 12 Practice Exercise 13 Practice Exercise 14 Practice Exercise 15 Cash Payments Journal Posting from the Cash Payments Journal Practice Exercise 16 Practice Exercise 17 Practice Exercise 18 Practice Exercise 19 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

79 80 82 83 85 85 86 86 87 87 90 91 91 92 93 93 93 94 97 98 99 99 100 100 100 102 103 104 104 104 105 106 106

CREDIT NOTES, REFUNDS, AND DISCOUNTS

109

Credit Notes and Refunds on Sales Practice Exercise 1 NEL

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110 113

viii

TABLE OF CONTENTS

Practice Exercise 2 Practice Exercise 3 Practice Exercise 4 Sales Discounts Practice Exercise 5 Practice Exercise 6 Practice Exercise 7 Credit Notes and Refunds on Purchases Practice Exercise 8 Practice Exercise 9 Practice Exercise 10 Practice Exercise 11 Practice Exercise 12 Practice Exercise 13 Purchase Discounts Cash on Delivery (COD) Practice Exercise 14 Practice Exercise 15 Practice Exercise 16 Practice Exercise 17 Practice Exercise 18 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

CHAPTER 8

REMITTING GST AND HST How GST/HST Works Registering for GST/HST Voluntary Registration Filing the GST/HST Return Remitting GST/HST Keeping Records Nil Returns (No Tax Owing) Penalties and Interest Discounts Offered to Customers Deposits on Goods and Services Sales to Aboriginals Imported Items Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Using the Quick Method Examples of the Quick Method Practice Exercise 4 Using the Simplified Method for ITCs How the Simplified Method Works

113 113 114 114 116 116 117 117 118 119 119 120 120 120 120 122 123 123 123 123 124 124 125 125

128 129 129 129 129 132 133 133 133 134 134 134 134 135 135 135 136 136 139 139 140 NEL

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ix

TABLE OF CONTENTS

Think About It! Case Study: KBC Decorating Co.

CHAPTER 9

ACCOUNTING FOR CASH

140 140

143

Petty Cash Establishing Petty Cash The Petty Cash Sheet Recording Petty Cash Entries Reimbursing Petty Cash Cash Over or Short Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Practice Exercise 4 Practice Exercise 5 Bank Reconciliation Bank Statement Bank Errors Cash Book Errors Reconciling the Bank Account Bank Reconciliation Statement Practice Exercise 6 Practice Exercise 7 Practice Exercise 8 Practice Exercise 9 Practice Exercise 10 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

CHAPTER 10

PAYROLL

144 144 145 146 148 149 151 152 153 153 153 154 155 157 158 158 160 162 162 163 163 165 169 169 169

173

The Payroll Process Calculating Gross Pay Using Deduction Tables Recording the Payroll Payments and Remittances Payments to Employees Remittance of Payroll Deductions and Company Contributions Workers’ Compensation Vacation Pay and Holiday Pay Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Practice Exercise 4 Practice Exercise 5 Supplementary Exercises NEL

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174 174 176 184 185 185 186 187 187 187 189 190 191 191 192

x

TABLE OF CONTENTS

Think About It! Case Study: KBC Decorating Co.

CHAPTER 11

PARTNERSHIPS AND CORPORATIONS

192 192

202

The Partnership 203 Partnership Accounting 204 Practice Exercise 1 205 Practice Exercise 2 206 Practice Exercise 3 206 The Drawings Account 206 Practice Exercise 4 208 Practice Exercise 5 208 Corporations209 Keeping the Books in a Corporation 210 Kinds of Shares 210 Authorized versus Issued Capital 211 Practice Exercise 6 211 Retained Earnings 212 Practice Exercise 7 213 Practice Exercise 8 213 Supplementary Exercise 213 Think About It! 213 Case Study: KBC Decorating Co. 214

CHAPTER 12

ACCOUNTS RECEIVABLE AND BAD DEBTS Aging of Accounts Receivable Writing Off Bad Debts Recovering a Bad Debt Practice Exercise 1 Practice Exercise 2 Bad Debts in a Small Business Practice Exercise 3 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

CHAPTER 13

INTERIM PROFIT OR LOSS Interim Profit or Loss The Interim Statement Preparing the Interim Statement Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

217 218 220 221 222 223 223 226 226 226 227

231 232 232 232 235 235 237 237 238 238 NEL

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xi

TABLE OF CONTENTS

CHAPTER 14

AT YEAR-END: PREPARING TO CLOSE THE BOOKS

246

Inventory247 Practice Exercise 1 249 Year-End Adjusting Entries 249 Types of Adjusting Entries 249 Practice Exercise 2 256 Practice Exercise 3 257 Practice Exercise 4 257 The Worksheet 257 Practice Exercise 5 260 Practice Exercise 6 261 Practice Exercise 7 263 Supplementary Exercises 264 Think About It! 264 Case Study: KBC Decorating Co. 264

CHAPTER 15

AT YEAR-END: CLOSING THE BOOKS

265

Closing Journal Entries Practice Exercise 1 Practice Exercise 2 Practice Exercise 3 Post-Closing Trial Balance A Look at GAAP Financial Statements Income Statement Balance Sheet Practice Exercise 4 Practice Exercise 5 Practice Exercise 6 Practice Exercise 7 Supplementary Exercises Think About It! Case Study: KBC Decorating Co.

266 268 268 268 268 269 271 271 271 274 274 274 274 275 276 276

APPENDIX A

REAL-WORLD FINANCIAL STATEMENTS 

277

APPENDIX B

ANSWERS TO THINK ABOUT IT! 

282

APPENDIX C

CHART OF ACCOUNTS: KBC DECORATING CO. 

289

GLOSSARY

293

INDEX

303

NEL

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PREFACE Welcome to the eighth edition of Basic Bookkeeping: An Office Simulation. In writing this textbook, I have endeavoured to provide teachers and students with the tools necessary to learn and practise the concepts of basic bookkeeping for a small business in a simple, meaningful way. As an educator for more than 40 years, I understand the importance of giving our students a real-world context for learning. If students can relate to what they are studying, they will learn better. In today’s working world, being book-smart is not enough. Our students must learn to think critically and they must be able to apply what they have learned to an everchanging work environment. I want my students to have a greater understanding of the realities of bookkeeping as a function and as an occupation. I believe I have achieved this through the approach I use in Basic Bookkeeping, in part through the varied practice exercises in each chapter, and, most importantly, through the case study that presents the ongoing activities of KBC Decorating Company, a small retail store, for an entire financial year. As a student, you will gain valuable knowledge and experience in keeping a set of books for a small business. You will learn not only the mechanics of recording daily transactions in a variety of journals but also how to analyze financial activities to ensure the accuracy and integrity of the books. You will learn by doing, just as you would in on-the-job training. As a teacher, you know the importance of having up-to-date, relevant materials at hand to guide your students in the ways of today’s typical bookkeeping practices. Simply assigning an endless series of unrelated exercises will not lead students to a working knowledge of concepts and practices. It merely teaches them to respond by rote learning. Giving your students a real-world situation like that of KBC Decorating Company goes a long way toward a true understanding of the concepts and principles you are teaching them. The method of presentation that I have used in this textbook reflects my personal teaching style in the classroom. In other words, I wrote the material this way because I teach this way; and I teach this way because it is a style that works very well for me. I have trained thousands of bookkeeping students over the years, with great success. I am confident that you will enjoy working with Basic Bookkeeping as so many others have over the past 30 years.

What’s New in the Eighth Edition The eighth edition of Basic Bookkeeping: An Office Simulation contains updated payroll deductions tables and the latest sales tax rates (at time of printing). This edition also provides options in many of the practice exercises to calculate sales taxes using the method of calculation applicable in each student’s home province (GST only, HST, or GST plus PST). The case study, KBC Decorating Company, located in Ontario, charges HST on all purchases and sales. Supplementary Exercises are available online in Microsoft Excel format for additional practice of basic bookkeeping concepts along with basic Excel formulas. xii

NEL

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PREFACE

xiii

Pedagogical Features The objective of each chapter of this text is to cover the basic bookkeeping techniques employed by small businesses in Canada. Explanations are purposely geared to students who have little or no previous bookkeeping knowledge, and the practice exercises and case study provide practical reinforcement of each concept discussed. Each chapter contains the following pedagogical features: CHAPTER OBJECTIVES Objectives are provided at the beginning of each chapter to identify the major areas and points covered in the chapter and to guide the learning process. IMPORTANT TERMS USED IN THE CHAPTER A list of key terms used in each chapter appears at the beginning of the chapter, and each term appears in boldface within the chapter. A complete list of bookkeeping-related terms used throughout the text, including the key terms highlighted in each chapter, is found in the Glossary at the back of the book. PRACTICE EXERCISES Each chapter includes practice exercises that provide students with ample opportunity to review how well they have learned the material in the chapter. The variety of exercises attempts to provide exposure to different types of businesses and thus different account names, different provincial sales tax rates and calculation methods, as well as different degrees of complexity. Hints are added to some exercises, wherever deemed beneficial, to simplify the calculation or recording of certain transactions and to guide the student on the best way to address that particular issue. SUPPLEMENTARY EXERCISES Most chapters have additional exercises in Microsoft Excel format available for download from nelson.com/student. The students will complete the exercises according to the instructions that appear at the top of each spreadsheet exercise. THINK ABOUT IT! Each chapter contains a series of theory questions that teachers can use to generate class discussion on issues addressed in the chapter and to check that the students have a firm grasp of the concepts presented. CASE STUDY: KBC DECORATING COMPANY At the end of Chapters 3 to 15 are the case study activities for KBC Decorating Company. This ongoing exercise incorporates each new concept into the com­ pany’s monthly transactions, chapter by chapter, month by month, with the results being greater student understanding, greater student confidence, and a more practical real-world experience in keeping financial records. NEL

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xiv

PREFACE

Supplements

®

INSTRUCTOR ANCILLARIES The Nelson Education Teaching Advantage (NETA) program delivers research-based instructor resources that promote student engagement and higherorder thinking to enable the success of Canadian students and educators. Visit Nelson Education’s Inspired Instruction website at nelson.com/inspired/ to find out more about NETA. The following instructor resources have been created for Basic Bookkeeping. Access these ultimate tools for customizing lectures and presentations at nelson.com /instructor. ●● Instructor’s Solutions Manual: Prepared by Brooke C.W. Barker, the solutions manual contains the solutions for all of the chapter exercises and the KBC Decorating Co. case study. Solutions have been independently checked to ensure their accuracy and reliability. ●● NETA Test Bank: This resource was written by Jake Chazan of Seneca College. It includes over 100 multiple-choice questions written according to NETA guidelines for effective construction and development of higher-order questions. Also included are true/false and short-answer questions. The NETA Test Bank is available in a new, cloud-based platform. Nelson Testing Powered by Cognero® is a secure online testing system that allows instructors to author, edit, and manage test bank content from anywhere Internet access is available. No special installations or downloads are needed, and the desktop-inspired interface, with its drop-down menus and familiar, intuitive tools, allows instructors to create and manage tests with ease. Multiple test versions can be created in an instant, and content can be imported or exported into other systems. Tests can be delivered from a learning management system, the classroom, or wherever an instructor chooses. Nelson Testing Powered by Cognero for Basic Bookkeeping: An Office Simulation, Eighth Edition, can be accessed through nelson.com/instructor. ●● PowerPoint Presentation: Microsoft® PowerPoint® lecture slides for every chapter have been prepared by Jake Chazan of Seneca College. There is an average of 35 slides per chapter, many featuring key figures and tables from Basic Bookkeeping: An Office Simulation, Eighth Edition. NETA principles of clear design and engaging content have been incorporated throughout. ●● Image Library: This resource consists of digital copies of figures and short tables used in the book. Instructors may use these jpegs to create their own PowerPoint presentations. STUDENT ANCILLARIES Working Papers (978-0-17-682784-7) This supplement contains working materials for the practice exercises and for the KBC Decorating Co. (introduced in Chapter 3) case study. Special ledger accounts and trial balances have been included expressly for work on the case study. NEL

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PREFACE

xv

Companion Web Site Nelson Education’s Companion Web Site for Basic Bookkeeping: An Office Simula­ tion, Eighth Edition (nelson.com/student), brings course concepts to life with interactive learning and exam preparation tools that integrate with the printed textbook, including: ●● Flashcards ●● PowerPoint presentations ●● Supplementary exercises ●● Alternative Case Study

Acknowledgments I wish to thank all the reviewers of the previous edition of Basic Bookkeeping: An Office Simulation for their opinions and suggestions on how to change and improve the material. There were so many great ideas and suggestions; the difficult task was putting them all together. I would like to acknowledge those who assisted in reviewing this edition and earlier editions of this textbook: Dennis Adolph of Saskatoon Business College, Nicole Ayotte of Canadore College, Daniel Basquill of Eastern College, Dianne Berlenbach of Fleming College, Ruby (Rupinderbant) K. Brar of SAIT, Julia Bueckert of Saskatoon Business College, Sylvia Culshaw of Red Deer College, Denise Dodson of Nova Scotia Community College, Dana Goedbloed of Kwantlen Polytechnic University, Kim Hyatt of Robertson College, Diamond Meuse of Eastern College, Kerri Simich of Niagara College, Gorian Surlan of George Brown College, Vicki Sutherland of College of New Caledonia, Marcia Whittaker of Saskatoon Business College, and Colin Wilkie of George Brown College. Special thanks to Sharla Trudell of Fleming College, the technical checker for this edition. As well, I wish to thank my accounting students for their participation in “test driving” my new exercises. Last, but certainly not least, I express a special thanks to all the staff at Nelson for their assistance in producing this eighth edition.

NEL

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● define the three forms of business organization ●● define the five categories of accounts: assets, liabilities, owner’s equity, revenues, and expenses ●● classify accounts according to the five categories ●● identify the generally accepted accounting principles

IMPORTANT TERMS USED IN THIS CHAPTER Assets Balance Sheet Bookkeeping Corporation Expenses GAAP (Generally Accepted Accounting Principles) Income Statement Liabilities Owner’s Equity Partnership Proprietorship Revenue

CHAPTER

1

AN INTRODUCTION TO BOOKKEEPING

NEL

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2

CHAPTER 1

An Introduction to Bookkeeping

T

he word bookkeeping typically refers to the recording and recordkeeping phase of the overall process called accounting. More simply put, bookkeeping is the process of keeping records of sales and purchases, money received and money paid out, as well as all costs incurred in running the business.

BOOKKEEPING ON A PERSONAL LEVEL

Fun Fact “Bookkeeping” and “bookkeeper” are the only English words that have three consecutive double letters.

On a basic level, bookkeeping is what you do when you keep track of your own financial activities in a personal chequing account. It is your record of the money you received and the money you spent. Your chequebook is your record of all deposits made to the chequing account and all payments made from the account, whether by cheque, by debit card, or even by electronic payments such as PayPal. (See Figure 1.1.) But where did the money come from that was deposited to the account? To whom were the cheques issued? What did those cheques pay for? Where was the debit card used, and what was purchased? Some people are careful about recording each transaction Figure 1.1  Chequebook Record

Apr. 1 Apr. 1

64

4

debit

6

65

11

debit

15

Hill Realty Rent Food Basket Groceries Provincial Power Hydro Bill Food Basket Groceries

16

debit

19

debit

23

66

25

debit

26

debit

Paycheque Gregg’s Auto Service Car Tune-Up L’il Corner Store Groceries Cell-Tel Cell Phone Bill Topper’s Tailors New Clothes Food Basket Groceries

debit

Paycheque Petro-Gas Bar Gas & Oil

30 30

930

00

650

00

280

00

50

00

230

00

95

00

135

00

35

00

100

00

972

50

872

50

75

00

897

50

25

00

872

50

45

00

827

50

155

00

672

50

60

00

612

50

50 1,485

00

1,335

00

872 150

00

NEL

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CHAPTER 1

3

An Introduction to Bookkeeping

that affects their chequing account. Others are not. So, then, just how important is this information? Perhaps more important than you think. A record of cash flow (the movement of cash into and out of your account) helps you plan your spending over the coming days, weeks, and months. If, for example, you have only a small amount of money in your bank account, you likely would not be planning any major spending, such as buying a shiny new sports car or booking a tropical vacation. Marvin Reese, for instance, has his eye on a new car, but he is not sure if he can afford to buy it. His bank account shows a balance of only $1,335—not nearly enough for his dream car! From the chequebook record in Figure 1.1, we get some idea of Marvin’s spending habits. A simple chart helps us see at a glance where his money comes from and where it goes each month.

Cash In (deposits)

Paycheques

Cash Out (cheques and debit card)

$872.50 872.50

Rent Hydro & phone Food Automobile Other

$1,745.00

$650.00 140.00 170.00 225.00 155.00 $1,340.00

On the one side, we see his deposits, which are usually his paycheques. On the other, we see a list of what he spends his money on every month. Simple arithmetic shows us that Marvin would be able to save $1,745 − $1,340 = $405 each month. Keep in mind, however, that we have not yet considered other costs, such as annual insurance costs on his car and his apartment, or regular or unforeseen car repairs and maintenance. At this rate, Marvin could be saving for many years before he has enough money to buy a new car. As an alternative to saving the money he needs, Marvin might be able to get a car loan from the bank. First, though, he will need to make a list of everything he owns, including his existing car, any investments (such as savings bonds and education funds), and all debts he currently owes, including any existing bank loans, student loans, and amounts owing on credit cards. The bank will want to know his present financial situation and will use this and other information to see if Marvin is eligible for a bank loan.

Things He Owns

Cash Car Furniture Savings Bonds

Debts He Owes

$1,335.00 7,500.00 2,000.00 2,500.00 $13,335.00

Credit Cards Topper’s Tailors Gregg’s Auto

$1,450.00 390.00 270.00 $2,110.00

NEL

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4

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This kind of detailed personal recordkeeping not only helps us make better day-to-day decisions about spending but also helps us set long-term goals for major purchases. By looking back over the financial activities of previous months and years, we get a picture of spending habits. This is helpful in establishing a budget so that money is spent wisely.

BOOKKEEPING FOR BUSINESS Lance Reed, on the other hand, is a college student with his own part-time business doing yard work for his neighbours—cutting grass in the summer and clearing snow in the winter. For his business, Lance keeps track of the same kind of information that Marvin does—that is, where his money comes from and how it is spent.

Cash In (deposits)

Cash Out (cheques and debit card)

Earnings from yard work: J. Tunnicliffe $187.00 L. Porth 85.00 B. Szuuts 150.00 D. Essig 50.00 $472.00

Gasoline/oil Garbage bags Miscellaneous

$155.00 45.00 15.00 $215.00

Also, Lance will prepare a list of what his business owns (called assets) and all the debts he owes (called liabilities).

Things Owned (Assets)

Debts Owed (Liabilities)

Lawnmower Other tools

Loan from father

$550.00 140.00 $690.00

$120.00 $120.00

Based on these figures, we can calculate Lance’s net personal investment in his business: $690 – $120 = $570. This value is sometimes called equity or net worth. Suppose, then, that upon graduating from college, Lance decides to operate his business on a full-time basis. To get started properly, he prepares the two statements that we discussed earlier and takes this information to the bank in order to apply for a $15,000 loan so he can buy a used truck and some additional equipment (more tools and another lawnmower). The bank will ask that the information be prepared in a more formal fashion. The statement of assets, liabilities, and owner’s equity is commonly called a NEL

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An Introduction to Bookkeeping

Figure 1.2  Balance Sheet Lance Reed Balance Sheet June 30, 20— ASSETS

Equipment: Lawnmower Tools

5 5 0 00 1 4 0 00 6 9 0 00 LIABILITIES

1 2 0 00

Loan (Father) EQUITY

5 7 0 00 6 9 0 00

Capital, L. Reed

Balance Sheet. (See Figure 1.2.) The statement that shows his business earnings and operating costs is an Income Statement. (See Figure 1.3.) Assuming the loan to Lance has been granted by his bank and he has purchased the additional items he needs, Figure 1.4 shows a new Balance Sheet for his business today. The loan for $15,000 appears in the Liabilities section, and the truck and additional equipment appear in the Assets section. You can see that the information recorded by an individual and the information recorded by a small business are very much the same. Company information, however, is generally kept more formally and is displayed formally for the benefit of others who must also interpret it. Examples of real-world financial statements can be found in Appendix A of this textbook. Figure 1.3  Income Statement Lance Reed Income Statement For three months ending June 30, 20— REVENUE

4 7 2 00

Yard Service OPERATING COSTS

1 5 5 00 4 5 00 1 5 00

Gas/Oil Garbage Bags Miscellaneous NET INCOME

2 1 5 00 2 5 7 00

NEL

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Figure 1.4  Balance Sheet Lance Reed Balance Sheet July 15, 20— ASSETS

1 0 0 0 00 11 0 0 0 00

Cash Truck Equipment: Lawnmower Tools

2 5 5 0 00 1 1 4 0 00

3 6 9 0 00 15 6 9 0 00

LIABILITIES

Loan (Father) Loan (Bank)

1 2 0 00 15 0 0 0 00

15 1 2 0 00

EQUITY

Capital, L. Reed

5 7 0 00 15 6 9 0 00

THREE FORMS OF BUSINESS ORGANIZATION Since our focus is on learning how to keep books for business, we will consider the different forms of business organization. Every business, regardless of size or type, falls into one of the three basic forms of organization: proprietorship, partnership, or corporation. 1. Proprietorship refers to a business owned by one person, such as a grocery store, a dress shop, or a TV repair shop. (Lance Reed’s yard care business is a proprietorship because he is the sole owner.) In a proprietorship, the owner is the manager, the owner makes all the business decisions, and the owner is personally responsible for all the debts of the business, such as bank loans, mortgages, and accounts owing to suppliers. 2. Partnership refers to a business owned by two or more persons. These coowners, or partners, combine their skills and financial resources (money) to form what they hope will be a successful business. The partners share the management and decision making, and are fully responsible for all the debts of the business. Any two or more people who have combined their skills and financial resources to operate a hardware store, a restaurant, or a computer repair shop, for example, have formed a partnership. 3. Corporation refers to a business that is a separate legal entity operating under a government charter. Entity, in this context, means that the business is separate from the owners (called shareholders or stockholders), almost NEL

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7

as if it too is a person. The ownership of a corporation is divided into shares or stocks. The most familiar examples of public corporations include large national and multinational companies, such as Coca-Cola, Microsoft, and Air Canada. The oldest corporation in Canada is the Hudson’s Bay Company, which started business in 1670. (The topics of partnerships and corporations will be discussed in more detail in Chapter 11.) Whether the business is large or small, or whether it is a proprietorship, a partnership, or a corporation, the basic principles of bookkeeping are the same: a clear, accurate record of all financial activities must be maintained and reported in a form that can be interpreted and verified by others.

THE FIVE CATEGORIES OF ACCOUNTS Next, we will look at some of the basic terminology commonly used in the bookkeeping and accounting fields. These terms apply whether we are talking about the financial activities of an individual, such as Marvin Reese; of a small business, such as Lance Reed’s yard care company; or of a large corporation, such as The Bay or Canadian Tire. Assets are things of value that are owned by the business and are expected to benefit the business into future years. Examples include cash, land, buildings, furniture, equipment, and inventories of merchandise and supplies. Amounts owing to the business from its customers (called Accounts Receivable) are also of value to the business, so they too are considered assets. Lance Reed’s assets include the lawnmowers, the truck, and the tools he uses in his yard work. If any of his customers have not yet paid him for work already completed, these amounts are his accounts receivable and would be included among his assets. Liabilities are debts owing to others. Examples include debts owing to suppliers (Accounts Payable) and debts owing to a bank or mortgage company (Bank Loan Payable and Mortgage Payable). If Lance had bought his tools from a local hardware store and had agreed to pay the amount over the next 60 days, this debt would be considered an account payable. His loan from the bank would be shown on his books as Bank Loan Payable. Equity (sometimes called Owner’s Equity) represents the value of assets remaining after all liabilities have been deducted. The owner’s equity typically comes from two sources: 1. Investments made by the owner to start the business, such as the cash, furniture, equipment, etc. (Lance Reed invested a lawnmower and cash when he started his business.) 2. Profits (or losses) earned through the operation of the business. The goal of most businesses is to earn a profit. These profits, if kept within the business, increase the worth (or equity) of the business. On the Balance Sheet for Lance Reed’s business (Figure 1.4), the equity value can be seen as Capital, a common term referring to the owner’s investment. Capital is determined by calculating the difference between the total assets and the total liabilities ($15,690 – $15,120 = $570). Revenue refers to the earnings from the sale of goods and/or services to customers. In Lance Reed’s case, some of his customers will pay immediately for NEL

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Figure 1.5  Sources of Revenue Type of Business

Primary Revenues

Secondary Revenues

Retail Store

Sales of Merchandise —Sales of Services —Cafeteria —Parking Lot —Interest on Charge Accounts Doctor, Lawyer, Dentist Professional Fees Colleges, and Universities Tuition Fees —Sale of Books and ­Supplies Grants —Cafeteria —Parking Lot Real-Estate Broker Commissions Earned —Interest —Real Estate Rental Fees

the work he does on their yards. Others might arrange to pay him at the end of the month. Regardless of when he receives the money for his work, Lance will record the revenue as having been earned because the work was completed. As Figure 1.5 shows, a business can have more than one source of revenue. Expenses are the costs of operating a business, which typically include rent, salaries, utilities, telephone, supplies, and advertising, to name just a few. Lance’s expenses are gas and oil for the lawnmowers and snow equipment, garbage bags, and the cost of getting his equipment to and from the work sites. Each of these expenses is necessary to his ability to provide service to his customers; therefore, they are considered operating expenses. Figure 1.6 shows account names that are commonly used by a variety of businesses. An account name should indicate the purpose and, when necessary, the classification of the account. For example, office supplies can be both an asset and an expense. Therefore, when referring to the expense, the account name is Office Supplies Expense, and when referring to the asset, the account name is Office Supplies Prepaid. The word “Prepaid” means the supplies have already been paid for but have not yet been used up. (When naming accounts, however, experienced accountants will sometimes take shortcuts by dropping the word “Expense,” thus referring to the account simply as Office Supplies.) Similarly, when interest is earned by the business, it is called Interest Revenue or Interest Earned, but when interest is paid by the business, it is called Interest Expense.

ASSETS VERSUS EXPENSES At first glance, the definitions for assets and expenses may seem quite similar. The basic difference between these two categories is the length of time for which the asset or expense is expected to be carried on the books. The general rule of NEL

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An Introduction to Bookkeeping

Figure 1.6  Sample Account Names

SAMPLE ACCOUNT NAMES Assets Bank (or Cash) Accounts Receivable Fees Receivable Supplies Prepaid Office Supplies Prepaid Store Supplies Prepaid Shop Supplies Prepaid Warehouse Supplies Prepaid Inventory Insurance Prepaid Land Buildings Office & Warehouse Trucks Autos Vehicles Vans & Trucks Delivery Equipment Service Equipment Rental Equipment Tools & Equipment Office Equipment Computer Equipment Office Furniture Telephone Equipment

Liabilities Accounts Payable Suppliers Payable Bank Loan Payable Loans Payable Mortgage Payable Interest Payable GST Payable GST-ITC HST Payable HST-ITC PST Payable Salaries Payable Wages Payable Payroll Payable CPP Payable EI Payable Pensions Payable Income Tax Payable Union Dues Payable

Equity Capital Equity Drawings Withdrawals Income Summary Current Earnings

Revenues Sales Service Income Service Revenue Interest Earned Rent Earned Fees Earned Medical Fees Earned Dental Service Income Professional Fees Tuition Revenue Legal Fees Earned Advertising Revenue Passenger Revenue Green Fees Earned Pro Shop Sales Parking Fees Earned

Expenses Purchases Freight Costs Delivery Expense Advertising Expense Maintenance Expense Business Tax Expense Property Tax Expense Licences Expense Amortization Expense Donations Expense Office Supplies Expense Store Supplies Expense Warehouse Supplies Expense Interest Expense Bank Charges Expense Interest & Bank Charges Postage Expense Professional Fees Expense Salaries/Wages Expense Telephone Expense Travel Expense Utilities Expense

thumb is that expenses contribute to the business only during this operating year, whereas assets contribute not only to this year but also to future operating years as well. Operating costs are usually recorded as expenses if they are of relatively insignificant amounts. But costs that are considered significant would instead be recorded in a prepaid account and then converted to expense as the cost is used up. For example, on November 15, $450 was spent on office supplies, such as paper, pens, pencils, paper clips, ink cartridges, etc. If these supplies are expected to be consumed (used up) before the end of the current operating year (December 31), the cost can immediately be recorded as an expense. In another example, a one-year insurance policy on a building is purchased on July 1 at a cost of $1,397. If the operating year ends on December 31, one-half the cost of the policy will contribute to operations in the current operating year NEL

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and one-half will contribute to next year’s operations. Because the cost will affect two operating years, it is recognized initially as an asset in the Insurance Prepaid account. Then each month, one-twelfth (1/12) of the cost will be transferred from the Insurance Prepaid account to the Insurance Expense account to reflect the amount of the policy that has been used up. Recognizing costs as assets or expenses is often at the discretion of the accountant, and the decision is based on when and how often such costs are incurred.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Across North America, and in fact in most nations around the world, all financial accounting information must be recorded and reported clearly, consistently, and objectively according to generally accepted standards. This means that anyone who relies on such information has a right to be assured that it is correct and fair, and free from bias and inconsistency. As a result, the practices and procedures illustrated and used in this textbook are in accordance with established standards or guides called GAAP (Generally Accepted Accounting Principles). They are the guidelines that tell us what to do and how to do it. GAAP will be discussed in more detail in Chapter 15. PRACTICE EXERCISE 1 Using the definitions explained in this chapter, determine the classification (assets, liabilities, equity, revenues, and expenses) of each of the following account names. If necessary, refer to Figure 1.6. To get you started, the first account has been done for you. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Account Name

Class

Cash Delivery Truck Bank Loan Payable Telephone Expense Salaries & Wages Sales Office Supplies Prepaid Accounts Receivable Service Sales Capital Tools & Equipment Building Mortgage Payable Rental of Equipment Advertising Expense Insurance Prepaid Utilities Expense Interest Earned Bank Office Equipment

Asset

NEL

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An Introduction to Bookkeeping

PRACTICE EXERCISE 2 Classify each of the following account names as an asset, liability, equity, revenue, or expense. Account Name

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Class

Vans & Trucks Accounts Payable Sales of Service Cash Mortgage Payable Store Supplies Prepaid Capital Accounts Receivable Bank Loan Payable Computers & Printers Sales of Merchandise Shipping Supplies Prepaid Office Building & Warehouse Interest Expense HST Payable Advertising Fees Earned Office Supplies Expense Parking Fees Earned Salaries/Wages Expense Taxes Expense

PRACTICE EXERCISE 3 Classify each of the following account names as an asset, liability, equity, revenue, or expense. Account Name

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Class

Land Income Tax Payable Property Taxes Travel Expenses Commissions Earned Automobiles Accounts Receivable Service Revenue Earned Accounts Payable Shop Supplies Prepaid Pro Shop Sales Building Postage & Courier Costs Interest on Bank Loan Legal Fees Earned

NEL

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Account Name

16. 17. 18. 19. 20.

Class

Business Taxes Rent Earned Mortgage Payable Rent Expense Interest Earned

Supplementary Exercise EXERCISE 1-1: Open the file SE-1-1. Follow the instructions and classify the accounts as assets, liabilities, equity, revenues, or expenses. THINK ABOUT IT! 1. The basic principles of bookkeeping are the same for all types of businesses. True or false? 2. How does a proprietorship differ from a partnership? 3. What is a corporation? 4. What is the difference between an asset and an expense? 5. (a) Give an example of an asset (other than cash). (b) Give an example of a liability. 6. What is capital? 7. Which statement shows the assets, liabilities and equity of the business? 8. Which statement shows the revenues and operating costs for a particular financial period? 9. What is a person’s usual source of earnings? What is a business’s source of revenue? 10. What does GAAP stand for? What are they?

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● define “debit” and “credit” as used in bookkeeping ●● apply the accounting equation to solve for missing values and to ensure balanced transactions ●● analyze transactions for the purpose of recording them ●● record typical bookkeeping transactions in a General Journal

IMPORTANT TERMS USED IN THIS CHAPTER Accounting Equation Compound Entry Credit Debit Double-Entry System General Journal Simple Entry

CHAPTER

2

RECORDING THE TRANSACTION

NEL

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Recording the Transaction

THE ACCOUNTING EQUATION When someone talks about “balancing” a chequebook or about “balancing the books,” what does it really mean? Balancing refers to maintaining equality. For example, when you receive your bank statement at the end of the month, you should check all the amounts on it with those entries recorded in your chequebook. If all entries match, and if you and the bank agree on the amount of money you have in your account at the end of the month, your chequebook balances. The concept is similar when applied to a company’s books. One way to express this important concept is by means of the accounting equation: ASSETS = LIABILITIES + EQUITY (or Capital) Simply stated, the total of all assets (items of value) must equal the combined total of all liabilities (debts) and the owner’s equity (net worth). While assets appear on one side of the equation, all those who provided the assets are shown on the other side of the equation. The owner likely invested the initial assets (usually cash), which represent the value known as Capital. The bank may have lent money to the business, and other companies might have sold items to the business on credit, with the balance to be paid in the near future. These debts owing to the bank and to other companies are the liabilities. To illustrate the use of the accounting equation, let’s say you are planning to go into business for yourself. You already have assets to invest in your new business, such as cash, equipment, etc. If these assets are worth $150,000, your equity in the business is $150,000, assuming you have no debts (liabilities). Here is how these values would be shown in the accounting equation: Assets = Liabilities + Equity $150,000 = Ø + $150,000 If, on the other hand, you still owe $50,000 on the assets in your business, your net worth is now $150,000 – $50,000 = $100,000. Assets = Liabilities + Equity $150,000 = $50,000 + $100,000 If you decide that you need additional furniture and equipment before you can open your doors to the public, you might buy another $50,000 worth of assets from a company that has granted credit to you. In this case, your total assets will increase by $50,000 to $200,000; and your liabilities will increase by $50,000 to $100,000 because you still owe the money on these new assets. Assets = Liabilities + Equity $200,000 = $100,000 + $100,000 As you can see from these examples, the equation always remains in balance even though the values have changed.

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Recording the Transaction

PRACTICE EXERCISE 1 Balance the accounting equation on each line by calculating the value of the missing number. =

ASSETS

LIABILITIES

+

Example: $25,000 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

= $15,000 + Answer: $25,000 2 $15,000 = $10,000 $32,000 = $12,000 + $60,000 = ? + ? = $24,000 + ? = $600 + $3,290 = $1,750 + $104,750 = ? + 93,400 = $13,640 + $1,340 + $725 = ? + ? = $2,120 + $320 + ? 2 $1,630 $11,800 = + $16,240 $7,290 = + $12,200 = ? + ? = $17,450 + $21,350 2 ? = $8,300 + $1,725 + $7,340 + $8,250 = $6,330 + ? +

CAPITAL

? ? $17,000 $13,000 $2,040 ? $82,900 ? $600 $1,850 $35,000 ? $9,000 $13,500 $9,000 $7,500

BALANCE SHEET The accounting equation discussed earlier in this chapter is formally represented in a statement called a balance sheet. Total assets must always equal the combined total of liabilities and equity. The balance sheet for Johan Braun’s business is shown in Figure 2.1. The left side shows what the business owns (assets), while the right side shows who supplied those assets (liabilities and owner’s equity). You can see that the total of the assets is equal to the combined total of the liabilities and equity. Figure 2.1  Balance Sheet Johan Braun Repairs Balance Sheet December 31, 20— LIABILITIES & EQUITY

ASSETS

Cash

150 0 0 0 00 150 0 0 0 00

Liabilities Capital, J. Braun

50 0 0 0 00 100 0 0 0 00 150 0 0 0 00

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Figure 2.2  Balance Sheet Johan Braun Repairs Balance Sheet December 31, 20— LIABILITIES & EQUITY

ASSETS

Cash Equipment

120 0 0 0 00 30 0 0 0 00 150 0 0 0 00

Liabilities Capital, J. Braun

50 0 0 0 00 100 0 0 0 00 150 0 0 0 00

Figure 2.3  Balance Sheet Johan Braun Repairs Balance Sheet December 31, 20— LIABILITIES & EQUITY

ASSETS

Cash Equipment

110 0 0 0 00 30 0 0 0 00 140 0 0 0 00

Liabilities Capital, J. Braun

40 0 0 0 00 100 0 0 0 00 140 0 0 0 00

If Johan Braun spends $30,000 of the cash to purchase new shop equipment, the asset Cash is decreased by $30,000 and the new asset Equipment is increased by $30,000. Figure 2.2 shows the effect of this shift in assets on the balance sheet. One asset (Cash) was used to acquire another asset (Equipment); therefore, the total of assets remains at $150,000, liabilities remain at $50,000, and Capital is still $100,000. If Johan Braun then decides to pay off $10,000 of his liabilities, the asset Cash is reduced by $10,000 because a cheque has been issued. The liabilities would also be reduced by $10,000. Notice the effect of this transaction on the balance sheet in Figure 2.3. Regardless of the business activities that occur and how the values are represented in either the accounting equation or the balance sheet, the equation must balance.

DEBITS AND CREDITS Another important equation in the accounting process is: DEBIT = CREDIT Debit (abbreviated Dr.) refers to the left side of the equation (the left of the equal sign). Credit (abbreviated Cr.) refers to the right side of the equation (the right of the equal sign). NEL

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Recording the Transaction

You will notice in Figure 2.3 that assets are on the left side of the balance sheet. They are said, then, to be on the debit side. Liabilities and Capital are on the right side of the statement; therefore, they are on the credit side. A word of caution: Do not associate any other meanings with the terms “debit” and “credit.” These words should not be interpreted as being good values or bad values, for they are neither good nor bad. They are simply accounting labels to refer to the two sides of the accounting equation. Remember: debit is left; credit is right.

BASIC RULES FOR DEBIT AND CREDIT As discussed in Chapter 1, the five categories of accounts are assets, liabilities, equity, revenues, and expenses. Figure 2.4 shows how debit and credit values affect the accounts in each category. It is important to learn these “rules” for debit and credit as they are the basis for everything that is recorded in business. All accounts will have transactions that increase and decrease their balances. The “normal” side of an account, though, is where the account increases. You can see in Figure 2.4 that both assets and expenses increase on the debit side; therefore, assets and expenses normally have debit balances. Liabilities, equities, and revenues increase on the credit side; therefore, liabilities, equities, and revenues normally have credit balances. We say “normally” because there are accounts that do not have “normal” balances; however, these will be introduced in later chapters. On financial statements, accounts typically are shown according to where they have normal balances. Figure 2.5 shows which category of accounts appears on each financial statement. Figure 2.4  How Debit and Credit Affect Accounts Credit

Debit

Assets increase Liabilities decrease Equities decrease Revenues decrease Expenses increase

Assets decrease Liabilities increase Equities increase Revenues increase Expenses decrease

Figure 2.5  How Accounts Affect Financial Statements Balance Sheet

Assets

Liabilities Owner’s Equity

Income Statement

Expenses

Revenues

NEL

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PRACTICE EXERCISE 2 For each of the following account names, indicate its classification (asset, liability, equity, revenue, or expense) and indicate whether the account increases on the debit or on the credit side. Use the definitions of classification from Chapter 1 to help you determine which class is appropriate.

Example: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Account Name

Class

Increases on Dr./Cr.

Cash Bank Loan Payable Telephone Expense Rent Expense Furniture Service Revenue Equipment Accounts Receivable Accounts Payable Utilities Salaries Expense Sales Rental Revenue Office Supplies Prepaid Capital Bank Plumbing Equipment Green Fees Earned Wrapping Supplies Expense PST Payable Plumbing Supplies Prepaid

Asset

Dr.

PRACTICE EXERCISE 3 For each of the following accounts, determine whether it increases or decreases on the side indicated.

Example: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Account Name

Dr./Cr.

Increases or Decreases

Cash Accounts Receivable Rent Expense Office Supplies Prepaid Bank Loan Payable Furniture Sales GST/HST Payable Telephone Expense Capital Legal Fees Earned Income Tax Payable

Dr. Cr. Dr. Cr. Dr. Dr. Dr. Cr. Cr. Cr. Dr. Dr.

Increases

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CHAPTER 2

12. 13. 14. 15. 16. 17. 18. 19. 20.

19

Recording the Transaction

Account Name

Dr./Cr.

Mortgage Payable Bank Advertising Expense Legal Fees Expense Parking Fees Revenue Interest Expense Accounts Payable Utilities Expense Insurance Prepaid

Cr. Cr. Cr. Dr. Dr. Cr. Dr. Dr. Cr.

Increases or Decreases

DOUBLE-ENTRY SYSTEM OF BOOKKEEPING

Fun Fact Double-entry bookkeeping is thought to have been introduced first in Europe in the early 16th century by Luca Pacioli, a monk. Born around 1447 in Tuscany, Pacioli was a friend of Leonardo da Vinci. Pacioli’s motto was “No person should go to bed until the debits equal the credits.”

Every bookkeeping transaction affects at least two accounts. One account will be debited and another account will be credited for an equal value. In other words, for every debit entry, there must be an equal credit entry. For example, if $35 is recorded as a debit entry to an account, a credit entry of $35 must be recorded to another account. This is called the double-entry system, which ensures that every transaction is balanced. When a transaction consists of one debit entry and one credit entry of equal value, it is known as a simple entry. On the other hand, a compound entry will have any number of debit entries and any number of credit entries, as long as the total debits and the total credits are the same. Every bookkeeping entry, whether simple or compound, must always balance. Simple Entry Debit Credit

$35

= $35

OR

Compound Entry Debit Credits

$75

=

$50 + $25

ANALYZING A TRANSACTION In order for a transaction to be recorded correctly, it can be analyzed by answering the following questions: 1. What did we get and what did we give through this transaction? (“We,” in this situation, refers to our business.) 2. What account is used for the item received and for the item given? 3. What kind of account is it? 4. Will the account increase or decrease because of this transaction? 5. Will the account be debited or credited? How much? 6. Is the entry balanced?

NEL

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EXAMPLE 1

Merchandise was sold for $525. Cash was received for the full amount. 1. What did we get and what did we give? We got cash. We gave merchandise to the customer when it was sold. 2. What account is used for the item received or given? The Bank (or Cash) account is used when money is received. The Sales account is used when merchandise is sold. 3. What kind of account is it? Bank is an asset account. Sales is a revenue account. 4. Will the account increase or decrease because of this transaction? The asset Bank will increase when money is received. The revenue account Sales will increase because more revenue is earned when goods are sold. 5. Will the account be debited or credited? How much? Assets increase on the debit side; therefore, Bank will be debited for $525. Revenue accounts increase on the credit side; therefore, Sales will be credited for $525. Accounts

Bank Sales

Debit

Credit

525.00 525.00

6. Is the entry balanced? Yes, $525 has been recorded on the debit side and on the credit side. EXAMPLE 2

A cheque for $48.95 was issued to pay this month’s phone bill. 1. What did we get and what did we give? We got the phone bill. We gave a cheque as payment. 2. What account is used for the item received or given? The Telephone Expense account is used to record phone bills. The Bank (or Cash) account is used for all cheques issued. 3. What kind of account is it? Telephone Expense is an expense account. Bank is an asset account. 4. Will the account increase or decrease because of this transaction? Telephone Expense will increase. Expense accounts accumulate values throughout the financial year, so the account balance builds up as each month’s phone bill is recorded. The asset Bank will decrease because a cheque has been issued, reducing the amount in the bank account. 5. Will the account be debited or credited? How much? Expenses increase on the debit side; therefore, Telephone Expense will be debited for $48.95. NEL

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Asset accounts decrease on the credit side; therefore, Bank will be credited for $48.95. Accounts

Debit

Telephone Expense Bank

48.95

Credit

48.95

6. Is the entry balanced? Yes, $48.95 has been recorded on the debit side and on the credit side. EXAMPLE 3

Bought desks and chairs ($850) and office equipment ($350). Paid in full by cheque. 1. What did we get and what did we give? We got the furniture and equipment. We gave a cheque as payment. 2. What account is used for the item received or given? The Furniture account is used to record the desks and chairs. The Equipment account is used to record devices such as fax machines, copiers, computers, printers, etc. The Bank (or Cash) account is used for all cheques issued. 3. What kind of account is it? Furniture and Equipment are both asset accounts. Bank is an asset account. 4. Will the account increase or decrease because of this transaction? Furniture will increase and Equipment will increase because the business now has more furniture and equipment. The asset Bank will decrease because a cheque has been issued. 5. Will the account be debited or credited? How much? Assets increase on the debit side; therefore, Furniture and Equipment will be debited for $850 and $350, respectively. Asset accounts decrease on the credit side; therefore, Bank will be credited for the total payment of $1,200. Accounts

Furniture Equipment Bank

Debit

Credit

850.00 350.00 1,200.00

6. Is the entry balanced? Yes, the two debit values are equal to the credit value. Example 3 above is a compound entry. Compound entries consist of three or more accounts, with any number of amounts on the debit side and any number of amounts on the credit side. In this case, two assets were purchased with a single payment, thus affecting three accounts. Care should always be taken when analyzing a compound entry to ensure that the correct accounts are affected, that the correct amount is applied to each account, and that the entry is balanced. NEL

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ANALYZING A TRANSACTION (CARTIER WINDOW COVERINGS) The concept of analyzing transactions is perhaps the most important aspect of the entire bookkeeping process and deserves further examination. Here are the transactions for Tom Cartier, who has just started a business that sells and installs window coverings such as Venetian and vertical blinds. June 1 Tom Cartier invests $80,000 cash in his new business. (New businesses often begin with the owner contributing his or her own money.) Analysis

Result

1. What did we get and what did we give?

We got money (cash). Ownership in the business was given to Tom Cartier.

2. What accounts are affected?

Bank is affected when cash is received. Capital is affected when the owner invests in the business.

3. What kind of account is it?

Bank is an asset. Capital is an equity account.

4. Will the account increase or decrease?

Bank will increase. Capital will increase because the business is now worth more than it was before the investment.

5. Debit or credit the account? How much?

Assets increase on the debit side, so Bank will be debited for $80,000. Equity accounts increase on the credit side, so Capital will be credited for $80,000.

6. Is the entry balanced?

Yes.

Accounts

Debit

Bank Capital

80,000.00

Credit

80,000.00

June 3  Land was bought as a future building site. A cheque was issued for $25,000. Analysis

Result

1. What did we get and what did we give?

We got land. We gave a cheque.

2. What accounts are affected?

The Land account is affected when land is received. Bank is affected when a cheque is issued.

NEL

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Recording the Transaction

3. What kind of account is it?

Land is an asset. Bank is an asset.

4. Will the account increase or decrease?

Land will increase because we now have more land than we had before the purchase. Bank will decrease because a cheque was issued.

5. Debit or credit the account? How much?

Assets increase on the debit side, so Land will be debited for $25,000. Assets decrease on the credit side, so Bank will be credited for $25,000.

6. Is the entry balanced?

Yes.

Accounts

Land Bank

Debit

Credit

25,000.00 25,000.00

June 7 Constructed a small building worth $200,000. Paid $20,000 as a down payment and arranged for a $180,000, 20-year mortgage. Analysis

Result

1. What did we get and what did we give?

We got (constructed) a new building. We gave money for the down payment. We gave a promise to pay the remainder by mortgage.

2. What accounts are affected?

The Building account is affected when a new building is bought or built. Bank is affected when money is paid out. Mortgage Payable is affected when a new mortgage is taken on.

3. What kind of account is it?

Building is an asset. Bank is an asset. Mortgage Payable is a liability.

4. Will the account increase or decrease?

Building will increase because we now have more buildings. Bank will decrease because of the money paid out for the down payment. Mortgage Payable will increase because we have more mortgage debt than we had before constructing this new building.

NEL

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Analysis

Result

5. Debit or credit the account? How much?

Assets increase on the debit side, so Building will be debited for $200,000. Assets decrease on the credit side, so Bank will be credited for the down payment of $20,000. Liabilities increase on the credit side, so Mortgage Payable will be credited for the value of the mortgage, $180,000.

6. Is the entry balanced?

Yes.

Accounts

Building Bank Mortgage Payable

Debit

Credit

200,000.00 20,000.00 180,000.00

Once again, this is an example of a compound entry. Three accounts are affected by this transaction. The new building worth $200,000 is only partially paid for by the $20,000 down payment. The rest of the cost will be paid through the $180,000 mortgage over the next 20 years. June 8 Bought equipment for the store, $5,000, from Strand Equipment Co. on terms of net 10 days. (Credit terms are usually expressed in days. In this case, the invoice must be paid within 10 days of the date of the invoice, so it must be paid by June 18.) Analysis

Result

1. What did we get and what did we give?

We got new equipment. We gave our promise to the supplier to pay for the equipment within 10 days.

2. What accounts are affected? The Equipment account is affected when new equipment is purchased. Accounts Payable is affected when we agree to pay in the future. 3. What kind of account is it?

Equipment is an asset. Accounts Payable is a liability.

4. Will the account increase or Equipment will increase because we now decrease? have more equipment. Accounts Payable will increase because we owe more money than we did before buying this new equipment.

NEL

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Recording the Transaction

Analysis

Result

5. Debit or credit the account? Assets increase on the debit side, so How much? Equipment will be debited for $5,000. Liabilities increase on the credit side, so Accounts Payable will be credited for the amount owing on the new equipment, $5,000. 6. Is the entry balanced? Yes. Accounts

Debit

Equipment Accounts Payable/Strand   Equipment Co.

Credit

5,000.00 5,000.00

The Equipment account can be used to record devices such as cash registers, computers, printers, copiers, and fax machines. Other items, such as desks, chairs, and filing cabinets could be debited to the Furniture account. Some accountants might prefer to combine these in an account called Furniture & Equipment. Notice also that the name of our supplier (Strand Equipment Co.) is included when naming the account payable. This ensures that a clear record is kept of how much is owing to each supplier we deal with. June 10 Bought merchandise (Venetian blinds) for an upcoming sale; paid $28,000 cash. Analysis

Result

1. What did we get and what We got merchandise. did we give?? We gave cash as payment. 2. What accounts are affected? The Purchases account is affected when goods are bought for resale. Bank is affected when cash is paid out. 3. What kind of account is it? Purchases is an expense. Bank is an asset. 4. Will the account increase Purchases will increase because we now or decrease? have more merchandise available for resale. Bank will decrease because of the cash paid out. 5. Debit or credit the Expenses increase on the debit side, so account? How much? Purchases will be debited for $28,000. Assets decrease on the credit side, so Bank will be credited for the amount of cash paid out, $28,000. 6. Is the entry balanced? Accounts

Purchases Bank

Yes. Debit

Credit

28,000.00 28,000.00

NEL

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Purchases is the typical account used when merchandise is bought for resale to customers. The word “merchandise” should not be used as an account name because it could lead to confusion later. June 18 A payment of $5,000 was made to Strand Equipment Co. in full payment of the balance owing. Analysis

Result

1. What did we get and what did we give?

We got a reduced balance in our debt to Strand Equipment Co. We gave cash as payment of the debt.

2. What accounts are affected?

Bank is affected when cash is paid out. Accounts Payable is affected because the payment to this supplier was for the purpose of paying down the balance owing.

3. What kind of account is it?

Accounts Payable is a liability. Bank is an asset.

4. Will the account increase or decrease?

Accounts Payable will decrease because a payment has now been made against the amount owing. Bank will decrease because of the cash paid out.

5. Debit or credit the account? How much?

Liabilities decrease on the debit side, so Accounts Payable will be debited for $5,000. Assets decrease on the credit side, so Bank will be credited for the amount of cash paid out, $5,000.

6. Is the entry balanced?

Yes.

Accounts

Debit

Accounts Payable/Strand Equipment Co. Bank

Credit

5,000.00 5,000.00

June 20 Cash sales of merchandise for the month, $75,500. Analysis

Result

1. What did we get and what did we give?

We got cash. We gave merchandise to the customer when it was sold.

2. What accounts are affected?

Bank is affected when cash is received. Sales is affected when goods are sold to customers. NEL

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Recording the Transaction

Analysis

Result

3. What kind of account is it?

Bank is an asset. Sales is a revenue. Bank will increase as a result of receiving cash. Sales will increase because our revenues have grown as a result of the sale. Assets increase on the debit side, so Bank will be debited for $75,500. Revenue accounts increase on the credit side, so Sales will be credited for $75,500. Yes.

4. Will the account increase or decrease?

5. Debit or credit the account? How much?

6. Is the entry balanced? Accounts

Bank Sales

Debit

Credit

75,500.00 75,500.00

June 30 Issued a cheque to pay the June telephone bill, $145. Analysis

Result

1. What did we get and what did We got the phone bill. we give? We gave a cheque as payment. 2. What accounts are affected? Telephone Expense is affected when a phone bill is recorded. Bank is affected when cash or cheques are paid out. 3. What kind of account is it? Telephone Expense is an expense. Bank is an asset. 4. Will the account increase or Telephone Expense will increase as decrease? the account accumulates each month’s phone bill. Bank will decrease because of the money paid out. 5. Debit or credit the account? Expenses increase on the debit side, so How much? Telephone Expense will be debited for $145. Assets decrease on the credit side, so Bank will be credited for $145. 6. Is the entry balanced? Yes. Accounts

Debit

Telephone Expense Bank

145.00

Credit

145.00

NEL

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PRACTICE EXERCISE 4 Analyze these transactions to determine what accounts will be debited and credited. If necessary, use the list of sample account names in Figure 1.6 in Chapter 1. Feb.

1 William Stibinski, the owner, invested $75,000 cash in a hardware store. 2 Borrowed $20,000 from the bank. 3 Bought a building and land for $80,000. The building is valued at $63,000 and the land at $17,000. Paid by cheque. 4 Bought a cash register for $950. Issued a cheque. 5 Bought a desk and chair for the office for $1,200 on account from Hillop Furniture Co. 6 Bought a used delivery truck for $6,100 on account from Morray Auto Sales. 7 Made a partial payment on the bank loan, $500. 8 Paid Hillop Furniture Co. $400 on account. 9 Bought an inkjet printer from Hillop Office Furniture Co. for $250. Paid $50 cash and agreed to pay the balance in 10 days.

PRACTICE EXERCISE 5 Analyze these transactions to determine what accounts will be debited and credited. If necessary, use the list of sample account names in Figure 1.6 in Chapter 1. May

2 Jared Delacruz began his business by investing $18,000 cash. 2 Bought merchandise, issuing a cheque for $985.60. 3 Bought wrapping supplies and other materials for wrapping parcels, $126. Paid by cheque. 4 Bought a cash register, $625, from McCleod Co., paying $300 as a down payment and owing the balance in 10 days. 5 Paid the water bill, $52. 6 Cash sales for the week, $216.45. 9 Sold merchandise to Jimmi Bevanio, $47. Payment is due in 10 days. 10 Borrowed $5,000 from the bank. 11 Bought merchandise from Coldwell Wholesalers on terms of net 30 days, $427.70. 12 Cash sales for the week, $241.60. 12 Jimmi Bevanio paid $25 toward his invoice dated the 9th. 14 Paid McCleod Co. $325 for the balance owing on the account. 15 Sold merchandise on account to Andre Cartier, $34.75. 25 Received payment from Jimmi Bevanio, $22. NEL

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THE GENERAL JOURNAL As each transaction is analyzed, it is recorded in an appropriate journal. A General Journal is a formal record of the transactions that have affected the business and these transactions are recorded in chronological (day-by-day) order. This journal (see Figure 2.6) captures all the important information about each transaction: the date the transaction occurred, the names of the accounts affected, the amounts affecting these accounts, and any special notes or details that are important. The transactions discussed previously for Cartier Window Coverings are shown in the General Journal in Figure 2.6. As you read through the following steps for recording General Journal entries, compare the explanations with the corresponding entries so that you can see how transactions are recorded properly. Figure 2.6  General Journal Entries for Cartier Window Coverings GENERAL JOURNAL DATE

20— Jun.

ACCOUNTS & DESCRIPTION

1

3

7

8

10

18

20

30

PAGE

F.

DEBIT

Bank Capital, Tom Cartier Investment in business.

80 0 0 0 00

Land Bank Bought land for cash.

25 0 0 0 00

Building Bank Mortgage Payable Bought building, assuming 15-year mortgage. Office Equipment Accts. Pay./Strands Office Equipment Co. Bought equipment, terms net 10 days. Due Jun. 18. Purchases Bank Bought merchandise for cash. Accts. Pay./Strands Office Equipment Co. Bank Paid account in full. Bank Sales Cash sales for the month. Telephone Expense Bank Paid telephone bill.

GJ1

CREDIT

80 0 0 0 00

25 0 0 0 00

200 0 0 0 00 20 0 0 0 00 180 0 0 0 00

5 0 0 0 00 5 0 0 0 00

28 0 0 0 00 28 0 0 0 00

5 0 0 0 00 5 0 0 0 00

75 5 0 0 00 75 5 0 0 00

1 4 5 00 1 4 5 00

NEL

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1. Analyze the transaction as discussed earlier. Determine the account that is to be debited and the account that is to be credited. Standard practice requires that the debit side of each transaction be recorded first, then the credit side. 2. Write the date of the transaction in the Date column. The year should be written at the top of every page. The month may be abbreviated if necessary. Only the day of the month is recorded for each successive transaction. The month and year are repeated only at the top of a new page or when the month or the year changes on the existing page. (All financial records must be kept for a period of at least six years; therefore, the year date is essential on all journal pages and all financial documents in order to distinguish one year’s activities from another.) 3. On the same line as the date, beginning at the left margin of the Accounts & Description column, write the name of the account to be debited and enter the amount in the debit column. If the amount has no cents, a dash may be used rather than entering “00” in the cents column, although both methods are acceptable. Note: Take care to write the amounts clearly and carefully. The amounts should be written, if possible, only half the height of the space available. This will ensure there is sufficient space available to correct the amount later should a correction be necessary. 4. On the next line, indent about 2 cm (1 inch) from the left margin and record the account name to be credited, then enter the amount in the credit column. The credit entry should be indented sufficiently to distinguish it clearly from the debit entry. 5. On the following line, starting at the left margin again, write a brief explanation of the transaction. Each transaction should be explained with enough detail that anyone examining the books later will have “the full story” about that transaction. The explanation will often include invoice numbers, cheque numbers, due dates, and other important details. Sometimes the explanation will be quite lengthy, requiring several lines. 6. Leave a blank line after each balanced transaction. If no blank lines are left between transactions, the journal entries will be very difficult to read. 7. Do not split a transaction between the bottom of the current page and the top of the next page. If the entire transaction cannot be recorded on the same page, start it at the top of a new page. 8. All pages of the journal are numbered consecutively; for example, GJ1 (General Journal page 1), GJ2, GJ3, etc. 9. Dollar signs, decimal points, and commas are not required when writing amounts in journals. Also, all numbers recorded in money columns should be written the same size—the cents figures are just as important as the dollar figures. Also, numbers should be written neatly to avoid misreading the amounts. 10. The recording of all financial activities should be done in a form that is permanent so as to maintain the integrity of the information. This means that journal entries should be recorded in ink, not in pencil. NEL

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PRACTICE EXERCISE 6 On April 1, 20—, James Mead opened a grocery store. Record the transactions for his business in a General Journal. Provide a suitable explanation for each transaction. The assets and liabilities invested by Mead appear on the chart in Figure 2.7. Record the investment of these items. Because this transaction will consist of two entries in the debit column and two entries in the credit column, it is a compound entry. Figure 2.7  Statement of James Mead’s Investment James Mead’s Investment ASSETS

25 0 0 0 00 1 0 0 0 00 26 0 0 0 00

Cash Inventory

LIABILITIES & EQUITY

Accounts Payable Capital, J. Mead

1 0 0 0 00 25 0 0 0 00 26 0 0 0 00

Continue by recording the following activities in the General Journal. Be sure to analyze each transaction carefully as discussed in this chapter. 20— Apr

2 Bought merchandise from Grein Wholesalers Ltd., $353. Issued Cheque #1. 2 Paid the store rent for April. Issued Cheque #2 for $800. 4 Sold merchandise to A. Hanana on 10-day terms, $228.50; Sales Invoice #1. 7 Bought merchandise from Weston Grocers on 10-day terms, $1,700; Purchase Invoice #342. 9 Cash sales for this week, $1,185.30. 12 Sold merchandise on 30-day terms to James Korol, $118.10, Sales Invoice #2; Jack Abbot, $123.60, Sales Invoice #3; and Jon Wilde, $160, Sales Invoice #4. (Record this as a compound entry.) 14 Received a cheque from A. Hanana for the amount owing on Sales Invoice #1, $228.50. 16 Cash sales for the week, $496.90. 17 Issued Cheque #3 to Weston Grocers in full payment of account (see the April 7 entry). 23 Cash sales for the week, $623.80. 30 Issued Cheque #4 to City Hydro to pay the electricity bill, $117.60. (Utilities Expense) 30 Cash sales for the week, $334.65.

NEL

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PRACTICE EXERCISE 7 Analyze and record the following transactions in the General Journal. Where indicated, use the account names provided. Each transaction requires a suitable explanation. 20— May

1 Janis Kennedy has invested $25,000 cash in a shoe store. The money was deposited into the company’s bank account. 2 Rented a building from Greenway Properties for $1,600 per month, making the payment for May rent by Cheque #1. 3 Bought store fixtures from Consolidated Enterprises, $1,650. Issued Cheque #2. (Furniture & Fixtures) 3 Bought wrapping materials, $185.30. Issued Cheque #3. (Wrapping Supplies Expense) 4 Bought a company car from Carman Auto Sales, $16,500. Paid $10,000 down (Cheque #4) with the balance due in 90 days; Purchase Invoice #8625. (Vehicles) 5 Bought merchandise, $2,825, from Dominion Shoe Co.; Purchase Invoice #842. This invoice must be paid within 30 days. 6 Cash sales, $420.15. 9 Sold merchandise on account, $297.50, to Tom Sanborn on Sales Invoice #1. Payment is due in 20 days. 10 Cash sales, $464.75. 11 Sales on credit: A.W. Holroyd, $147.95; G.R. Robons, $63.50; F.W. Grant, $75. Sales Invoices #2, #3, and #4, respectively, due in 20 days. (Record this as a compound entry.) 13 Bought merchandise on account, $1,550, from Standard Footwear Ltd. Terms are net 30 days on Purchase Invoice #441. 15 Paid Dominion Shoe Co. $1,825 for the balance owing on Purchase Invoice #842. Issued Cheque #5. 16 Cash sales, $527.45. 17 Sales on credit: F.W. Grant, $223.50; A.W. Holroyd, $136.75; G.R. Robons, $119. Terms are net 20 days on Sales Invoices #5, #6, and #7, respectively. 18 Received a $60 cheque from F.W. Grant as partial payment on Invoice #4. 20 Cash sales, $746.95. 25 Sales on credit: A.W. Holroyd, $245; G.R. Robons, $32.95. Terms are net 20 days; Sales Invoices #8 and #9. 26 Bought merchandise, $895, from Dominion Shoe Co. Terms are net 10 days; Purchase Invoice #930. 29 Paid telephone bill, $80. Cheque #6. 29 Received a cheque from Tom Sanborn on Sales Invoice #1, $297.50; and from A.W. Holroyd on Sales Invoice #2, $147.95. (Record this as a compound entry.) NEL

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33

PRACTICE EXERCISE 8 Robert Khan has started a plumbing business under the name of The Village Plumber. Analyze and record these transactions for the month of June in the General Journal. Where indicated, use the account names provided. 20— Jun.

1 Robert Khan invested the following into plumbing business: cash, $10,500, and a used truck, $6,500. 2 Rented part of a building from Heswell Properties and paid the rent for June, $1,700. Cheque #101. 2 Bought tools and plumbing equipment from Gunn’s Plumbing Supply, $2,200. Cheque #102. (Tools & Equipment) 3 Bought supplies for the office from Chang Stationery Co., $135.90. Cheque #103. (Office Supplies Expense) 3 Completed plumbing repair work for Country Hardware on account, $267. This is Work Order #1, payment due in 10 days. (Repair Service Revenue) 5 Bought laptop computer for the office from Toledo Electronics, $250. Cheque #104. (Office Equipment) 7 Installed a new water heater and new pipes for Gerald Wallace; Work Order #2. Received $1,020 cash as full payment for the work performed. 10 Newspaper advertising is to appear in the Daily Journal on June 15. Purchase Invoice #327 for $125 is due on June 20. 13 Collected the amount owing from Country Hardware, $267. 15 Completed repairs for Horton Drugs, $310, to be collected June 25; Work Order #3. 19 Received Purchase Invoice #752 from Acme Auto Service for repairs and gasoline for the truck, $283. Payment due in 10 days. (Truck Expense) 20 Paid Daily Journal $125 on account. Cheque #105. 21 Completed plumbing repairs for Anne Brill; received $96 in full payment of Work Order #4. 25 Collected the amount owing from Horton Drugs for repairs completed on June 15, $310. 29 Paid the telephone bill, $123. Cheque #106. 29 Paid the amount owing to Acme Auto Service, $283. Cheque #107.

Supplementary Exercises EXERCISE 2-1: Open file SE-2-1. Calculate the missing value in accounting equations. EXERCISE 2-2: Open file SE-2-2. Fill in the blanks to complete the table. NEL

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CHAPTER 2

Recording the Transaction

EXERCISE 2-3: Open file SE-2-3. Review the table and make all necessary corrections. EXERCISE 2-4: Open file SE-2-3. Identify the accounts that will be debited and credited. EXERCISE 2-5: Open file SE-2-4. Record General Journal entries. EXERCISE 2-6: Open file SE-2-5. Record General Journal entries. THINK ABOUT IT! 1. Debit refers to the right side of the account. True or false? 2. A “normal” account balance is on the side on which the account increases. True or false? 3. The accounting equation is Assets + Liabilities = Capital. True or false? 4. Every transaction must balance. True or false? 5. Bookkeeping should be done in pencil so errors can be corrected easily. True or false? 6. What is a journal? 7. (a) Which side of a General Journal transaction should be recorded first, debit or credit? (b) Can a transaction be split between two pages? (c) How are the pages in a journal numbered? 8. Why is the year date required on every journal page? 9. Is it necessary to explain every transaction? 10. Explain the difference between a simple entry and a compound entry.

NEL

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● assign account numbers according to a chart of accounts ●● post transactions from the General Journal to General Ledger accounts ●● prepare a trial balance of the General Ledger

IMPORTANT TERMS USED IN THIS CHAPTER Audit Trail Chart of Accounts Folios General Ledger Ledger Account Posting Slide Error Transposition of Figures Trial Balance

CHAPTER

3

THE LEDGER

NEL

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I

Fun Fact Walter E. Diemer, an accountant, invented bubble gum in 1928.

n Chapter 2, we learned that the General Journal is used for recording business transactions on a daily basis. But recording the transactions in the General Journal is only the first phase of the bookkeeping process. If we want to know how much money Tom Cartier’s business has in its bank account at the end of the month, can we tell by looking at the General Journal? Not very easily, because the cash transactions are scattered throughout the pages of the General Journal. In order to get this kind of information, we will need to transfer each transaction from the General Journal to the General Ledger. The General Ledger is a book or file that holds all the individual ledger accounts in one place. These ledger accounts show the increases and decreases (the debit and credit entries) of each asset, liability, equity, revenue, and expense account. All the bank (or cash) transactions, for example, come together in the Bank account, with the final balance representing the amount of money available at that time. Likewise, all sales transactions will be shown in the Sales account, representing the revenue earned to date from the sale of merchandise or services. And all purchases of merchandise for resale will be shown in the Purchases account. In manual bookkeeping systems, such ledger accounts are in the form of loose-leaf sheets or cards and are stored in a binder or index file. Computerized accounting systems store this information in data files.

THE LEDGER ACCOUNT Each ledger account is headed with all the pertinent information that identifies the account, such as the account name, the account number, and the sheet (page) number. (See Figure 3.1.) Each account starts out as Sheet 1; and when the first page is filled, a second page is started (Sheet 2), then a third sheet (Sheet 3), and so on. The Date column shows the same date that was entered for each transaction in the journal. A year date is entered at the top of each ledger page and when a new year begins. The Memo (or Explanation) column contains any details important to a transaction. Although memos are not always necessary in General Ledger accounts, they can be particularly helpful in the customers’ and suppliers’ ledger accounts. Such memos help to provide a complete picture of the transactions and are helpful when looking for unusual transactions or for possible errors. Figure 3.1  Customer’s Ledger Account ACCOUNT TERMS

A/R Devon Lauryl Company n/30

DATE

20— Oct. 1 7 13 26

MEMO

Bal. Fwd. Inv. #387 Paid on a/c Inv. #419

ACCT. NO. CREDIT LIMIT DISC. DATE

F.

✓

$3,000

DEBIT

✓

SHEET NO. CREDIT

DR. ✓ CR.

Dr. SJ7 CR5 SJ8

2 5 0 00 3 0 0 00 8 0 0 00

137 4 BALANCE

3 5 2 1 0

0 5 5 5

0 0 0 0

00 00 00 00

NEL

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37

Folios, sometimes called posting references, provide a cross-reference for the transactions that are transferred from the journal to the ledger accounts. In the journal, the Folio column shows the number of the ledger account to which the entry was transferred. In the ledger account, the Folio column (the “F” column in Figure 3.1) shows the journal page number from which the entry was transferred. These posting references, in the journal and in the ledger account, provide evidence that the transfer of each journal entry to its respective ledger account has been completed. The Debit column shows the amounts transferred from the debit column in the journal. If the entry was recorded in the debit column in the journal, it must appear in the debit column in the ledger account. This ensures that the books remain in balance. The Credit column shows the amounts transferred from the credit column in the journal. If the entry was recorded in the credit column in the journal, it must appear in the credit column in the ledger account. This ensures that the books remain in balance. The Balance column shows a running dollar balance for each account. Some bookkeepers will wait until all entries for the month have been posted to the account before calculating the balance. However, as a student of bookkeeping, you will likely find it easier to calculate the balance after each transaction has been entered. The Dr./Cr. column that appears between the Credit column and the Balance column is used to show the “status” of the account balance; that is, whether the balance is debit or credit. This will be discussed later in this chapter.

CHART OF ACCOUNTS A chart of accounts is a list of ledger account names and the account numbers assigned to them. The accounts are arranged and numbered in a standard order according to the classifications discussed in Chapter 1. Here is an example of how numbers might be assigned to each category: Assets 100–199 Liabilities 200–299 Owner’s Equity 300–399 Revenues 400–499 Expenses 500–599 The range of numbers assigned to a category will depend on how many accounts might be needed in that category. Some businesses, for example, may have so many operating expense accounts that a range of 500 to 699 might be more suitable; or a wider range might be required for assets, such as 100 to 299. As well, the use of four- or five-digit account numbers might better serve the needs of the business. The chart of accounts, then, is flexible and can be altered easily to meet the changing needs of the business, such as when the transition is made from a manual accounting system to a computerized system. The following table shows how flexible the structure of a chart of accounts can be and how different companies might number their accounts: NEL

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Northern Ltd.

Western Co.

Eastern Repairs

1001–1999 2001–2999 3001–3999 4001–5999 6001–8999

100–299 300–499 500–599 600–699 700–999

1–19 20–29 30–39 40–49 50–75

Assets Liabilities Owner’s Equity Revenues Expenses

PRACTICE EXERCISE 1 Using the account numbering guide shown at the beginning of the “Chart of Accounts” section of this chapter, assign an appropriate three-digit account number to each of these General Ledger accounts. Be sure not to assign any number more than once. Cash (or Bank) Accounts Receivable Drafting Supplies Prepaid Insurance Prepaid Service Equipment Office Furniture & Equipment Land Building Accounts Payable GST/HST Payable Bank Loan Payable Mortgage Payable

Capital, Arthur Fraser Sales Interest Revenue Rental Revenue Purchases Advertising Expense Delivery Expense Donations Interest Expense Rent Expense Salaries Expense Telephone Expense

POSTING Posting is the process of copying journal information to the individual ledger accounts. Every debit and credit entry in the journal should be posted to its respective ledger account in the order in which it appears in the journal. To demonstrate the posting process, the first two General Journal entries for Cartier Window Coverings (discussed in Chapter 2) will be illustrated and explained. As you read through the following steps, refer to Figure 3.2, which shows the posting of Tom Cartier’s transactions from the journal to the ledger accounts. Follow the arrows as the amounts are transferred from the journal to the ledger accounts: 1. Locate the ledger for the first account named in the first General Journal entry. In this case, the account is Bank (account 101). 2. Enter the date of the transaction in the Date column of the ledger account. The month and year are usually recorded only for the first entry NEL

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Figure 3.2  Posting to Ledger Accounts GENERAL JOURNAL DATE

20— Jun.

ACCOUNTS & DESCRIPTION

1

3

ACCOUNT

PAGE

F.

DEBIT

CREDIT

Bank Capital, Tom Cartier Investment in business

101 301

80 0 0 0 00

Land Bank Purchased land for cash

110 101

25 0 0 0 00

80 0 0 0 00

25 0 0 0 00

Bank

ACCT. NO. SHEET NO.

DATE

MEMO

DISC. DATE

20— Jun. 1 3

ACCOUNT

F.

✓

GJ1 GJ1

DEBIT

✓

DR. ✓ CR.

CREDIT

80 0 0 0 00 25 0 0 0 00

Land

SHEET NO. DATE

MEMO

20— Jun. 3

ACCOUNT

F.

✓

GJ1

DEBIT

✓

DR. ✓ CR.

CREDIT

25 0 0 0 00

ACCT. NO. SHEET NO.

DATE

20— Jun. 1

MEMO

F.

GJ1

✓

DEBIT

BALANCE

110 1 BALANCE

Dr. 25 0 0 0 00

Capital, Tom Cartier DISC. DATE

101 1

Dr. 80 0 0 0 00 Dr. 55 0 0 0 00

ACCT. NO.

DISC. DATE

GJ1

✓

CREDIT

80 0 0 0 00

DR. ✓ CR.

Cr.

301 1 BALANCE

80 0 0 0 00

in each account. It is not necessary to repeat them for subsequent entries in the same account, except when the account transactions are continued on a new page or when the month or year changes. 3. Write a suitable explanation in the memo column, if one is required. This might include an invoice number, a cheque number, or a special notation. 4. Enter the amount ($80,000) that appears in the debit column of the journal in the debit column of the ledger account. Take care to ensure that all amounts are copied accurately. Be sure to write all numbers neatly. 5. Calculate the balance of the account and enter it in the Balance column. Since this is the first entry in the Bank account, the balance will be the NEL

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same amount ($80,000). Later, when the second transaction is posted to the Bank account (the credit side of the June 3 entry), that transaction amount will be deducted from this balance to arrive at a new balance ($80,000 – $25,000 = $55,000). 6. Mark the status of this balance in the DR/CR column located between the Credit column and Balance column. You will write either Dr. or Cr. (indicating debit or credit) depending on the current status of each new balance. Here is an easy way to determine the status of an account balance: add up all the entries in the debit column, then add up all the entries in the credit column. Which column is larger? If the debit is larger, the balance is a debit. If the credit is larger, the balance is a credit. In the Bank account on June 1, there was a debit entry recorded but no credit entries; therefore, the $80,000 balance on that date is a debit balance. Later, when the June 3 entry is posted, the debit column will have a total of $80,000 and the credit column will have a total of $25,000. Since the debit column is still larger than the credit column, the new balance of $55,000 is a debit balance. 7. Enter the two folios (often called posting marks or posting references) that provide a cross-reference between the journal and the ledger account. (a) In the Folio (F.) column of the ledger account, write GJ1 to indicate that the transaction was transferred from page 1 of the General Journal. (b) In the Folio (F.) column in the General Journal, write the ledger account number (101 in this case) to indicate that the transaction was posted to that specific ledger account. These folios serve two important purposes: (1) they show that the transfer of the entry is complete; and (2) they assist in locating an entry that may be questionable or requires a correction. Folios provide an audit trail, which is the means of following a transaction from the source document to the journal and to the various ledger accounts, or from the ledger accounts back to the journal entry and back to the source document. 8. Repeat the posting process for the credit side of the transaction (Capital) in the journal. To avoid errors and missed entries, it is advisable to post the debit and credit entries line by line in the order they are written on the journal page. In Cartier’s journal, we first post to Bank, then to Capital, then to Land, and then to Bank again. Balances in the ledger accounts should be calculated after each entry has been posted. This provides a running balance of each account.

THE TRIAL BALANCE After all entries in the journal have been posted to the ledger accounts, a trial balance is prepared. A trial balance is a list of all the accounts in the ledger and their balances. If no errors are made in posting from the journal to the ledger accounts, the total of the debit balances should equal the total of the credit balances. The trial balance for the Cartier Window Coverings ledger is shown in Figure 3.3. This statement begins with a three-line heading identifying who, NEL

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Figure 3.3  Trial Balance (Cartier Window Coverings) Cartier Window Coverings Trial Balance June 30, 20— #

101 112 121 122 213 301 401 501 506

ACCOUNT

Bank Office Equipment Land Building Mortgage Payable Capital, T. Cartier Sales Purchases Telephone Expense

CREDIT

DEBIT

77 5 25 200

3 0 0 0

5 0 0 0

5 0 0 0

00 00 00 00 180 0 0 0 00 80 0 0 0 00 75 5 0 0 00

28 0 0 0 00 1 4 5 00 335 5 0 0 00

335 5 0 0 00

what, and when: who the trial balance was prepared for, what the name of the statement is, and when it was prepared (usually the last day of each month). The accounts on a trial balance are listed in the same order as the accounts appear in the ledger; that is, in numerical order, with the current balance of each account entered appropriately in the debit or credit column. A total is then calculated for each column. These totals must balance. To complete the statement, a single line is drawn above the totals and double line (or a heavy line) is drawn below the totals. The importance of preparing a trial balance should not be underestimated. It proves that equal debits and credits have been recorded in the General Journal for all transactions and that the balance of each ledger account has been calculated correctly. If the totals of the trial balance are not equal, it is likely that one or more of the following errors have occurred: 1. A debit amount was entered into the credit column in a ledger account, or vice versa. 2. A debit balance was listed in the credit column of the trial balance, or vice versa. 3. An error was made in calculating one or more account balances. 4. Amounts were copied incorrectly from a ledger account to the trial balance or from the journal to a ledger account. 5. The Debit and Credit columns of the trial balance were totalled incorrectly. There are some errors, however, that will not be revealed whether the trial balance is in balance or not. These include: ●● posting to the wrong ledger account ●● leaving out an entire transaction during posting ●● compensating errors (an error on the debit side that offsets an error of equal value on the credit side) NEL

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PRACTICE EXERCISE 2 Record the following activities in the books of H. Bruin Real Estate Services. (a) Select blank ledger sheets from your supplies and open the following accounts using the account numbers indicated. All ledger accounts will be marked Sheet 1, except Bank, which will require two ledger sheets, marked Sheet 1 and Sheet 2, respectively. Bank, 101; Office Furniture & Equipment, 102; A/R Michael Benson, 110; A/P Khan’s Computer Co., 201; Capital, Henri Bruin, 301; Commission Revenue, 401; Rent Expense, 501; Office Supplies Expense, 503; Telephone Expense, 505. (b)  Record the following transactions in the General Journal. 20— Mar.

1 Henri Bruin invested $18,000 cash in his real estate business. 1 Paid rent for the month of March, $1,350. Issued Cheque #1 to Masc Properties. 2 Bought office furniture from City Furniture Co. Issued Cheque #2 for $2,575. 3 Bought a computer on account from Khan’s Computer Co., $995. Payment due in 30 days. Purchase Invoice #322. 8 Provided real estate services to Tom Dunphy and received a commission cheque from him for $2,250. Sales Contract #0001 (Commission Revenue). 10 Bought office supplies from Wilson’s Stationery Co., $33. Issued Cheque #3. 15 Sold a farm property for Michael Benson, earning commission of $3,000, to be paid in 15 days. Sales Contract #0002. 18 Sold a city lot for Marcel Parent on Sales Contract #0003. Received commission cheque from him for $1,125. 30 Received cheque from Michael Benson for $2,000 on account. This is a partial payment of the amount owing. 30 Paid Khan’s Computer Co. for the balance owing. Issued Cheque #4. 31 Paid telephone bill, $83.90. Issued Cheque #5.

(c) Post the journal entries to the ledger accounts as explained and illustrated in this chapter. Be sure to enter appropriate posting references. (d) Prepare a trial balance like the one in Figure 3.3, including a suitable three-line heading. PRACTICE EXERCISE 3 (a) Jack Herta, the owner of Red River Moving & Storage, started his business on February 1, 20—. Before recording these transactions in the journal, open the following ledger accounts, using the account numbers shown. All ledger accounts will be marked Sheet 1. (The Bank account will require two ledger sheets.) NEL

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Bank, 101; A/R Edward Smith, 105; A/R Jack Swain, 106; Moving Van, 112; Office Equipment, 113; A/P Peckoff Equipment Co., 201; Bank Loan Payable, 220; Capital, J. Herta, 301; Moving Service Revenue, 401; Storage Fees Revenue, 402; Interest Revenue, 405; Gasoline Expense, 501; Maintenance Expense, 502; Rent Expense, 503; Utilities Expense, 504. (b) Here is a statement of the assets and liabilities that Herta invested in the business on February 1. Record a compound entry in the General Journal for this investment. Be sure to include a suitable explanation. Statement of Assets, Liabilities, and Owner’s Equity February 1, 20— ASSETS

20 0 0 0 00 40 0 0 0 00 60 0 0 0 00

Cash Moving Van LIABILITIES & OWNER’S EQUITY

Bank Loan Capital, J. Herta

15 0 0 0 00 45 0 0 0 00 60 0 0 0 00

(c) Continue the journal entries by recording the following transactions for the month of February. Each transaction requires a suitable explanation. 20— Feb. 2 Bought office equipment from Peckoff Equipment Co. on 30-day credit terms, $1,390. Purchase Invoice #2071. 3 A customer, Edward Smith, stored his furniture for one month. The storage fee is $180. Today Smith paid a $50 deposit. Balance will be paid in 20 days. Sales Invoice #1. 3 Paid National Agency for February rent, $2,000. Cheque #1. 5 Received $2,380 from William Butler for moving services. 10 Charged Jack Swain $1,975 for moving services, to be paid on March 2. Sales Invoice #2. 15 Paid Shell Canada for gasoline for our moving vans, $400. Cheque #2. 23 Received cheque from Edward Smith to cover balance of his account. 25 Received $3,250 from Philip Webster for moving services provided today. 26 Issued Cheque #3 for $150 to Frodo’s Garage for maintenance work on the van. 28 The bank deposited $200 into our account for interest earned on a short-term investment. 28 Issued Cheque #4 for the electricity bill, $150. NEL

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(d) Post the journal entries to the ledger accounts as illustrated in this chapter. (e)  Prepare a trial balance, complete with an appropriate three-line heading. PRACTICE EXERCISE 4 (a) Set up the following ledger accounts using the account numbers indicated. All accounts will require only one sheet, marked Sheet 1, except Bank, which will require two ledger sheets. Bank, 101; A/R S. Canto, 110; A/R Jooni’s Dress Shoppe, 111; A/R Ellen Nash, 112; A/R Ronaldo Auto Sales, 113; Cleaning Equipment, 120; Store Fixtures, 130; Delivery Equipment, 140; A/P Bondi Equipment Suppliers, 201; A/P Bruce Auto Sales, 202; A/P Daily Press, 203; Bank Loan Payable, 220; Capital, John Grady, 301; Service Revenue, 401; Advertising Expense, 501; Cleaning Supplies Expense, 502; Rent Expense, 503; Salaries Expense, 504; Telephone Expense, 505; Utilities Expense, 506. (b)  Journalize the following transactions, complete with appropriate explanations, for Rainbow Rug & Furniture Cleaners. 20— Oct.

1 John Grady started his business by investing the following assets and liabilities: Bank, $18,000; Cleaning Equipment, $8,000; Store Fixtures, $3,000; and Bank Loan, $5,000. (Calculate the Capital value needed to balance this transaction, then record the compound journal entry.) 2 Issued Cheque #1 to Deutsch Holdings for $925 to pay the October rent. 2 Bought truck for $16,900 from Bruce Auto Sales; paid $6,900 down; terms net 90 days. Purchase Invoice #773; Cheque #2. 4 Bought additional cleaning equipment, $3,000, and supplies, $800, from Bondi Equipment Suppliers. Payment due in 10 days. Purchase Invoice #663. 5 Received $175 from Tony Laicini for cleaning services provided to him today. 7 Sent an invoice to S. Canto for cleaning services provided; terms net 10 days; Sales Invoice #01; $225. 9 Placed newspaper advertisement in the Daily Press, to be paid in 10 days, $185. Purchase Invoice #113. 11 Sent an invoice to Ronaldo Auto Sales for $425 for cleaning carpets in the showroom; 10-day credit terms; Sales Invoice #02. 12 Received $195 cash from Sally Ritchie for cleaning rugs and furniture in her home today. 14 Issued Cheque #3 for $3,800 to pay balance owing to Bondi Equipment Suppliers. 17 Received $225 from S. Canto on Sales Invoice #01. NEL

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45

19 Issued Cheque #4 to Daily Press on account, $185. 21 Received $425 from Ronaldo Auto Sales on Sales Invoice #02. 22 Sent an invoice to Jooni’s Dress Shoppe for cleaning services provided today, $345; Sales Invoice #03; terms 30 days. 23 Sold cleaning services for cash to Rozmin Jamal, $165. 25 Paid telephone bill, $27, with Cheque #5. 26 Services provided on credit to Ellen Nash, $145; terms net 10 days; Sales Invoice #04. 30 Services provided to John Carter for cash, $130. 30 Paid utilities, $65. Cheque #6. 31 Paid monthly salaries to two employees, $1,050 each. Cheques #7 and 8. (c)  Post the General Journal entries to the ledger accounts. (d)  Prepare a trial balance in proper form. PRACTICE EXERCISE 5 Etienne Martin, the owner of the Family Shoe Store, has hired you as the bookkeeper. (a) Set up ledger accounts in the order stated below. The Bank account will require two ledger sheets; all others will require only one each. Assign an appropriate account number to each account using the account classification guide shown in the Chart of Accounts section of this chapter. Bank; A/R W.A. Crow; A/R R.G. Dragovic; A/R W.F. Lobato; Delivery Truck; Store Fixtures; A/P Canada Auto Sales; A/P Dominion Shoe Co.; A/P Royal Stationery; Capital, E. Martin; Sales; Purchases; General Expense; Rent Expense; and Supplies Expense. (b) Record the following transactions in the General Journal. All payments are to be made by cheque, beginning with Cheque #1. Record the cheque number issued in the explanation portion of the entry. 20— May

1 Martin invested $35,000 cash in his business. 2 Signed rental agreement today with Pelletier Properties for the use of store space for $1,600 per month. (No entry will be made until the rent is paid because no values have yet been exchanged.) The first rent cheque will be issued on May 7. 3 Bought store fixtures from O’Connor & Day for $16,500. Paid by cheque. 3 Bought wrapping materials from Business Warehouse, $145. Paid by cheque. 4 Bought office supplies for $186.70 from Royal Stationery, Sales Invoice #223; terms net 30 days. 4 Bought used delivery truck for $12,000 from Canada Auto Sales. Purchase Invoice #773; terms net 30 days.

NEL

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5 Bought merchandise from Dominion Shoe Co., $2,450. Purchase Invoice #523; terms net 10 days. 6 Cash sales, $624.75. 7 Issued cheque to pay rent for May. 9 Sold shoes on account to W.A. Crow, $69.95. Sales Invoice #1; terms net 15 days. 10 Cash sales, $924.75. 11 Shoe sales on credit: W.A. Crow, $47.65; R.G. Dragovic, $63.50; W.F. Lobato, $40. Sales Invoice #2, 3, and 4; terms net 15 days. (Record this as a compound entry.) 13 Bought additional merchandise on account from Dominion Shoe Co., $1,500. Purchase Invoice #587; terms net 30 days. 15 Issued cheque for $2,450 to Dominion Shoe Co. in payment of Invoice #523. 16 Cash sales, $1,027.50. 17 Shoe sales on credit: W.F. Lobato, $53.50; R.G. Dragovic, $42.40; W.A. Crow, $39.98. Sales Invoices #5, 6, and 7; terms net 15 days. 18 Received cheque from W.F. Lobato in partial payment of his account, $35. 19 Issued cheque as partial payment to Canada Auto Sales, $6,000. 20 Cash sales, $946.98. 23 Paid Dominion Shoe Co. $850 on account. 23 Received cheques on account from W.F. Lobato, $35; W.A. Crow, $69.95; and R.G. Dragovic, $63.50. 25 Sales on credit: R.G. Dragovic, $72.98; and W.F. Lobato, $44.65. Sales Invoices #8 and 9; terms net 15 days. 31 Received cheque from W.A. Crow on account, $20. (c)  Post all transactions to the ledger accounts. (d)  Prepare a trial balance in proper form.

LOCATING ERRORS IN A TRIAL BALANCE Every bookkeeper, whether new or experienced, is faced occasionally with a trial balance that does not balance. Here are seven steps that will help you to locate just about any balancing error you are likely to encounter: 1. Add up the trial balance columns again. The error may be just an amount entered incorrectly on the calculator. 2. Compare the amounts on the trial balance with those in the ledger accounts. An amount might have been copied incorrectly from the ledger account to the trial balance, such as $840.10 copied as only $840.00. 3. Calculate the difference between the debit and credit totals on the trial balance to determine how much you are out of balance. This difference may reveal that one of the accounts was left out by mistake or that a journal entry has not yet been posted. 4. Using the difference in step 3 above, divide it by 2 and look for that amount. This amount may have been placed on the wrong side of the trial balance, or NEL

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The Ledger

it may have been posted to the wrong side of a ledger account. For example, if the difference is $70, divide by 2 to get $35; then look for a possible incorrect account balance or transaction entry of $35. 5. Divide the difference by 9. If the difference is divisible by 9, the error is usually a transposition of figures, such as $96 entered as $69, or $572 entered as $527. A difference divisible by 9 could also mean a slide error, such as $2,157.00 entered as $21.57, with the decimal placed incorrectly. 6. Double-check the calculation of the balance in each ledger account. 7. If the above steps do not reveal the error, thoroughly check every posting from the journal to the ledger accounts to ensure each one has been posted accurately. The steps just described for locating errors in a trial balance are the regular bookkeeping cycle in reverse: checking the trial balance, tracing the figures back to the ledger accounts, then tracing them back to the journals and, if necessary, tracing them back to the source documents. All errors must be located and corrected before the next month’s transactions can be recorded and posted. PRACTICE EXERCISE 6 Jillian Wai, a bookkeeping trainee, is unable to balance the trial balance below and has asked for your help. Fix the errors and calculate new totals to prove equal debits and credits. Adamson Company Trial Balance February 28, 20— ACCOUNT

101 104 110 121 130 135 160 201 211 301 401 410 501 504 508 511 515 519

Bank Investment in Bonds Accounts Receivable Insurance Prepaid Land Building Equipment Accounts Payable Mortgage Payable Capital, Jerri Adamson Sales Revenue Interest Revenue Purchases Rent Expense Property Tax Expense Supplies Expense Interest Expense Utilities Expense

DEBIT

CREDIT

7 4 0 0 00 5 0 0 0 00 13 7 9 5 00 7 2 0 00 30 0 0 0 00 130 0 0 0 00 15 0 0 0 00 10 8 0 0 00 130 0 0 0 00 45 0 0 0 00 75 8 7 5 00 7 5 5 00 50 0 4 0 00 6 0 0 0 00 1 2 0 0 00 4 5 5 00 1 5 0 0 00 1 3 2 0 00 249 9 3 0 00

274 9 3 0 00

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PRACTICE EXERCISE 7 Examine the trial balance for Timbor Specialty Co. (Figure 3.4). Make the necessary corrections, then add up the columns to prove equal debits and credits. PRACTICE EXERCISE 8 Look carefully at the General Journal entries in Figure 3.5. Write a suitable explanation for each transaction. Supplementary Exercises EXERCISE 3-1: Open file SE-3-1. Make the necessary corrections to complete the trial balance. EXERCISE 3-2: Open file SE-3-2. Prepare a trial balance from ledger account balances.

Figure 3.4  Trial Balance for Practice Exercise 7 Timbor Specialty Co. Trial Balance December 31, 20— ACCOUNTS

105 111 113 120 125 140 145 202 205 211 301 410 415 417 501 520 522 525 530 533 535 537

Bank A/R Johnson Bros. A/R Liston Fuels Ltd. Furniture & Equipment Trucks & Vans Land Building A/P Dillon Drill Works A/P Royal Rubber Mortgage Payable Capital, Robert Steel Sales Interest Revenue Rental Revenue Purchases Advertising Expense Business Tax Expense Delivery Expense Interest Expense Office Supplies Expense Packing Supplies Expense Rent Expense

CREDIT

DEBIT

13 0 0 0 00 11 3 7 0 00 10 8 6 0 00 9 28 50 103 2 1

3 4 0 0 0 0

7 0 0 0 3 4

5 0 0 0 5 0

00 00 00 00 00 00 47 6 0 0 00 140 0 0 0 00

192 7 6 0 00 4 2 5 00 4 2 8 5 00 138 7 0 0 00 4 3 8 1 5 5

2 0 9 7

0 0 0 5

00 00 00 00 3 0 5 00 4 5 0 00

15 4 0 0 00 422 2 9 5 00

353 9 9 5 00

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CHAPTER 3

49

The Ledger

Figure 3.5  General Journal for Practice Exercise 8 GENERAL JOURNAL DATE

20— Apr.

F.

1

3

4

7

10

14

16

18

21

30

Cash Office Equipment Truck Bank Loan Payable Capital, Norio Orta

DEBIT

x x x x xx x x x x xx xx x x x xx xx x x x xx x x x x xx

Purchases Cash

x x x x xx

Office Furniture A/P Sunrise Furniture Co.

x x x x xx

A/R Susan Little Sales

x x x x xx

Rent Expense (Equipment) Cash A/P Sunrise Furniture Co. Cash Cash Interest Revenue

CREDIT

x x x x xx

x x x x xx

x x x x xx x x x xx x x x xx x x x x xx x x x x xx x x xx x x xx

A/R Packard Co. A/R Western Glove Ltd. A/R Simon & Sons Sales

x x x x xx x x x x xx x x x x xx

Purchases A/P Dalhousie Produce Co.

x x x x xx

Cash A/R Susan Little

x x x x xx

xx x x x xx

x x x x xx

x x x x xx

THINK ABOUT IT! 1. 2. 3. 4. 5. 6.

What is the purpose of a ledger account? What is the purpose of the Folio or posting reference? What is posting? In what order should the entries on a journal page be posted to ledger accounts? In what order are accounts listed on the trial balance? If the totals of the debit and credit columns on the trial balance are equal, does this mean all accounts are correct? Why? 7. Identify the seven steps for locating an error in the trial balance. NEL

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CHAPTER 3

The Ledger

CASE STUDY: INTRODUCING KBC DECORATING CO. Henri Martin and Wes Corbett have decided to go into business together and have chosen the name KBC Decorating Co. Their business will have two main divisions: a retail department to sell paint, wallpaper, and related interior decorating supplies; and a service department to do painting and decorating of office buildings, apartment blocks, and private homes. Martin and Corbett were previously in this same type of work but operated separate businesses. KBC Decorating Co. is located in Paris, Ontario, about an hour from Toronto. Martin and Corbett found a suitable location from which to operate their business, renting half of a warehouse building owned by Frank Bailes. Their space includes an office, retail space, and warehouse space. Your job is to keep the books for KBC Decorating Co. for the first calendar year (January to December). As you progress through these chapters, you will learn and do. Each chapter will introduce new concepts that you will incorporate into the regular bookkeeping activities of KBC Decorating Co. Just as in any new job, each step will be explained and practiced before you are asked to apply it to KBC’s activities. You will be learning on the job. All the supplies necessary for keeping the books for KBC Decorating Co. are found in the package of working papers available with this textbook. All ledger accounts are preprinted with the appropriate account names and account numbers. Be sure these ledger account pages remain in the order given. This will ensure that the ledger is organized and that the accounts are easy to locate. The chart of accounts for this ledger has been printed at the end of the textbook for easy reference (see Appendix C). JANUARY TRANSACTIONS You will begin by recording the transactions for the first half of January. Select a General Journal sheet from your supplies and give it the page number GJ1. Continue numbering the journal pages as you start each new page (GJ2, GJ3, etc.). All entries should be recorded in proper format with suitable explanations. As you continue with this case study in later chapters, you will be referring to this first journal page again, so keep it handy. (a) Begin now by recording these transactions in the General Journal: 20— Jan.

2 The owners started their new business by investing the assets shown here. Notice from the chart of accounts that each owner has his own Capital account. (You will record two compound entries for these investments, one for each owner.) Henri Martin: Cash $22,000 8,000 Furniture & Equipment $30,000 Wes Corbett: Cash $15,000 15,000 Vehicle (used van) $30,000 NEL

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CHAPTER 3

The Ledger

51

2 Issued Cheque #1 for the January rent, $2,500. 2 Issued Cheque #2 for advertising in the newspaper, $610.20. (Debit Advertising Expense.) 4 Bought office supplies, $305.10. Issued Cheque #3. (Debit Office Supplies Expense.) 4 Issued Cheque #4 for the installation of our new phone line, $165. (Telephone Expense). 5 Bought merchandise as follows: paint and supplies, $10,000; wallpaper, $5,000. Issued Cheque #5. (Notice on the chart of accounts that there are separate Purchases accounts for these goods. Record this as a compound entry.) 9 Bought a paint mixer and colour dispenser from Rainbow Supplies Co., $1,620. Issued Cheque #6. (Tools & Equipment). 10 Cash sales: paint and supplies, $3,000; wallpaper, $1,000. (Notice that there are separate Sales accounts for these goods.) 15 Cash sales: paint and supplies, $6,000; wallpaper, $2,000. (b) Post the journal entries to the ledger accounts. (All ledger accounts for KBC Decorating Co. should be kept separate from your Practice Exercise material and should be neatly arranged in a binder or file so you can access them easily. Do not change the order of the ledger pages.) (c) After completing the posting, prepare a trial balance on January 15. If you are using the working papers available with this textbook, prepare your trial balance on Form TB-KBC. If your trial balance does not balance on the first attempt, use the steps for locating errors as described in this chapter.

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CHAPTER OBJECTIVES

CHAPTER

4

CORRECTING ENTRIES AND SALES TAXES IN CANADA

After completing this chapter, you will be able to: ●● record journal entries to correct errors in current and previously posted entries ●● calculate and record the GST/HST charged on taxable sales of goods and services ●● calculate and record the GST/HST paid on the purchase of assets and expenses ●● calculate and record the PST charged on taxable sales and purchases of goods and services

IMPORTANT TERMS USED IN THIS CHAPTER

Correcting Entry GST (Goods and Services Tax) GST-ITC (Input Tax Credit) HST (Harmonized Sales Tax) PST (Provincial Sales Tax) Reversing Entry

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CHAPTER 4

Fun Fact Author John Grisham, as well as singers Mick Jagger and Janet Jackson, studied accounting before becoming celebrities.

53

Correcting Entries and Sales Taxes in Canada

E

rrors are a fact of life for anyone who works with numbers, as bookkeepers and accountants do. Everyone encounters errors despite their best attempts to avoid them. No doubt you have already encountered a few errors of your own as you worked through the exercises in the first three chapters. Naturally, a good knowledge of bookkeeping and accounting principles and procedures will help to minimize errors, but probably will not eliminate them altogether. The next best thing, then, is to know how to deal with errors so that the correction is simple and straightforward rather than complicated and frustrating.

CORRECTING WRITING ERRORS If an error is discovered in the journal or in the ledger accounts before posting is done, it should be corrected using a common-sense approach. As mentioned earlier, all financial records must be kept by the business for at least six years. Anyone looking back through the records of previous years must be able to read every word and every amount. Erasing, using liquid cover-ups, and writing over figures are usually the first things new bookkeepers try to do to correct a writing error. The problem is that these methods of correction, although effective in getting rid of the error, make it look as if the bookkeeper is trying to hide something. Everything in the financial records of a business must be easily and clearly read, even the mistakes. In a manual bookkeeping system, all entries should be written in blue or black pen, not in pencil. When errors are detected, they should be corrected by neatly crossing out the incorrect figures or words with a single line (without obliterating the original characters) and writing the correct information neatly above. Figure 4.1 shows how best to correct writing errors. To allow space for possible future corrections, it is a common practice to use only half the height of the writing space when first recording the transaction. This would leave enough space to make a correction should an error be discovered. Figure 4.2 shows how large, crowded figures are difficult to correct and how figures written half-height can be corrected much more easily.

Figure 4.1  How to Correct Writing Errors

The WRONG way.

45 123 00

The RIGHT way.

6 5 0 0 0 00

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CHAPTER 4

Correcting Entries and Sales Taxes in Canada

Figure 4.2  Writing Amounts Properly

1 2 3 45 3 4 5 60 7 8 9 60

Too BIG. There is no room to correct these numbers.

1 2 3 45 3 4 5 60 7 8 9 60

Just right. All numbers should be written in half the height of the space, leaving room for any necessary corrections.

RECORDING CORRECTING ENTRIES Occasionally, an error is discovered in an entry that has already been posted. In such a case, it would not be practical to attempt to correct it as a writing error in the journal, then in the ledger, and then in the trial balance; too many amounts would need to be corrected. A more practical solution is to record a correcting entry. A correcting entry is a journal entry that will transfer an amount from the incorrect account(s) to the correct account(s) or adjust the amount of the transaction in the existing accounts. For example, we will assume that Cheque #53 for $456 was issued to A. Smith & Sons as payment on account but was entered incorrectly in the journal as $546. This transposition error (an error where the figures are in the wrong order) was not discovered until after the trial balance was prepared. (We will assume that the amount recorded on the cheque itself, $456, is correct.) Because the original journal entry was recorded for an amount greater than the amount of the actual cheque, the correcting entry in Figure 4.3 is recorded to reduce the amount of the original journal entry by $546 – $456 = $90. Notice that this entry is the reverse of the original entry, but only for the amount of the difference, $90.

Figure 4.3  Correcting Entry for a Transposition Error Original Entry

Jun.

21

A/P A. Smith & Co. Bank Payment on account. Cheque #53.

5 4 6 00 5 4 6 00

Correcting Entry

Jul.

2

Bank A/P A. Smith & Co. To correct error in June 21 payment, cheque #53 ($546 – $456 = $90)

9 0 00 9 0 00

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CHAPTER 4

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Correcting Entries and Sales Taxes in Canada

Figure 4.4  Correcting Entry for Wrong Account Charged Original Entry

Jan.

19

Office Equipment Bank Bought supplies for the office.

3 5 0 00 3 5 0 00

Correcting Entry

Feb.

3

Office Supplies Expense Office Equipment To correct error in Jan. 19 entry for office supplies charged in error to Office Equipment.

3 5 0 00 3 5 0 00

Sometimes, though, an amount might be posted to the wrong account, so a correcting journal entry would be necessary to transfer the amount from the wrong account to the correct account. For example, on January 19, a purchase of office supplies for $350 was recorded and posted by mistake to the Office Equipment account. Once again, this error was not spotted until after the January trial balance was prepared. A correcting entry is recorded on February 3 to remove the amount from the Office Equipment account (credit) and to charge it to the Office Supplies Expense account (debit). Figure 4.4 shows the correcting entry that would accomplish this. PRACTICE EXERCISE 1 The following errors were discovered on the books of A-Line Distributors. Record correcting entries, complete with detailed explanations, for these errors. The dates of the original transactions appear in parentheses. (a) $67 was debited to Office Equipment but should have been debited to Office Supplies Expense. (December 3) (b) $25 was debited to Advertising Expense instead of Postage Expense. (December 5) (c) $250 was charged to the Insurance on Stock account instead of the Insurance on Building account. (December 10) (d) The total of cash sales for the day, $4,250, was credited to Purchases instead of Sales. (December 14) (e) $210.52 for gas and oil for the truck was charged to the Vehicles account instead of Delivery Expense. (December 18) (f ) An invoice for the purchase of warehouse supplies ($117.30) and office supplies ($141.70) was debited to Purchases. (December 20)

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Correcting Entries and Sales Taxes in Canada

PRACTICE EXERCISE 2 For each of the following transactions, prepare a correcting entry in the General Journal. Use the original date of the transaction as the date of correction. Jan. 6 Cash purchase of office stationery, $87.15, was charged to the Office Equipment account. Jan. 13 Cheque #19 for $61.50 issued to pay the phone bill. Charged the Utilities Expense account. Jan. 23 Cheque for $135 received from customer Shara Curtis, for Invoice #37. Credited to the Sales account. Mar. 17 Purchased computer from Western Office Equipment Co. for $1,250 on 90-day terms; Invoice #2171. Debited Purchases account. Jun. 11 Cheque for $450 received on account from Striker & Sons was credited to the account of Jay Stryker & Co. Aug. 9 Cheque for $144.40 issued as payment on account to Martin Friesen Co. was debited in error to the Purchases account. Oct. 3 Cheque for $59 to pay the phone bill was recorded incorrectly as $95.

RECORDING REVERSING ENTRIES An alternative way to handle journal entries recorded incorrectly but discovered after the journals are closed is to record a reversing entry. As the name indicates, this kind of entry has the effect of reversing, or undoing, the original transaction as if the entry had not happened at all. A new entry can then be recorded with all the correct information without having to worry about what was recorded previously. To illustrate the use of a reversing entry, we will look at the purchase of office equipment from Sunare Equipment Co. on terms of n/30. Figure 4.5 shows the incorrect entry recorded by the bookkeeper. The credit should have been Accounts Payable, not Capital. Because the original entry is now known to be wrong, an entry is recorded to reverse it, as shown in Figure 4.6. This reversing entry has the effect of “cancelling out” the original entry, as if it had never happened. Now the transaction for the purchase of office equipment can be recorded correctly, as if the original error had not happened. (See Figure 4.7.) This method of correcting errors is highly recommended, particularly when compound entries are found to contain errors. It is an easy-to-use method for correcting all kinds of recording errors. Figure 4.5  Original Incorrect Entry

Feb.

3

Office Equipment Capital Bought office equipment on terms n/30.

9 8 0 00 9 8 0 00

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CHAPTER 4

57

Correcting Entries and Sales Taxes in Canada

Figure 4.6  Reversing Entry

Feb.

3

Capital Office Equipment To reverse incorrect entry.

9 8 0 00 9 8 0 00

Figure 4.7  Corrected Entry

Feb.

3

Office Equipment A/P Sunare Equipment Co. To record corrected entry for purchase of office equipment on account.

9 8 0 00 9 8 0 00

PRACTICE EXERCISE 3 Record the General Journal entries, complete with suitable explanations, to correct the following errors using the reversing-entry method. 1. Cheque for $200 received from customer John Arthurs on January 10 was credited to the account of Arthur Jonah. 2. Sales invoice dated January 15 for $526.30 was posted to Robert Hall’s account. Invoice showed the sale was actually to Carl Hull. 3. On January 31, total sales for the week was debited to Cash and credited to Purchases, $9,836.30. 4. Purchase invoice dated January 31 for $136.50 for office supplies was debited to Purchases and credited to Accounts Payable/Nicoli Company. 5. Payment of $47 to pay water bill was debited to Telephone Expense and credited to Cash. PRACTICE EXERCISE 4 The transactions shown in Figure 4.8 were recorded in the General Journal by an inexperienced bookkeeper. The explanations are correct, but the journal entries contain errors. Record the General Journal entries necessary to correct these errors using the reversing-entry method. Use the original date for each correction.

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Correcting Entries and Sales Taxes in Canada

Figure 4.8  Journal Entries with Errors

Jun.

Aug.

Sep.

Oct.

Nov.

Dec.

4

16

30

5

7

3

Utilities Expense Cash To record payment of gas bill ($24.60) and electricity bill ($122.20).

1 5 6 80

Cash Sales To record merchandise sold to our customer (Alfred Wong) on terms of n/30.

2 1 0 00

1 5 6 80

2 1 0 00

Purchases Accounts Receivable To record purchase of merchandise from our supplier (ARC Co.) on account.

2 5 0 0 00

Sales Cash To record cash sales for the week.

7 2 1 5 00

2 5 0 0 00

7 2 1 5 00

Cash Sales To record payment received from our customer (A.L. Santori) on account.

7 0 2 00

Telephone Expense Capital To record payment of telephone bill.

3 2 70

7 0 2 00

3 2 70

SALES TAXES IN CANADA The goods and services tax (GST) is a federal tax charged on most goods and services bought and sold in Canada. Across western Canada, including the territories, it is known as GST. Across most of eastern Canada (not including Quebec), it is known as HST (Harmonized Sales Tax) because the federal tax has been combined with the provincial sales tax to create a blended, or harmonized, single tax. At the time this textbook was written, the GST rate was 5%, and the HST rate varied by province. In this chapter, we will discuss and illustrate how GST/HST is recorded on typical sales and purchase transactions. Later, in Chapter 8, we will take a more detailed look at this tax, including how to calculate the amount of GST/HST to send to the government and how to complete the GST/HST tax return.

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CHAPTER 4

59

Correcting Entries and Sales Taxes in Canada

Figure 4.9  Recording Sales with GST/HST

Jun.

2

Cash Sales

3 1 5 0 00 3 0 0 0 00 1 5 0 00

GST Payable (or HST Payable)

Cash sales for the week. 7

A/R LMQ Company Sales GST Payable (or HST Payable)

5 2 5 0 00 5 0 0 0 00 2 5 0 00

Sale on account on terms of n/30

GST/HST ON SALES In Chapter 2, we learned how to record the sale of merchandise. As we know, though, sales of almost all goods and services are subject to GST or HST, and the taxes must be recorded so that an accurate reporting can be made to Canada Revenue Agency on a regular basis. The usual cash sale entry has a debit to Cash (or Bank) and a credit to Sales. Some of the money received from customers, though, is actually the GST/HST that was charged and collected. Figure 4.9 shows a sale transaction, including an accounting for the GST or HST. Notice that the cash received on June 2 is the total of the sale of the goods ($3,000) plus the 5% GST ($3,000 × 5% = $150). The GST Payable or HST Payable account is used to record the tax that has been charged to and collected from customers. It is a liability account because this amount is owed to the government. A similar entry is recorded on June 7 when the goods are sold on account, in which case the debit is Accounts Receivable.

GST/HST ON PURCHASES Recording GST/HST on purchases is similar to that shown above. We know that a typical purchase of merchandise is debited to Purchases and credited to Cash (or Bank). However, some of the cash paid for the goods is actually GST/HST, so this tax must be shown separately. In this case, the account is GST-ITC or HST-ITC, which represents the amount of GST or HST paid on goods and services needed to run the business. This Input Tax Credit (GST-ITC or HST-ITC) will eventually be deducted from GST/HST Payable to determine the actual amount owing to the government. Figure 4.10 shows common entries for the purchase of merchandise. When non-merchandise expenditures are recorded, such as for equipment or supplies, GST/HST is recorded in a similar fashion. As long as the expenditure is for business purposes, the GST/HST is recorded in the ITC account. Figure 4.11 shows examples of assets and expenses on which GST/HST was paid when purchased. NEL

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Correcting Entries and Sales Taxes in Canada

Figure 4.10  Recording Purchases with GST/HST

Jun.

10

Purchases GST-ITC (or HST-ITC)

2 2 0 0 00 1 1 0 00

Cash Cash purchase of merchandise. 12

Purchases GST-ITC (or HST-ITC)

2 3 1 0 00

1 5 0 0 00 7 5 00

A/P XYZ Company Purchase of merchandise on account.

1 5 7 5 00

Figure 4.11  Recording GST/HST on Assets and Expenses

Jun.

15

Advertising Expense GST-ITC (or HST-ITC)

6 0 0 00 3 0 00

Cash Paid for newspaper advertising. 19

Office Equipment GST-ITC (or HST-ITC)

A/P A.D.E. Ltd. Bought equipment on account.

6 3 0 00

2 0 0 0 00 1 0 0 00 2 1 0 0 00

PRACTICE EXERCISE 5 Record the following transactions in the General Journal, accounting for GST as explained in this chapter. Use GST Payable for the tax on goods sold, and use GST-ITC for the tax on items purchased. Provide suitable explanations. 20— Apr.   2 Bought merchandise worth $7,500 plus 5% GST. Issued cheque.   8 Bought merchandise on account from Lipton Suppliers Co., $2,300 plus 5% GST. Invoice #234, terms net 30 days. 11 Cash sales for the week, $12,500 plus GST. 12 Sale on account to C. Sakrapee, $540 plus GST. Invoice #14, terms net 10 days. 16 Sold merchandise on account to R.J. Lupin, $262.50 (includes $12.50 GST). Invoice #15, terms net 10 days. 21 Bought office supplies, $315, which includes $15 GST. Paid cash. 22 Paid water bill, $78.75, which includes $3.75 GST. NEL

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CHAPTER 4



61

Correcting Entries and Sales Taxes in Canada

25 Sold merchandise to Franco Moret on account, $210, which includes $10 GST. Invoice #16, terms net 10 days. 26 Bought a new cash register, $420 plus GST. Paid cash.



PRACTICE EXERCISE 6 Record the following transactions in the General Journal. Assume the HST rate is 13%. Use HST Payable for the tax on goods sold, and use HST-ITC for the tax on items purchased. Provide suitable explanations. 20— Apr.   2 Bought merchandise worth $7,500 plus 13% HST. Issued cheque.   8 Bought merchandise on account from Lipton Suppliers Co., $2,300 plus HST. Invoice #234, terms net 30 days. 11 Cash sales for the week, $12,500 plus HST. 12 Sale on account to C. Sakrapee, $540 plus HST. Invoice #14, terms net 10 days. 16 Sold merchandise on account to R.J. Lupin, $250 plus HST. Invoice #15, terms net 10 days. 21 Bought office supplies, $339, which includes $39 HST. Paid cash. 22 Paid the water bill, $84.75, which includes $9.75 HST. 25 Sold merchandise to Franco Moret on account, $226, which includes $26 HST. Invoice #16, terms net 10 days. 26 Bought a new cash register, $420 plus HST. Paid cash.

PROVINCIAL SALES TAX In those provinces where GST is charged and paid, it is also necessary to record provincial sales tax (PST). Exactly what goods and services are taxable will vary from province to province. Alberta and the three northern territories currently do not have provincial sales tax, and those provinces that charge HST have the provincial tax already included in the HST (consisting of 5% GST plus a provincial component). Figure 4.12 shows the tax rates in effect across Canada at the time this textbook was written. All tax rates, of course, are subject to change. When calculating and recording GST and PST, the GST must be calculated first, then the provincial tax. Both taxes are based on the pretax value of the goods or service. For example, a $100 sale of merchandise or service would be calculated this way in Saskatchewan and in Quebec:

Sale GST ($100 × 5%) PST ($100 × 6%) PST ($100 × 9.975%) Total

Saskatchewan

Quebec

$100.00 5.00 6.00

$100.00 5.00

$111.00

9.98 $114.98

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Figure 4.12  Sales Tax Rates Across Canada 2017 Rates Prov/ Terr

GST/HST

PST

BC AB SK MB ON QC NL NS NB PE NT NU YT

  5% GST   5% GST   5% GST   5% GST 13% HST   5% GST 15% HST 15% HST 15% HST 15% HST   5% GST   5% GST   5% GST

7% n/a 6% 8% n/a 9.975% n/a n/a n/a n/a n/a n/a n/a

All rates subject to change. Source: 2017 Sales Tax Rates in Canadian Provinces and Territories, from: http://www.taxtips.ca/salestaxes/ sales-tax-rates-2016.htm. Reprinted by permission from TaxTips.ca

In those provinces that charge HST, such as Ontario, the calculation involves just the single tax: Sale HST ($100 × 13%) Total

$100.00 13.00 $113.00

PRACTICE EXERCISE 7 Calculate the taxes and the total of each sale in the following table. Each sale is made in a different province, so you will need to refer to the sales tax rates in Figure 4.12. If the sale is made in a province that charges HST, leave the PST column blank. Province

Sale Amount

ON BC NS AB MB SK PE NL

$320.00 290.00 500.00 185.00 210.00 300.00 365.00 1,430.00

GST/HST

PST

Total

NEL

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Correcting Entries and Sales Taxes in Canada

RECORDING SALES WITH PST The journal entry to record a sale of merchandise with provincial sales tax is very similar to that of a sale with GST/HST. The only difference is the extra credit entry to account for the provincial tax. Figure 4.13 shows a sale of $2,500 + 5% GST + 8% PST (Manitoba). The total is either the cash that was collected or the amount still to be collected from the customer ($2,500 + $125 + $200 = $2,825). The provincial tax is recorded in the PST Payable account, a liability account representing the tax owing to the provincial government. (The name of the tax may be different in your province, but for teaching purposes we will use the term “PST.”) Notice that GST is calculated and recorded before the provincial tax. Figure 4.14 shows the same sale in a province that charges 13% HST. Notice that only a single tax is calculated and recorded. This is because HST already includes a provincial sales tax component. PRACTICE EXERCISE 8 Using the information from Practice Exercise 7, record General Journal entries for the sales in ON, BC, SK, and PEI. Assume all are cash sales. Figure 4.13  Recording a Sale with GST and PST

Jun.

20

Cash (or Accounts Receivable) Sales GST Payable PST Payable Cash sales for the week.

2 8 2 5 00 2 5 0 0 00 1 2 5 00 2 0 0 00

Figure 4.14  Recording a Sale with HST

Jun.

21

Cash (or Accounts Receivable) Sales HST Payable Cash sales for the week.

2 8 2 5 00 2 5 0 0 00 3 2 5 00

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PRACTICE EXERCISE 9 Complete the following table using the rates from Figure 4.12, then prepare the General Journal entries. Assume all are cash sales. Province

Sale Amount

MB YT NU QC

$87.00 190.00 285.00 135.00

GST

PST

Total

Recording Other Expenses with PST Many of the non-merchandise goods and services bought for use within the business are subject to provincial sales tax. Typically, there is not a separate entry for this tax paid as there is with GST-ITC. Instead, the PST is added into the value of the goods or services bought and is included in the amount debited to the appropriate asset or expense account. For example, we will assume a business in British Columbia is paying its monthly electricity bill: Electricity service GST ($125 × 5%) PST ($125 × 7%) Total

$125.00 6.25 8.75 $140.00

Only the GST will be recorded separately in the GST-ITC account. The rest of the cost ($125 + $8.75 PST = $133.75) will be charged to Utilities Expense. Figure 4.15 shows the entry for this utility bill. Figure 4.15  Recording Expenses with PST

Jun.

Jun.

23

23

Utilities Expense GST-ITC Cash Paid electricity bill

1 3 3 75 6 25

Office Supplies Expense GST-ITC Cash Bought office supplies.

1 9 7 95 9 25

1 4 0 00

2 0 7 20

NEL

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Correcting Entries and Sales Taxes in Canada

In another example, the purchase of office supplies would be recorded in the same manner: Office supplies GST ($185 × 5%) PST ($185 × 7%) Total

$185.00 9.25 12.95 $207.20

Once again, only the GST will be recorded separately in the GST-ITC account. The rest of the cost ($185 + $12.95 PST = $197.95) will be charged to Office Supplies Expense. Figure 4.15 shows the entry for this purchase of office supplies. PRACTICE EXERCISE 10 Complete the following table of assets and expenses purchased during the month of April. This business operates in British Columbia, so these items are taxed at the rates indicated. Then record a General Journal entry for each purchase. Item

Office supplies Equipment Tools Advertising Desk & chair

Value

5% GST

7% PST

Total

$87.00 630.00 888.00 895.00 550.00

REMITTING PST The provincial tax charged and collected must be remitted to the provincial government according to the rules and conditions of each province. In Manitoba, for example, the PST must be remitted within 20 days of the end of the sales period for which the tax was collected. The reporting period may be annually, quarterly, or monthly, depending on the amount of tax charged to customers. As compensation for collecting and remitting the tax, the provincial government may allow the business to keep a small portion of the tax, sometimes referred to as a “commission.” How much can be kept, if any, will vary from province to province, as do the rules and exceptions for charging, collecting, and remitting PST. In Manitoba, for example, the commission is equal to 15% of the first $200 of tax collectable, and 1% of the remaining tax collectable, to a maximum of $58 per month. (Other rules and exceptions also apply.) The journal entry to remit the tax is shown in Figure 4.16. The debit to PST Payable will clear the account to a zero balance. The commission is recorded in a revenue account. And the Cash amount is the difference between the previous two amounts. NEL

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Figure 4.16  Remitting PST

Jun.

20

PST Payable PST Commission Revenue Cash To remit provincial tax, less commission.

8 5 0 00 3 6 50 8 1 3 50

PRACTICE EXERCISE 11 Calculate the amount of tax that a company can keep each month when remitting provincial sales tax. Assume that the commission is equal to 15% of the first $200 of tax and 1% of the remaining tax, to a maximum of $58 per month. Then, record the journal entry on the 20th of each month following the month of the sale. Month

PST Charged

January February March April

$248.50 119.95 485.00 3,625.00

Commission

PST to Remit

CALCULATING THE TAX INCLUDED As you work through the practice exercises and the case study in this textbook, you will see that the tax amounts will sometimes be given to you, and you may want to see how they were calculated. The formula to confirm the amount of tax is a variation of the usual formula for calculating the tax, or taxes, in the first place. Let’s look at some examples: EXAMPLE 1

An invoice that totals $840 includes 5% GST (Alberta). To find the amount of GST included in this total, multiply the invoice total by 5 and divide by 105. (The number 105 represents the 100% pretax value + 5% GST = 105%.) Therefore, $840 × 5 4 105 = $40 GST This means that our $840 invoice includes $40 GST. Therefore, the pretax value is $840 – $40 = $800. We can prove that this is correct by calculating GST in the usual way: $800 × 5% GST = $40

NEL

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Correcting Entries and Sales Taxes in Canada

EXAMPLE 2

An invoice that totals $339 includes 13% HST (Ontario). To find the amount of HST in this invoice, multiply the invoice total by 13 and divide by 113. (The number 113 represents the 100% pretax value + 13% HST = 113%.) $339 × 13 4 113 = $39 HST This means that our $339 invoice includes $39 HST. Therefore, the pretax value is $339 – $39 = $300. We can prove that this is correct by calculating the HST in the usual way: $300 × 13% HST = $39 EXAMPLE 3

An invoice of $271.20 includes both 5% GST and 8% PST (Manitoba). To find the amount of GST, multiply the invoice total by 5 and divide by 113. (The number 113 represents the 100% pretax value + 5% GST + 8% PST = 113%.) $271.20 × 5 4 113 = $12 GST And to find the amount of PST, we use a similar calculation. Multiply the invoice total by 8 and divide by 113: $271.20 × 8 4 113 = $19.20 PST We can now subtract the taxes from the invoice total to find the pretax value: $271.20 – $12.00 GST – $19.20 PST = $240.00 pretax value Finally, prove that the taxes are correct by calculating them in the usual way: $240 × 5% = $12 GST and $240 × 8% = $19.20 PST PRACTICE EXERCISE 12 Set up a table similar to the following, then calculate how much GST/HST and PST are included in each of the invoices below. Amount

GST/HST

PST

Calculations

(a) (b) etc. (a) An invoice of $157.50 includes only 5% GST (Alberta). (b) An invoice of $920 includes 15% HST (Newfoundland and Labrador). (c) An invoice of $248.60 includes 5% GST and 8% PST (Manitoba). (d) An invoice of $824.90 includes 13% HST (Ontario). (e) An invoice of $42.18 includes 5% GST and 6% PST (Saskatchewan). NEL

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(f ) An invoice of $97.02 includes 15% HST (Prince Edward Island). (g) An invoice of $123.03 includes 5% GST and 9.975% PST (Quebec). Supplementary Exercises EXERCISE 4-1: Open file SE-4-1. Record reversing and corrected entries. EXERCISE 4-2: Open file SE-4-2. Name the correct tax account for each journal entry and calculate the amount of tax. THINK ABOUT IT! 1. How have you corrected writing errors in previous exercises? Considering what you have learned in this chapter, are those methods correct or incorrect? Why? 2. What is the best way to correct a writing error? 3. What are the two methods of correcting errors if posting has already been completed? 4. In provinces where both GST and PST are charged, which tax should be calculated and recorded first? 5. What is HST? 6. In all provinces that charge PST as a separate tax, on what amount is PST based? 7. Why are the taxes on sales recorded in liability accounts? 8. What amounts are charged to the GST/HST-ITC account?

CASE STUDY: KBC DECORATING CO. CORRECTING JANUARY TRANSACTIONS In this chapter, you learned how to correct writing and recording errors, as well as how to calculate and record GST/HST and PST. You will now apply these concepts to the entries that have already been recorded in the General Journal; therefore, you will need to refer to the journal entries that you recorded for KBC Decorating in Chapter 3. KBC Decorating Co. is located in Paris, Ontario. Most goods and services bought and sold in Ontario are subject to 13% HST. We will assume that a number of errors were recorded in January. For each of the following transactions, record a reversing entry, then record the correct entry based on the new information available. 20— Jan. 2

Cheque #1 issued for rent was actually $2,500 plus HST.

2

Cheque #2 for advertising should have been $540 plus HST.

4

Cheque #3 for office supplies should have been $270 plus HST.

4

Cheque #4 for the new phone line should have been $165 plus HST. NEL

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CHAPTER 4

Correcting Entries and Sales Taxes in Canada

5

The purchase of merchandise on the 5th was recorded without HST. Add HST to the values given.

9

Cheque #6 for the paint mixer and colour dispenser should have been $1,620 plus HST.

10

HST was not charged on the sales recorded on the 10th. Add HST to the amounts given.

15

HST was not charged on the sales recorded on the 15th. Add HST to the amounts given.

69

AT MONTH-END Post these entries to the ledger accounts and prepare a trial balance on January 15, 20—.

NEL

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CHAPTER OBJECTIVES

CHAPTER

5

After completing this chapter, you will be able to: ●● record transactions for shipping costs and import charges on merchandise and non-merchandise items

IMPORTANT TERMS USED IN THIS CHAPTER Delivery Expense Duty & Brokerage Freight In

FREIGHT IN, DELIVERY EXPENSE, AND DUTY & BROKERAGE

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CHAPTER 5

Fun Fact Comedian Bob Newhart worked as an accountant before his fame as a TV and stand-up comic, most recently with appearances in The Big Bang Theory.

71

Freight In, Delivery Expense, and Duty & Brokerage

F

or a business that sells merchandise, some of the most important accounts on the books are those that relate directly to the merchandise itself. These would include, of course, the Purchases account and the Sales account. Three additional accounts will be discussed and illustrated in this chapter: Freight In, Delivery Expense, and Duty & Brokerage. Each of these accounts is directly related to the incoming and outgoing of merchandise.

FREIGHT IN Freight In (sometimes called Transportation In) is the account in which the transportation or shipping costs on incoming merchandise are recorded. When we buy merchandise from our supplier, the cost may or may not include shipping charges; so if we have to pay the shipping costs to get the goods into our possession, the account debited is Freight In. It is important to keep track of these and other merchandise-related costs as they help management make good business decisions, such as whether to buy goods from a supplier that perhaps provides free delivery or from another supplier that does not. Such transportation costs contribute to the total cost of goods purchased for resale and, along with all other costs, are taken into consideration when setting the selling prices of goods and services to our own customers. Freight In is an expense account used to record transportation costs on merchandise only. It is not for recording shipping costs of non-merchandise items, such as office supplies or advertising materials. Figure 5.1 shows two typical journal entries to record the payment of freight costs on merchandise: the first entry as it would appear in a province that charges HST, such as Newfoundland and Labrador; and the second entry as it would appear in a province that charges GST and PST, such as Saskatchewan. As the memo for the second entry shows, the two taxes are calculated separately; then the amount debited to Freight In must include any PST that was charged. Figure 5.1  Recording Freight Costs

May

May

16

16

Freight In HST-ITC Bank Paid freight charges on merchandise.

3 6 00 4 68

Freight In GST-ITC Bank Paid freight charges on merchandise. Freight: 36.00 GST: 36.00 5% 1.80 1.80 PST: 36.00 5% Total: 39.60

3 7 80 1 80

4 0 68

3 9 60

NEL

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Figure 5.2  Recording Freight Cost Included on Invoice

May

May

16

16

Purchases Freight In HST-ITC Bank Paid freight charges on merchandise. HST: 556.00 13% 72.28

5 4 0 00 1 6 00 7 2 28

Purchases Freight In GST-ITC Bank Paid freight charges on merchandise. Merchandise: 540.00 Freight: 16.00 27.80 5% GST: 556.00 5% 1.12 7% PST: 16.00 7% Total: 584.92

5 4 0 00 1 7 12 2 7 80

6 2 8 28

5 8 4 92

If the freight charges appear as a separate charge on the purchase invoice, a journal entry such as those in Figure 5.2 would be recorded to show the portion of the invoice that represents the merchandise and the portion that represents the freight. Once again, the first entry is as it would appear in a province that charges HST (Ontario); the second in a province that charges GST and PST (British Columbia). Notice in the second entry, the amount charged to Freight In is $16 + $1.12 PST = $17.12.

FREIGHT ON NON-MERCHANDISE ITEMS When freight or other shipping charges are paid on non-merchandise items (that is, on items that will be used within the business, such as equipment or supplies), these charges should not be included in the Freight In account. Instead, they should be charged directly to the asset or expense account that was debited when the item was purchased. For example, if shipping charges are paid on a new computer, the account debited is Office Equipment (or Computer Equipment). Or if shipping costs are paid on new advertising brochures, the account debited is Advertising Expense. To illustrate this, we will assume $2,900 was paid for new computer equipment and $35 was paid to ABC Courier Co. for delivering the computer to us. Because it was purchased for use within the company (that is, not for resale), the shipping charges will be added to the cost of the equipment. Therefore, the shipping costs are debited to the Computer Equipment account as shown in Figure 5.3. NEL

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CHAPTER 5

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Freight In, Delivery Expense, and Duty & Brokerage

Figure 5.3  Freight Charges on Non-merchandise Items

Jun.

28

Computer Equipment

HST-ITC Bank Bought new computer; cheque #48. 28

Computer Equipment

HST-ITC Bank Paid shipping on new computer; cheque #49.

2 9 0 0 00 3 7 7 00 3 2 7 7 00

3 5 00 4 55 3 9 55

Although both entries shown are dated June 28, it is necessary to issue two separate cheques because two different companies are involved; therefore, two separate entries are required.

DELIVERY EXPENSE Transportation costs on incoming shipments of merchandise should not be confused with the costs of outgoing shipments; that is, the cost of delivering merchandise to our own customers. The cost of delivering merchandise to our own customers is debited to Delivery Expense, as shown in Figure 5.4. Whether we use our own delivery truck or hire the services of a courier or shipping company to deliver the goods, the Delivery Expense account is charged. As with Freight In, the amount of PST (if any) is included in the debit to Delivery Expense.

DUTY & BROKERAGE Items imported into Canada are usually subject to import duties and tariffs imposed by the federal government. These taxes apply whether you carry them across the border yourself or have them shipped. Although some tariffs have been eliminated in North America as a result of free trade agreements between Canada, United States, and Mexico, other duties and tariffs exist on goods imported from other countries around the world. Figure 5.4  Recording Delivery Costs

Jun.

28

Delivery Expense HST-ITC Bank Paid delivery charges on merchandise sent to a customer.

2 3 50 3 06 2 6 56

NEL

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Figure 5.5  Brokerage Fees on Imported Goods

Jun.

Jun.

17

24

Purchases Bank Special merchandise from Asia.

3 4 0 0 00 3 4 0 0 00

8 0 00 4 5 2 40

Duty & Brokerage HST-ITC Bank Paid duty/brokerage fees on goods imported from Asia. HST on goods: 3,400 13% HST on brokerage: 80 13% Total HST

5 3 2 40

442.00 10.40 452.40

When imported merchandise is subject to import duties, whether from the United States or any other country, these additional costs are debited to an expense account called Duty & Brokerage. The word “duty” refers to the importation costs charged by the government. The word “brokerage” refers to the fees charged by customs brokers that handle all the necessary paperwork related to clearing of imported goods through customs on the buyer’s behalf. Figure 5.5 shows the purchase of special merchandise imported from Asia and the duty and brokerage charges on this order. Notice here that the GST/HST is charged when the goods enter Canada. Therefore, the tax on the merchandise is included in the entry for the duty and brokerage. Figure 5.6 shows how the freight and the duty and brokerage costs contribute to the total cost of merchandise purchased for resale during the year. By totalling the Purchases, the Freight In, and the Duty & Brokerage balances, the result is the total cost of all merchandise bought throughout the year. When the imported item is not merchandise for resale, any duty and brokerage charges are debited directly to the asset or expense involved. For example, if special equipment was purchased from Germany, the shipping costs would be charged to Equipment (as discussed previously) and the importation costs would also be charged to Equipment. (See Figure 5.7.) Figure 5.6  Total Cost of Merchandise for Resale Cost of Good Purchased for Resale:

Purchases Add: Freight In Duty & Brokerage Total Cost of Goods

$12,847.75 $694.95 580.40

1,275.35 $14,123.10

NEL

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CHAPTER 5

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Freight In, Delivery Expense, and Duty & Brokerage

Figure 5.7  Additional Costs on Imported Equipment 

July

8

7 5 0 0 00

Equipment

7 5 0 0 00

Bank Special equipment from Germany. July

16

Equipment

HST-ITC Bank Paid duty/brokerage fees on goods imported from Asia.

3 5 0 00 1 0 2 0 50 1 3 7 0 50

975.00 HST on equipment: 7,500 13% HST on brokerage: 350 13% 45.50 Total HST 1,020.50 July

18

Equipment

HST-ITC Bank Paid shipping charges on equipment imported from Germany.

2 4 0 00 3 1 20 2 7 1 20

PRACTICE EXERCISE 1 Record General Journal entries for the following transactions related to purchases, transportation charges, and duty and brokerage. Include a suitable explanation for each transaction to keep track of invoices and cheques. Use one of these sales tax rates: (1) 13% HST or (2) 5% GST. 20— Sept. 1 Bought merchandise from Bright Co., $2,620 plus tax, on Invoice #292, terms n/30. 2 Sold merchandise to John Cabot, $240.10 plus tax; Invoice #66, terms n/30. 2 Paid Apex Carriers for transportation charges on goods received from Bright Co., $61 plus tax. Issued Cheque #73. 3 Issued cheque for $43 plus tax to Fast Courier Service for delivering merchandise to John Cabot. 4 Bought new furniture and display fixtures for store from J. Sparling Ltd. Paid by cheque, $1,459 plus tax. (Store Furniture) 4 Issued cheque to ABC Truckers, $182.40 plus tax, for delivering store furniture and fixtures to the store. NEL

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6 Bought merchandise, $960, from Fielding Co. of Fargo, North Dakota, U.S.A. Import broker billed an additional $125 for the brokerage fee plus GST/HST on the imported goods and on the broker’s fee. Since separate cheques are issued, record these as separate entries. (All amounts here are expressed in Canadian funds.) 9 Bought office supplies from Royal Stationery Co., $94 plus tax, Invoice #B273, terms n/30. 11 The office supplies bought from Royal Stationery were delivered today by Fast Courier Service. Paid shipping charges of $32 plus tax, by cheque. 13 Bought special equipment for the office, $15,025 from the Better Systems Co. of Detroit, Michigan, U.S.A. Also paid RK Importers for brokerage fees, $350, freight charges, $148, and GST/HST on equipment, brokerage, and freight. (Reminder: The Duty & Brokerage account is used to record import duties and brokerage fees on merchandise only.) All amounts here are quoted in Canadian funds. Issued separate payments for these items. PRACTICE EXERCISE 2 Record General Journal entries for the following transactions related to freight and duty and brokerage charges. Provide a suitable explanation for each transaction. All payments are made by cheque, beginning with #101. Use one of these sales tax options: (1) 15% HST or (2) 5% GST + 7% PST. (Reminder: PST will not apply to merchandise for resale.) 20— Jan. 3 Bought merchandise on account from Kelsey Equipment Company of Dallas, Texas, U.S.A., $7,230 (Canadian funds); Invoice #421, terms n/30. 5 Issued Cheque #101 for duty and brokerage charges on the goods imported from Texas, $583, and for tax(es) on the goods and brokerage fee. 6 Paid Acme Transport for transporting the merchandise from Texas, $370 plus tax(es). 12 Bought special packaging equipment for the warehouse from Quality Packaging Solutions Ltd. of Boston, Massachusetts, U.S.A., $8,200 (Canadian funds); Invoice #83647, terms n/45. (Packaging Equipment) 17 Paid brokerage fees on the packaging equipment imported from Quality Packaging Solutions, $480, plus tax(es) on the equipment and broker’s fee. 20 Paid Kwiky Delivery Service for the shipping charges for the new packaging equipment, $291 plus tax(es). NEL

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CHAPTER 5

Freight In, Delivery Expense, and Duty & Brokerage

77

Supplementary Exercises EXERCISE 5-1: Open file SE-5-1. Record the transactions in the General Journal. EXERCISE 5-2: Open file SE-5-2. Record the transactions in the General Journal. THINK ABOUT IT! 1. What is the purpose of the Freight In account? 2. When would freight or shipping charges not be debited to the Freight In account? 3. Name the account used to record the cost of delivering merchandise to our own customers. 4. When is the Duty & Brokerage account used? 5. When merchandise and non-merchandise items are imported from other countries, when is GST/HST calculated and recorded?

CASE STUDY: KBC DECORATING CO. JANUARY TRANSACTIONS CONTINUED These transactions occurred during the second half of January. Continue the General Journal where you left off in the previous chapter. Be sure to account for HST as indicated. 20— Jan. 16 Bought advertising space in the local community newspaper, $125 plus 13% HST. Issued Cheque #7. 16 Paid shipping costs on the merchandise bought on the 5th, $85 plus HST. Issued Cheque #8. 17 Paid transportation cost for new paint mixer and colour dispenser bought on the 9th and delivered from Toronto. Issued Cheque #9 for $84.75 (includes $9.75 HST). 20 Cash sales: paint and supplies, $2,500; wallpaper, $2,000; plus HST. 21 Paid delivery costs for paint and supplies delivered to our customer, $60 plus HST. Cheque #10. 26 Bought paint and supplies, $8,500 plus HST. Cheque #11. 26 Paid the shipping on paint and supplies bought today, $45 plus HST. Cheque #12. 30 Cash sales: paint and supplies, $3,000; wallpaper, $1,000; plus HST.

AT MONTH-END Post these entries to the ledger accounts and prepare a trial balance on January 31, 20—. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER OBJECTIVES

CHAPTER

6

USING SPECIAL JOURNALS

After completing this chapter, you will be able to: ●● record purchase transactions in the Purchase Journal ●● record sale transactions in the Sales Journal ●● record cash received and paid in the Cash Receipts Journal and Cash Payments Journal ●● post from the special journals to the General Ledger and to subsidiary ledgers ●● prepare a trial balance using control accounts and schedules of accounts receivable and accounts payable

IMPORTANT TERMS USED IN THIS CHAPTER

Accounts Payable Control Accounts Receivable Control Cash Payments Journal Cash Receipts Journal Control Account Purchase Journal Sales Journal

NEL

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CHAPTER 6

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Using Special Journals

INTRODUCING SPECIAL JOURNALS

Fun Fact You probably thought the term “bean counter,” referring to a detail-obsessed accountant, has been around forever. Well, guess what, it’s only been around since the 1970s!

Until now, we have recorded all transactions in the General Journal. No doubt you can appreciate that the General Journal is cumbersome and time consuming because many of those transactions are recorded again and again. How many times, for example, did you record a cash sale by debiting Cash (or Bank) and crediting Sales? And how many times did you record the purchase of merchandise on account by debiting Purchases and crediting Accounts Payable? The answer, of course, is that you have recorded them many, many times. To minimize such unnecessary repetition, special journals are used to handle transactions that occur frequently. This would, for example, allow you to keep all sales in one place and all purchases in one place, making these transactions easier to record and easier to find later. Special journals offer several advantages over the General Journal: 1. Special journals reduce the amount of unnecessary writing. This, in turn, reduces time and labour. 2. Special journals provide a means of capturing important details more efficiently and effectively. Special columns can be used for capturing specific information, which minimizes the potential for errors or the omission of necessary details. 3. Special journals allow for more than one employee to be involved in the recordkeeping process at the same time. For example, one employee may be responsible for recording all transactions affecting customers (accounts receivable), whereas another employee would be responsible for transactions affecting suppliers (accounts payable). 4. Posting to ledger accounts is much simpler. Gone is the need to post to the Sales, Purchases, and Bank accounts many times during the month. Only one posting to each account is generally all that is needed each month. The majority of the transactions you have recorded so far fall into four categories: sales, purchases, cash receipts, and cash payments. Therefore, these journals will be discussed, illustrated, and practised in this chapter: Journal

What it is used for

Sales Journal

To record sales of goods and services on account To record money received for any reason, such as for cash sales or from customers on their accounts To record the purchase of assets and expenses on account To record all payments of money, whether by cheque, cash, or debit card, including payments to suppliers on account

Cash Receipts Journal

Purchase Journal Cash Payments Journal

NEL

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Special journals are designed according to the kinds of transactions they are expected to capture and the amount of information the company needs to retain. To accomplish this, special journals are set up with columns that will capture information about the transactions that occur most frequently. If a particular type of transaction occurs only occasionally, a special column probably would not be made for it. Using special journals, though, does not eliminate the need for the General Journal. Occasionally, transactions will occur that cannot be recorded in any of the special journals. These transactions would then be recorded in the General Journal. The word “general” is important because it distinguishes this journal from the special journals.

SALES JOURNAL The Sales Journal (sometimes called the Accounts Receivable Journal) is used for recording sales of goods and services on account. As you will soon discover, the Sales Journal offers important advantages: 1. Recording of transaction details is greatly simplified because the repetitious writing of account names is virtually eliminated. 2. Time is saved in posting because of the use of special columns. In many cases, only the column totals are posted. 3. The work of recording and posting can be done by more than one employee (often referred to as division of labour). Many businesses tailor the columnar Sales Journal to their specific needs, such as those with two or more departments or those that sell both merchandise and services. Some sales journals may have many columns; others may have only a few. Figure 6.1 shows a simple Sales Journal that might be used by a small retail store. Here is a brief description of each column: Date: The date that appears on the sales invoice is recorded in this column. Name of Customer: The name of the customer to whom the merchandise or service was sold is entered in this column. Since only customers’ names can be entered in this column, it is not necessary to write “Accounts Receivable” or “A/R” with each customer’s name. Figure 6.1  Recording Sales in the Sales Journal SALES JOURNAL DATE

20— Aug.

NAME OF CUSTOMER

1 3 8

Rodin, Trevor Gar, Harvey Meeta, Taj Proof:

Dr. 304.03 304.03

INV. NO.

TERMS

1 2 3

n/10 n/30 n/20

F.

PAGE

SALES CR.

ACCOUNTS REC. DR.

5 1 4 9 3 0

7 7 8 4

97 47 59 03

5 1 3 8 2 6

1 0 7 9

SJ1

HST PAY. CR.

30 50 25 05

6 67 1 6 97 1 1 34 3 4 98

Cr. 269.05 34.98 304.03

NEL

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Invoice Number: Sales invoices are usually prenumbered. To ensure that all invoice numbers are accounted for, they are usually entered in the journal in sequential order. Terms: The terms of sale are entered here. If all customers are given the same terms, such as n/30, this column is unnecessary. Accounts Receivable Dr.: The total amount of the invoice, including taxes, is entered in this column. This is the amount that will be posted to the customer’s ledger account. Sales Cr.: The amount of the sale before taxes is entered in this column. HST Payable Cr.: The amount of HST charged on the invoice is recorded in this column. (In those provinces that charge GST and PST, there would be a column for each of these taxes. These columns would be labelled GST Payable Cr. and PST Payable Cr.) Let’s look at how typical sales transactions would be recorded in a Sales Journal. In Figure 6.2, the transaction shown in the General Journal is similar to the many sales transactions you have already recorded in previous exercises. Compare this entry in the General Journal with those in the Sales Journal in Figure 6.1 as each step is explained for the August 1 sale to Trevor Rodin: 1. Enter the date of the invoice (August 1) in the Date column. As with all journals, the year date will appear at the top of the date column. 2. Enter the name of the customer (Trevor Rodin) in the Name of Customer column. Since all these customers are Accounts Receivable, there is no need to write “A/R” before each name. 3. Enter the invoice number (#1) and the terms (n/10) in their respective columns. 4. Enter the pretax amount of the sale, $51.30, in the Sales Cr. column. 5. Enter the amount of HST ($51.30 3 13% = $6.67) in the HST Payable Cr. column. In provinces that charge GST and PST, these taxes would be recorded in the GST Payable and PST Payable columns. 6. Add together the amounts for Sales and HST and enter the total, $57.97, in the Accounts Receivable Dr. column. Each line recorded in the Sales Journal is a balanced entry. The debit amount (the total of the invoice recorded in the Accounts Receivable column) must be equal to all the credit amounts (the sale amount plus all taxes). After all entries are recorded for the month, the columns are totalled and the balance is proved by adding all the credit totals together and comparing it to debit total. Figure 6.1 shows the proof for this journal. Experienced bookkeepers Figure 6.2  Recording a Sale in the General Journal

Aug.

1

A/R Rodin, Trevor Sales HST Payable Sales on account. Inv #1, n/10.

5 7 97 5 1 30 6 67

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and accountants will always prove the balance of the journal, although they may not actually write the proof on the journal itself. As a student of bookkeeping, you are encouraged to write the proof on every journal.

Posting from the Sales Journal Figure 6.3 shows how the information is posted from the Sales Journal to the various ledger accounts. Refer to the numbered arrows as you read through the following four steps. 1. The individual amounts in the Accounts Receivable Dr. column are posted to the debit of the customers’ accounts on a daily basis, as illustrated with Arrow 1. (The other two customer amounts are posted similarly.) By posting to their accounts immediately, each customer’s ledger balance is kept up to date at all times. Figure 6.3  Posting from the Sales Journal PAGE

SALES JOURNAL DATE

20— Aug.

NAME OF CUSTOMER

1 3 8

INV. NO.

1 2 3

Rodin, Trevor Gar, Harvey Meeta, Taj

TERMS

F.

n/10 n/30

153 155 159

n/20

ACCOUNTS REC. DR.

SALES CR.

5 7 97 1 4 7 47 9 8 59 3 0 4 03

5 1 3 8 2 6

(1 0 1)

(4 0 1)

1 ACCOUNT

Rodin, Trevor

2

ACCT. NO. SHEET NO.

DATE

20— Aug. 1

ACCOUNT

DISC. DATE

MEMO

Inv. #1

n/10

F.

SJ1

DEBIT

CREDIT

5 7 97

Gar, Harvey

DR. CR.

DATE

20— Aug. 3

ACCOUNT

MEMO

ACCT. NO.

Inv. #2

n/30

F.

SJ1

DEBIT

CREDIT

1 4 7 47

DR. CR.

Dr.

ACCT. NO.

Meeta, Taj

SHEET NO. DATE

20— Aug. 8

DISC. DATE

MEMO

Inv. #3

n/20

F.

SJ1

DEBIT

9 8 59

153

CREDIT

DR. CR.

Dr.

ACCOUNT

HST PAY. CR.

30 50 25 05

6 67 1 6 97 1 1 34 3 4 98 (2 0 2)

3

4

Accounts Receivable

ACCT. NO.

1

SHEET NO.

BALANCE

Dr.

SHEET NO. DISC. DATE

1 0 7 9

5 7 97

155

DATE

MEMO

DISC. DATE

20— Aug. 31

ACCOUNT

F.

SJ1

DEBIT

CREDIT

Sales

DR. CR.

Dr.

3 0 4 03

ACCT. NO.

1

SHEET NO.

BALANCE

1 4 7 47

159

DATE

MEMO

DISC. DATE

20— Aug. 31

ACCOUNT

F.

DEBIT

SJ1

CREDIT

DR. CR.

2 6 9 05 Cr.

HST Payable

ACCT. NO.

1

SHEET NO.

BALANCE

9 8 59

DATE

20— Aug. 31

MEMO

DISC. DATE

SJ1

F.

SJ1

DEBIT

CREDIT

DR. CR.

3 4 98 Cr.

101 1 BALANCE

3 0 4 03

401 1 BALANCE

2 6 9 05

202 1 BALANCE

3 4 98

NEL

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2. The total of the Accounts Receivable column is posted to the debit of the Accounts Receivable Control account at the end of the month (Arrow 2). Control accounts will be discussed in the next section. 3. The total of the Sales column will be posted to the credit of the Sales account at the end of the month (Arrow 3). The individual amounts in this column are not posted. 4. The totals of the tax column will be posted to the credit of the HST Payable account at the end of the month (Arrow 4). The individual amounts in this column are not posted. As mentioned earlier, the individual amounts in the Sales column and the tax column are not posted—only their totals are posted. There is no need to post these individual amounts since posting the totals will achieve the same results in those ledger accounts. Notice that posting references are entered in Folio columns of both the Sales Journal and the ledger accounts. When column totals are posted, however, the posting references in the journal are written immediately below the totals and are either circled or shown in brackets. (Notice the posting references below the totals in Figure 6.3.) The date used when posting column totals is typically the last day of the month.

CONTROL ACCOUNTS An important method of ensuring balance in a set of books is the use of control accounts. A control account is a single General Ledger account that takes the place of a group of accounts. For example, if all the customers’ accounts were removed from the General Ledger, they could be replaced by a single account called Accounts Receivable Control. To ensure the books are balanced, this control account must always have a balance that is equal to the total of all the individual customer accounts that it replaces. For example, if the individual customers’ accounts add up to $1,234.56, the balance in the Accounts Receivable Control account must also have a balance of $1,234.56. As mentioned earlier, the invoice amounts recorded in the Accounts Receivable column of the Sales Journal are posted to the debit of the individual customers’ accounts in the Accounts Receivable Ledger. However, because these customers’ accounts are not part of the General Ledger, the total of the Accounts Receivable column must then be posted to the debit of the Accounts Receivable Control account to ensure that the General Ledger remains in balance. When the trial balance is prepared at the end of the month, the customers’ individual accounts will not be shown in the usual listing of General Ledger accounts. Instead, they will be listed separately in a Schedule of Accounts Receivable. Only one account is required in the main trial balance to represent all the receivables—the Accounts Receivable Control account. Figure 6.4 shows a trial balance with the Accounts Receivable Control account in the General Ledger section and the individual customers’ accounts listed in a supporting schedule below it. The total of the Schedule of Accounts Receivable, $106.80, is equal to the balance in the Accounts Receivable Control account, also $106.80. NEL

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Figure 6.4  Trial Balance with Schedules Harvey Shortt Promotions Trial Balance February 28, 20— #

101 104 108 111 115 201 222 301 401 405 407 501 503 511 515 519 522 526 533 539

ACCOUNT

Bank Accounts Receivable Control Wrapping Supplies Prepaid Store Fixtures Equipment Accounts Payable Control Bank Loan Payable Capital, H. Shortt Sales Interest Revenue Rental Revenue on Equipment Purchases Freight In Advertising Expense Donations Miscellaneous Expense Postage Salaries Expense Telephone Expense Utilities

DEBIT

15 7 1 4 3 8 8 4

6 0 5 7 2

1 6 4 9 9

CREDIT

60 80 00 50 50 4 5 22 3 1

6 3 3 1 90 1 3 6 00 1 2 7 75 5 0 00 7 4 60 1 8 70 1 8 0 0 00 8 3 45 1 7 8 50 37 4 3 2 30

37

9 0 0 7 3 3

9 0 0 4 5 4

0 0 0 6 0 5

60 00 00 70 00 00

4 3 2 30

Schedule of Accounts Receivable

153 Grant, Edward 156 Hobson, Linda 159 Lawson, Joe

3 2 4 1 0

3 4 8 6

95 70 15 80

Schedule of Accounts Payable

261 Kildonan Lumber Co. 265 Neepawa Novelty Co. 269 Wholesale Products Ltd.

4 4

1 4 4 9

8 1 0 9

0 0 0 0

00 60 00 60

Similarly, an Accounts Payable Control account is set up to replace the individual suppliers’ accounts that are now listed in the Schedule of Accounts Payable. In Figure 6.4, you can see that the Accounts Payable Control amount, $4,990.60, is equal to the total of all the suppliers’ accounts listed in the Schedule of Accounts Payable, also $4,990.60. NEL

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Whenever a discrepancy is discovered between a control account and the group of accounts it represents, you can usually find the imbalance by using the same steps as those discussed in Chapter 3 for locating errors in a trial balance. PRACTICE EXERCISE 1 Use the following accounts and balances to prepare a trial balance with schedules of accounts receivable and accounts payable. This trial balance is for Electron Company on June 30, 20—. Bank Accounts Receivable Control Equipment Accounts Payable Control Bank Loan Payable Capital, L. Jarya Accounts Receivable: Ajaam Co. Blackberry Enterprises Cypress Printers Accounts Payable: Lodestone Ltd. Market Marketing Co. Northstar Co. Overland Courier

$2,450.70 ? 17,500.00 ? 4,200.00 15,300.00 340.45 210.50 84.90 567.20 222.30 68.80 228.25

PRACTICE EXERCISE 2 The following transactions are to be recorded in the Sales Journal of Seymours Ltd. of Squamish, BC: (a) Set up a Sales Journal (page SJ4) with the following column headings: Date, Name of Customer, Invoice No., Terms, Folio, Accounts Receivable Dr., Sales Cr., GST Payable Cr., and PST Payable Cr. (b) Set up these General Ledger accounts: Accounts Receivable Control, 110; GST Payable, 220; PST Payable, 222; Sales, 401. Also, open a ledger account for each of these customers: A/R Terri Beadlor, 120; A/R Susan Betle, 121; A/R Betty Grabowski, 122; A/R Lui Hanh, 123; A/R Ahmed Mulla, 124; A/R Marie Nelson, 125; A/R Edna Shultz, 126; A/R Jane Travis, 127; and A/R Alison Wassin, 128. (c) All sales invoices are to be numbered consecutively, beginning with #80. Customers are allowed 30 days on all credit sales. (d) Add 5% GST and 7% PST to all sales. The amounts quoted in the transactions represent the value of the goods before taxes. NEL

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(e) Record the following sales and post daily to the customers’ accounts. 20— May 1 Sold merchandise to Lui Hanh, Sales Invoice #80, $210.25. 3 Credit sales: Jane Travis, $267.95; Marie Nelson, $141.60; Alison Wassin, $242.70. 5 Sold merchandise on account to Betty Grabowski, $155.10. 6 Credit sales: Jane Travis, $126.90; Betty Grabowski, $97.20. 8 Sold merchandise on account to Susan Betle, $145.30. 11 Credit sales: Ahmed Mulla, $258.15; Terri Beadlor, $133.50. 15 Credit sales: Alison Wassin, $239.60; Edna Shultz, $366.55; Marie Nelson, $260. 18 Sold goods on account to Lui Hanh, $285.15. 22 Credit sales: Jane Travis, $95.80; Ahmed Mulla, $65. 26 Sold merchandise on credit to Alison Wassin, $211.65. (f ) Prove equal debits and credits. (g) Enter the totals and rulings. (h) Post the total of the Accounts Receivable column to the Accounts Receivable Control account. Post the other totals appropriately. (i) Prepare a trial balance with a schedule of accounts receivable. PRACTICE EXERCISE 3 Assume the company in Practice Exercise 2 is located in Saskatchewan. (a) Set up the Sales Journal and ledger accounts as instructed, then record the transactions. Add 5% GST and 6% PST to all sales. (b) Post to customers’ accounts daily, then post the totals to their respective accounts. (c) Prepare a trial balance with a schedule of accounts receivable. PRACTICE EXERCISE 4 In the books of Fashion Frenzy of Ottawa, Ontario, record the sales transactions for the month of April. (a) Set up a Sales Journal (page SJ1) with the following headings: Date, Name of Customer, Invoice No., Terms, Folio, Accounts Receivable Dr., Shoe Sales Cr., Handbag Sales Cr., Accessories Sales Cr., and HST Payable Cr. (b) Open General Ledger accounts for Accounts Receivable Control, 110; HST Payable, 221; Sales—Accessories, 401; Sales—Handbags, 402; Sales—Shoes, 403. Also, open customers’ accounts for A/R Beverley Anaka, 121; A/R Kay Beaudry, 122; A/R Angelica Cuevas, 123; A/R Jane Fraser, 124. NEL

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(c) Record the following entries in the Sales Journal. Sales invoices will be numbered consecutively, beginning with #1. Add 13% HST to all sales amounts shown. Post to the customers’ accounts on a daily basis. 20— Apr. 2 3

5 8 10 16 19

25 28

Sold shoes, $65.50, and handbag, $35.95, to Kay Beaudry; Invoice #1, terms net 10 days. Credit sales: Angelica Cuevas, shoes, $44.95, terms net 30 days; Beverley Anaka, shoes, $48.95, and accessories, $12.95, terms net 30 days. Sold accessories, $29.75, to Kay Beaudry; terms net 10 days. Sold to Beverley Anaka, shoes, $49.95, and a handbag, $35.75; terms net 30 days. Sold shoes, $64.95, to Jane Fraser; terms net 30 days. Sold shoes, $65.00, to Jane Fraser; terms net 30 days. Credit sales: Angelica Cuevas, shoes, $75.50, terms net 30 days; Beverley Anaka, handbag, $35, and accessories, $27.50, terms net 30 days. Sold to Angelica Cuevas, shoes, $61.50, a handbag, $46.50, and accessories, $37.50; terms net 30 days. Sold accessories, $41.25, to Kay Beaudry; terms net 10 days.

(d) Total and rule the journal. (e) Post the total of the Accounts Receivable column to the Accounts Receivable Control account. Post the other totals accordingly. (f ) Prepare a trial balance with a schedule of the accounts receivable. PRACTICE EXERCISE 5 Assume the company in Practice Exercise 4 is located in Halifax, Nova Scotia. (a) Set up a Sales Journal (page SJ1) with the following headings: Date, Name of Customer, Invoice No., Terms, Folio, Accounts Receivable Dr., Shoe Sales Cr., Handbag Sales Cr., Accessories Sales Cr., and HST Payable Cr. (b) Record the entries. Sales invoices will be numbered consecutively, beginning with #1. Add 15% HST to all sales amounts shown. (c) Total and rule the journal. (This journal will not be posted.)

CASH RECEIPTS JOURNAL Receiving money is a common transaction on the books of almost any business, most commonly for cash sales of goods and services and for payments received from customers on their accounts. To simplify the recording of such transactions, NEL

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a Cash Receipts Journal is set up with special columns to accommodate the accounts most frequently affected when cash is received. Like the Sales Journal discussed previously, the Cash Receipts Journal usually requires only a one-line entry for each transaction and yet remains balanced. All journals are designed to suit the requirements of each particular business. One business may require many columns, while another will require only a few. Figure 6.5 illustrates a basic Cash Receipts Journal. Each column captures specific information related to the transaction: Date: The Date column is used to record the date of the transaction. Account Credit: The same accounts are credited here as would have been credited if the entry were recorded in the General Journal. For example, when cash or a cheque is received from a customer on account, the account credited is Accounts Receivable/Customer Name. Therefore, the same account is named in the Account Credit column. Memo: Sometimes called Particulars or Details, this column is used to record all necessary details or explanations that are important to the transaction. These details might include the invoice number to which the payment is to be applied or a notation about a refund received for the return of defective goods. Self-explanatory entries, such as cash sales, usually do not require explanations. Accounts Receivable Cr.: When cash is received from a customer on account, the amount is entered in this column and the name of the customer is entered in the Account Cr. column (discussed above). Entries recorded in this column should be posted immediately to the customers’ accounts so that their accounts are kept up to date. Figure 6.5  Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

20— Sept. 1 2 2 4 8 12

ACCOUNT CREDIT

Capital, G. Greene Sales A/R Bell, Robert Land Sales A/R Dubois, J.P.

MEMO

F.

ACCTS. REC. CR.

SALES DISC. DR.

SALES CR.

PAGE HST PAY. CR.

Investment On acct., Inv. #15

8 0 0 00

1 0 4 00

1 5 0 0 00

1 9 5 00

2 3 0 0 00

2 9 9 00

2 0 0 00

Sold unused land On acct., Inv. #21

1 2 5 00 3 2 5 00

GEN. LED. CR.

CR1 BANK DR.

20 0 0 0 00 20 0 0 0 00 9 0 4 00 2 0 0 00 10 0 0 0 00 10 0 0 0 00 1 6 9 5 00 1 2 5 00 30 0 0 0 00 32 9 2 4 00

Proof: Dr. 3 2 9 2 4.00

Cr. 3 2 5.00 2 3 0 0.00 2 9 9 .00 3 0 0 0 0.00 3 2 9 2 4.00 3 2 9 2 4.00

NEL

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Sales Discount Dr.: Discounts will be discussed in Chapter 7. Sales Cr.: Only those entries that represent over-the-counter cash sales of merchandise are recorded in this column. These would include sales made on debit cards and credit cards. This amount is the value before any taxes are added. The words “Sales” or “Cash Sales” would be written in the Account Cr. column or in the Memo column. HST Payable Cr.: Like the HST Payable column in the Sales Journal, this column shows how much HST was charged on the cash sale. (This column is called GST Payable Cr. in those provinces where GST is charged.) PST Payable Cr.: The provincial sales tax (if applicable) that is charged on the cash sale is recorded in this column. (Figure 6.5 does not use this column.) General Ledger Cr.: Sometimes called Other Accounts, this column is used to record cash receipt transactions that do not occur frequently. If the transaction does not affect any of the special columns described above because it does not meet the purposes of those columns, the amount is recorded in the General Ledger column and the account name is written in the Account Cr. column. In Figure 6.5, the transactions entered on September 1 and 4 are examples of entries that do not occur often. Bank Dr.: The amounts recorded in the various credit columns are balanced by entering an equal value in the Bank Dr. column. Let’s take a closer look at how the transactions were recorded in the Cash Receipts Journal in Figure 6.5 by comparing them to the same entries as they appear in the General Journal in Figure 6.6. The first entry (September 1) is a typical investment by the owner, calling for a debit to Bank and a credit to Capital. In the Cash Receipts Journal, we begin by entering the date as usual. Then, “Capital, G. Greene” is entered in the Account Cr. column to identify the account that will be credited. A suitable explanation is entered in the Memo column. The amount invested, $20,000, is entered in the General Ledger Cr. column because there is not a special column for Capital entries. The debit side of every cash receipt entry is Bank; therefore, $20,000 is also Figure 6.6  Cash Receipt Transactions in the General Journal

Sept.

1

2

2

Bank Capital, G. Greene To record owner’s investment.

2 0 0 0 0 00 2 0 0 0 0 00

Bank Sales HST Payable Cash sales for the day.

9 0 4 00

Bank A/R Bell, Robert Received on Invoice #15.

2 0 0 00

8 0 0 00 1 0 4 00

2 0 0 00

NEL

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entered in the Bank Dr. column. The entry is now complete because both the debit side and the credit side of the transaction have been recorded and the entry balances. The second entry (September 2) is a cash sale of merchandise. This is a very common transaction; therefore, special columns are provided for the revenue account and the tax account to simplify recording. In the Account Cr. column, the account name Sales is entered. A cash sale entry is usually self-explanatory, so no memo is needed. The amount of the sale before tax, $800, is entered in the Sales Cr. column. HST of $104 (assuming a rate of 13%) is entered in the HST Payable Cr. column. Finally, the total amount of cash received, $904, is entered in the Bank Dr. column. Once again, the entry is balanced. The third entry (September 2) is the receipt from customer Robert Bell on account. The account to be credited is Accounts Receivable/Robert Bell, so the customer’s name is entered in the Account Cr. column. A suitable explanation, such as an invoice number, should be entered in the Memo column. The amount paid on account, $200, is entered in the Accounts Receivable column and is offset by the debit amount, also $200, entered in the Bank Dr. column. Again, this entry is balanced. The next three entries are similar to those already described; therefore, they are not illustrated in the General Journal. After all entries are recorded for the month, the columns are totalled and the balance is proven. This is done by adding all the debit totals together, then adding all the credit totals together, and showing that they are equal. Figure 6.5 shows the proof for this journal.

POSTING FROM THE CASH RECEIPTS JOURNAL Posting from the Cash Receipts Journal is essentially the same as posting from the Sales Journal. To ensure that all transactions are posted correctly, the following posting sequence is recommended: 1. Accounts Receivable Cr.: The individual entries in this column should already have been posted to the customers’ accounts on a daily basis to keep their account balances up to date. The column total is then credited to the Accounts Receivable Control account in the General Ledger. This ensures that the balance in the Accounts Receivable Control account is equal to the total of all the individual customers’ accounts. 2. Sales Discount Dr.: The total of this column is debited to the Sales Discounts account in the General Ledger. (Discounts will be discussed in Chapter 7.) 3. Sales Cr.: The total of this column is credited to the Sales account in the General Ledger. Since the purpose of this column is to record the selling price of the goods or services sold for cash, only the total is posted, not the individual entries. 4. HST Payable Cr.: Only the total of this column is credited to the HST Payable account. The individual entries are not posted. 5. General Ledger Cr.: The total of this column is not posted because it is the sum of a variety of unrelated transactions. The individual entries are credited to the accounts named in the Account Cr. column. NEL

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6. Bank Dr.: Only the total of this column is debited to the Bank account in the General Ledger. This represents the total cash received during the month. As mentioned for the Sales Journal, posting references are entered in Folio columns of both the journal and the ledger accounts. When column totals are posted, however, the posting references in the journal are written immediately below the totals and are either circled or shown in brackets.

CASH OR PLASTIC? Credit cards and debit cards are popular methods of payment for items purchased. Customers pay for items purchased on a credit card after receiving the credit card statement that itemizes all the purchases made on the card during the month. In effect, credit has been granted to the customer by the credit card company based on the customer’s financial standing and credit history, and thus the customer is authorized to charge purchases to the extent of the credit limit assigned to the account. A debit card, on the other hand, deducts the amount of the purchase directly from the customer’s bank account immediately. The limit on the value of purchases made is determined by the balance available in the customer’s bank account and by the daily spending limit imposed on the card by the bank. Credit cards and debit cards, as well as electronic pay apps on smart phones, offer a variety of benefits to the customer: 1. The customer does not have to carry large amounts of cash. 2. The use of chequebooks and means of identification is at a minimum. The card or phone app itself is a form of identification. 3. The statement received monthly by the customer details the customer’s spending during the month. Businesses also benefit when they accept debit cards, credit cards, and e-pay as forms of payment from customers: 1. The amount of cash held on the premises is reduced. This reduces the potential for theft. 2. There are no losses from uncollectible accounts or bad cheques. 3. The investigation of customers’ credit histories is eliminated. These investigations were conducted by the credit card company or by the bank prior to issuing the card to the customer. 4. The maintenance of an Accounts Receivable Ledger, along with the task of collecting due and overdue accounts, is minimized or eliminated. PRACTICE EXERCISE 6 (a) Set up a Cash Receipts Journal (page CR4) with the following headings: Date, Account Cr., Memo, Folio, Accounts Receivable Cr., Sales Cr., GST Payable Cr., PST Payable Cr., General Ledger Cr., and Bank Dr. (b) Record the following transactions on the books of Grouse Mountain Industries of Vancouver, B.C., for the month of February, 20—. Add 5% GST and 7% PST to all sales. NEL

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Using Special Journals

1 Received $900 plus GST from P. Simons for office space sublet to him. (Credit Rent Revenue.) 2 Cash sales, $1,279 plus taxes. 4 Received $300 from B. Robbins on Invoice #11. 5 Received cheque for $230 from L. Pierce covering Invoice #27. 6 Received cheque for interest earned on a short-term investment, $38. 8 Cash sales, $1,640 plus taxes. 10 Received cheque from B. Robbins on Invoice #33, $250. 12 Cash sales, $2,000 plus taxes. 15 Received cheque from L. Pierce for $400 on Invoice #38. 18 Cash sales, $3,640 plus taxes. 22 Borrowed $15,000 from the bank at a rate of 4.5% interest for five years. (Credit Bank Loan Payable.) (Interest will not be recorded until the first loan payment is made.) 23 D. Jowan, a longtime customer, made a $495 partial payment on Invoice #56. 27 Cash sales, $2,975 plus taxes. (c) Total and rule the journal. Prove equal debits and credits. (No posting is required.)

PRACTICE EXERCISE 7 (a) Set up a Cash Receipts Journal (page CR4) with the following headings: Date, Account Cr., Memo, Folio, Accounts Receivable Cr., Sales Cr., HST Payable Cr., General Ledger Cr., and Bank Dr. (b) Record the following transactions for Atlantic Packaging Company of Halifax, Nova Scotia. Add 15% HST to all sales. Calculating Interest on an Overdue Account The overdue interest on G. Hamilton’s account was calculated assuming the account had been overdue for 60 days and the rate charged was 18% per annum (per year). To calculate the interest, the following formula was used: Principal × Rate × Days ÷ 365 5 Interest Therefore, $510 × 0.18 × 60 ÷ 365 5 $15.09 in overdue interest.

20— Oct.

2 5 8 12 20

21 24

Received cheques from these customers on account: D. Rampersad, $325 on Invoice #43; G. Gable, $414 on Invoice #51. Cash sales, $2,890 plus HST. A. Clements sent $441.50 in full payment of Invoice #48. Cash sales, $3,475 plus HST. Received cheque for $525.09 from G. Hamilton in payment of his overdue balance of $510 plus interest of $15.09. (A two-line entry is required for this transaction.) Cash sales, $3,335 plus HST. Received $625.50 from L. Dubois in payment of Invoice #52. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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27

Borrowed $15,000 from the bank for five years with interest at 5.4% per annum (per year). (Credit Bank Loan Payable.) No entry required for interest. 28 Cash sales, $3,510 plus HST. (c) Total and rule the journal. Prove equal debits and credits. (No posting is required.) PRACTICE EXERCISE 8 Refer to Practice Exercise 6. Assume this business operates in Saskatchewan. 1. Set up a Cash Receipts Journal with the headings provided. Record the transactions, adding 5% GST and 6% PST where appropriate. 2. Total the columns and prove equal debits and credits. (No posting is required.) PRACTICE EXERCISE 9 Refer to Practice Exercise 7. Assume this business operates in Ontario. 1. Set up the Cash Receipts Journal with the headings provided. Record the transactions, adding 13% HST where applicable. 2. Total the columns and prove equal debits and credits. (No posting is required.) PRACTICE EXERCISE 10 1. Set up a Sales Journal (page SJ7) with the following headings: Date, Name of Customer, Invoice No., Terms, Folio, Accounts Receivable Dr., Sales Cr., GST Payable Cr. 2. Set up a Cash Receipts Journal (page CR7) with the following headings: Date, Account Cr., Memo, Folio, Accounts Receivable Cr., Sales Cr., GST Payable Cr., General Ledger Cr., and Bank Dr. 3. Record the following transactions for Jackimon Specialties, located in Wainwright, Alberta. Add 5% GST to all sales. 20— May 2 Cheques received on account from B. Parker, $325 on Invoice #816, and Dale Barclay, $215 on Invoice #802. 2 Sold on terms of net 10 days to L. Porth, $125 plus GST, Invoice #835. 3 Mona Alise sent a cheque for $625 as a partial payment on Invoice #822 dated April 17. 5 Received cheque from Peter Greene, $404.91, on overdue account of $396 plus interest for three months at 9% per annum (per year). A two-line entry is required for this transaction. 7 Sold on account to M. O’Sullivan, $300 plus GST, Invoice #836, terms net 10 days. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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8 Cash sales for the week, $2,890.65 plus GST. 12 Received cheque from L. Porth in full payment of Invoice #835. (Check the Sales Journal to find full amount of this invoice.) 15 Cash sales for the week, $3,133.20 plus GST. 15 Sold on terms of net 10 days to L. Porth, $220 plus GST, Invoice #837. 17 Received full payment from M. O’Sullivan on Invoice #836. (Check the Sales Journal to find full amount of this invoice.) 20 Received cheques from Alison Clements on Invoice #831, $84.50, and Angie Joli on Invoice #833, $40.75. 22 Cash sales for the week, $2,923.70 plus GST. 24 Sold on terms of net 10 days to M. O’Sullivan, $540 plus GST, Invoice #838, and to L. Porth, $110 plus GST, Invoice #839. 25 Received partial payment of $150 from L. Porth on Invoice #837. 29 Cash sales for the week, $3,286.15 plus GST. 4. Total and rule the journals. Prove equal debits and credits. (No posting is required.)

PURCHASE JOURNAL The Purchase Journal (sometimes called the Accounts Payable Journal) is the special journal used for the purchase of anything on account. As in the Sales Journal, the columns of a Purchase Journal can vary depending on the nature of the business and how frequently certain kinds of purchases occur. Some Purchase Journals might have many columns, while others will have only a few. Here is an explanation of the columns that appear in the Purchase Journal illustrated in Figure 6.7. Invoice Date: The date shown on the purchase invoice is recorded in this column. Name of Supplier: When goods are purchased on account, a record is made of the name of the company to which the money is owing. Because only suppliers’ names can appear in this column, the term “Accounts Payable” does not have to be written beside each name. Invoice Number: The invoice received from each supplier will have an invoice number. This number identifies the source document on which the Purchase Journal transaction is based. Terms: The terms of payment are recorded in this column as shown on the invoice. The most common term allowed by suppliers is net 30 days (or n/30), meaning that the amount owing must be paid within 30 days after the invoice date. Usually, interest is charged on the balance if it remains unpaid after 30 days. Terms will be discussed in more detail in Chapter 7. Accounts Payable Cr.: The total amount of the invoice is recorded in this column, representing the credit side of the transaction (liability increasing). The debit side of the transaction (the item purchased and related taxes) will be recorded in one or more of the following columns. NEL

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Figure 6.7  Purchase Journal PURCHASE JOURNAL

PAGE

ACCOUNT CREDIT INVOICE DATE

20— Sept. 3

NAME OF SUPPLIER

ACCOUNT DEBIT

INV. NO.

TERMS

F.

ACCOUNTS PAYABLE

HST-ITC

PURCHASES

Standard Co.

16

n/30

9 6 0 50

1 1 0 50

8 5 0 00

6

Morton Tire Co.

75

n/20

1 8 0 80

2 0 80

1 6 0 00

17

Allied Parts Ltd.

10

n/60

3 0 5 10

3 5 10

25

K-R Printers

303

n/10

1 6 0 46

1 8 46

30

Central Ads

49

n/30

2 8 8 15

3 3 15

1 8 9 5 01

2 1 8 01

Proof:

Dr.

PJ1

OFFICE SUPPLIES

WHSE SUPPLIES

OTHER ACCOUNTS ACCOUNT DR

F.

AMOUNT

2 7 0 00 8 5 00

5 7 00 Advertising Exp.

1 0 1 0 00

8 5 00

3 2 7 00

2 5 5 00 2 5 5 00

Cr.

218.01 1,895.01 1,010.00 85.00 327.00 255.00 1,895.01 1,895.01

HST-ITC Dr.: The amount of HST included in the total of the purchase invoice is recorded in this column. This column is called GST-ITC Dr. in those provinces where GST is charged. Purchases Dr.: The amount entered here is the portion of the invoice total that represents merchandise bought for resale. This is the pretax value of the goods. Office Supplies Dr.: The amount entered here is the portion of the invoice total that represents the purchase of supplies for use in the office, such as pens, pencils, letterhead, envelopes, computer and printer supplies, etc. (In provinces that charge GST and PST, this amount must include a relative proportion of any PST that has been charged on the supplies.) Warehouse Supplies Dr.: The amount entered here is the portion of the invoice total that represents the purchase of supplies used in the warehouse or shipping department, such as wrapping materials, tape, shipping labels, etc. (In provinces that charge GST and PST, this amount must include a relative proportion of any PST that has been charged on the supplies.) Of course, if a business does not have a warehouse or shipping department, it will not have this column in its Purchase Journal. Other Accounts Dr.: If all or part of the invoice is for the purchase of something other than merchandise for resale, office supplies, or warehouse supplies, the amount is recorded in the Other Accounts column. (In provinces that charge GST and PST, this amount must include a relative proportion of any PST that has been charged on the item recorded here.) For each entry in the Other Accounts column, the name of the asset or expense account must be identified in the Account column. Sometimes, an invoice will be allocated to two or more different asset or expense accounts, in which case the invoice amount would be split between two or more columns. This would be the equivalent of a compound entry, as discussed in Chapter 2. NEL

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Figure 6.8 shows the same purchase transactions as those in the Purchase Journal (Figure 6.7). Let’s take a closer look at how each is entered in the Purchase Journal. The September 3 entry is a typical purchase of merchandise. It is a transaction you have already recorded many times. Here is how we would record this: 1. Enter the date of the invoice (September 3) in the Invoice Date column. As in all journals, the year date is recorded at the top of the column. 2. Enter the name of the supplier (Standard Co.) in the Name of Supplier column. 3. Enter the invoice number, #16, and terms, n/30, in the appropriate columns. 4. Enter the total of the invoice, $960.50, in the Accounts Payable column. This is the credit side of the transaction. It is the total amount owing to the supplier. 5. Enter the HST, $110.50, in the HST-ITC column. 6. Because this invoice is for the purchase of merchandise for resale, the account debited is Purchases; therefore, enter the pretax value of the goods, $850.00, in the Purchases column.

Figure 6.8  Purchase Transactions in the General Journal

Sept.

3

6

17

25

30

Purchases HST-ITC A/P Standard Co. Invoice #16, n/30.

8 5 0 00 1 1 0 50

Purchases HST-ITC A/P Morton Tire Co. Invoice #75, n/20.

1 6 0 00 2 0 80

Warehouse Supplies Expense HST-ITC A/P Allied Parts Ltd. Invoice #10, n/60.

2 7 0 00 3 5 10

Office Supplies Expense Warehouse Supplies Expense HST-ITC A/P K-R Printers Invoice #303, n/10.

8 5 00 5 7 00 1 8 46

Advertising Expense HST-ITC A/P Central Ads Invoice #49, n/30.

9 6 0 50

1 8 0 80

3 0 5 10

1 6 0 46

2 5 5 00 3 3 15 2 8 8 15

NEL

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The transaction is now complete. It is a balanced transaction that requires only a one-line entry in the journal because the invoice total is equal to the two debit entries (a debit to HST-ITC plus a debit to Purchases). The second entry (September 6) is also a purchase of merchandise for resale, so it is recorded exactly the same way. Take a moment to see how this transaction was recorded. Always take care to ensure the amounts entered make a balanced entry. The third entry (September 17) for the purchase of warehouse supplies is recorded in a similar fashion. The date, supplier name, invoice number, and terms are entered as usual. The invoice total, $305.10, is entered in the Accounts Payable column to represent the credit side of the transaction. The HST of $35.10 is entered in the HST-ITC column, and the value of the warehouse supplies, $270.00, is entered in the Warehouse Supplies column. Again, this one-line entry is balanced because the two debit amounts (Warehouse Supplies and HST-ITC) are equal to the total of the invoice shown in the Accounts Payable column. The next entry (September 25) for the purchase of both office supplies and warehouse supplies is recorded in a similar way. The full amount of the invoice, $160.46, is entered in the Accounts Payable column. The HST, $18.46, is entered in the HST-ITC column. The value of the office supplies, $85.00, is entered in the Office Supplies column, and the value of the warehouse supplies, $57.00, is entered in the Warehouse Supplies column on the same line. Although four columns are used in this “compound” entry, it is still a balanced entry that requires only one line in the Purchase Journal. The final entry (September 30) for the purchase of advertising materials is handled in a similar way, with one exception. Our Purchase Journal does not have a special column for Advertising Expense; therefore, Advertising Expense is entered under Other Accounts to indicate which expense account is to be affected, and the value of the advertising materials is entered in the Amount column. We can see, then, that the Other Accounts column gives us the flexibility to record the purchase of anything that cannot be recorded in the special columns. At the end of the month, all money columns in the Purchase Journal are totalled and checked for equal debits and credits. The total of the credit column must be equal to all the debit column totals.

POSTING FROM THE PURCHASE JOURNAL The Purchase Journal is posted in the same way as the Sales Journal. Here are the key steps: 1. The amounts that appear in the Accounts Payable Cr. column will be credited to the individual suppliers’ accounts in the Accounts Payable Ledger. These amounts should be posted as soon as the transaction is recorded in the journal to ensure that each supplier’s account is up to date at all times. 2. The total of the HST-ITC Dr. column is debited to the HST-ITC account in the General Ledger. There is no need to post the individual entries in this column because the same result is accomplished by posting only the total. This one entry saves the repeated postings that would otherwise be necessary. 3. The total of the Purchases Dr. column is debited to the Purchases account. 4. The total of the Office Supplies Dr. column is debited to the Office Supplies Expense account. NEL

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5. The total of the Warehouse Supplies Dr. column is debited to the Warehouse Supplies Expense account. 6. Any entries that appear under the heading of Other Accounts Dr. are not related to each other, so they must be posted individually. The total of the Other Accounts column is not posted. PRACTICE EXERCISE 11 1. Set up a Purchase Journal for the Bell Athletics Co. of Belleville, ON, using the headings shown in Figure 6.7. 2. Record the following transactions in the Purchase Journal. Add 13% HST to all purchases. 20— May 2 Bought merchandise from Northland Co., $500; Invoice #78 dated May 1; terms net 10 days. 3 Received invoice for $290 from Panda Suppliers for the purchase of office supplies, $120, and warehouse supplies, $170; Invoice #67 dated May 2; terms net 30 days. 5 Bought furniture for office, $1,450, from Ringer Furniture Co., Invoice #63 dated May 3; terms net 90 days. 6 Received Invoice #98 dated May 5 from Brandon Co. for $783 for purchase of merchandise; terms net 10 days. 10 Bought desktop printer from Ringer Furniture Co. for $750; Invoice #72 dated May 8; terms net 90 days. 14 Received Invoice #33 dated May 13 from Green Tree Printers for $90 for advertising material; terms net 10 days. 14 Bought merchandise, $623, from Northland Co.; Invoice #93 dated May 13; terms net 10 days. 16 Bought one-year insurance policy from Yeung Insurance Co. The premium was $175. Invoice #48 was dated yesterday and showed terms of net 10 days. Assume this insurance policy is tax exempt. 19 Bought new file cabinet, $525, from Ringer Furniture Co.; Invoice #88 dated May 17; terms net 90 days. 20 Received Invoice #174 dated May 18 from Nielson Ltd. for merchandise purchased, $916; terms net 30 days. 24 Bought wrapping paper and paper cartons for the warehouse, $230, from Panda Suppliers; terms net 30 days; Invoice #81 dated May 23. 29 Bought second-hand truck for the delivery of goods to customers. Harris Trucks Ltd. has sent Invoice #21 for $9,000; terms net 90 days. 3. Total the columns and prove equal debits and credits. See Practice Exercise 12 for posting instructions. NEL

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PRACTICE EXERCISE 12 Using the completed Purchase Journal in Practice Exercise 11, post the transactions and prepare a trial balance: 1. Set up the following General Ledger accounts with account numbers as indicated: Insurance Prepaid, 111; Office Equipment, 123; Office Furniture, 124; Vehicle, 135; Accounts Payable Control, 201; HST-ITC, 250; Purchases, 501; Advertising Expense, 512; Office Supplies Expense, 515; and Warehouse Supplies Expense, 518. 2. Set up the following accounts payable accounts with account numbers as indicated: A/P Brandon Co., 220; A/P Green Tree Printers, 221; A/P Harris Trucks, 222; A/P Nielsen Ltd., 223; A/P Northland Co., 224; A/P Panda Suppliers, 225; A/P Ringer Furniture Co., 226; A/P Yeung Insurance Co., 227. 3. Post the transactions in the order recommended for purchase journals. Be sure to use the Memo column in the suppliers’ ledger accounts to keep track of invoice numbers and terms. 4. Prepare a trial balance with a schedule of accounts payable. PRACTICE EXERCISE 13 Percy Hassano opened a retail shoe store called the The Family Store, located in Calgary, Alberta, on March 1, 20—. 1. Set up a Purchase Journal (PJ1) with the same headings as those in Figure 6.7. Change the column heading for HST-ITC to GST-ITC. 2. Record the following transactions in the Purchase Journal. The amount of GST included in the invoice is shown in brackets unless otherwise stated. (There is no PST in Alberta.) 20— Mar. 1 Bought counters and shelves from Kashta Lumber Co. on Invoice #627 dated Feb. 27; terms net 90 days; $8,610 ($410 GST). (Store & Office Equipment) 2 Received Invoice #263 dated March 1 from Capone Equipment Co. for the purchase of cash register; $2,310 ($110 GST); terms net 30 days. (Store & Office Equipment) 3 Bought packaging supplies, $370.91 ($17.66 GST), from Krane Suppliers on Invoice #196 dated March 2; terms net 30 days. 5 Bought computer for $995 and stationery and supplies for $221.49 from Lees Office Equipment Co.; Invoice #331 dated March 4; terms net 30 days. Add 5% GST to these items. 6 Placed advertisement in the Daily Chronicle for opening-day specials; $168.47 ($8.02 GST); Invoice #899 dated March 6; terms net 10 days. 8 Received Invoice #893 from Walgreen Wholesalers for merchandise purchased on March 7, $2,547.43 ($121.31 GST); terms net 30 days. NEL

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14 Telec Alarm Services installed fire alarm system at total invoice cost of $3,150 ($150 GST) to be paid in 60 days; Invoice #318 dated March 14. (Store & Office Equipment) 16 Bought warehouse supplies, $233.53 ($11.12 GST), from Krane Suppliers; Invoice #326 dated March 15; terms net 30 days. 18 Bought supplies for office, $190.25 ($9.06 GST), from Lees Office Equipment Co. Invoice #476 dated yesterday shows terms of net 30 days. 23 Bought coffee maker for use in the store, $88.17 ($4.20 GST). Invoice #532 from Fast Perc Co. dated today with terms of net 10 days. (Store & Office Equipment) 29 Ran ad in the Daily Chronicle advertising our month-end sale, $78.75 ($3.75 GST); Invoice #1003 dated March 29; terms net 10 days. 30 Bought vacuum cleaner, $479.24 ($22.82 GST), from Ecko Wholesalers; Invoice #556 dated March 29; terms net 30 days. 3. Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 14 Refer to Practice Exercise 11. Assume this business is located in Manitoba. 1. Set up a Purchase Journal (PJ4) with the same headings as those shown in Figure 6.7. Change the HST-ITC column to GST-ITC. 2. Record the transactions in the Purchase Journal. Add 5% GST and 8% PST to all purchases (except merchandise and insurance). Be sure to add the PST into the amount debited to the asset or expense account. 3. Total the columns and prove equal debits and credits. (No posting is required.) PRACTICE EXERCISE 15 Refer to Practice Exercise 11. Assume this business is located in Saskatchewan. 1. Set up a Purchase Journal (PJ4) with the same headings as those shown in Figure 6.7. Change the HST-ITC column to GST-ITC. 2. Record the transactions in the Purchase Journal. Add 5% GST and 6% PST to all purchases (except merchandise and insurance). Be sure to add the PST into the amount debited to the asset or expense account. 3. Total the columns and prove equal debits and credits. (No posting is required.)

CASH PAYMENTS JOURNAL Sometimes called the Cash Disbursements Journal, the Cash Payments Journal is used to record all payments of money. Therefore, the Cash Payments Journal can be thought of as a chequebook. As with all special journals, the Cash Payments Journal is designed to meet the needs of each particular company. Here is a brief explanation of the columns that appear in the Cash Payments Journal illustrated in Figure 6.9. NEL

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Figure 6.9  Cash Payments Journal CASH PAYMENTS JOURNAL DATE

20— Jan. 2

ACCOUNT DEBIT

MEMO

Rent Expense

F.

ACCTS. PAY. DR.

PAGE PURCH. DISC. CR.

PURCH. DR.

HST-ITC DR.

CP13

BANK CR.

CH. NO.

1 3 0 00 1 0 0 0 00 1 1 3 0 00 147

For January

3

Purchases

4

A/P Morton Motors

On account

4 0 0 00

6

A/P Packards Ltd.

On account

7 5 00

1 8 500

2 0 9 05 148

2 4 05

4 0 0 00 149 7 5 00 150

10 Mortgage Payable

5 0 0 00

Interest Expense

On mortgage

12 Office Supplies Expense

Stationery

8 45 4 7 5 00

Proof:

GEN. LED. DR.

Dr. 475.00

1 8 500

1 5 0 00

6 5 0 00 DM

6 5 00

7 3 45 151

1 6 2 50 1 7 1 5 00 2 5 3 7 50

Cr. 2,537.50

185.00 162.50 1,715.00 2,537.50

2,537.50

Date: The Date column is used to record the date on which the transaction occurred; that is, the date on which the payment was made. Account Dr: The name of the account affected (debited) by this transaction is entered in this column. For example, if the cheque is issued to pay the rent, Rent Expense is the account name entered in this column. If the cheque is issued to pay the electricity bill, Utilities Expense is entered in this column. Memo: Sometimes called Details or Explanation, this column is used to record any additional information that is important to the transaction. This might include an invoice number on which a payment has been made or a notation regarding a refund given for the return of defective goods. Accounts Payable Dr.: When payments are made to creditors (suppliers), the amount is entered in this column and the name of the creditor is entered in the Account Dr. column. Entries affecting accounts payable should be posted immediately to the suppliers’ accounts. Posting right away allows the balance of each supplier’s account to be kept up to date. Purchase Discounts Cr.: Purchase discounts will be discussed in Chapter 7. Purchases Dr.: Goods bought for resale are entered in this column. This includes COD (Cash on Delivery) purchases. When an amount is entered in this column, “Purchases” or “Merchandise Purchases” would be written in the Account Dr. column or in the Memo column. HST-ITC Dr.: The amount of HST included in the payment, if any, is entered in this column. (This column is called GST-ITC Dr. in those provinces where GST is charged.) General Ledger Dr.: Sometimes called Other Accounts, this column is used to record payments that cannot be recorded in any of the money columns mentioned previously. The amount recorded here includes any provincial sales tax paid NEL

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(if applicable). The name of the specific account to be debited must be written in the Account Dr. column. Bank Cr.: The amount of the payment is entered here. This credit amount offsets the debit entry (or entries) to ensure a balanced entry. Cheque No.: The number that appears on the cheque is recorded in this column. If a payment is made without a cheque, such as payments made through online banking, electronic transfer, mortgage or bank loan payments deducted directly from the bank account, some meaningful notation can be entered instead of a cheque number. The process of recording transactions in the Cash Payments Journal is virtually identical to that for the Cash Receipts Journal. Because money is paid out, the credit side of the transaction is always Bank. The debit side, then, is the account that represents the purpose of the payment. For example, in the January 2 entry of Figure 6.9, the January rent of $1,130 is being paid. “Rent Expense” is entered in the Account Dr. column, followed by a suitable explanation in the Memo column. The HST amount, $130, is entered in the HST-ITC column, and the pretax value of rent, $1,000, is entered in the General Ledger column. Finally, the amount of the cheque, $1,130, is entered in the Bank Cr. column and the cheque number is entered appropriately. This is a balanced entry because the two debit values are equal to the credit to Bank. One other transaction worth discussing is the mortgage payment on January 10. In this case, the payment covers both the principal of the mortgage and the mortgage interest. Two accounts are debited in this transaction, so two lines are needed to record this payment. On the first line, “Mortgage Payable” is written in the Account Dr. column, and the principal portion of the payment, $500, is entered in the General Ledger column. On the next line, “Interest Expense” is entered in the Account Dr. column, and the interest portion of the payment, $150, is entered in the General Ledger column. Finally, the total amount of payment, $650, is entered in the Bank Cr. column. A cheque was not issued for this payment, so a number cannot be entered in the Cheque No. column. Instead, the notation “DM” is used to refer to the debit memo that was prepared by the bank to authorize this payment from the account. Once again, this is a balanced entry because the two debit values are equal to the credit to Bank. Compare the transactions in the Cash Payments Journal (Figure 6.9) with the same entries as they appear in the General Journal (Figure 6.10). In the Cash Payments Journal, just as in any other journal, each entry must be balanced. Each transaction calls for one or more debit amounts being offset by an equal amount in the credit column. Because each entry is balanced, the journal itself is in balance. In Figure 6.9, a proof shows that equal debits and credits were recorded in this journal.

POSTING FROM THE CASH PAYMENTS JOURNAL Posting from the Cash Payments Journal is the same as posting from the Cash Receipts Journal. These steps are recommended: 1. Accounts Payable Dr.: The individual entries should be posted to the suppliers’ accounts as soon as they are recorded so that their balances are always up to date. The column total is debited to the Accounts Payable Control account. NEL

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Figure 6.10  Payment Transactions in the General Journal

Jan.

2

3

4

6

10

12

Rent Expense HST-ITC Bank Paid January rent; Cheque #147.

1 0 0 0 00 1 3 0 00 1 1 3 0 00

Purchases HST-ITC Bank Bought merchandise; Cheque #148.

1 8 5 00 2 4 05

A/P Morton Motors Bank Paid on account; Cheque #149.

4 0 0 00

A/P Packards Ltd. Bank Paid on account; Cheque #150.

7 5 00

Mortgage Payable Interest Expense Bank Paid mortgage and interest. Office Supplies Expense HST-ITC Bank Bought stationery; Cheque #151.

2. 3. 4. 5. 6.

2 0 9 05

4 0 0 00

7 5 00

5 0 0 00 1 5 0 00 6 5 0 00

6 5 00 8 45 7 3 45

The balance in the Accounts Payable Control account will then agree with the total of all the individual suppliers’ accounts when the trial balance is prepared at month-end. Purchase Discounts Cr.: Only the total of this column is credited to the Purchase Discounts account. (Discounts will be discussed in Chapter 7.) Purchases Dr.: Only the total of this column is debited to the Purchases account. HST-ITC Dr.: Only the total of this column is debited to the HST-ITC account. General Ledger Dr.: The individual entries in this column are debited to the accounts named in the Account Dr. column. The total is not posted because it represents unrelated transactions. Bank Cr.: The total of this column is credited to the Bank account.

PRACTICE EXERCISE 16 1. Record the following payment transactions for Letzelter Co. of Saint John, NB, during the month of November. Set up a Cash Payments Journal (page CP6) with these headings: Date, Account Dr., Memo, Folio, Accounts NEL

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Payable Dr., Purchases Dr., HST-ITC Dr., General Ledger Dr., Bank Cr., and Cheque No. (The first cheque to be issued will be #111. Number all cheques sequentially.) Add 15% HST as indicated. 20— Nov.

1 3 4 5 8 10 11 17

Paid rent for November, $700 plus HST. Cheque #111. Paid for one-year insurance policy on stock, $325 (tax exempt). Bought merchandise, $115 plus HST. Paid $300 to D. Buchanan for Invoice #72 dated October 8. Paid $441 to Tracy Onysko for Invoice #39. Bought merchandise from Litz Bros., $301 plus HST. Paid the October telephone bill, $179 plus HST. Bought letterhead and other stationery for general office use, $124.50 plus HST. 20 Paid Pony Courier for delivering merchandise to customer, $45 plus HST. 23 Paid $390 to Donald Plantje on account, Invoice #447. 27 Paid water bill, $65 (tax exempt). 2. Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 17

Refer to Practice Exercise 16. Assume this business operates in Banff, AB. (a) Set up the Cash Payments Journal as stated. Change the HST-ITC column to GST-ITC. (b) Record the transactions. Add 5% GST where applicable. (c) Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 18 Refer to Practice Exercise 16. Assume this business operates in Regina, SK. 1. Set up the Cash Payments Journal as stated. Change the HST-ITC column to GST-ITC. 2. Record the transactions. Assume 5% GST and 6% PST will be calculated on all expenditures except accounts payable, merchandise, and insurance. Be sure to add the PST into the value of the asset or expense. 3. Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 19 The following transactions will be recorded on the books of Mertaug Company of Brantford, ON. 1. Set up a Purchase Journal using headings shown in Figure 6.7. 2. Set up a Cash Payments Journal using headings shown in Figure 6.9. The next cheque to be issued is #123. NEL

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3. Record the following transactions appropriately. Account for 13% HST as indicated in each transaction. 20— July 3 Bought merchandise from Appleton Co., $500 plus HST; Invoice #212 dated July 2; terms net 10 days. 3 Received invoice from Levi Suppliers for the purchase of office supplies, $110, and warehouse supplies, $190; Invoice #190 dated July 3; terms net 30 days. Add HST. 5 Bought furniture for office, $1,200 1 HST, from Winner Warehouse, Invoice #63 dated July 3; terms net 10 days. 12 Issued cheque to Appleton Co. in full payment of Invoice #212 dated July 2. 13 Paid in full to Levi Suppliers for Invoice #190 dated July 3. 14 Received Invoice #41 dated July 13 from Lex Copy Centre for $90 1 HST for advertising material; terms net 10 days. 14 Bought merchandise, $680 1 HST from Appleton Co.; Invoice #234 dated July 13; terms net 10 days. 15 Issued cheque to Winner Warehouse in full payment of the July 3 invoice. 16 Bought one-year insurance policy from Young Insurance Co. The premium was $175 (exempt from taxes). Paid by cheque. 19 Bought new filing cabinet, $525 1 HST from Winner Warehouse; Invoice #79 dated July 17; terms net 30 days. 20 Bought merchandise from Daigle Co., $920 1 HST. Paid by cheque. 23 Paid Lex Copy Centre for full amount owing on Invoice #41. 23 Paid Appleton Co. in full for Invoice #234 dated July 13. 28 Made partial payment on Invoice #79 from Winner Warehouse, $300. 29 Paid electricity bill, $122 1 HST. 4. Total, balance, and rule the journals. (No posting is required.) Supplementary Exercises EXERCISE 6-1: Open file SE-6-1. Complete the sales journals. Choose the appropriate tab for the tax system used in your province. EXERCISE 6-2: Open file SE-6-2. Complete the cash receipts journals. Choose the appropriate tab for the tax system used in your province. EXERCISE 6-3: Open file SE-6-3. Complete the purchase journals. Choose the appropriate tab for the tax system used in your province. EXERCISE 6-4: Open file SE-6-4. Complete the cash payments journals. Choose the appropriate tab for the tax system used in your province.

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THINK ABOUT IT! 1. How is time saved by using special journals? 2. What is the purpose of the Sales Journal? of the Purchase Journal? 3. What is the purpose of the Cash Receipts Journal? of the Cash Payments Journal? 4. Does the Bank Dr. column in the Cash Receipts Journal have an entry on every line? Why? 5. Do all payment entries in the Cash Payments Journal have cheque numbers? Why? 6. Should the totals of the General Ledger columns in the Cash Receipts and Cash Payments Journals be posted? Why? 7. Why is it important to prove that the totals of a special journal are in balance? 8. If a transaction cannot be recorded in any of the special journals, in which journal will it be recorded?

CASE STUDY: KBC DECORATING CO. FEBRUARY TRANSACTIONS In this chapter, you learned how to use special journals to record transactions and how to post from these special journals to the ledger accounts. KBC Decorating Co. will now begin using the following special journals: Sales Journal, Purchase Journal, Cash Receipts Journal, and Cash Payments Journal. The company also has ledger accounts for its regular customers (Accounts Receivable Ledger) and its suppliers (Accounts Payable Ledger). These ledger accounts are located immediately after the General Ledger accounts that you have already been using. Set up the Sales Journal (page SJ1) with these headings: Date, Account Dr., Invoice No., Terms, Folio, Accounts Receivable Dr., Sales Paint & Supplies Cr., Sales Wallpaper Cr., and HST Payable Cr. Set up the Purchase Journal (page PJ1) with these headings: Invoice Date, Account Cr., Invoice No., Terms, Folio, Accounts Payable Cr., Purchases Paint & Supplies Dr., Purchases Wallpaper Dr., HST-ITC Dr., and Other Accounts Dr. (with subheadings of Account Dr., Folio, and Amount). Set up a Cash Receipts Journal (page CR1) with these headings: Date, Account Cr., Memo, Folio, Accounts Receivable Cr., Sales Discounts Dr., Sales Paint & Supplies Cr., Sales Wallpaper Cr., HST Payable Cr., General Ledger Cr., and Bank Dr. Set up a Cash Payments Journal (page CP1) with these headings: Date, Account Dr., Memo, Folio, Accounts Payable Dr., Purchase Discounts Cr., HST-ITC Dr., General Ledger Dr., Bank Cr., and Cheque No. (All payments will be by cheque unless otherwise stated.) Record each of the following transactions in the appropriate special journal. Be sure each transaction is recorded as a balanced entry. Post immediately any transaction affecting a customer’s or a supplier’s account. 20— Feb. 1 Paid rent for February, $2,500 plus 13% HST. Issued Cheque #13. (Continue numbering cheques sequentially. All payments will be by cheque unless stated otherwise.) NEL

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2 Paid telephone bill for January service, $145 plus HST. 3 Paid electricity bill for January service, $160 plus HST. 4 Sold paint and supplies to Beavis & Sons, $375 plus HST. Terms net 30 days. Sales Invoice #1. (This is your first entry in the Sales Journal. Be sure to post immediately to the customer’s account. This will ensure that the account is up to date.) 4 Paid heating (gas) bill for January, $480 plus HST. 7 Bought from Major Office Supplies, on terms n/30, on Invoice #122 dated February 5, office supplies worth $240, and warehouse supplies worth $210. Add HST. (This is the first entry in the Purchase Journal. Since this journal does not have special columns for office and warehouse supplies, two lines will be needed in the Other Accounts column. However, only one amount for HST is needed, and only one amount for Accounts Payable is needed.) Be sure to post immediately to this supplier’s account to keep the account up to date. 7 Cash sales this week: paint and supplies, $2,400, and wallpaper, $800. Add HST. 8 Received Invoice #87 dated February 5 from Reynolds Paper Co. for purchase of wallpaper, $2,600 plus HST. Terms are n/30. 10 Sold on account to Jay-Mar Co., paint and supplies, $550 plus HST. Terms n/30. Sales Invoice #2. (Continue numbering sales invoices sequentially.) 10 Sold on account to Dayson & Son, wallpaper, $800 plus HST. Terms n/30. 12 Sold on account to S. Miller, paint and supplies, $300, and wallpaper, $300; plus HST. Terms n/30. 14 Cash sales this week: paint and supplies, $2,200, and wallpaper, $1,200. Add HST. 15 Bought insurance policy on building and contents, $840 (assume this insurance is tax exempt). Paid by cheque. (Insurance Prepaid) 21 Cash sales this week: paint and supplies, $1,600, and wallpaper, $800. Add HST. 25 Bought additional wallpaper from Reynolds Paper on Invoice #98 dated February 24, terms n/30; $1,000 plus HST. 28 Cash sales this week: paint and supplies, $1,400, and wallpaper, $900. Add HST. 28 Paid for gas and oil for the truck used for occasional deliveries of goods to customers, $82.49 (including $9.49 HST). Taxes on gasoline vary from province to province; therefore, for the purposes of this case study, HST will be applied as with other purchases of products and services.

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AT MONTH-END 1. Total, balance, and rule the special journals. 2. Post all entries from the special journals as discussed in this chapter. Post the journals in this order: Purchase Journal, Sales Journal, Cash Receipts Journal, and Cash Payments Journal. By posting in this order, you may occasionally see the dates of transactions out of sequence. This is normal. 3. Finally, prepare a trial balance on February 28, 20—. Be sure to doublecheck that the total of the schedule of Accounts Receivable is equal to the balance in the Accounts Receivable Control account. As well, check to see that the total of the schedule of Accounts Payable is equal to the balance in the Accounts Payable Control account.

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● record adjustments on sales and purchases for goods returned or damaged, including adjustments to GST/HST and provincial sales tax ●● record sales discounts and purchase discounts for early payment of accounts

IMPORTANT TERMS USED IN THIS CHAPTER Cash Refund Cash on Delivery (COD) Credit Note Credit Terms Purchase Discounts Purchase Returns & Allowances Sales Discounts Sales Returns & Allowances

CHAPTER

7

CREDIT NOTES, REFUNDS, AND DISCOUNTS

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A

Fun Fact Every year, a team of certified public accountants spends an average of 1,700 hours prior to Oscar night counting the Academy Awards ballots … by hand.

s discussed and practised in previous chapters, a business earns its primary revenue (its main revenue) through the sale of merchandise and/or service. We have learned that the balance in the Sales account represents the total of all sales—that is, all cash sales and all sales on account—and the balance in the Purchases account represents the total of all merchandise that was acquired for resale, whether purchased for cash or on account. In this chapter, we will look at other factors that affect sales and purchases. Specifically, we will look at (1) unsatisfactory merchandise that has been returned by customers (called returns); (2) price adjustments for defective merchandise that customers have decided to keep (called allowances); and (3) discounts offered to customers for early payment of their invoices.

CREDIT NOTES AND REFUNDS ON SALES If a customer returns goods that are not wanted, our sales are reduced because the goods have come back. The same applies if our customer asks for a price reduction because the goods are damaged but the customer has decided to keep them anyway. These reductions in sales can be recorded in two ways: (1) Debit entries can be made to the Sales account, thus reducing the balance directly; or (2) debit entries can be made to an account called Sales Returns & Allowances, which indirectly reduces the Sales account. Sales Returns & Allowances is a contra-revenue (or negative-revenue) account. Revenue accounts usually have credit balances, but a contra-revenue account will have a debit balance so as to reduce the total revenues. For example, Total Sales for the Month Minus: Sales Returns & Allowances Net Sales

$15,450.00 850.00 $14,600.00

The reason for showing sales in one account and the returns and allowances in another account is to make the returns and allowances more evident so that management can make better business decisions. The percentage relationship between total returns and allowances and total sales will be of interest to the owner of the business because such a comparison may point out a level of customer dissatisfaction. This dissatisfaction could, in turn, result in loss of future sales and even a loss of customers. It might also point out the inferior quality of merchandise purchased for resale, possibly making it necessary to look for a new supplier. Customers who paid cash for their merchandise usually expect to receive a cash refund when the goods are returned. This refund is usually paid out of the cash register or by cheque. On the other hand, customers who bought their merchandise on account can expect to receive an adjustment to their account for any goods returned or for defective goods that have been price-adjusted. A credit note (Figure 7.1) would be given to a customer in such a situation. Notice that the credit note is really just an invoice with negative amounts. NEL

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Figure 7.1  Credit Note CREDIT NOTE

KBC DECORATING CO. 79 Buffalo Place Paris, Ontario N3L 0N0 TO

David Rayerson 307 Roblin Road Paris Ontario N3L 0G0

DATE INVOICE # FOB Via Terms Ref #

Quantity

Size

Item

–1 case

12 cm

24-740A

–2 cases

30 cm

33-257A

August 12, 20— CN0023 Warehouse Pick up net 30 days 223 Price

Amount

Paint Brush

@ 23.00/case

–23.00

Paint Rollers

@ 40.00/case

–80.00

Subtotal

–103.00

HST 13% (Reg. #987654321)

–13.39

Total

–116.39

Since the original sale to the customer was made in the Sales Journal, the entry for the credit note should be recorded in the Sales Journal as well. For the credit note entry, however, the amounts will be shown in brackets to indicate that they are negative amounts to be subtracted, rather than added, when the columns are totalled. Figure 7.2 shows typical sales on account and a credit note as they would appear in the Sales Journal. Recording a credit note in the Sales Journal simplifies posting because the “negative” invoice amount would be posted as a credit to the customer’s account (reducing the amount owing by that customer) and the column totals would be posted as usual. No other special posting is required. An alternative method of recording the credit note is to make a General Journal entry. This might be more practical when the accountant wants the Figure 7.2  Recording a Credit Note in the Sales Journal SALES JOURNAL DATE

20— Aug.

NAME OF CUSTOMER

1 3 6 8

Rodin, Trevor Gar, Harvey Gar, Harvey Meeta, Taj

INV. NO.

TERMS

142 n/10 143 n/30 CN 144 n/20

F.

ACCOUNTS REC. DR.

1 1 ( 2

5 9 3 4

8 0 3 4

77 97 90) 08 5 5 9 92

SALES CR.

1 1 ( 2 4

4 6 3 1 9

0 9 0 6 5

HST PAY. CR.

50 00 00) 00 50

1 8 2 1 ( 3 2 8

27 97 90) 08

6 4 42

NEL

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Figure 7.3  Recording a Credit Note in the General Journal

Aug.

3

6

A/R Gar, Harvey Sales HST Payable Sale on account. Inv #143, n/30.

1 9 0 97 1 6 9 00 2 1 97

Sales Returns & Allowances HST Payable A/R Gar, Harvey Credit note for returned goods

3 0 00 3 90 3 3 90

returns and allowances posted to the Sales Returns & Allowances account rather than directly to the Sales account. Figure 7.3 shows the original sale entry and the credit note in the General Journal. Notice that the credit note is the reverse of the original sale entry. The debit entry to Sales Returns & Allowances reduces the overall sales; and the debit entry for the tax reduces the balance of the tax account as well. Refunds on cash sales are accounted for in much the same way. The original cash sale was recorded in the Cash Receipts Journal, so the refund for returned goods should also be recorded there. If the refund is paid out of the cash register, it will be deducted from the daily cash sales. Figure 7.4 shows the cash sales and refunds for the day on August 9. Alternatively, if the accountant wants refunds to be shown in a contra-revenue account, Sales Returns & Allowances is credited as shown on August 23. Regardless of the method used, notice that the refund is recorded in brackets because it is deducted from the day’s sales and that the difference between the amounts is shown in the Bank column to reflect the day’s deposit. Sometimes a refund is too large to be paid out of the cash register. In that case, a cheque would be issued and recorded in the Cash Payments Journal. Figure 7.5 shows this refund charged to Sales Returns & Allowances. Notice too that the tax is adjusted in the Account Dr. column. There are no special columns for this transaction; therefore, all amounts are entered in the General Ledger column. Figure 7.4  Recording Cash Refunds in the Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

Aug. 9 Sales 9

ACCOUNT CREDIT

MEMO

Daily sales Refunds

23 Sales Daily sales 23 Sales Returns & Allowances Refunds

F.

ACCTS. REC. CR.

SALES DISC. DR.

SALES CR.

HST PAY. CR.

GEN. LED. CR.

BANK DR.

2 7 5 0 00 ( 7 5 00)

3 5 7 50 ( 9 75)

3 1 7 0 00

4 1 2 10 ( 1 5 60) ( 1 2 0 00) 3 5 6 6 50

3 0 2 2 75

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Figure 7.5  Recording a Refund in the Cash Payments Journal CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

MEMO

Aug. 10 Sales Returns & Allowances

F.

ACCTS. PAY. DR.

PURCH. DISC. CR.

PURCH. DR.

HST-ITC DR.

GEN. LED. DR.

BANK CR.

CH. NO.

7 5 0 00 Refund

HST Payable

9 7 50

8 4 7 50 148

PRACTICE EXERCISE 1 (a) Set up a Sales Journal with the same headings as those in Figure 7.2. (b) Record the following transactions. Add 13% HST to each sale and each refund. Sales invoices will be numbered sequentially, beginning with #25. All sales are on terms of net 30 days. Credit notes will have the original sales invoice number plus “CN,” such as “25CN.” Be sure to record all credit notes and related taxes in brackets, such as (75.00). 20— Oct.

3

Sold $280 worth of merchandise to Alfred Mayer, Invoice #25.

8 8

Sold merchandise to Malcolm Cheeter on account, $310. Issued credit note to Alfred Mayer for goods returned, $75 plus HST, on Invoice #25. Issued credit note for $80 plus HST to Malcolm Cheeter for damaged goods on Invoice #26. Sold $565 worth of merchandise to Marten Thuli on account. Issued credit note for $100 plus HST to Marten Thuli as price adjustment for defective goods that he will keep. Sold merchandise to Alfred Mayer on account, $325. Issued credit note to Alfred Mayer for damaged goods, $125 plus HST, on his latest invoice. Sold $430 worth of merchandise to Wallace Lu on account. Issued credit note to Wallace Lu, $135 plus HST, for goods returned.

9 12 14 21 23 27 28

(c) Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 2 Record the credit notes from Exercise 1 in the General Journal. These credit notes will be charged to Sales Returns & Allowances. Refer to Figure 7.3 to help you with these entries. PRACTICE EXERCISE 3 (a) Set up a Sales Journal with the same headings as in Figure 7.2. However, two tax columns will be required: GST Payable Cr. and PST Payable Cr. NEL

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Credit Notes, Refunds, and Discounts

(b) Record the transactions in Practice Exercise 1. Add 5% GST and 7% PST to each sale and each refund. Sales invoices will begin with #25. All sales are on terms of net 30 days. Credit notes will have the original sales invoice number plus “CN,” such as “25CN.” Be sure to record all credit notes and related taxes in brackets, such as (75.00). (c) Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 4 Record the credit notes from Exercise 3 in the General Journal. These credit notes will be charged to Sales Returns & Allowances. Refer to Figure 7.3 to help you with these entries.

SALES DISCOUNTS Most businesses rely on prompt payments from customers in order to have cash available to pay their own bills. Therefore, it is important to encourage customers to pay promptly. Sometimes, this can be done by offering special terms on credit sales. The prompt collection of accounts reduces the risk of a customer’s account balance becoming uncollectible; and it ensures that there is sufficient cash available to meet the ongoing requirements for paying bills. Credit terms stipulate how long the credit period is and what discount, if any, may be taken for early payment of the invoice. Credit terms may differ from one company to another, and sometimes even from customer to customer. They may vary according to the type of customer, the volume of purchases made by the customer, and the ability of the customer to pay the account. A common term of credit is net 30 days (often written as “n/30”), meaning the full amount of the invoice is due 30 days from the date of the invoice. Other terms or combinations of terms will sometimes be offered, such as 2/10, n/30; or 1/20, n/60; or 3/5, n/15. The term “2/10, n/30” means that the customer may deduct 2% of the pretax value of the goods if the payment is made within 10 days of the invoice date; otherwise, payment of the full amount of the invoice is due 30 days from the date of the invoice. This 2% discount is typically recorded in the Cash Receipts Journal as a debit to the Sales Discounts account. Sales Discounts is a contra-revenue account and, like Sales Returns & Allowances, decreases the total sales revenue. To illustrate the use of sales discounts, we will assume that on August 6, merchandise was sold to Jack Harper for $500 plus tax, for a total of $565 on Sales Invoice #16. The terms were 2/10, n/30. If Mr. Harper wants to take advantage of the 2% discount, he must pay the invoice no later than August 16. If he pays within the discount period, the amount of the discount will be $500 × 2% = $10. Therefore, the amount to pay off the invoice will be $565 – $10 = $555. Figure 7.6 shows this payment and discount in the General Journal. Notice that Sales Discounts is debited because it accounts for the difference between the amount of the invoice and the amount of cash we accepted in settlement of it. NEL

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Credit Notes, Refunds, and Discounts

Figure 7.6  Recording a Sales Discount in the General Journal

Aug.

16

Cash Sales Discounts A/R Harper, Jack Rec’d on account, less 2% discount.

5 5 5 00 1 0 00 5 6 5 00

Figure 7.7 shows the same transaction as it would be recorded in the Cash Receipts Journal. Here the transaction is recorded as a single-line entry because there is a special column to capture each of the necessary amounts—Accounts Receivable, Sales Discount, and Bank. To know how these entries affected Jack Harper’s ledger account, see Figure 7.8 which shows the sale on August 6 and the cash received on August 16. The sale on the 6th was posted from the Sales Journal as usual, and a notation was made in the Discount Date column of the date on which the discount would expire. In this case, the discount expired on August 16, that is, 10 days after the date of the invoice. Then, when Harper’s payment was received on the 16th, the full amount of the invoice ($565 recorded in the Accounts Receivable Cr. column of the Cash Receipts Journal) was posted to Harper’s account in order to fully clear this invoice. The actual amount paid on this invoice, $555, does not appear in the customer’s account, nor does the amount of the discount, except perhaps as a notation in the Memo column. Figure 7.7  Recording a Sales Discount in the Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

Aug. 16

Harper, Jack

MEMO

On acct. –2%

126

SALES CR.

SALES DISC. DR.

ACCTS. REC. CR.

F.

5 6 5 00

HST PAY. CR.

GEN. LED. CR.

BANK DR.

5 5 5 00

1 0 00

Figure 7.8  Customer’s Ledger Account ACCOUNT

A/R Harper, Jack

ACCT. NO. SHEET NO.

DATE

20— Aug. 6 16

MEMO

inv #16, 2/10, n/30 on inv #16 –2% disc

DISC. DATE

F.

Aug. 16 SJ4 CR7

DEBIT

CREDIT

5 6 5 00

DR. CR.

Dr. 5 6 5 00

126 1 BALANCE

5 6 5 00 ∅

NEL

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PRACTICE EXERCISE 5 Complete this chart by filling in the blanks and totalling the columns where shown. (Discounts, if eligible, are to be calculated on the net pre-tax invoice value; that is, on the pre-tax value after the credit note is deducted.) Assume each invoice and credit note includes 5% GST (no PST). To calculate how much GST is included, multiply by 5 and divide by 105. Date of Invoice

Amount of Invoice ($)

Jan. 3 Jan. 5 Jan. 7 Jan. 9 Jan. 12 Jan. 15 Jan. 19 Jan. 23 Jan. 24 Jan. 29

425.50 230.25 99.75 137.75 393.75 186.95 73.50 267.75 50.65 157.50

Totals

?

Terms

Discount Date

2/10, n/30 n/30 1/10, n/20 3/20, n/30 2/10, n/30 2/15, n/30 1/10, n/30 2/5, n/15 n/20 2/10, n/30

______ ______ ______ ______ ______ ______ ______ ______ ______ ______

Credit Notes ($)

30.25 10.00 15.00 8.50

14.00 ?

Date of Cash Received

Discount Amount

Amount Received

Jan. 12 Jan. 31 Jan. 17 Jan. 30 Jan. 21 Jan. 31 Jan. 29 Jan. 28 Feb. 13 Feb. 8

______ ______ ______ ______ ______ ______ ______ ______ ______ ______

______ ______ ______ ______ ______ ______ ______ ______ ______ ______

?

?

PRACTICE EXERCISE 6 (a) Set up a Cash Receipts Journal using the headings from Figure 7.7. (b) Record the following transactions. Discounts will be calculated on the pre-tax value of the invoice; that is, on the value of the goods and services before taxes were added. Assume all payments are eligible for the discount. 20— Dec.

2

Received payment from Emmett Little on Invoice #456 for $1,224 plus GST and 7% PST. Terms of the invoice were 2/10, n/30. 6 Customer P.J. Krub sent a cheque in payment of Invoice #480 for $344 plus GST and 7% PST. Terms were 1/5, n/15. 9 Robert Dindaeng sent cheque to pay Invoice #477 for $650 plus GST and 7% PST. Terms of sale were 3/10, n/30. 15 Anna Aranya paid Invoice #481 for $792 plus GST and 7% PST. Terms of account were 2/15, n/30. 19 Received payment from C. Ratchada on Invoice #488 for $1,450 plus GST and 7% PST. Terms were 1/5, n/20. 20 Cheque received from N. Bangkaen to settle Invoice #490 for $444 plus GST and 7% PST. Terms were 2/10, n/30. (c) Total, balance, and rule the journal. (No posting is required.) NEL

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Credit Notes, Refunds, and Discounts

PRACTICE EXERCISE 7 (a) Record the Cash Receipts Journal transactions from Practice Exercise 6 assuming 13% HST was added. Discounts will be calculated on the pre-tax value of the invoice; that is, on the value of the goods and services before taxes were added. Assume all payments are eligible for the discount. (b) Total, balance, and rule the journal. (No posting is required.)

CREDIT NOTES AND REFUNDS ON PURCHASES A business that buys merchandise for resale also could encounter damaged goods in its shipments received, or could request an allowance on the price. In such cases, the supplier would issue a credit note for the value of the adjustment. These adjustments will have the effect of decreasing the total of Purchases. One method of recording the credit note is to make a negative entry in the Purchase Journal, as shown on August 8 in Figure 7.9. The amounts are entered in brackets and would be subtracted from the other amounts in the column when the column is totalled at the end of the month. When adjustments are made on items that are not for resale (such as on the purchase of assets and other expenses), the original account that was debited when the items were purchased must be credited when the adjustment is recorded. Look again at Figure 7.9. The credit note from Hi-Lux Office Store on August 28 is recorded by entering the amounts in brackets and charging the entry back to the original accounts. An alternative is to record the credit note through a contra-expense account called Purchase Returns & Allowances. By doing this, the books would show more clearly the total amount of adjustments on purchases of merchandise, which in turn would provide clearer information on which better business decisions could be made. Excessive returns might indicate a need to change suppliers or to change to a better quality of product. Figure 7.10 shows the same credit note

Figure 7.9  Recording a Credit Note in the Purchase Journal PURCHASE JOURNAL ACCOUNT DEBIT

ACCOUNT CREDIT INVOICE DATE

20— Aug.

NAME OF SUPPLIER

INV. NO.

TERMS

n/30

2

Red River Co.

78

8

Red River Co.

CN

23

Hi-Lux Office Store

120

28

Hi-Lux Office Store

CN

n/60

F.

ACCTS. PAY. CR.

HST-ITC DR.

PURCHASES DR.

OFFICE SUPPL. DR.

W’HSE SUPPL. DR.

OTHER ACCOUNTS DEBIT ACCOUNT DR

F.

AMOUNT

3 3 9 00

3 9 00

3 0 0 00

( 6 7 80)

( 7 80)

( 6 0 00)

9 6 0 50

1 1 0 50

Office Equip.

8 5 0 00

( 9 0 40)

( 10 40)

Office Equip.

( 8 0 00)

NEL

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Figure 7.10  Recording a Credit Note in the General Journal

Aug.

2

A/P Red River Co. Purchase Returns & Allowances HST-ITC Credit note on damaged goods on Invoice #78.

6 7 80 6 0 00 7 80

Figure 7.11  Recording a Refund on Purchases in the Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

MEMO

F.

Aug. 22 Purchase Rtns & Allow. HST-ITC

Refund

29 Office Supplies Expense HST-ITC

Refund

ACCTS. REC. CR.

SALES DISC. DR.

SALES CR.

HST PAY. CR.

GEN. LED. CR.

BANK DR.

5 5 00 7 15

6 2 15

2 1 30 2 77

2 4 07

from Red River Co. that was illustrated in the Purchase Journal in Figure 7.9. This time, however, the credit note is charged to Purchase Returns & Allowances. The entry is the reverse of a typical purchase entry, but rather than credit the Purchases account directly, this adjustment is charged to Purchase Returns & Allowances. Recording refunds on purchases is handled very much the same way as refunds on sales. Figure 7.11 shows a refund received on merchandise that was returned to the supplier. Notice that the entries to Purchase Returns & Allowances and to HST-ITC are recorded in the General Ledger column because there are no special columns to accommodate this kind of transaction. Both accounts are credited to reduce the total purchases and the total HST. Figure 7.11 also shows a refund on a non-merchandise item; in this case, office supplies. Again, the amounts are in the General Ledger column because no special columns are available for this transaction. PRACTICE EXERCISE 8 (a) Set up a Purchase Journal using the headings in Figure 7.9 and record the following purchase-related transactions. Add 15% HST to all purchases and all credit notes. All returns and allowances are to be charged back to the original accounts.

NEL

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20— Jun.

Credit Notes, Refunds, and Discounts

119

2 Bought merchandise from I.P. Lipton on account, $2,500. Invoice #225, terms 2/10, n/30. 8 Returned damaged merchandise to I.P. Lipton. The company granted credit note for $185. 9 Bought supplies for the office, $165, from Marshall Supplies on invoice #34, terms n/30. 13 A small quantity of office supplies bought on June 9 was returned, $18. Received credit note. 19 Bought merchandise from T.E. Tanjer on terms n/30. Received invoice #804 for $920. 24 T.E. Tanjer has granted a price adjustment because of slightly defective merchandise delivered on our order of June 19. Received a credit note for $18.80.

(b) Total, balance, and rule the journal. (No posting required.) PRACTICE EXERCISE 9 Refer to Practice Exercise 8. Assume this business operates in Saskatchewan. (a) Set up the Purchase Journal like Figure 7.9. Change the heading of the tax column to GST-ITC. (b) Record the transactions. Add 5% GST and 6% PST to all purchases and credit notes. PST will not apply to merchandise for resale. (c) Total, balance, and rule the journal. (No posting required.) PRACTICE EXERCISE 10 Record the following transactions in the General Journal. Adjustments on merchandise are to be recorded as credits to Purchase Returns & Allowances. Adjustments on other assets and expenses are to be charged back to their original accounts. 20— Jul. 6 Returned damaged merchandise to supplier, Wyncott Ltd., and received credit note, $362.25 plus 13% HST. 12 Requested price adjustment on slightly defective merchandise purchased from Blacq & Bleu Co. on invoice #944. The company has issued a credit note for $87.50 plus HST. 14 Returned damaged office supplies bought from Gardier Office Hut on invoice #61, $26.40 plus HST. 17 Sent back damaged desk that was for use in our office, $555 plus HST. Modern Furniture Co. issued credit note on original invoice #79.

NEL

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20 LeBeau Co. issued credit note to us for merchandise returned, $750 plus HST. The original invoice was #866. 21 Received a credit note for merchandise returned to DIY Workshop on invoice #044, $70 plus HST. PRACTICE EXERCISE 11 Refer to Practice Exercise 10. Record the adjustments in the General Journal. Add 5% GST and 8% PST. (PST will apply to non-merchandise items only.) PRACTICE EXERCISE 12 (a) Set up a Cash Receipts Journal using the headings in Figure 7.11. (b) Record the following transactions. All adjustments to purchases of merchandise are to be charged to Purchase Returns & Allowances. 20— Oct.

3 Cash sales, $640 plus 13% HST. 7 Received refund from supplier for damaged merchandise returned, $78.50 plus HST. 10 Returned office supplies to our supplier and received a refund, $45 plus HST. 14 We applied for adjustment to our electricity bill because of an error on the September meter reading, $13.50 plus HST. (Assume the electric utility has chosen to issue a refund cheque to us rather than adjust our account.) 17 Received refund from our supplier as adjustment on damaged merchandise we have chosen to keep, $110 plus HST. 22 Received refund for the return of damaged merchandise, $88 plus HST. (c) Total, balance, and rule the journal. (No posting is required.)

PRACTICE EXERCISE 13 Refer to Practice Exercise 12. (a) Set up the Cash Receipts Journal using the headings in Figure 7.11. Two tax columns will be required: GST Payable Cr. and PST Payable Cr. (b) Record the transactions. Add 5% GST and 7% PST. (c) Total, balance, and rule the journal. (No posting is required.)

PURCHASE DISCOUNTS Purchase discounts are handled in the same way as sales discounts. Discounts taken on the purchase of merchandise are recorded in the contra-expense account called Purchase Discounts. Taking advantage of available discounts helps to reduce the cost of the merchandise. NEL

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Credit Notes, Refunds, and Discounts

Figure 7.12  Recording a Purchase Discount in the Cash Payments Journal CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

Aug. 24 A/P A.C. Suppliers Ltd.

MEMO

Paid on account –2%

F.

ACCTS. PAY. DR.

9 4 5 0 00

PURCH. DISC. CR.

PURCH. DR.

GST-ITC DR.

GEN. LED. DR.

BANK CR.

CH. NO.

9 2 7 0 00 82

1 8 0 00

Let’s assume that $9,000 worth of merchandise was purchased on August 14 from A.C. Suppliers Ltd. on terms of 2/10, n/30. To take advantage of the 2% discount, the invoice must be paid within the 10-day discount period; therefore, it must be paid by August 24. Figure 7.12 shows the payment of this invoice, including the discount taken. The full amount of the invoice, $9,450, must be entered in the Accounts Payable column so that the invoice can be fully cleared from A.C. Suppliers’ account when this entry is posted. The discount is entered in the Purchase Discounts column. The 2% discount is based on the pre-tax value of the goods ($9,000 × 2% = $180), and it represents the difference between the amount of the original invoice, $9,450, and the amount of the payment, $9,270. Figure 7.13 shows the same payment transaction in the General Journal. Let’s look at one more example, this time with the purchase, the credit note, and the discount upon payment. We will assume that we bought merchandise from Reining & Sons on August 14 for $4,068 ($3,600 plus $468 HST). The terms were 2/10, n/30. On August 16, we returned $100 worth of the merchandise (plus HST) because of damage. The supplier gave us a credit note for $113. We are entitled to a discount of 2% on the remaining $3,500 worth of goods ($3,600 – $100 = $3,500) if we pay the invoice on the 24th. The discount is $3,500 × 2% = $70. The debit to the Reining & Sons account is $4,068 – $113 = $3,955 to clear the invoice from their account. And the credit to Bank is $3,955 – $70 discount = $3,885. Figure 7.14 shows this series of transactions in the General Journal. (Although the rate of tax and the taxation system—HST vs GST + PST—varies from province to province, this sequence of journal entries will remain the same.) Purchase Discounts, like Purchase Returns & Allowances, will have the effect of decreasing the overall cost of merchandise for resale. But if discounts are taken on items other than merchandise, such as equipment or supplies, the original asset or expense account should be reduced directly by the amount of the Figure 7.13  Recording a Purchase Discount in the General Journal

Aug.

24

A/P A.C. Suppliers Ltd. Purchase Discounts Bank Paid on account, less 2% discount.

9 4 5 0 00 1 8 0 00 9 2 7 0 00

NEL

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Figure 7.14  Recording a Purchase, Return, and Payment with Discount

Aug.

14

16

24

Purchases HST-ITC A/P Reining & Sons Terms 2/10, n/30. A/P Reining & Sons Purchase Returns & Allowances HST-ITC Credit note for damaged goods A/P Reining & Sons Purchase Discounts Bank Paid on account, less credit note and 2% discount ($3500 2% $70)

3 6 0 0 00 4 6 8 00 4 0 6 8 00

1 1 3 00 1 0 0 00 1 3 00

3 9 5 5 00 7 0 00 3 8 8 5 00

Figure 7.15  Recording Discounts on Non-merchandise Items

Aug.

20

24

Office Equipment HST-ITC A/P Forest Computers New computer; terms 2/10, n/30.

3 0 0 0 00 3 9 0 00

A/P Forest Computers Office Equipment Bank Paid on account, less 2% discount on pre-tax value ($3,000 2% $60).

3 3 9 0 00

3 3 9 0 00

6 0 00 3 3 3 0 00

discount. Figure 7.15 shows the purchase of a computer on terms of 2/10, n/30 and the subsequent payment that takes advantage of the eligible discount. Notice that the discount is deducted directly from the asset, Office Equipment.

CASH ON DELIVERY (COD) Goods ordered on a cash on delivery (COD) basis are treated as cash purchases; therefore, the transaction is recorded in the Cash Payments Journal when the invoice and the goods arrive at the door. This is because the delivery driver will hand over the goods only when paid. Goods are usually sold on a COD basis to customers who have not established a credit record or to those who have a poor NEL

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123

credit history. In short, COD transactions are cash transactions; therefore, they are entered in the Cash Payments and Cash Receipts Journals. PRACTICE EXERCISE 14 (a) Set up a Cash Payments Journal with headings as in Figure 7.12, then record the following transactions. Assume all invoices are eligible for discounts, based on the pre-tax value. Each invoice includes 5% GST. Number the cheques beginning with #41. 20— Aug. 5 Issued cheque to supplier XL Industries, in payment of invoice #65 for $241.50. Terms of the invoice were 2/10, n/30. 12 Paid invoice #896 for $682.50 owing to Midwest Suppliers. Terms were 3/10, n20. 13 Sent cheque in payment of invoice #456 owing to Sarakham Ltd., $215.25. Terms on invoice were 1/5, n/15. 21 Paid invoice #224 for $380.10 owing to FDT Manufacturing Co. Terms were 2/15, n/30. 23 Issued cheque to Passmann Co. for invoice #67 of $741.30. Terms were 1/5, n/15. 26 Paid Castle Builders for invoice #008, $510.30, with terms of 3/15, n/45. (b) Total, balance, and rule the journal. (No posting is required.) PRACTICE EXERCISE 15 Refer to Practice Exercise 14. Assume each invoice includes 13% HST. Record the transactions in the Cash Payments Journal, taking advantage of all discounts. PRACTICE EXERCISE 16 Refer to Practice Exercise 14. Assume each invoice includes 5% GST and 8% PST (Manitoba). Record the transactions in the Cash Payments Journal, taking advantage of all discounts. PRACTICE EXERCISE 17 (a) Set up a Cash Receipts Journal with headings as in Figure 7.4. (b) Set up a Cash Payments Journal with headings as in Figure 7.5. The first cheque number will be #70. (c) Record these transactions. Refunds on merchandise will be charged to Sales Returns & Allowances and Purchase Returns & Allowances. Invoice amounts include 5% GST (Alberta) unless otherwise stated. Any eligible discounts will be based on the pre-tax value. NEL

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20— Nov.

Credit Notes, Refunds, and Discounts

4 Paid Natchke Fabrics for Invoice #367, $660.45 less 2% discount. 6 Paid Robinson Ltd. $419 for Invoice #112, which had terms of n/30. 8 Received payment from Sellers & Shaw on invoice #665, $1,900.50 less 3% discount. 8 Gave refund of $64.90 plus tax to a customer who returned damaged merchandise. 9 Received cheque from William Wight to cover Invoice #649, $372.75 less 3% discount. 12 Paid Walton Fixtures Ltd. for Invoice #9029, $302.40 less 1% discount. 14 Received refund for unwanted merchandise returned to supplier, $53 plus tax. 14 Received money order for $325.50 from Cambridge Auto Sales for balance owing on Invoice #683. Invoice had terms of n/45. 17 Customer returned merchandise sold to him last week. We refunded $71.40 plus tax, by cheque. 20 Issued cheque to The Stationery Store for Invoice #1012. Note: The invoice for $766.50 was dated November 2 and carried terms of 2/10, n/30. 24 Issued cheque to Dahl Services for Invoice #0039, $220.50 less 2% discount. 25 Received payment from Peter Seung for Invoice #694, $631.47 less 3% discount. 30 Received refund for the overcharge on an order of letterhead and envelopes for office, $40 plus tax. (d) Total, balance, and rule the journals as usual. (No posting is required.)

PRACTICE EXERCISE 18 Refer to Practice Exercise 17. Set up the cash journals as stated. Assume all invoices include 13% HST unless otherwise stated. Any eligible discounts will be based on the pre-tax value. Supplementary Exercises EXERCISE 7-1: Open file SE-7-1. Complete the sales journal by adding credit notes and additional sales invoices. Choose the tab for the tax system used in your province. EXERCISE 7-2: Open file SE-7-2. Complete the purchase journal by adding credit notes and additional purchase invoices. Choose the tab for the tax system used in your province. NEL

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EXERCISE 7-3: Open file SE-7-3. Complete the cash receipts journal by calculating sales discounts. EXERCISE 7-4: Open file SE-7-4. Complete the cash payments journal by calculating purchase discounts. THINK ABOUT IT! 1. Today you purchased merchandise on an invoice that has terms of 2/10, n/30. Would you receive a refund if you return part of the order tomorrow? Why? 2. If you had purchased merchandise for cash, would you receive a credit note if defective goods were returned? Why? 3. Some businesses prefer to record returns and allowances in specific accounts set up for that purpose, such as Purchase Returns & Allowances and Sales Returns & Allowances. Why? 4. Why do some businesses record returns and allowances directly to the Sales or Purchases accounts? 5. When defective office supplies are returned to the supplier, which account is credited? Why? 6. What is the meaning of the term “2/20, n/60”? 7. In which of the five journals would a COD purchase be recorded? a COD sale? Why?

CASE STUDY: KBC DECORATING CO. MARCH TRANSACTIONS In this chapter, you learned about accounting for credit notes, refunds, and discounts. You will now apply these concepts to the regular activities of KBC Decorating Co. From this point forward, some sale and purchase invoices will carry terms such as 2/10, n/30. If the invoice is paid within the discount period, the discount will be based on the pre-tax value of the goods. Credit notes and refunds should be recorded in the same journal as the original entry to which the credit note or refund relates. Take care to record these amounts in brackets as they are to be deducted from the accounts affected. 20— Mar. 1 Sold paint and supplies, $600, and wallpaper, $500, to K. Young Painting on terms of 2/10, n/30. Add 13% HST as usual. (Check last month’s Sales Journal to see what invoice number should be used.) 1 Paid rent for March, $2,500 plus HST. (Check last month’s Cash Payments Journal to see what cheque number should be used.) 3 Paid electricity bill for February, $184 plus HST.

NEL

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3 Paid heating (gas) bill for February, $510 plus HST. 3 Paid courier for the delivery of the goods to K. Young Painting, $45 plus HST. 4 Received payment from Beavis & Sons on Invoice #1. Check that company’s account to find amount owing. 5 Paid phone bill, $188.50 plus HST. 7 Paid Major Office Supplies for amount owing on Invoice #122. Check Major’s account to find amount owing. 7 Paid Reynolds Paper for amount owing on Invoice #87. 11 Received payment from K. Young Painting on Invoice #5. This invoice is paid within the discount period. 12 Bought paint and supplies from Coleman Industries, $3,000 plus HST, on Invoice #407 dated March 11. Terms 2/10, n/30. 12 Paid courier for delivering to us the goods bought from Coleman Industries, $38 plus HST. 12 Sold wallpaper to Beavis & Sons, $570 plus HST, on terms n/30. 14 Received payments from Dayson & Son, Jay-Mar Co., and S. Miller for the invoices owing. 15 Returned defective supplies to Coleman Industries on Invoice #407, $200 plus HST. The company has issued a credit note to us. 18 A couple of rolls of wallpaper sold to Beavis & Sons on the 12th are damaged. We issued credit note 6CN for $85 plus HST. 20 Made donation to the Cancer Society, $500, by cheque. 20 Bought paint and supplies, $3,500 plus HST, from Rainbow Supplies on Invoice #49, terms 1/10, n/30. 24 Found damaged goods in the order from Rainbow Supplies, $300 plus HST. The company has issued a credit note to us. 30 Paid Rainbow Supplies for the balance owing on Invoice #49. We have taken advantage of the eligible discount based on the pre-tax value. Look back at your entries in the Purchase Journal to find the pre-tax value of the original purchase and of the credit note. The difference between the two amounts is the base amount on which the discount is calculated. 30 Cash sales for the month: paint and supplies, $12,400, and wallpaper, $4,600. Add HST as usual. 30 During the month, we gave refunds to cash customers for goods that were returned damaged or unwanted: paint and supplies, $420, and wallpaper, $160. Add HST as usual. Since these amounts were paid from the cash register, make the necessary entry in the Cash Receipts Journal as a bracketed entry. 31 Paid for gas and oil for our own truck used for deliveries of goods to customers, $95 plus HST. NEL

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127

AT MONTH-END (a) Total, balance, and rule the special journals. When adding up the columns, be sure to subtract any amounts that are in brackets. (b) Post all entries to the ledger accounts. (c) Prepare a trial balance on March 31, 20—. Be sure to double-check that the total of the schedule of Accounts Receivable is equal to the balance in the Accounts Receivable Control account. As well, check to see that the total of the schedule of Accounts Payable is equal to the balance in the Accounts Payable Control account.

NEL

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CHAPTER OBJECTIVES

CHAPTER

8

After completing this chapter, you will be able to: ●● calculate and record the net GST/HST remittance ●● complete a GST/HST return ●● calculate the net GST/ HST remittance using the Quick Method

IMPORTANT TERMS USED IN THIS CHAPTER CRA (Canada Revenue   Agency)

REMITTING GST AND HST

NEL

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129

HOW GST/HST WORKS

Fun Fact The notorious Chicago crime boss Al Capone was finally brought down in 1931 by FBI accountants. Although Capone was alleged to be responsible for crimes ranging from bootlegging to murder, he was ultimately arrested and convicted for income tax evasion.

As introduced in earlier chapters, the federal sales tax on goods and services appears in two forms: the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). Each province decides which form of the tax will be applied and on what goods and services it will be based. All goods and services fall into three categories: those that are charged at the current rate of GST/HST, those that are zero-rated (0%), and those that are exempt from GST/HST. Zero-rated means that a business does not charge GST/HST when it sells goods or services, but can claim back any GST/HST-ITC that it paid when buying goods and services used to run its business. Examples of zero-rated goods and services include basic groceries, prescription drugs, and medical devices (such as hearing aids). Exempt means that GST/HST is not charged on goods or services sold and GST/HST-ITC cannot be claimed back from the government. Examples of exempt goods and services include residential housing, medical and legal aid services, and most services of financial institutions. A comprehensive explanation of these classes is available from CRA (Canada Revenue Agency).

REGISTERING FOR GST/HST Any business that plans to sell taxable goods and/or services must register with CRA unless the total annual sales are expected to be $30,000 or less. This registration can be done online, by phone, or by mailing or faxing the appropriate application form. The details of what information to provide and how to provide it are available from CRA. Once the business has registered and a business number has been assigned, the business will be required to show the first nine digits of that number on all sales invoices and sales receipts that show a charge for GST/HST.

VOLUNTARY REGISTRATION As mentioned earlier, a business does not have to register for GST/HST if its worldwide revenues are $30,000 or less. Such a business is considered a “small supplier.” However, small suppliers can register voluntarily. There are advantages to registering, such as being able to claim ITCs to recover the GST/HST that was paid on purchases. Once registered, though, the business is then committed to charging, collecting, and remitting GST/HST as usual, and it must file the necessary GST/HST tax returns on a regular basis. If a small supplier chooses not to register, it cannot charge GST/HST to its customers and it cannot claim back the ITCs it pays on its business purchases.

FILING THE GST/HST RETURN The amount of annual taxable sales and services determines how often a business is required to file a GST/HST Return. If annual taxable sales are $1.5 million or less, a return can be filed annually (only once a year). If annual taxable sales are between $1.5 million and $6 million, a return should be filed quarterly (every three months). If annual taxable sales are greater than $6 million, a return must NEL

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be filed monthly. CRA does make provision for more frequent filing if the business chooses to do so. Just before the end of each GST/HST reporting period, CRA will mail a GST/HST Return form (see Figure 8.1) to the business. This return must be completed, signed, and returned with the appropriate remittance within a certain period after the end of the reporting period. For example, a GST/HST return covering the first quarter of the year (January, February, and March) must be filed by the end of April. Or, if a small business files a return only once a year, it must do so within three months after the end of that one-year period. GST/HST returns may be filed online, at a financial institution, or by mail. Each method has certain terms and conditions. The GST/HST tax return shown in Figure 8.1 is the “working copy” available for download from the CRA web site. It is used for gathering all the necessary information in preparation for e-filing or filing by telephone. It is virtually identical to the official GST/HST return that would be used for filing the return by making a remittance at a financial institution. Here is a brief line-by-line explanation of the GST/HST Return in Figure 8.1. Line 101—Sales and Other Revenue: The amount entered on this line represents the total sales of all GST/HST-taxable goods and services (not including any provincial sales tax and GST/HST collected) during the reporting period. Zero-rated goods and services must be included in this amount. If the business uses the Quick Method of accounting for GST/HST (discussed later in this chapter), the total sales including GST/HST is entered here. Line 103—GST Collected and Collectible: This amount is the total GST/ HST charged to customers on the sales of goods and services during the reporting period. The balance in the GST/HST Payable account at the end of the reporting period is generally the amount to be recorded on this line. Line 104—Adjustments: Occasionally, adjustments must be made for recognizing GST/HST other than for amounts collected from customers during the reporting period. For example, if a customer’s account was written off in a previous reporting period, it was assumed at that time to be uncollectible and an adjustment was made for the GST/HST no longer collectible. If that account balance (or a portion of it) has now been recovered, the amount of the payment received from the customer is considered to include GST/HST, so it must now be reported. Line 105—Total GST/HST and Adjustments for Period: This amount is the total of lines 103 and 104. Line 106—Input Tax Credits (ITCs): This amount is generally the balance in the GST/HST-ITC account, which represents the total GST/HST paid on purchases of goods and services during the reporting period. Line 107—Input Tax Credit Adjustment: Any adjustments to GST/ HST–ITC are shown on this line. An example is GST/HST reported on a sale to a customer in a previous reporting period that is now assumed to be uncollectible. Since the tax charged at the time of the sale can no longer be collected, the business may record this lost GST/HST as an ITC adjustment, thus reducing the net tax to be remitted. (See also Line 104 above.) Line 108—Total ITCs and Adjustments: This amount is the total of lines 106 and 107. NEL

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Figure 8.1  GST/HST Tax Return (Working Copy)

Source: Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return Working Copy http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/ bspsbch/rtrns/wrkngcp-eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

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Line 109—Net Tax: The difference between line 105 and line 108 is entered here. If the amount is negative, a minus sign is written in the box next to the line number. A negative would occur if the ITC amount (line 108) is greater than the GST/HST collected (line 105). Line 110—Instalment Payments: If the company has chosen to file the GST/HST Return only once yearly, the total amount of instalment payments made during the year, if any, is entered here. Line 111—Rebates: Any rebates to be claimed are entered on this line. A separate form must be completed and attached if a rebate is being claimed. Details about rebates are available from CRA. Line 112—Total Other Credits: This amount is the total of lines 110 and 111. Line 113A—Balance: The difference between line 109 and line 112 is entered on this line. If the amount is negative, a minus sign is written in the box next to the line number. Line 205—GST on Acquisition of Taxable Real Property: Special rules apply to the purchase of real estate (real property). The amount of GST/HST paid on eligible real property is entered here. Line 405—Other GST/HST to Be Self-Assessed: Special rules apply to the self-assessment of GST/HST on imported goods or services and to the selfassessment of the provincial component of HST. The appropriate amounts for these items, if any, are entered here. Line 113B—Total Other Debits: This amount is the total of lines 205 and 405. Line 113C—Balance: This amount is the total of lines 113A and 113B. If the result is negative, a minus sign is entered in the box next to the line number. Line 114—Refund Claimed: If the amount on line 113C is negative, it is entered again on this line in order to claim the refund. Line 115—Payment Enclosed: If the amount on line 113C is positive, it is entered again on this line. A cheque for this amount should accompany the GST/HST return when it is filed. A balance of less than $2 on lines 114 or 115 is neither payable nor refunded.

REMITTING GST/HST The net amount of GST/HST may be remitted to CRA in one of the following ways: 1. by making payment to any chartered bank or participating financial institution 2. by mailing a cheque and the completed return to the GST Processing Centre or to any CRA Excise Office (some conditions apply) 3. by electronic payment The net amount referred to above is generally the difference between the GST/HST charged to customers on sales (GST/HST Payable) and the amount of GST/HST paid to suppliers on purchases (GST/HST-ITC). If, for example, a total of $1,500 of GST/HST was paid on the purchase of merchandise, supplies, and services during the reporting period and a total of $2,300 of GST/HST was collected from customers during the same reporting period, the net amount of GST to be remitted is $2,300 2 $1,500 5 $800. NEL

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Figure 8.2  Remitting GST in the Cash Payments Journal

Apr.

30

2 3 0 0 00

GST Payable GST-ITC Bank Remitted net GST for the fiscal quarter ending March 31; Cheque #72

1 5 0 0 00 8 0 0 00

CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

MEMO

20— Apr. 30 GST Payable

}

GST-ITC

Remittance

F.

ACCTS. PAY. DR.

PAGE PURCH. DISC. CR.

PURCH. DR.

GST–ITC DR.

GEN. LED. DR.

CP1

BANK CR.

CH. NO.

2 3 0 0 00

(1 5 0 0 00 ) 8 0 0 00 72

Figure 8.2 shows how the remittance of tax would be recorded in the General Journal and how the same entry would be recorded in the Cash Payments Journal. Although the Cash Payments Journal has a GST/HST–ITC column, the recommended procedure for recording the remittance is to make a separate line entry for GST/HST-ITC and to enter the amount in brackets in the General Ledger column. By this method, the ITC amount related to the remittance is posted separately, rather than as part of the column total at the end of the month.

KEEPING RECORDS CRA does not require that receipts and supporting documents be submitted with the GST/HST return; however, such receipts and documents must be kept for six years from the end of the period to which they apply. All regular financial books and records must also be kept in the event a CRA auditor requests them.

NIL RETURNS (NO TAX OWING) A GST/HST return must be filed for every reporting period, even if there is no net tax to remit and no claim for a refund. In other words, even if there are no business transactions in a reporting period, a return must still be filed. If a business does not file returns regularly, it may experience delays in getting refunds for later reporting periods. It can also expect to receive a reminder notice about the failure to file.

PENALTIES AND INTEREST A penalty is charged for any GST/HST return that is filed late, unless there is a $0 amount owing or a refund is claimed on that return. This penalty is calculated at the rate in effect at the time and may be combined with other penalties depending on circumstances. The penalty rate is subject to change. Details are available from CRA. NEL

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Interest will be charged at a prescribed rate on: ●● ●● ●● ●●

any overdue balance owing on a return late or insufficient installment payments any penalties assessed any other overdue GST/HST amount that must be remitted

Both the interest on overdue amounts and the interest on penalties are compounded daily.

DISCOUNTS OFFERED TO CUSTOMERS If a business offers a discount to a customer as an encouragement for early payment (as discussed in Chapter 7), such a discount does not affect the amount of GST/ HST charged and collected on the invoice. For example, if $100 worth of goods are sold to a customer (Alberta), $100 3 5% 5 $5 GST would be added to the invoice as usual; therefore, the customer is billed $105. Although the customer may take advantage of a 2% discount for early payment, the GST amount remains at $5. The customer would then pay $100 1 $5 GST 2 $2 discount 5 $103. Late-payment charges that may have been added to a customer’s account are not subject to GST/HST; therefore, such late charges do not affect the amount of tax remitted. Volume discounts offered to customers represent a change in the selling price of the goods or service. Therefore, the GST/HST is calculated on the discounted price.

DEPOSITS ON GOODS AND SERVICES A deposit received from a customer on the sale of merchandise or services does not affect the amount of GST/HST charged. The tax is calculated on the selling price of the goods, whether a deposit is paid or not. However, if the customer withdraws the order and forfeits the deposit, the amount of that deposit is then assumed to include GST/HST. For example, we will assume a customer orders $70,000 worth of goods from us and pays $15,000 as a deposit, but then cancels the order; the forfeited deposit of $15,000 is considered to include GST/HST, which must be reported.

SALES TO ABORIGINALS Special rules apply when making sales to Aboriginals, Aboriginal bands, band-empowered entities, and band councils. Most sales to Aboriginals made on reserves or delivered to reserves are treated as zero-rated. The purchase order must certify that the goods are being acquired for band activities. Sales made to non-Aboriginals living on the reserve, or to Aboriginals living off the reserve, are GST/HST-taxable as usual.

IMPORTED ITEMS Goods imported into Canada are generally subject to GST/HST, except zero-rated goods and those specified as “nontaxable importations” under the GST/HST legislation. Examples of nontaxable importations include medals, trophies, and NEL

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135

other prize items; goods imported by a charity that have been donated to it; and warranty replacement parts. GST/HST is calculated on the value of the goods after duty and excise taxes have been added. The importer is responsible for paying the tax at the same time as paying the duties. The GST/HST paid can then be claimed as an ITC. PRACTICE EXERCISE 1 Using the following information, complete a GST/HST return for the WinslowTrail Company (Business No. 555789000) for the reporting period July 1 to September 30, 20—. This return is due by October 31, 20—. 1. Total sales for the fiscal reporting period are $23,560.39. 2. Balance in the GST/HST Payable account at the end of the reporting period is $1,413.62. 3. Balance in the GST/HST-ITC account at the end of the reporting period is $849.55. 4. A customer’s account has been determined to be uncollectible because the customer has declared bankruptcy. The amount of GST/HST on the sale made to the customer was $42.19 and was reported as collectible on the GST/HST return for the previous reporting period. Since this tax will not be collected, an adjustment will be required on this return. Sign your name and title (General Manager) and date this return October 27, 20—. PRACTICE EXERCISE 2 Prepare a GST/HST return from the following information: the company name is Nelson Office Products and the Business Number is 345678900. The return covers the reporting period of April 1 to June 30, 20—. 1. Total sales for the fiscal period are $24,720.44 (before taxes); GST collected from customers during this period is $1,483.23. 2. Total GST/HST paid on purchases is $1,421.66. 3. A customer’s balance was written off last quarter as uncollectible because the customer had not been heard from for a long time. When the GST/HST return was filed for that quarter, a GST/HST adjustment was made for tax not collected. The customer, however, has now made a partial payment of $500 on the account. To calculate the portion of this payment considered to be GST collected, multiply this payment by 5/105 (assuming this business is in Alberta). Indicate the due date of this return. Sign your own name and title (Accounts Manager) and date this return July 29, 20—. PRACTICE EXERCISE 3 The R.A.M. Software Company files a GST/HST return on an annual basis. The company’s Business Number is 987000001. Complete the return for one year ending December 31, 20—, based on the following information: NEL

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1. A total of $66,975.32 HST was collected on taxable sales of $478,395.12. 2. $35,204.03 HST was paid on assets and expenses acquired during the year. 3. $30,000 HST has already been paid in instalments. No rebates are being claimed. Enter the due date of this return as April 30. Sign your own name and title (Office Manager) and date this return April 21.

USING THE QUICK METHOD The “Quick Method” is an alternative way to calculate the GST/HST that a business must remit to the government. Generally, this method can be used only by small businesses with total annual sales (including GST/HST) of not more than $400,000 in any four of the five most recent fiscal quarters. Not all sales are eligible for this method, and not all kinds of businesses can use this method. Details about eligibility are available from CRA. When the Quick Method is used, GST/HST is charged as usual on the taxable sales of goods and services. However, ITCs are not recorded on purchases of assets and expenses as practised in previous chapters. Instead, the total of the sales (including GST/HST) is multiplied by a prescribed remittance rate to arrive at the amount of GST/HST to be remitted. The remittance rates are lower than the usual GST or HST rates charged to customers. This means that the business remits only a part of the tax that it charged its customers. Since businesses that use the Quick Method cannot claim ITCs on most of their purchases, the part of the tax that they keep would account for the approximate value of the ITCs they would otherwise have been entitled to claim. The remittance rates depend on if the province in which the business operates is a participating province or a non-participating province, and if the sales are for goods or for services. “Participating” refers to those provinces that use HST and “non-participating” refers to all other provinces and territories. Figures 8.3A and 8.3B show the remittance rates in effect at the time this textbook was written.

EXAMPLES OF THE QUICK METHOD The following examples show how the Quick Method works. In each case, we will assume the business meets the eligibility requirements for using the Quick Method and that the business files quarterly GST/HST returns. Refer to Figure 8.3 for the rates used in these examples. EXAMPLE 1

LMNO Company operates in Fort McMurray, AB (a non-participating province), and buys and sells goods within Alberta. Therefore, the table in Figure 8.3A is used. Here are the calculations for remitting GST for the first quarter of the year:

NEL

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Figure 8.3A  GST/HST Remittance Rates (Quick Method) for Businesses That Sell Goods GST/HST quick method remittance rates for businesses that purchase goods for resale, based on the province where the permanent establishment (PE) of a business is located Column 1: PE located where GST at 5% applies

Supplies where GST 1.8% at 5% applies Supplies where HST 8.0% at 12% applies Supplies where HST 8.8% at 13% applies Supplies where HST 9.6% at 14% applies Supplies where HST 10.4% at 15% applies

Column 2: PE located where HST at 12% applies

Column 3: PE located where HST at 13% applies

Column 4: PE located where HST at 14% applies

Column 5: PE located where HST at 15% applies

0% (and 2.3% credit)

0% (and 2.8% credit)

0% (and 3.4% credit)

0% (and 4.0% credit)

4.1%

3.6%

N/A

2.5%

5.0%

4.4%

3.9%

3.3%

N/A

5.3%

4.7%

4.2%

6.6%

6.1%

5.6%

5.0%

Figure 8.3B  GST/HST Remittance Rates (Quick Method) for Service Businesses GST/HST quick method remittance rates for businesses that provide services, based on the province where the permanent establishment (PE) of a business is located Column 1: Column 2: PE located PE located where where GST at 5% HST at 12% applies applies

Supplies where 3.6% GST at 5% applies Supplies where 9.7% HST at 12% applies Supplies where 10.5% HST at 13% applies Supplies where 11.3% HST at 14% applies Supplies where 12.0% HST at 15% applies

Column 3: PE located where HST at 13% applies

Column 4: PE located where HST at 14% applies

2.1%

1.8%

8.2%

8.0%

9.0%

8.8%

8.6%

8.4%

9.6%

9.4%

9.2%

10.4%

10.2%

10.0%

N/A 10.6%

1.6%

Column 5: PE located where HST at 15% applies

N/A

1.4% 7.6%

NEL

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Total eligible sales of goods for the first quarter (including GST) $44,000 Multiply the total eligible sales by the remittance rate ($44,000 3 1.8%) $792 This rate is found in Column 1 (GST at 5%) on the row with GST at 5%. *Deduct 1% for the first $30,000 of eligible sales ($30,000 3 1%) (300) $492 First-quarter remittance *Note: Businesses that use the Quick Method are entitled to a 1% credit on the first $30,000 of eligible sales (including GST/HST) in each fiscal year. EXAMPLE 2

MountainView Dry Cleaners operates in Calgary, AB (a non-participating province). For a service business, the table in Figure 8.3B is used. Here are the calculations for the remittance for the first quarter of the year: $222,000 Total eligible sales for the first quarter (including GST) Multiply the total eligible sales by the remittance rate ($222,000 3 3.6%) $7,992 This rate is found in Column 1 (GST at 5%) on the row with GST at 5%. Deduct 1% for the first $30,000 of eligible sales ($30,000 3 1%) (300) $7692 First-quarter remittance EXAMPLE 3

Atlantic Plumbing Supplies operates in Halifax, NS (a participating province), and makes nearly all of its sales of goods within Nova Scotia and buys all of its supplies in Nova Scotia. The amount of sales made outside Nova Scotia, less than 10% of total sales, is considered insignificant; therefore, a separate remittance rate for the out-of-province sales does not have to be used. At the end of the first quarter, the total eligible sales (including HST) were $18,000 on which a 1% credit was deducted from the remittance at that time. This means there is still $12,000 of sales eligible for the 1% credit in this second quarter. Using Figure 8.3A: $32,000 Total eligible sales for the second quarter (including HST) Multiply total eligible sales by the remittance rate ($32,000 3 5.0%) $1,600 Find this rate in Column 5 (HST at 15%) and the last row (HST at 15%). Deduct 1% for remainder of first $30,000 of eligible sales ($12,000 3 1%) (120) $1,480 Second-quarter remittance EXAMPLE 4

A&B Lumber Products operates in Goose Bay, Newfoundland (a participating province), but also sells its product in the province of Quebec (a non-participating province) through its Goose Bay store. During the first quarter, A&B sold $36,000 (including HST) of product in Newfoundland and Labrador and $9,000 (including GST) of product in Quebec. Using Figure 8.3A, here are the calculations for the first quarter when two remittance rates must be used: NEL

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Multiply the eligible sales made in Quebec (including GST) by the remittance rate of 0% ($9,000 3 0%) Multiply the eligible sales made in Newfoundland and Labrador (including HST) by the remittance rate of 4.4% ($36,000 3 4.4%) Deduct 2.8% for the eligible sales made in QC ($9,000 3 2.8%) Deduct 1% for the first $30,000 of eligible sales ($30,000 3 1%) First-quarter remittance

$0 1,584 (252) (300) $1,032

PRACTICE EXERCISE 4 Using the rates in Figures 8.3A and 8.3B, calculate the GST/HST remittance for each of the following companies: (a) Singh-Taylor Company is located in Manitoba (a non-participating province) and sells its services only in Manitoba. Using Figure 8.3B, calculate the GST remittance for the first quarter, assuming the total eligible sales (including GST) are $38,000. (b) Halifax Widgits Company is located in Nova Scotia (a participating province) and sells its goods only in Nova Scotia. Using Figure 8.3A, calculate the HST remittance for the first quarter, assuming the total eligible sales (including HST) are $36,000. (c) Capital Company is located in Newfoundland and Labrador (a participating province) and sells merchandise in both Newfoundland and Quebec (a non-participating province). During the fourth quarter, the total eligible sales in Newfoundland (including HST) were $16,000 and in Quebec (including GST) were $8,000. (The entire amount of eligible sales subject to the 1% deduction was claimed in the first and second quarters.) Using Figure 8.3A, calculate the GST/HST remittance for the fourth quarter. (d) Pichit Company is located in New Brunswick (a participating province) and sells its service in both New Brunswick and Nova Scotia (also a participating province) from its New Brunswick store. Using Figure 8.3B, calculate the HST remittance for the second quarter assuming the total eligible sales (including HST) in New Brunswick were $15,000 and in Nova Scotia were $12,000. (When the remittance was calculated for the first quarter, the 1% deduction was taken on $20,000 of eligible sales.)

USING THE SIMPLIFIED METHOD FOR ITCs Another way of calculating input tax credits (ITCs) is to use the Simplified Method. Like the Quick Method discussed previously, only some businesses can use it. A business can use the simplified method for claiming ITCs only if the annual worldwide revenues from taxable goods or services are $1 million or less in the last fiscal year and in any previous fiscal periods of the current year. In NEL

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addition, the business must have $4 million or less in taxable purchases made in Canada in the last fiscal year. Other terms and conditions may also apply. Under the Simplified Method, the business does not have to show GST/HST separately in the records. This means there are no columns for GST/HST-ITC in any of the journals. Instead, total taxable purchases are added up at the end of the reporting period, providing a total on which the GST/HST will be calculated. The usual documents to support ITC claims must be kept for six years for audit purposes.

HOW THE SIMPLIFIED METHOD WORKS The Simplified Method can be used to calculate ITCs only for purchases used to provide taxable sales of goods and services. Any purchases that are not for business use or are not subject to GST/HST cannot be included. Step 1: Add up the business expenses for which you can claim an ITC. These expense amounts will include GST/HST, and duties and taxes on imported goods, among other costs. (CRA provides a list of costs that can and cannot be included in the business expense total.) Step 2: Multiply the total business expenses in Step 1 by the appropriate GST or HST calculation: ●● ●● ●●

multiply by 5/105 for purchases on which 5% GST was paid, or multiply by 13/113 for purchases on which 13% HST was paid, or multiply by 15/115 for purchases on which 15% HST was paid Step 3: Enter the resulting total on line 106 of your GST/HST return. THINK ABOUT IT! 1. How often must a business file a GST/HST return? 2. If a business records no taxable revenues and no ITCs during a reporting period, is it required to file a GST/HST return for that reporting period? 3. If a customer takes advantage of a discount for early payment of an invoice, will GST/HST be adjusted to reflect the reduced payment on the account? Why? 4. What is the difference between the regular method of accounting for GST/ HST and the Quick Method? 5. Can all businesses use the Quick Method? Why?

CASE STUDY: KBC DECORATING CO. APRIL TRANSACTIONS In this chapter, you learned about filling out the GST/HST return and remitting the tax to the federal government. KBC Decorating Co. has now completed three months of business activity and will file the GST/HST return this month.

NEL

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141

Record the following transactions in the usual way: 20— Apr. 2 Paid rent as usual. 2 Issued cheque to Reynolds Paper Co. in full payment of Invoice #98. This payment is late; however, Reynolds has agreed not to charge interest because we are a good customer and our payment is only a few days overdue. 3 Issued cheques to pay these bills: • electricity, $160 plus HST • heating (gas), $410 plus HST 6 Bought on account from Rainbow Supplies, Invoice #66 dated today, terms 1/10, n/30: paint and supplies, $3,600 plus HST. 6 Paid RamJet Courier for delivering the order from Rainbow Supplies, $55 plus HST. 9 Paid the phone bill, $189 plus HST. 10 Paid Coleman Industries for amount owing on Invoice #407. 10 Sold on account to Dayson & Son, paint and supplies, $1,450 plus HST; terms 2/10, n/30. 13 Bought new office desk and chair from Major Office Supplies on Invoice #167 dated yesterday; $485 plus HST. Terms n/30. 13 Paid RamJet Courier $56 plus HST to deliver desk and chair from Major Office Supplies. 14 Dayson & Son reported damaged goods in our order of the 10th. Gave them a credit note for $80 plus HST. 15 Bought from Coleman Industries, paint and supplies, $2,600, and wallpaper, $2,000. Add HST as usual. Terms n/30 on Invoice #430 dated today. 15 Cash sales to date: paint and supplies, $4,800, and wallpaper, $2,200. Add HST as usual. 17 Received payment from Beavis & Sons for balance owing on Invoice #6. 20 Received payment from Dayson & Son for balance owing on Invoice #7. As usual, discount is on the pretax value. 21 Sold on account to Jay-Mar Co., wallpaper, $450 plus HST. Terms 2/10, n/30. 24 Remitted HST charged and collected during the first quarter of the year: (i) To complete the GST/HST return (available in the package of working papers available with this textbook), you will need the March 31 balances for these accounts: • HST Payable • HST-ITC • Sales Paint & Supplies • Sales Wallpaper (ii) Record necessary entries in the Cash Payments Journal for this remittance to CRA. NEL

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Cash sales to date: paint and supplies, $8,200, and wallpaper, $2,000. Add HST as usual. Paid for gas and oil for our own truck used for occasional deliveries of goods to cash customers, $135 plus HST.

AT MONTH-END (a) Total, balance, and rule the special journals. (a) Post all entries to the ledger accounts. (a) Prepare a trial balance on April 30, 20—.

NEL

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● establish a petty cash fund and record expenditures from the fund ●● reimburse the petty cash fund ●● reconcile the Bank account in the General Ledger with the monthly bank statement ●● prepare a bank reconciliation statement and resulting journal entries

IMPORTANT TERMS USED IN THIS CHAPTER Bank Charges Bank Errors Bank Reconciliation Bank Statement Cancelled Cheques Cash Over or Short Certified Cheques Credit Memos Debit Memos NSF (Non-Sufficient Funds) Outstanding Cheques Outstanding Deposits Petty Cash Petty Cash Sheet

CHAPTER

9

ACCOUNTING FOR CASH

NEL

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C Fun Fact Robert Plant, lead singer of Led Zeppelin, started his working life training to be an accountant but he couldn’t stick with it. So he had to settle for being a famous rocker.

ash and merchandise are the most common objects of theft by both customers and employees. For this reason, every business must consider a variety of policies and procedures to protect itself from such losses. The business will want to have procedures for double-checking the count and value of merchandise that comes in (purchases), merchandise that goes out (sales), and merchandise that is sitting on the shelf (inventory). This protection of goods may include using security cameras and/or hiring security personnel to make sure goods are not stolen (often called shoplifting) during business hours. Similarly, policies must be put into place to protect the cash—cash in the cash registers, cash in the petty cash fund, and cash in the company’s bank account. So far, we have looked at the recording procedures for cash receipts and cash payments. Cash received should be kept on the premises no longer than necessary, particularly in large amounts; therefore, it should be deposited at the bank daily, if possible. Payments should be made by cheque, and only certain company officials should have the authority to sign those cheques. In this chapter, we will continue our look at accounting for cash by introducing petty cash and bank reconciliation.

PETTY CASH Almost every business will have expenditures of such small amounts that it would be inconvenient and impractical to issue cheques for them. Consider, for example, running to the local dollar store to buy a package of pens for $1.69. It would not be practical to issue a cheque for such a trivial amount. Such small expenditures can best be made from a petty cash fund.

ESTABLISHING PETTY CASH The petty cash fund (often around $100 to $500) is an amount based on the anticipated need for cash to pay for small expenditures over a given period of time, usually one month. To get the fund started, a cheque is issued and charged to an asset account called Petty Cash. This account will remain open indefinitely with a debit balance equal to the value of the fund. Thereafter, any change in the base amount of the fund will occur only if the fund is considered insufficient to cover the anticipated expenditures for the specified period. In that case, the fund will be increased to an appropriate amount (or decreased if the fund is excessive). The employee who controls the petty cash fund will cash a company cheque for the amount of the fund and place the money in a cash drawer or cash box for safekeeping. He or she ensures that the fund is used only for the purpose for which it was intended; therefore, only the petty cashier has access to the money, and only the petty cashier keeps a record of how that money is spent. When payments are made from the fund, a petty cash voucher (Figure 9.1) may be filled out as evidence of each expenditure. This voucher contains information as to the amount of the expenditure, the date of the payment, the name of the person or company to whom the cash was paid, the purpose of the expenditure, the account to be debited, and all necessary signatures (the person who received the cash and the person who approved the payment of the expenditure). The store receipt for NEL

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Figure 9.1  Petty Cash Voucher No. 1

Amount $

PETTY CASH VOUCHER Date: Paid to For Charge to

KBC DECORATING CO. Approved by Received by

the item purchased should be attached to the voucher as proof of the expenditure. If the receipt is for a meal where a client or customer was entertained, the name of the client or customer should also be noted. These signed vouchers for the petty cash expenditures are kept in the petty cash drawer to represent the amounts that have already been paid out. At all times, the total of the vouchers plus the cash still in the drawer should equal the value of the fund; such as the following:

Total paid out (vouchers) Cash in the drawer Total fund

$89.04 10.96 $100.00

THE PETTY CASH SHEET When the petty cash fund is nearly used up, a summary of the expenditures is prepared from the information on the petty cash vouchers. This summary might be a preprinted form, much like a journal, or it could be a simple list of expenditures on a sheet of note paper. Figure 9.2 is an example of what a petty cash sheet might look like. Just as with the special journals discussed in previous chapters, a petty cash sheet is designed to meet the specific needs of the business. The special columns make it easier to record frequently recurring expenditures. These petty cash expenditures will make their way on to the books by one of the following methods: Method 1: The petty cash sheet can be treated as a journal. In this method, the total of each column is posted directly to the debit of the appropriate asset or expense account. Any items listed in the Other Accounts column would be posted individually, much like in the Purchase Journal. The Bank account is credited for the total amount of the reimbursement through the Cash Payments Journal when the reimbursing cheque is issued. NEL

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Figure 9.2  Petty Cash Summary Sheet PETTY CASH SHEET DISTRIBUTION OF PAYMENTS

Amount in Petty Cash Fund Account 20— DATE

EXPLANATION

PAGE

VO. #

AMOUNT PD. OUT

Total paid out

$

Cash on hand

$

HSTITC

OFFICE SUPPL.

POSTAGE EXP.

WHSE. SUPPL.

MISC. EXP.

OTHER ACCTS.

AMOUNT

$ Reimbursement cheque required

$

Cheque #

Method 2: Instead of using the petty cash sheet as a journal, it is used only as a summary sheet from which the expenditures are transferred to the Cash Payments Journal and a cheque is issued to reimburse the fund. The amounts are then posted from the Cash Payments Journal to the debit of the various accounts. Method 2 will be used in this textbook.

RECORDING PETTY CASH ENTRIES To illustrate how the petty cash system works, we will assume that a petty cash fund was established on October 1 by debiting $100 to the Petty Cash account. Figure 9.3 shows a General Journal entry to establish the fund. Figure 9.4 shows the same entry on October 1 as it would be recorded in the Cash Payments Journal. Let’s take a look at how petty cash expenditures were recorded during October. Notice in Figure 9.5 that the recording of these expenditures is similar to the recording of transactions in the Purchase Journal. On October 2, a stamp pad was bought for use in the office at a cost of $3.50 plus HST. The date of the purchase is entered as usual in the Date column and a notation is entered in the Explanation column to identify the item purchased. The voucher number (#1) is entered in the Voucher # column. (If the company does not use voucher numbers, this column will not appear on the petty cash sheet or it will be left blank.) The full amount of the disbursement, $3.96, is NEL

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Figure 9.3  Establishing the Petty Cash Fund (General Journal)

Oct.

Petty Cash Bank Issued cheque to establish petty cash fund.

1

1 0 0 00 1 0 0 00

Figure 9.4  Establishing the Petty Cash Fund (Cash Payments Journal) CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

Oct. 1

MEMO

Petty Cash Fund

ACCTS. PAY. DR.

F.

PURCH. DISC. CR.

PURCH. DR.

HST–ITC DR.

GEN. LED. DR.

1 0 0 00

To establish fund

BANK CR.

CH. NO.

1 0 0 00 60

Figure 9.5  Petty Cash Sheet PETTY CASH SHEET Amount in Petty Cash Fund DATE

100.00

EXPLANATION

20— 2 Stamp pad Oct. 4 Window cleaning

VO. #

AMOUNT PD. OUT

HST– ITC

OFFICE SUPPL.

3 96

0 46

2

1 6 95 1 2 71

1 95

3

11 Shipping on supplies

4

8 19

0 94

16 Shipping of advert

5

7 01

19 Special merchandise

6

1 9 55

24 Wrapping materials

7

7 85

0 90

29 Cups/soft drink machine

8

6 22

0 72

30 Blank CDs

9

7 63

0 88

6 75

9 0 06

1 0 36

1 0 25

Cheque #

101

Shipping on merchandise

Total paid out Cash on hand

1

DISTRIBUTION OF PAYMENTS

1

8

PAGE

POSTAGE

WHSE. SUPPL.

MISC. EXP.

OTHER ACCTS.

AMOUNT

3 50 1 5 00 Freight In

1 1 25

0 81

Advertising Exp.

2 25

Purchases

6 20 1 7 30

1 46 7 25

6 95 5 50

1 4 20

2 0 50

3 4 75

9 94 1 0 0 00

Reimbursement for

9 0 06

entered in the Amount Paid Out column. The HST, $0.46, is entered in the HST-ITC column and the value of the stamp pad ($3.50, including any provincial sales tax, where applicable) is entered in the Office Supplies column. Like in the Purchase Journal, this single line is a balanced entry. NEL

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On October 4, $16.95 (including HST) was paid for the cleaning of the store windows. The date, explanation, and voucher number (if any) are entered as usual. The total payment, $16.95, is entered in the Amount Paid Out column, the HST, $1.95, is entered in the HST-ITC column, and the value of the window cleaning service ($15.00, including PST, where applicable) is entered in the Miscellaneous Expense column. (Other account names that could have been used for this transaction include Cleaning Expense, Maintenance Expense, or General Expense.) On October 8, $12.71 (including HST) was paid for shipping costs on special merchandise bought for resale. Shipping costs on incoming merchandise are typically charged to Freight In as discussed in Chapter 5; however, our petty cash sheet does not have a special column for Freight In. Therefore, by following the same steps we use in the Purchase Journal, “Freight In” is entered in the Other Accounts column, and the value of the shipping charge ($11.25, including PST, where applicable) is entered in the Amount column. Here are the other transactions that are recorded in our petty cash sheet. Study each entry carefully. Oct. 11 Bought paper and string for shipping room 16 Paid shipping on advertising material 19 Bought merchandise to fill a special order 24 Bought wrapping materials 29 Bought cups for the soft-drink machine 30 Bought blank CDs for data backup

7.25 + 0.94 HST 6.20 + 0.81 HST 17.30 + 2.25 HST 6.95 + 0.90 HST 5.50 + 0.72 HST 6.75 + 0.88 HST

After all the expenditures have been recorded, the columns are totalled and balanced. Then, the remaining cash in the petty cash drawer is counted. Since our petty cash sheet shows that $90.06 was spent from the fund, there should still be $9.94 cash in the petty cash drawer. The amount of cash remaining is entered as “Cash on hand,” and the two amounts are added together to arrive at the original value of the petty cash fund ($100.00). The amount needed to replenish the fund is $90.06, which is entered as “Reimbursement for,” and the cheque number will be entered in the appropriate space once the cheque has been written. Occasionally, the cash remaining in the petty cash drawer is slightly more or slightly less than it should be, probably because of an error in making change. This will be discussed later in this chapter (see Cash Over or Short).

REIMBURSING PETTY CASH Reimbursement of the petty cash fund can be made at any time, although some businesses might choose to replenish the fund at the end of each month in order to recognize the expenditures as expenses incurred during that particular month. In most small businesses, however, such a need to charge the expenses to the month in which they were incurred is not necessarily important, so the fund will be reimbursed only when the petty cash drawer runs out of cash. NEL

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Figure 9.6  Reimbursing Petty Cash in the General Journal

Oct.

31

HST-ITC Office Supplies Expense Warehouse Supplies Expense Miscellaneous Expense Freight In Advertising Expense Purchases Bank To reimburse the petty cash fund.

1 1 1 2 1

0 0 4 0 1 6 1 7

36 25 20 50 25 20 30 9 0 06

Figure 9.7  Reimbursing Petty Cash in the Cash Payments Journal CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

MEMO

}

Oct. 31 Office Supplies Expense Warehouse Supplies Expense Miscellaneous Expense Freight In Advertising Expense

F.

ACCTS. PAY. DR.

PURCH. DISC. CR.

PURCH. DR.

1 7 30

HST–ITC DR.

1 0 36

GEN. LED. DR.

BANK CR.

CH. NO.

1 0 25 1 4 20

To reimburse petty cash

2 0 50 1 1 25 6 20

9 0 06 101

Figure 9.6 shows the reimbursement entry on October 31 as it would appear in the General Journal. Each column total is debited to its respective account and the total amount spent is credited to Bank (or Cash) to represent the cheque issued to replace the money spent. Typically, the reimbursement would be recorded in the Cash Payments Journal, as shown in Figure 9.7. The expenses are entered in the appropriate columns, taking advantage of special columns, if available. Since Purchases and GST/HST-ITC can be accommodated by their special columns, they do not need to be named in the Account Dr. column. The amount of the reimbursement cheque is entered in the Bank Cr. column on the same line as the last petty cash entry, thus completing a balanced journal entry.

CASH OVER OR SHORT When goods or services are sold for cash, the cash register or cash drawer begins each day or each shift with a quantity of cash, called a float, from which change is made. This float will consist of coins and small bills, usually totalling between $50 and $300 depending on the size of the business. At the end of each day or each shift, the cash in the drawer, minus the float, should equal the total cash received as shown on the cash register reading (minus any cash refunds paid out). NEL

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Figure 9.8  Calculating Cash Over and Cash Short Example 1: Cash Over Total cash in cash drawer (end of day) Deduct Float Net cash sales for the day Reading on cash register tape Cash Over on Feb. 16

5 3 2 5 1 5 0 1

5 5 0 0 0

00 00 00 00 00

5 2 2 4 9 5 0

0 5 5 0 5

00 00 00 00 00

Example 2: Cash Short Total cash in cash drawer (end of day) Deduct Float Net cash sales for the day Reading on cash register tape Cash Short on Feb. 23

Sometimes, though, these amounts do not agree. When they do not, the amount of the difference is recorded in an account called Cash Over or Short. In Example 1 of Figure 9.8, the total cash in the cash register on February 16 was $535. After the $25 float was deducted, the net cash taken in on this day was $510. The reading (or report) from the cash register, however, shows that sales were $500; therefore, there is $10 too much. To account for this overage in the Cash Receipts Journal (see Figure 9.9), the sales of $500 are recorded as usual from the cash register reading in the Sales Cr. column. On the next line, “Cash Over or Short” is entered under Account Credit and the amount of the $10 overage is entered in the General Ledger Cr. column. The total of $510 is entered in the Bank Dr. column to agree with the actual amount of cash deposited at the bank. Figure 9.9  Cash Over and Short in the Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

20— Feb. 16 16

23 23

MEMO

F.

Sales Cash Over or Short

Daily sales Cash overage

575

Sales Cash Over or Short

Daily sales Cash shortage 575

ACCTS. REC. CR.

PAGE SALES DISC. DR.

SALES CR.

GEN. LED. CR.

CR1 BANK DR.

5 0 0 00 1 0 00

5 1 0 00

5 0 0 00

( 5 00 ) 4 9 5 00

NEL

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Figure 9.10  Cash Over or Short Account ACCOUNT

Cash Over or Short

ACCT. NO. SHEET NO.

DATE

20— Feb. 16 23

MEMO

Overage Shortage

DISC. DATE

F.

CR1 CR1

DEBIT

CREDIT

DR. CR.

575 1 BALANCE

1 0 00 5 00

Cr.

5 00

In Example 2 of Figure 9.8, the cash total at the end of the day on February 23 was $520. After the $25 float was deducted, the net cash taken in was $495. On this day, the sales reported on the cash register were $500; therefore, there is a $5 shortage, perhaps because too much change was given out to a customer. To account for a shortage, the $500 of sales is recorded as usual from the cash register reading in the Sales Cr. column of the Cash Receipts Journal. On the next line, “Cash Over or Short” is entered under Account Credit, and the amount of the shortage ($5) is entered in the General Ledger Cr. column. But this time, the amount is recorded in brackets because it must be deducted from the sales amount to agree with the actual amount of the day’s cash receipts. When an amount in brackets is entered in a credit column, it becomes a debit and is posted as a debit to the Cash Over or Short account. Figure 9.10 shows the Cash Over or Short ledger account after the cash receipts entries from Figure 9.9 were posted. PRACTICE EXERCISE 1 Wigorn Bros. has a petty cash fund of $150. The following items were paid from this fund during the month of August. (a) Enter these payments on a petty cash sheet, beginning with Voucher #44. Ask your instructor which of the following tax rates to use: i.  No taxes ii.  Add 5% GST only iii.  Add 13% HST iv.  Add 5% GST + 7% PST 20— Aug. 6 Broom for the warehouse, $12.08. 8 Coffee and creamer for the staff room, $16.25 (tax exempt) 9 Delivery of special order of office supplies, $7.88. 12 Pens for office, $7.35. 14 Special order of merchandise, $23.52. 15 Delivery of sale brochures, $22.89. 16 Masking tape for warehouse, $6.09. NEL

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20 Donation to charity, $20 (tax exempt). 22 Pens and pencils for office, $6.51. 24 Postage, $6.62. (b) Total the petty cash sheet and prove equal debits and credits. Calculate the cash on hand. (c) Prepare a General Journal entry to establish the fund on August 1. (d) Prepare a General Journal entry to reimburse the fund at month-end. Cheque #101 was issued. (e) Prepare a General Journal entry to increase the petty cash fund to $200. (f ) Prepare a Cash Payments Journal entry to reimburse the fund at month-end. Cheque #101 was issued. PRACTICE EXERCISE 2 (a) Record the following transactions on a petty cash sheet. All petty cash vouchers will be numbered sequentially, beginning with #1. Ask your instructor which of the following tax rates to use: i.  No taxes ii.  Add 5% GST only iii.  Add 13% HST iv.  Add 5% GST + 7% PST 20— Nov. 1 1 3 4 4

The fund was started with $200. Bought pads of writing paper for office, $27.70 Paid for delivery of above stationery, $5.78 Bought special order of merchandise, $13.14. Paid for delivery of the above special order of merchandise by courier, $5.25 5 Bought sugar and cream for staff kitchen, $4.50 (no taxes). 6 Paid for minor repairs to office furniture, $18.06. (Debit Repairs Expense) 6 Paid ABC Courier for delivering merchandise to customer, $7.35. 7 Bought packaging materials for warehouse, $28.35. 10 Paid for printing of advertising flyers, $32.55. 17 Paid for delivery of incoming merchandise, $11.98. 21 Contributed $20 to Heart & Stroke Foundation (no taxes). (b) Total all columns and prove equal debits and credits. Calculate the cash on hand. (c) Make an entry in the Cash Payments Journal to establish the fund on November 1. Cheque #130 was issued. (d) Make an entry in the Cash Payments Journal for the reimbursement of the fund on November 30. Cheque #149 was issued. NEL

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153

PRACTICE EXERCISE 3 (a) Set up a petty cash sheet for the month of June. The amount of the fund is $150. All vouchers are numbered in sequence, beginning with #41. (b) Enter the following transactions on the petty cash sheet. Assume that all amounts include tax(es). Ask your instructor which of the following tax rates to use: i.  Amounts include 5% GST only ii.  Amounts include 13% HST iii.  Amounts include 5% GST + 8% PST 20— Jun. 1 Paid shipping charges for two new office chairs, $18.90. 2 Paid freight charges on incoming merchandise, $7.88. 6 Bought stationery and supplies for office, $28.14. 8 Paid Speedy Courier for delivering merchandise to customer, $17.01. 12 Bought postage stamps for office, $10.50. 14 Bought coffee cups for staff room, $3.47. 17 Bought packaging and tape for warehouse, $9.87. 21 Bought straws and paper napkins for staff room, $2.63. 23 Bought stamps for mailing advertising material, $11.55. 29 Gave donation to the Cancer Society, $25 (taxes not applicable). (c) Total the columns and prove equal debits and credits. Calculate the cash on hand. (d) Prepare a Cash Payments Journal entry to reimburse the petty cash fund. The reimbursing cheque is #97, dated June 30. PRACTICE EXERCISE 4 On November 1, a petty cash fund was established for $100. By month-end, the following expenditures had been recorded: office supplies, $15.70; postage, $26; miscellaneous, $8.40; delivery expense, $31.25; and freight in, $12.70. Record the following entries in the Cash Payments Journal: (a) An entry to establish the petty cash fund on November 1 (Cheque #841). (b) An entry to reimburse the fund on November 30, assuming the actual cash on hand in the petty cash box was $5.70. (Cheque #882) (c) An entry to reimburse the fund on November 30, assuming the actual cash on hand in the petty cash box was $6.95. (Cheque #882) PRACTICE EXERCISE 5 On June 2, a cheque for $150 was issued to establish a petty cash fund. During June, the following expenditures were made: postage, $18.38; office supplies, $25.35; purchases, $30.40; advertising, $53.60; miscellaneous, $11.45; and GST-ITC, $6.96. Cheque #40 was issued on June 28 to reimburse the fund. NEL

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Record the following entries in the Cash Payments Journal: (a) An entry to establish the fund on June 2 (Cheque #008). (b) An entry to reimburse the petty cash fund on June 28, assuming the actual cash on hand was $4.86. (c) An entry to reimburse the petty cash fund on June 28, assuming the actual cash on hand was $3.80.

BANK RECONCILIATION When a business deposits all cash receipts daily and makes all payments by cheque, a double record is maintained of all cash transactions. One record is maintained by the bank (by means of the bank statement) and the other record is kept by the company (in the Cash Receipts and Cash Payments Journals). In theory, we might expect that the balances of these two independent records should be equal. However, in reality, the month-end cash balance shown on the company’s records is often different from the balance reported by the bank on the bank statement. At the end of each month, the bookkeeper will reconcile the bank account in an effort to determine why there is a difference and to bring the two sets of records into agreement. Below are items that are typically considered when reconciling the bank statement balance and the Bank account balance in the General Ledger: Cancelled cheques are issued cheques that have been cleared (cashed) by the bank and charged back to our bank account. The cancelled cheques (or images of them) are returned to us each month along with our bank statement. Outstanding cheques are cheques that have been issued and entered in the Cash Payments Journal, but have not yet been cashed by the people or companies to which we have issued them; therefore, these cheques have not yet been cleared by the bank. These outstanding cheques have reduced the cash book balance because the entries are recorded in the Cash Payments Journal, but they have not yet reduced our balance at the bank. Outstanding deposits are cash and cheques received in the last day or two of the month and recorded in the Cash Receipts Journal, but deposited at the bank too late to be included on that month’s bank statement. Such outstanding deposits have increased our cash book balance but have not yet increased our balance at the bank. Certified cheques are cheques for which the bank guarantees that we will have enough money in the account when the cheque clears. A certified cheque is guaranteed not to “bounce.” At the time the cheque is certified, the bank will immediately withdraw the amount of the cheque from our account; therefore, a certified cheque cannot be outstanding. NSF (Non-Sufficient Funds) cheques are cheques issued for an amount greater than the balance available in the bank account. As we have learned, all cheques received from customers in the normal course of daily business are recorded in the Cash Receipts Journal and are included as usual in the daily deposit. Occasionally, the bank will “bounce” a customer’s cheque because the customer did not have enough money in the account to cover it. This bounced NEL

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Figure 9.11  Recording an NSF Cheque (General Journal)

Oct.

16

104 117

A/R Burton, S. Bank To record customer’s NSF cheque returned by the bank.

7 5 50 7 5 50

Figure 9.12  Recording an NSF Cheque (Cash Receipts Journal) CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

Oct. 16 Burton, S.

MEMO

F.

NSF cheque 152

ACCTS. REC. CR.

( 7 5 50)

SALES DISC. DR.

SALES CR.

GST PAY. CR.

PST PAY. CR.

GEN. LED. CR.

BANK DR.

( 7 5 50)

cheque is then returned by the customer’s bank to our bank and the amount is deducted from our account. It becomes our responsibility, then, to charge the amount back to our customer’s ledger account and to attempt to collect from them again. Figure 9.11 shows the NSF cheque entry as it would appear in the General Journal. It is important to note that the debit must be posted to both the Accounts Receivable Control account in the General Ledger and the customer’s account in the Accounts Receivable Subsidiary Ledger. This double-posting ensures the equality between the control account and the subsidiary ledger. Alternatively, an NSF cheque can be recorded in the Cash Receipts Journal (see Figure 9.12) as a negative entry. It is recorded as if payment is received from the customer as usual, except the amounts are entered in brackets. When posted to the customer’s account, the bracketed amount is debited rather than credited because the amount is being added back to the account so we can attempt to collect payment from the customer again.

BANK STATEMENT At the end of each month, the bank makes available to us a bank statement showing all the transactions that occurred during the month in our bank account. (See Figure 9.13.) Although the format of bank statements varies from bank to bank, all bank statements show the following: the balance in the account at the beginning of the month, the deposits made during the month, the cheques issued and cleared during the month, any other charges and credits to the account that occurred during the month, and the balance at the end of the month. NEL

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Figure 9.13  Bank Statement

$

The Canadiana Bank 54321 Yonge Street Toronto ON M8U 7R4 Customer: LMN Importing Co

Date

Details

01-Jun. 01-Jun. 01-Jun. 02-Jun. 03-Jun. 03-Jun. 03-Jun. 03-Jun. 08-Jun. 08-Jun. 08-Jun. 09-Jun. 09-Jun. 10-Jun. 10-Jun. 10-Jun. 15-Jun. 15-Jun. 17-Jun. 25-Jun. 26-Jun. 26-Jun. 30-Jun. 30-Jun.

Balance Forward

Account #: 626-000-3 Cheques

Deposits

1,309.04 Cheque 00084

950.00 541.08 1,057.04

Cheque 00086 Cheque 00087 Cheque 00085 Cheque 00088 Cheque 00089

140.00 1,800.00 140.00 50.00 86.20 2,898.81

Loan 47886539 Cheque 00090 Cheque 00092 Cheque 00091

506.00 70.00 50.00 275.00 438.38

Cheque 00093

23.00 1,737.53 864.24 2,255.54

Cheque 00094

452.75 775.64

Cheque 00095 Service Charge

578.08 43.00

Balance

8,292.96 9,602.00 8,652.00 9,193.08 10,250.12 10,110.12 8,310.12 8,170.12 8,120.12 8,033.92 10,932.73 10,426.73 10356.73 10,306.73 10,031.73 10,470.11 10,447.11 12,184.64 13,048.88 15,304.42 14,851.67 15,627.31 15,049.23 15,006.23

Credit memos (sometimes called credit slips) are notices sent by the bank to inform us of transactions that have increased the balance in our bank account. They are the source documents for recording these transactions in the Cash Receipts Journal. Such transactions might be interest earned on investments or a recently negotiated bank loan deposited by the bank to our account. (See Figure 9.14.) Debit memos (or debit slips) are notices sent by the bank to inform us of amounts that have decreased the balance of our bank account. Debit memos are the source documents for recording these transactions in the Cash Payments Journal. Examples include bank service charges, customers’ NSF cheques, and loan or NEL

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Figure 9.14  Recording Credit Memos in the Cash Receipts Journal CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

MEMO

F.

ACCTS. REC. CR.

SALES DISC. DR.

SALES CR.

GST PAY. CR.

PST PAY. CR.

Jun. 30 Interest Revenue On investments Bank Loan Payable New loan

GEN. LED. CR.

BANK DR.

1 6 0 00 1 6 0 00 5 0 0 0 00 5 0 0 0 00

Figure 9.15  Recording Debit Memos in the Cash Payments Journal CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

Jun. 30 Bank Charges Bank Loan Payable

MEMO

For the month Monthly payment

F.

ACCTS. PAY. DR.

PURCH. DISC. CR.

PURCH. DR.

GST–ITC DR.

GEN. LED. DR.

BANK CR.

CH. NO.

1 5 00

1 5 00 DM

4 8 0 50

4 8 0 50 DM

mortgage payments. Such charges may not have an actual source document, but rather may be just entries on the bank statement, which would then have to be recorded in the Cash Payments Journal. Figure 9.15 shows debit memos recorded in the Cash Payments Journal. Bank charges (or bank service fees) are the amounts deducted by the bank each month to cover the cost of maintaining the bank account. Such service fees will vary depending on the bank and on the level of service provided by the bank. This service fee appears on the bank statement each month.

BANK ERRORS Although bank errors are relatively uncommon, they do still occur. They may be the result of a bank employee keying the wrong information when recording a transaction. Examples of bank errors include charging a cheque to the wrong customer’s bank account or recording an incorrect deposit amount in the company’s account. A cheque charged to our account in error will reduce the bank balance, so it should be added back to the bank statement balance when preparing a bank reconciliation. A deposit made to our account in error will increase the bank balance, so it should be deducted from the bank statement balance when preparing a bank reconciliation. If the error and the bank’s correction occur within the same month, no adjustment on the bank reconciliation is necessary. Once aware of such an error, the bank will make the necessary correction, which often appears on the bank statement with a code “CORR” or similar. Bank errors will have no effect on the company’s books; therefore, no entries are made in the journals.

NEL

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Figure 9.16  Correcting a Payment Entry (Example 1)

Jun.

30

Bank A/P Gordon Bros. To correct error in CP6 (Cheque #67) for $89 recorded as $98.

9 00 9 00

Figure 9.17  Correcting a Payment Entry (Example 2)

Jun.

30

A/P A. Dudeck & Co. Bank To correct error in CP7 (Cheque #76).

1 3 0 68 1 3 0 68

CASH BOOK ERRORS Errors made by bookkeepers and accountants within a company’s own records are common enough to warrant discussion here. For example, the amount on a cheque might be correct, but an error could be made when recording the cheque in the Cash Payments Journal. Such errors might be transposed figures (for example, $89 recorded as $98) or a misplaced decimal point (such as $132.00 recorded as $1.32). As well, they could be simple writing errors, such as recording $426.75 as only $426.00 (the cents are missing). In any event, these errors usually come to light when the bank statement is checked against the entries in the Cash Payments Journal. Example 1

Cheque #67 was issued to Gordon Bros. for $89 as full payment of account. The payment, however, was recorded incorrectly as $98 in our Cash Payments Journal. Since $9 too much was deducted from the Bank account on our books because of this error, a correcting entry is required to add the $9 back into the Bank account (see Figure 9.16). Example 2

Cheque #76 for $132 issued to A. Dudeck & Co. on account was recorded by mistake as only $1.32 in the Cash Payments Journal. Since the amount entered in the Cash Payments Journal is smaller than the true amount of the cheque issued, an additional $132.00 — $1.32 = $130.68 must be deducted from the Bank account. The correcting entry is shown in Figure 9.17.

RECONCILING THE BANK ACCOUNT Occasionally, transactions will appear in the company journals but will not yet have been recorded by the bank. These usually include outstanding cheques (cheques that have been issued but have not yet been cashed) and outstanding NEL

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deposits (amounts recorded in the journal on the last day or two of a month but not actually deposited at the bank until the first few days of the next month). As well, transactions may appear on the bank statement but have not yet been recorded in the journals. These will include monthly bank service charges, customers’ NSF cheques that have been returned, other bank charges and credits (debit memos and credit memos), and other reconciling items (errors corrected by the bank and errors made on the company’s records). Bank reconciliation is the process of accounting for the differences between the existing journal entries and those that appear on the bank statement, and of determining the correct bank balance. The following steps will achieve a balance between the two sets of records: 1. Compare the cancelled cheques, debit memos, and credit memos with the items on the bank statement. Since the bank has included some or all of these documents when it mailed the bank statement, it is important to doublecheck that all the documents are present. Put a check mark on the bank statement beside each item that agrees. Any unchecked item on the statement could indicate a bank error, such as someone else’s cheque being charged to our account by mistake or a service fee charged to our account in error. Such errors would have reduced the bank balance; therefore, when doing the bank reconciliation, we will add these amounts back to the bank statement balance. 2. Compare the deposits listed on the bank statement with the deposits recorded in the Cash Receipts Journal. Put a check mark on both the bank statement and the journal beside each item that agrees. Unchecked items in the Cash Receipts Journal are usually outstanding deposits. Write “OS” (outstanding) beside each unchecked item. Since the bank was not aware of the outstanding deposit at the time the statement was printed, we will add it to the bank statement balance. An amount in the deposit column on the bank statement that does not have a corresponding amount in the Cash Receipts Journal could indicate a bank error (such as a cheque previously deducted from the company’s account by mistake and now redeposited) or a deposit that the bookkeeper has forgotten to record in the Cash Receipts Journal. Be sure to check last month’s bank reconciliation to see if there was an outstanding deposit that now appears on this month’s bank statement. 3. Arrange the cancelled cheques in numerical order and compare them with the entries in the Cash Payments Journal. Put a check mark beside each item that agrees. Unchecked items in the Cash Payments Journal are outstanding cheques. Write “OS” beside each unchecked item. Since these cheques had not yet cleared the bank by the time the statement was printed, they will be deducted from the bank statement balance on the bank reconciliation. Also, be sure to check last month’s bank reconciliation for any outstanding cheques to see if they have cleared and now appear on this month’s bank statement. 4. Deduct from the cash book balance (the balance in the Bank account in the General Ledger) any debit memos issued by the bank for items not yet recorded in the Cash Payments Journal, such as NSF cheques and bank service charges. NEL

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5. Add to the cash book balance any credit memos issued by the bank that have not yet been recorded in the Cash Receipts Journal, such as interest earned on a short-term investment. 6. Prepare a bank reconciliation statement (discussed later). 7. Prepare the necessary journal entries for the items that appear on the bank statement but have not yet been recorded in the journals.

BANK RECONCILIATION STATEMENT To illustrate the bank reconciliation procedure described in the previous topic, we will assume that the October bank statement received by Parkdale Company shows a balance of $5,338.40. The Bank account in the General Ledger, however, shows a balance of $4,968.80 at the end of October. The purpose of the bank reconciliation is to find out why there is a difference of $369.60 between the two balances. Below is a list of the reconciling items. As each item is explained, locate it on the bank reconciliation statement in Figure 9.18. 1. A deposit of $301.90 was recorded in the Cash Receipts Journal on October 31, but the bookkeeper did not go to the bank until a couple of days later (on November 2). The bank therefore did not receive it on time for the October 31 bank statement, so it is considered an outstanding Figure 9.18  Bank Reconciliation Statement Parkdale Company Bank Reconciliation Statement October 31, 20— Bank Statement Balance Add: Bank Error Outstanding Deposit Deduct: Outstanding Cheques #602 #684 #692 #696 Adjusted Statement Balance

$5 3 3 8 40 $6 4 20 3 0 1 90

1 1 3 2

1 1 1 1

8 0 4 5

50 00 45 00

7 5 7 95 $4 9 4 6 55 4 9 6 8 80 6 5 00 5 0 3 3 80

Cash Book (General Ledger) Balance Add: Interest Revenue Deduct: Bank Charges Error on Cheque #680 (Telephone) NSF Cheque (L.D. Peters) Adjusted Cash Book Balance

3 6 6 10 5 7 0 4 50

1 5 00 2 7 00 4 5 25

8 7 25 $4 9 4 6 55

NEL

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deposit. It must be added to the bank statement balance on our reconciliation statement. 2. A credit memo issued by the bank on October 30 for $65 is listed in the deposit column on the bank statement. This credit memo represents interest earned on a short-term investment. Since this item has not yet been recorded in the company’s journal, it must be added to the cash book balance on the reconciliation statement. 3. Several cheques issued in September and October have not yet been cleared by the bank and are considered outstanding: Date

Sept. 10 Oct. 19 Oct. 29 Oct. 30

Cheque No.

Amount

602 684 692 696

$118.50 110.00 314.45 215.00

When these cheques are eventually cleared by the bank, they will reduce the statement balance; therefore, they must be deducted from the statement balance on the reconciliation. 4. No entry has been made in the books for an NSF cheque of $45.25 (originally received from L.D. Peters and deposited) that was returned by Peters’ bank on October 30. Since the bank has already deducted the amount of this bad cheque from Parkdale’s bank account, the amount must be deducted from the Bank account in the General Ledger. Therefore, it is shown as a deduction from the cash book balance on the reconciliation. 5. Cheque #680, issued October 18 for $96 to pay the telephone bill, was recorded as only $69 on the cheque stub and in the Cash Payments Journal. The cheque was cleared by the bank and was included in the cancelled cheques on October 31. Because an additional $27 must be deducted from the Bank account in the General Ledger to agree with the amount of the actual cheque, it is shown as a deduction from the cash book balance on the reconciliation. 6. The usual monthly service fee (bank charge) of $15 appears on the bank statement. This amount has not yet been recorded on the books; therefore, it is shown as a deduction from the cash book balance on the reconciliation. 7. Cheque #364 for $64.20 issued to Greene Bros. was listed in the Cheques column on the bank statement and was included with the cancelled cheques. This cheque, however, was not issued by Parkdale Company. Because the bank has cleared someone else’s cheque through Parkdale’s account, it will eventually correct its error by adding back the amount; therefore, Parkdale will show this as an addition to the bank statement balance on the reconciliation. The bank reconciliation statement illustrated in Figure 9.18 shows that an adjusted balance of $4,946.55 would have been the amount available in the account if all reconciling items had been cleared or recorded by the close of business on October 31. NEL

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Figure 9.19  Recording Entries from Bank Reconciliation

Oct.

31

31

31

31

Bank Interest Revenue To record interest deposited by the bank.

6 5 00

A/R Peters, L.D. Bank To record NSF cheque returned by the bank.

4 5 25

Bank Charges Bank To record service charges deducted by the bank.

1 5 00

Telephone Expense Bank To correct error in CP7 for Cheque #680 entered as $69 instead of $96 ($96 – $69=$27).

2 7 00

6 5 00

4 5 25

1 5 00

2 7 00

To bring Parkdale Company’s records up to date, journal entries affecting the Bank account are necessary to account for the difference between the present balance in the Bank account, $4,968.80, and the adjusted balance of $4,946.55. As you can see in Figure 9.19, every reconciling transaction is recorded either as a debit to the Bank account or as a credit to the Bank account. PRACTICE EXERCISE 6 Prepare a Bank Reconciliation Statement for LMN Consulting showing the adjusted bank balance for June 30, 20—. The bank statement dated June 30 shows a balance of $10,462.85. The Bank account in the General Ledger shows a balance of $9,897.30. The following cheques have been issued but do not appear on the bank statement: #56, $166.50; #61, $175.40; #74, $236.25; and #75, $348.75. On June 30, a deposit of $361.35 was made too late to appear on the June bank statement. PRACTICE EXERCISE 7 On April 30, the Bank account in the General Ledger of Warren Company showed a balance of $8,596.50. (a) On May 31, the total of the Bank Dr. column of the Cash Receipts Journal was $15,766.90 and the total of the Bank Cr. column of the Cash Payments Journal was $11,947.60. Calculate the balance in the Bank account in the General Ledger on May 31. NEL

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The May 31 bank statement showed a balance of $12,532.85. The outstanding cheques were determined to be #701 for $402.50, #723 for $89.60, #729 for $127.85, and #730 for $118.35. A late deposit of $621.25 did not appear on the bank statement. (b) Prepare a bank reconciliation statement for Warren Company showing the adjusted bank balance on May 31, 20—. PRACTICE EXERCISE 8 The following information comes from the banking activities of D & N Appliance Co.: 1. The Bank account in the General Ledger shows a balance of $5,232.65 on November 30, 20—. 2. The statement from the bank on November 30 shows a balance of $4,907.20. 3. Cheques received from customers on November 30 were recorded in the November journal, but the bookkeeper did not make it to the bank on that day. The total of these cheques is $535.75. 4. Cheque #155 issued for $34.75 was recorded incorrectly in the Cash Payments Journal as $43.75. This cheque was issued to pay the freight on incoming merchandise. 5. A cross-check of the Cash Payments Journal entries and the returned cancelled cheques reveals that these cheques in November are still outstanding: #140 for $182.50; #161 for $47.80; #170 for $200.25, and #172 for $95.25. Also, Cheque #178 for $580, which was certified two weeks ago, has not yet been cashed by the bank. 6. Among the cancelled cheques returned by the bank is Cheque #501 for $210 issued by N & D Appliance Repair Co. but charged in error to the account of D & N Appliance Co. 7. A debit memo for $25 included with the November bank statement represents a charge for the annual safety deposit box rental. 8. The bank statement shows a regular bank service charge of $19.50. 9. A $70 cheque received from a customer, Jack Miller, was returned by the bank marked NSF and charged back to D & N Appliance Co.’s account on November 29. From the above information, prepare a bank reconciliation statement showing the adjusted balance. Also, prepare the necessary General Journal entries to record those items from the reconciliation that have not yet been recorded on the books. PRACTICE EXERCISE 9 From the following information, prepare a bank reconciliation statement for the Asian Book Store on February 28, 20—. Follow these steps carefully: Compare the outstanding deposit and the outstanding cheques shown on the January 31 reconciliation statement (Figure 9.20a) with the deposits and cheques listed on the February bank statement (Figure 9.20b). If these items now appear on the bank statement, they are no longer outstanding. Therefore, you should put a check mark beside each of these amounts on the bank statement. NEL

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Figure 9.20a  Bank Reconciliation for January Asian Book Store Bank Reconciliation January 31, 20— $1 5 8 4 00 3 2 5 0 00 4 8 3 4 00

Bank Statement Balance Outstanding Deposit

less: Outstanding Cheques #231 #232 Adjusted Balance

$1 6 6 0 00 1 9 4 0 00

3 6 0 0 00 $1 2 3 4 00

Figure 9.20b  Bank Statement for February Bank Statement (February) Date

Feb. 1 2 2 2 3 3 7 7 7 8 11 12 12 13 17 22 22 22 23 26 27 28 28 28

Cheques

Deposits

3,250 1,940 1,660 1,580 926 4,560 3,500 89 91 123 3,300 84 155 7,500 3,000 361 2,750 MTG 2,500 4,250 3,910 667 S/C 23 NSF 250

Balance

1,584 4,834 2,894 1,234 2,814 1,888 6,448 2,948 2,859 2,768 2,645 5,945 5,861 5,706 13,206 16,206 15,845 13,095 10,595 14,845 10,935 10,268 10,245 9,995

NEL

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Figure 9.20c  Cash Receipts Journal

Figure 9.20d  Cash Payments Journal Cash Payments Journal

Cash Receipts Journal Date

Deposits

Feb. 3 7 12 17 22 26 28

1,580 4,560 3,300 7,500 3,000 4,250 3,550 27,740

Date

Feb. 2 5 5 6 7 11 11 17 20 23 23 23 27 27 28

Chq#

233 234 235 236 237 238 239 240 241 242 243 Mortgage 244 245 246

Amount

926 89 3,500 91 123 84 155 2,750 361 3,910 667 2,500 1,740 1,000 2,050 19,946

Check the February deposits in the Cash Receipts Journal (Figure 9.20c) against the deposits listed on the bank statement. Write “O/S” beside any deposit in the journal that does not appear on the bank statement. These are the outstanding deposits that will be shown on this month’s bank reconciliation. Check the February entries in the Cash Payments Journal (Figure 9.20d) against the cheques listed on the bank statement. Write “O/S” beside any payment in the journal that does not have a corresponding amount on the bank statement. These are the outstanding cheques to be shown on this month’s bank reconciliation. The balance in the Bank account on the books at the end of January was $1,234. Use this amount and the totals of the Cash Receipts and Cash Payments Journals to calculate the balance in the Bank account at the end of February. The following items were noted on the bank statement at the end of February but have not yet been recorded on the books: (a) monthly bank charges, $23. (b) NSF cheque from H. Potter, $250. Finally, record the General Journal entries for the items not yet recorded on the books. PRACTICE EXERCISE 10 (a) Prepare a bank reconciliation statement on August 31 from the information taken from the books of KRA Enterprises. To complete this task, you will refer to the following journals and documents: i.  last month’s bank reconciliation statement (Figure 9.21a) NEL

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ii. Cash Receipts and Cash Payments Journals for August (Figures 9.21b and 9.21c) iii.  bank statement dated August 31 (Figure 9.21d) Follow these steps carefully: 1. Compare the outstanding deposit and the outstanding cheques listed on the July reconciliation statement with the deposits and cheques listed on the August bank statement. If these items appear on the bank statement, place a check mark beside each amount on the bank statement since it is no longer outstanding. Figure 9.21a  Bank Reconciliation Statement for July KRA Enterprises Bank Reconciliation Statement July 31, 20— $12 0 4 2 89 1 1 2 9 34 13 1 7 2 23

Bank Statement Balance Add: Outstanding Deposit Deduct: Outstanding Cheques #85 #86 Adjusted Balance

$

9 5 0 00 1 5 0 0 00

2 4 5 0 00 $10 7 2 2 23

Figure 9.21b  Cash Receipts Journal for August KRA ENTERPRISES CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

20— Aug. 4 Rental Revenue 5 Dorn & Son Beaver Weaver Co.

MEMO

Clear-View

F.

ACCTS. REC. CR.

SALES DISC. DR.

412

On acct. –2% 151

5 8 1 01

1 1 62

On acct. –2% 150

2 8 1 41

5 63 3 6 2 0 00

404

13 Sales—Service

2 9 5 0 00 On acct.

150

1 4 6 0 55

Dayton Co.

On acct.

151

1 9 6 3 45

Jasper Co.

On acct.

152

9 6 3 00

1 8 1 00

On acct.

151

5 0 0 00

28 E. Morgan

On acct. –2% 154

9 4 1 60

1 8 83

W. Wilkes

On acct. –2% 155

1 0 3 6 40

2 0 73

K. Yeung

On acct. –2% 156

7 4 9 00

1 4 98

1 4 7 50

2 7 0 0 00

1 9 0 4 77 2 0 0 0 00

2 8 9 60

4 9 3 5 77 2 0 5 6 08 2 1 5 8 88

2 3 6 00

1 3 5 00

3 3 3 3 50

2 1 6 00

3 7 38 (104)

BANK DR.

3 5 5 1 00

404 8 4 7 6 42

GEN. LED. CR.

4 3 8 7 00

27 Cash Sales

Sales—Service

PST PAY. CR.

1 0 2 80

17 Cash Sales

Dorn & Son

GST PAY. CR.

9 5 23

Cash Sales

19 Beaver Weaver Co.

SALES CR.

7 1 79 9 2 7 0 00 ( 4 1 5)

(401)

6 9 8 91 (220)

7 4 7 66

3 4 5 7 50

7 4 1 60 4 7 0 8 51 23 8 2 3 65 (210)

( 1 0 1)

NEL

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Accounting for Cash

Figure 9.21c  Cash Payments Journal for August KRA ENTERPRISES CASH PAYMENTS JOURNAL DATE

ACCOUNT DEBIT

MEMO

20— Aug. 4 Telephone Expense

F.

ACCTS. PAY. DR.

PURCH. DISC. CR.

GST–ITC DR.

GEN. LED. DR.

BANK CR.

CH. NO.

531

8 22

1 7 7 60

1 8 5 82 87

Utilities Expense

Electricity

534

1 01

2 1 79

2 2 80 88

Utilities Expense

Hydro

534

3 88

8 3 90

8 7 78 89

Mortgage Payable

For August

214

Interest on Mortgage

On above

523

Freight In On imported goods

Duty & Brokerage 5 Postage Expense

3 1 3 50 1 0 0 0 00

1 3 1 3 50 DM

506

2 27

4 9 03

5 1 30 90

505

4 07

8 7 93

9 2 00 91

526

4 73

1 0 2 27

1 0 7 00 92

1 55

11 Freight In

CP Freight

506

3 3 45

3 5 00 93

12 Donations

Red Cross

520

5 0 00

5 0 00 94

14 Bank Loan Payable

Final installment

202

8 5 0 0 00

On above

522

3 2 60

8 5 3 2 60 DM

For July

210

1 2 1 7 30

1 2 1 7 30 95

513

8 0 0 00

8 0 0 00 96

Interest on Loan 19 PST Payable 26 Business Tax Expense 27 Miscellaneous Expense Postage Expense Advertising Expense 28 Richland Ent.

}

Reimburse

524

Petty cash

526

2 31

1 6 90 3 10 2 9 83

510

5 2 14 97 9 5 0 00 98

9 5 0 00

On acct.

255

Walker Co.

On acct.

259

1 5 0 0 00

Colfield Industries

On acct. –2%

250

1 6 0 0 00

3 2 00

Rayburn Suppliers

On acct. –2%

254

8 2 0 00

1 6 40

Spencer Stationery

On acct.

257

2 2 0 0 00

2 2 0 0 00 102

Ranger Insurance Co.

On acct.

253

2 0 0 0 00

2 0 0 0 00 103

Kraus, Allen

On acct.

251

2 0 0 0 00

2 0 0 0 00 104

On bank stmt.

522

31 Bank Charges Expense

1 5 0 0 00 99 1 5 6 8 00 100 8 0 3 60 101

4 2 00 11 0 7 0 00 (2 0 1)

4 8 40 (5 0 4 )

4 2 00 DM

2 8 04 12 5 6 1 20 23 6 1 0 84 ( 2 2 2)

( 1 0 1)

2. Check the August deposits in the Cash Receipts Journal against the deposits listed on the bank statement. Write “O/S” beside any deposit in the journal that does not appear on the bank statement. These are the outstanding deposits to be shown on this month’s bank reconciliation. 3. Check the August cheques and debit memos on the bank statement against the cheques listed in the Cash Payments Journal. Write “O/S” beside any payments in the journal that do not have corresponding amounts on the statement. These are the outstanding cheques to be shown on this month’s bank reconciliation. 4. The balance in the Bank account in the General Ledger was $10,722.23 on July 31. Add the August receipts and subtract the August payments to find the Bank account balance on August 31. NEL

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Figure 9.21d  Bank Statement for August

$

The Canadiana Bank 54321 Yonge Street Toronto ON M8U 7R4 Customer: KRA Enterprises

Date

Details

01-Aug. 02-Aug. 02-Aug. 02-Aug. 04-Aug. 04-Aug. 05-Aug. 06-Aug. 07-Aug. 07-Aug. 07-Aug. 08-Aug. 08-Aug. 12-Aug. 14-Aug. 14-Aug. 15-Aug. 17-Aug. 19-Aug. 20-Aug. 27-Aug. 27-Aug. 27-Aug. 27-Aug. 27-Aug. 28-Aug. 28-Aug. 29-Aug. 29-Aug. 30-Aug. 30-Aug. 31-Aug.

Balance Forward Cheque 00085 Cheque 00086

Account #: 654-000-0 Cheques

Deposits

950.00 1,500.00 1,129.34 1,313.50 2,000.00 4,935.77

Cheque 00090 Cheque 00087 Cheque 00088 Cheque 00092 Cheque 00089 Cheque 00091 Cheque 00093

51.30 185.82 22.80 107.00 87.78 92.00 35.00 8,532.60 2,158.88

Cheque 00094

50.00 3,333.50 4,387.00

Cheque 00095 Cheque 00096 Cheque 00097

1,217.30 800.00 52.14 3,551.00

SafeDepositBox NSFchqRtrn

40.00 120.00 3,457.50 250.00

Cheque 00098 Cheque 00099 Cheque 00101 Cheque 00104 ServiceCharge

950.00 1,500.00 803.60 2,000.00 42.00

Balance

12,042.89 11,092.89 9,592.89 10,722.23 9,408.73 11,408.73 16,344.50 16,293.20 16,107.38 16,084.58 15,977.58 15,889.80 15,797.80 15,762.80 7,230.20 9,389.08 9,339.08 12,672.58 17,059.58 15,842.28 15,042.28 14,990.14 18,541.14 18,501.14 18,381.14 21,838.64 22,088.64 21,138.64 19,638.64 18,835.04 16,835.04 16,793.04

NEL

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169

5. These items were received with the bank statement at the end of August but are not yet recorded on the books: i. credit memo for $250 for interest earned on a term deposit ii. debit memo for $40 for the rental of the safety deposit box iii. debit memo for $120 for an NSF cheque from Janet Long Record the General Journal entries for the items not yet recorded on the books. Supplementary Exercises EXERCISE 9-1: Open file SE-9-1. Complete the petty cash sheet. Choose the tab for the tax system used in your province. EXERCISE 9-2: Open file SE-9-2. Calculate the missing amounts in a bank reconciliation statement. THINK ABOUT IT! 1. What is the purpose of the petty cash fund? 2. How often is the petty cash fund reimbursed? 3. Does the balance on the bank statement usually agree with the balance in the Bank account in the General Ledger? Why? 4. What are the chief differences between the bank statement balance and the Bank account balance in the ledger? 5. When is the bank balance reconciled? 6. Name two items that often accompany the bank statement when it is sent to the customer. 7. What is an outstanding cheque? 8. What is a certified cheque? 9. What is an NSF cheque? How would a customer’s NSF cheque affect our books?

CASE STUDY: KBC DECORATING CO. MAY TRANSACTIONS In this chapter, you learned about using the petty cash fund for small cash expenditures, and about bank reconciliation. Both of these concepts will be included in this month’s activities for KBC Decorating Co. Last month, the owners were in negotiations to buy the building that they have been renting. They have come to an agreement on the price of the property and have agreed to continue the rental arrangement with the other tenant, Clear-Vu Windows, which has been renting a small portion of the building. Beginning this month, Clear-Vu will pay rent to KBC Decorating at $1,500 per month plus HST. This month, KBC will launch a major advertising campaign for painting and decorating. The company has contracted the services of Mitchell Advertising to look after all media advertising. NEL

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Record these transactions for the month of May: 20— May 1 KBC has arranged a $150,000 mortgage for the purchase of the land and building, valued as follows: Land $40,000 Building 160,000 Total $200,000 The difference between the value of the property and the amount of the mortgage ($200,000 – $150,000 = $50,000) will be paid from company funds as the down payment. However, to ensure that the owners leave enough money in the bank account for ongoing business needs, each partner will invest an additional $10,000. Here is what you will do: First, record entries in the cash Receipts Journal for the investment of $10,000 cash by each partner. Next, record the entry in the Cash Receipts Journal for the $150,000 mortgage. Credit Mortgage Payable. Figure 9.22 shows this entry in General Journal format. Finally, issue a cheque for $200,000 for the purchase of the property. In the Cash Payments Journal, debit Land for $40,000 and debit Building for $160,000. 1 Received cheque from Clear-Vu Windows for rent for May, $1,500 plus HST. Credit Rental Revenue. 1 Received cheque from Jay-Mar Co. as full payment on Invoice #8, less discount. 1 Issued cheque for $50 to establish the petty cash fund. 2 Bought office supplies, $240, and warehouse supplies, $120, from Major Office Supplies on Invoice #203 dated today; terms n/30. Add HST. 4 Paid Rainbow Supplies in full for Invoice #66. 4 Issued cheques to pay phone bill, $182 plus HST; electricity bill, $133 plus HST; and gas (heating) bill, $146 plus HST. 5 Sold paint and supplies, $620 plus HST, to Edna Morton on terms 2/10, n/30.

Figure 9.22  Recording a New Mortgage May

1

Bank Mortage Payable Received new mortage from the bank

150 0 0 0 00 150 0 0 0 00

NEL

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5 Bought wallpaper from Reynolds Paper Co., $6,200 plus HST, on Invoice #153 dated yesterday. Terms n/30. 6 Contracted with Mitchell Advertising for new advertising campaign. Mitchell has invoiced for $4,644 plus HST on Invoice #255 dated today, terms n/10. (Charge Advertising Expense) 6 Paid from petty cash: postage, $6 plus HST; and pens and pencils for office, $4.86 plus HST. 8 Bought paint and supplies, $10,500 plus HST, from Rainbow Supplies on Invoice #91 dated today. Terms 1/10, n/30. 9 Edna Morton has asked for price adjustment for damaged goods on her order of the 5th. We issued credit note for $30 plus HST. 9 Paid RamJet Courier for shipping the unusually large order of paint and supplies from Rainbow Supplies, $170 plus HST. 10 Received credit note from Rainbow Supplies for damage to our order on the 8th, $150 plus HST. 10 Paid from petty cash: courier charges for delivering documents to the lawyer, $18 plus HST (Miscellaneous Expense); postage, $5.50 plus HST. 10 Received April bank statement (Figure 9.23). Prepare the Bank Reconciliation Statement and record the necessary entry for service charge not yet recorded on the books. 12 Paid Major Office Supplies in full for Invoice #167.

Figure 9.23  Bank Statement for April (KBC Decorating Co.) Bank Statement—April Date

1-Apr. 5-Apr. 7-Apr. 7-Apr. 7-Apr. 10-Apr. 12-Apr. 15-Apr. 15-Apr. 17-Apr. 20-Apr. 20-Apr. 26-Apr. 30-Apr.

Details

CHQ0030 CHQ0033 CHQ0031 CHQ0032 CHQ0034 CHQ0035 CHQ0036 DEP DEP CHQ0037 DEP CHQ0038 SC

Cheques

Deposits

2,825.00 463.30 1,130.00 180.80 62.15 213.57 3,164.00 7,910.00 548.05 63.28 1,520.70 802.94 12.00

Balance

46,395.39 43,570.39 43,107.09 41,977.09 41,796.29 41,734.14 41,520.57 38,356.57 46,266.57 46,814.62 46,751.34 48,272.04 47,469.10 47,457.10

NEL

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14 Sold paint and supplies, $2,300, and wallpaper, $800, to S. Miller on terms 2/10, n/30. 15 Received payment from Edna Morton for net amount owing on Invoice #9. 15 Paid Coleman Industries in full for Invoice #430. 16 Paid Mitchell Advertising for Invoice #255. 16 Cash sales to date: paint and supplies, $6,800, and wallpaper, $4,400. Add HST as usual. 18 Paid Rainbow Supplies for balance owing on Invoice #91. 23 Received full payment from S. Miller for Invoice #10. 24 Paid from petty cash: postage, $7.50 plus HST. 24 Reimbursed petty cash fund: Cash remaining in the petty cash drawer was $2.45. Any difference between the calculated cash on hand and the actual cash on hand will be charged to Cash Over or Short. Issued cheque to reimburse fund. 31 Cash sales to date: paint and supplies, $8,600, and wallpaper, $2,000. Add HST as usual. 31 Paid for gas and oil for our truck used for occasional deliveries of goods to cash customers, $180 plus HST. AT MONTH-END (a) (b) (c)

Total, balance, and rule the journals. Post all entries to the ledger accounts as usual. Prepare a trial balance on May 31, 20—.

NEL

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● calculate and record payroll for employees in hourly, piecework, salary, commission, and salary/commission payroll systems ●● look up payroll deductions from government payroll deduction tables ●● record remittances for government deductions and voluntary deductions

IMPORTANT TERMS USED IN THIS CHAPTER Canada Pension Plan (CPP) Compulsory Deductions Employee Earnings Record Employment Insurance (EI) Federal Income Tax Gross Pay Net Pay Payroll Record Provincial Income Tax Voluntary Deductions

CHAPTER

10 PAYROLL

NEL

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S

Fun Fact The ancient Romans were fanatical recordkeepers. Their military bases kept detailed accounts on everything! They knew exactly how much grain was in their stores and how many nails were in their workshops.

alaries and wages are among the most significant costs incurred in the operation of any business. The employer not only pays the employees but also contributes to the federal government’s Canada Pension and Employment Insurance plans, and may also contribute to company pension plans, medical plans, and Workers’ Compensation. Because salaries and wages represent such a large part of total operating costs, and because of the many federal and provincial laws pertaining to the administration of payroll, every employer is required to keep a detailed record of payroll information, not only for its own internal purposes but also for the sake of its employees and for Canada Revenue Agency (CRA). The employer’s payroll system must include all the pertinent input data, such as social insurance numbers, the number of regular and overtime hours worked, pay rates, and payroll deductions. As well, it must produce accurate paycheques, payroll records, withholding (deductions) statements, and various reports for the government. Such payroll records are also used for determining employees’ vacation time and pay, sick leaves, and retirement pensions.

THE PAYROLL PROCESS CALCULATING GROSS PAY The method of calculating an employee’s gross pay will depend on the nature of the employee’s work—a factory worker may be paid on an hourly or piecework basis while an office employee may earn a fixed monthly salary. Gross pay refers to the value earned by the employee before any deductions are taken. Here are the most common methods for calculating gross pay: 1. Salary Payroll: The salaried employee is paid a fixed amount for the pay period, usually weekly, biweekly (every two weeks), semimonthly (twice per month), or monthly. 2. Hourly Payroll: Employees are paid on the basis of the number of hours worked in a given pay period (weekly, biweekly, monthly, etc.). As each employee enters and leaves the workplace, he or she stamps a time card (see Figure 10.1) in a special time clock that notes the exact “time in” and “time out” each working day. This is often referred to as “punching in” and “punching out.” From the time card, the total regular hours and total overtime hours are calculated. Gross pay is then calculated using these formulas: Regular Hours Worked 3 Regular Rate 5 Gross Pay (Regular) Overtime Hours Worked 3 Overtime Rate 5 Gross Pay (Overtime) The overtime pay rate may vary depending on the time of day or the day of the week during which the overtime was worked, such as “double time” (double the regular pay) for work on a Sunday or holiday. The business may have different overtime rates in effect, such as “time-and-a-half” (1.5 times the regular rate) for working more than 8 hours on a weekday plus double time for working on weekends. The employment contract between employer and employee will specify what rates are in effect. NEL

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Payroll

Figure 10.1  Payroll Time Card WEEK ENDING

NO.

NAME

January 8

20—

103 Ronald Davies

Morning IN

Noon OUT

Noon IN

Night OUT

Extra IN

Extra OUT

TOTAL HOURS

5:00

7:02

8+2

M

7:55

12:00

12:29

4:30

T

8:00

12:00

12:30

4:30

8

W

8:01

12:01

12:30

4:31

8

T

8:00

12:00

12:30

4:30

8

F

7:58

12:00

12:28

4:30

8

S

40 + 2 = 42 15.00 / 22.50

TOTAL TIME RATE

TOTAL WAGES FOR WEEK $

HRS.

645.00

As shown in Figure 10.1, Ron Davies has worked 40 regular hours and 2 overtime hours at time-and-a-half. His gross pay is calculated as follows: Regular pay: 40 hours 3 $15.00 = $600.00 45.00 Overtime pay: 2 hours 3 $15.00 3 1.5 = Gross Pay $645.00 The employee’s gross pay may also be affected by penalties for arriving late for work, depending on the employment policies of the company. Some companies might not impose a penalty for lateness unless the employee is late 15 minutes or more. Others might impose a penalty even if the worker is only a minute or two late, which could result in 15 to 30 minutes of pay being deducted. 3. Piecework Payroll: Employees are paid according to the number of pieces they produce during the pay period. The incentive for the employee is to produce as many pieces of product as possible in order to earn a higher wage. The employer benefits from this increased production too, but may have to sacrifice quality for quantity. To calculate the gross pay in a piecework payroll system, a factory worker might be paid $0.50 for each of the first 500 pieces produced, $0.60 for each of the next 250 pieces, and $0.65 for each piece over 750 pieces completed. The more productive the employee is, the more he or she is paid. So if the worker completed 800 pieces this week, the gross pay would be calculated as follows: First 500 pieces: 500 × 0.50 = $250.00 Next 250 pieces: 250 × 0.60 = 150.00 Over 750 pieces:   50 × 0.65 = 32.50 Gross Pay for 800 pieces $432.50 NEL

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4. Commission Payroll: Commission employees, such as salespeople, are paid on an incentive basis similar to that of the piecework payroll. Such an employee is paid a commission based on his or her sales (usually a fixed percentage of either the number of units sold or the value of the goods or services sold). For example, a salesperson might be paid a commission of 7% of all sales recorded during the month. Another employee might be paid on an escalating commission scale as an added incentive, such as 7% on the first $5,000 of sales and 9.5% on all sales over $5,000. Just as with the piecework payroll, the more the salesperson sells, the more he or she earns. 5. Salary–Commission Payroll: In this payroll system, the employee is paid a basic weekly or monthly salary plus a commission on sales recorded during the pay period. For example, a salesperson might be paid a basic salary of $400 a week plus 5% commission on sales. If this salesperson sold $4,800 worth of goods this week, the gross pay would be as follows: Basic salary Commission: $4,800 sales 3 5% 5 Gross Pay

$400.00 240.00 $640.00

This is sometimes known as the guaranteed pay method. An employee might earn a high commission during peak sales periods, but would have to depend on the basic salary of $400 per week when sales are low.

USING DEDUCTION TABLES All employees will have compulsory deductions taken from their gross pay. These deductions include federal and provincial income tax, the Canada Pension Plan contribution, and Employment Insurance premium. Deductions are withheld by the employer and remitted regularly to the government on the employees’ behalf. The amounts of the compulsory deductions are determined by looking up the employee’s gross pay in the Payroll Deductions Tables issued by CRA twice a year. These tables are available in booklet form and as pdf documents that can be downloaded from the CRA web site. As well, deductions can be determined using the Payroll Deductions Online Calculator on the CRA web site. Also, employers who use payroll software receive regular updates for deductions tables. 1. Income Tax: The compulsory deductions for income tax are federal income tax and provincial income tax. The income tax category (or Claim Code) for each employee is based on the total of personal claim amounts (tax credits) to which the employee is entitled (such as the basic personal claim amount, a claim for spouse or common-law partner, claims for dependants, etc.). These claim amounts are determined from the TD1 Form that an employee fills out when he or she begins employment with the company. The claim code may be different for both federal and provincial income taxes. 2. Canada Pension Plan (or Quebec Pension Plan) (CPP/QPP): In this discussion, we will be referring to the Canada Pension Plan (CPP); however, NEL

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177

the QPP is similar. CPP contributions must be made by all employees aged 18 to 70 who are in pensionable employment and who are not currently receiving a CPP or QPP retirement or disability pension. The rate of CPP contributions and the maximum contributory earnings are subject to change each year. The employer is required to contribute an amount equal to the CPP contributed by the employees. For example, if $550 is withheld from employees for CPP, the employer must also contribute $550, therefore remitting a total of $1,100. 3. Employment Insurance (EI): The EI fund provides benefits for limited periods of unemployment, for parental leave, for periods of injury or illness, and for periods of providing compassionate care to a family member. As with CPP, the rate of EI contributions and the maximum earnings are subject to change each year. The employer is required to contribute an amount 1.4 times the amount of EI contributed by employees. For example, if $390 is withheld from employees for EI, the employer must contribute $390 3 1.4 5 $546, for a total remittance of $390 1 $546 5 $936. 4. Other Deductions: In addition to the compulsory deductions already discussed, voluntary deductions are often authorized by the employee for life insurance, medical and dental plans, company pension plans, registered retirement savings plans (RSPs), and Canada Savings Bonds. Union dues, though, are a compulsory deduction if the employee is a member of a union. Most life insurance companies offer group insurance plans that provide not only life insurance but also health coverage for employees unable to work due to illness or injury. These plans may also include semiprivate hospital coverage, vision care, ambulance fees, and dental insurance. Employers may or may not contribute to voluntary plans, depending on the type of plan. In Figure 10.1, we determined that the gross pay for Ron Davies is $645. However, this amount will not be paid to him because deductions must be withheld from his gross pay. Net pay is the amount the employee will receive after deductions are withheld. We must first determine the income taxes, Employment Insurance, Canada Pension Plan, and group health insurance premiums. For the purposes of our ongoing illustration with Ron Davies, we will use deductions tables downloaded from the CRA web site. We will assume that Ron Davies lives and works in Ontario and that his claim code is CC 5 for both federal and provincial taxes. First, we will determine the amount of federal income tax deduction by using the weekly federal income tax table. In Figure 10.2, look for the range of pay on the left side of the table into which this employee’s gross pay ($645) falls. In this case, the amount happens to fall in two pay ranges: $637–$645 and $645–$653. For this illustration, we use the range $645–$653. Look across to column CC 5 (Claim Code 5) to see the amount of federal tax, $32.05. Next, we will look up the provincial income tax deduction the same way using the weekly provincial income tax table in Figure 10.3. The gross pay of $645 falls in the range of $639 to $647. Look across to column CC 5 (Claim Code 5) to see a deduction of $18.95. Then, we will find the Canada Pension Plan contribution using the table for weekly CPP contributions in Figure 10.4. Again, look for the range of pay into which the gross pay ($645) falls. Here the range is $644.98 to $645.17. The CPP contribution is $28.60. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Figure 10.2  Federal Tax Deductions (Weekly) Federal tax deductions

Effective January 1, 2017 Weekly (52 pay periods a year)

Also look up the tax deductions in the provincial table Pay From less than

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589 - 597 597 - 605 605 - 613 613 - 621 621 - 629 629 - 637 637 - 645 645 - 653 653 - 661 661 - 669 669 - 677 677 - 685 685 - 693 693 - 701 701 - 709 709 - 717 717 - 725 725 - 733 733 - 741 741 - 749 749 - 757 757 - 765 765 - 773 773 - 781 781 - 789 789 - 797 797 - 805 805 - 813 813 - 821 821 - 829 829 - 837 837 - 845 845 - 853 853 - 861 861 - 869 869 - 877 877 - 885 885 - 893 893 - 901 901 - 909 909 - 917 917 - 925 925 - 933 933 - 941 941 - 949 949 - 957 957 - 965 965 - 973 973 - 981 981 - 989 989 - 997 997 - 1005 1005 - 1013 1013 - 1021 1021 - 1029

80.20 81.30 82.45 83.55 84.70 85.80 86.95 88.05 89.15 90.30 91.40 92.55 93.65 94.75 95.90 97.00 98.15 99.25 100.40 101.50 102.60 103.75 104.85 106.00 107.10 108.20 109.35 110.45 111.60 112.70 113.85 114.95 116.05 117.20 118.30 119.45 120.55 122.00 123.60 125.15 126.70 128.25 129.80 131.40 132.95 134.50 136.05 137.65 139.20 140.75 142.30 143.90 145.50 147.05 148.65

46.65 47.75 48.90 50.00 51.10 52.25 53.35 54.50 55.60 56.75 57.85 58.95 60.10 61.20 62.35 63.45 64.55 65.70 66.80 67.95 69.05 70.20 71.30 72.40 73.55 74.65 75.80 76.90 78.05 79.15 80.25 81.40 82.50 83.65 84.75 85.85 87.00 88.45 90.00 91.55 93.15 94.70 96.25 97.80 99.40 100.95 102.50 104.05 105.60 107.20 108.75 110.35 111.90 113.50 115.10

43.45 44.55 45.65 46.80 47.90 49.05 50.15 51.30 52.40 53.50 54.65 55.75 56.90 58.00 59.10 60.25 61.35 62.50 63.60 64.75 65.85 66.95 68.10 69.20 70.35 71.45 72.60 73.70 74.80 75.95 77.05 78.20 79.30 80.40 81.55 82.65 83.80 85.25 86.80 88.35 89.95 91.50 93.05 94.60 96.15 97.75 99.30 100.85 102.40 104.00 105.55 107.15 108.70 110.30 111.90

37.00 38.15 39.25 40.40 41.50 42.60 43.75 44.85 46.00 47.10 48.25 49.35 50.45 51.60 52.70 53.85 54.95 56.10 57.20 58.30 59.45 60.55 61.70 62.80 63.90 65.05 66.15 67.30 68.40 69.55 70.65 71.75 72.90 74.00 75.15 76.25 77.35 78.85 80.40 81.95 83.50 85.10 86.65 88.20 89.75 91.30 92.90 94.45 96.00 97.55 99.15 100.70 102.30 103.90 105.45

30.60 31.75 32.85 33.95 35.10 36.20 37.35 38.45 39.55 40.70 41.80 42.95 44.05 45.20 46.30 47.40 48.55 49.65 50.80 51.90 53.05 54.15 55.25 56.40 57.50 58.65 59.75 60.85 62.00 63.10 64.25 65.35 66.50 67.60 68.70 69.85 70.95 72.40 74.00 75.55 77.10 78.65 80.25 81.80 83.35 84.90 86.45 88.05 89.60 91.15 92.75 94.30 95.90 97.45 99.05

24.20 25.30 26.45 27.55 28.70 29.80 30.90 32.05 33.15 34.30 35.40 36.50 37.65 38.75 39.90 41.00 42.15 43.25 44.35 45.50 46.60 47.75 48.85 50.00 51.10 52.20 53.35 54.45 55.60 56.70 57.80 58.95 60.05 61.20 62.30 63.45 64.55 66.00 67.55 69.15 70.70 72.25 73.80 75.35 76.95 78.50 80.05 81.60 83.20 84.75 86.30 87.90 89.50 91.05 92.65

17.80 18.90 20.00 21.15 22.25 23.40 24.50 25.65 26.75 27.85 29.00 30.10 31.25 32.35 33.45 34.60 35.70 36.85 37.95 39.10 40.20 41.30 42.45 43.55 44.70 45.80 46.95 48.05 49.15 50.30 51.40 52.55 53.65 54.75 55.90 57.00 58.15 59.60 61.15 62.70 64.30 65.85 67.40 68.95 70.50 72.10 73.65 75.20 76.75 78.35 79.90 81.50 83.05 84.65 86.25

11.35 12.50 13.60 14.75 15.85 16.95 18.10 19.20 20.35 21.45 22.60 23.70 24.80 25.95 27.05 28.20 29.30 30.45 31.55 32.65 33.80 34.90 36.05 37.15 38.25 39.40 40.50 41.65 42.75 43.90 45.00 46.10 47.25 48.35 49.50 50.60 51.70 53.20 54.75 56.30 57.85 59.45 61.00 62.55 64.10 65.65 67.25 68.80 70.35 71.90 73.50 75.05 76.65 78.25 79.80

4.95 6.10 7.20 8.30 9.45 10.55 11.70 12.80 13.90 15.05 16.15 17.30 18.40 19.55 20.65 21.75 22.90 24.00 25.15 26.25 27.40 28.50 29.60 30.75 31.85 33.00 34.10 35.20 36.35 37.45 38.60 39.70 40.85 41.95 43.05 44.20 45.30 46.75 48.35 49.90 51.45 53.00 54.60 56.15 57.70 59.25 60.80 62.40 63.95 65.50 67.10 68.65 70.25 71.80 73.40

.80 1.90 3.05 4.15 5.25 6.40 7.50 8.65 9.75 10.85 12.00 13.10 14.25 15.35 16.50 17.60 18.70 19.85 20.95 22.10 23.20 24.35 25.45 26.55 27.70 28.80 29.95 31.05 32.15 33.30 34.40 35.55 36.65 37.80 38.90 40.35 41.90 43.50 45.05 46.60 48.15 49.70 51.30 52.85 54.40 55.95 57.55 59.10 60.65 62.25 63.85 65.40 67.00

1.10 2.20 3.35 4.45 5.60 6.70 7.80 8.95 10.05 11.20 12.30 13.45 14.55 15.65 16.80 17.90 19.05 20.15 21.30 22.40 23.50 24.65 25.75 26.90 28.00 29.10 30.25 31.35 32.50 33.95 35.50 37.05 38.65 40.20 41.75 43.30 44.85 46.45 48.00 49.55 51.10 52.70 54.25 55.85 57.40 59.00 60.60

Source: T4032ON, Payroll Deductions Tables – CPP, EI, and income tax deductions – Ontario – Effective January 1, 2017 – Sections D and E – Federal and Ontario provincial tax deductions tables, 52 pay periods per year (Weekly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/2017/ t4032-on-52pp-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Payroll

Figure 10.3  Provincial Tax Deductions (Weekly) Ontario provincial tax deductions Effective January 1, 2017 Weekly (52 pay periods a year)

Also look up the tax deductions in the federal table Pay From less than

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411 415 419 423 427 431 435 439 443 447 451 455 459 463 467 471 475 479 483 487 491 495 499 503 507 511 515 519 523 527 531 535 539 543 547 551 555 559 563 567 571 575 579 583 587 591 595 599 603 607 611 615 619 623 627

21.35 21.80 22.20 22.65 23.05 23.50 23.95 24.35 24.80 25.20 25.65 26.05 26.50 26.95 27.35 27.80 28.20 28.65 28.80 29.00 29.20 29.40 29.55 29.75 29.95 30.15 30.35 30.50 30.70 30.90 31.10 31.25 31.45 31.65 31.85 32.05 32.20 32.40 32.60 32.80 32.95 33.15 33.35 33.55 33.70 33.90 34.10 34.30 34.50 34.65 34.85 35.05 35.25 35.40 35.60

11.50 11.90 12.35 12.75 13.20 13.60 14.05 14.50 14.90 15.35 15.75 16.20 16.60 17.05 17.50 17.90 18.35 18.75 18.95 19.15 19.30 19.50 19.70 19.90 20.05 20.25 20.45 20.65 20.85 21.00 21.20 21.40 21.60 21.75 21.95 22.15 22.35 22.55 22.70 22.90 23.10 23.30 23.45 23.65 23.85 24.05 24.20 24.40 24.60 24.80 25.00 25.15 25.35 25.55 25.75

10.10 10.70 11.25 11.70 12.15 12.55 13.00 13.40 13.85 14.25 14.70 15.15 15.55 16.00 16.40 16.85 17.25 17.70 17.90 18.05 18.25 18.45 18.65 18.80 19.00 19.20 19.40 19.60 19.75 19.95 20.15 20.35 20.50 20.70 20.90 21.10 21.25 21.45 21.65 21.85 22.05 22.20 22.40 22.60 22.80 22.95 23.15 23.35 23.55 23.75 23.90 24.10 24.30 24.50 24.65

5.85 6.45 7.05 7.70 8.30 8.90 9.55 10.15 10.75 11.40 12.00 12.60 13.25 13.85 14.30 14.70 15.15 15.55 15.75 15.95 16.15 16.30 16.50 16.70 16.90 17.05 17.25 17.45 17.65 17.85 18.00 18.20 18.40 18.60 18.75 18.95 19.15 19.35 19.50 19.70 19.90 20.10 20.30 20.45 20.65 20.85 21.05 21.20 21.40 21.60 21.80 22.00 22.15 22.35 22.55

1.70 2.20 2.80 3.45 4.05 4.65 5.30 5.90 6.50 7.15 7.75 8.35 9.00 9.60 10.20 10.85 11.45 12.05 12.45 12.80 13.20 13.55 13.95 14.30 14.70 14.95 15.15 15.30 15.50 15.70 15.90 16.05 16.25 16.45 16.65 16.85 17.00 17.20 17.40 17.60 17.75 17.95 18.15 18.35 18.55 18.70 18.90 19.10 19.30 19.45 19.65 19.85 20.05 20.25 20.40

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.75 5.35 5.95 6.60 7.20 7.80 8.20 8.55 8.95 9.30 9.70 10.05 10.45 10.80 11.20 11.60 11.95 12.35 12.70 13.10 13.45 13.85 14.20 14.60 14.90 15.10 15.25 15.45 15.65 15.85 16.00 16.20 16.40 16.60 16.80 16.95 17.15 17.35 17.55 17.70 17.90 18.10 18.30

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.60 4.80 5.05 5.30 5.55 5.75 5.75 5.75 5.75 5.75 5.75 5.80 6.20 6.55 6.95 7.30 7.70 8.10 8.45 8.85 9.20 9.60 9.95 10.35 10.70 11.10 11.45 11.85 12.25 12.60 13.00 13.35 13.75 14.10 14.50 14.85 15.05 15.20 15.40 15.60 15.80 15.95 16.15

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.60 4.80 5.05 5.30 5.55 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 6.10 6.45 6.85 7.20 7.60 7.95 8.35 8.75 9.10 9.50 9.85 10.25 10.60 11.00 11.35 11.75 12.10 12.50 12.90 13.25

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.60 4.80 5.05 5.30 5.55 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 6.00 6.35 6.75 7.10 7.50 7.85 8.25 8.60 9.00

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.60 4.80 5.05 5.30 5.55 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75

1.70 1.95 2.20 2.40 2.65 2.90 3.15 3.40 3.60 3.85 4.10 4.35 4.60 4.80 5.05 5.30 5.55 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75

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415 419 423 427 431 435 439 443 447 451 455 459 463 467 471 475 479 483 487 491 495 499 503 507 511 515 519 523 527 531 535 539 543 547 551 555 559 563 567 571 575 579 583 587 591 595 599 603 607 611 615 619 623 627 631

NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Figure 10.3  Provincial Tax Deductions (Weekly)(Continued) Ontario provincial tax deductions Effective January 1, 2017 Weekly (52 pay periods a year)

Also look up the tax deductions in the federal table Pay From less than

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631 639 647 655 663 671 679 687 695 703 711 719 727 735 743 751 759 767 775 783 791 799 807 815 823 831 839 847 855 863 871 879 887 895 903 911 919 927 935 943 951 959 967 975 983 991 999 1007 1015 1023 1031 1039 1047 1055 1063

35.90 36.25 36.65 37.05 37.40 37.80 38.15 38.55 39.30 40.15 41.05 41.90 42.75 43.60 44.05 44.45 44.80 45.20 45.55 45.95 46.35 46.70 47.10 47.75 48.50 49.20 49.90 50.60 51.30 52.00 52.70 53.40 54.10 54.80 55.55 56.25 56.95 59.65 61.25 61.95 62.65 63.35 64.05 64.75 65.45 66.20 66.90 67.60 68.30 69.05 69.75 70.45 71.15 71.90 72.60

26.00 26.40 26.75 27.15 27.55 27.90 28.30 28.65 29.45 30.30 31.15 32.00 32.85 33.75 34.20 34.55 34.95 35.30 35.70 36.05 36.45 36.85 37.20 37.90 38.60 39.30 40.00 40.70 41.40 42.10 42.85 43.55 44.25 44.95 45.65 46.35 47.05 49.75 51.35 52.05 52.75 53.45 54.20 54.90 55.60 56.30 57.00 57.75 58.45 59.15 59.85 60.55 61.30 62.00 62.70

24.95 25.35 25.70 26.10 26.45 26.85 27.20 27.60 28.35 29.25 30.10 30.95 31.80 32.65 33.10 33.50 33.90 34.25 34.65 35.00 35.40 35.75 36.15 36.85 37.55 38.25 38.95 39.65 40.35 41.05 41.75 42.45 43.20 43.90 44.60 45.30 46.00 48.70 50.30 51.00 51.70 52.40 53.10 53.80 54.55 55.25 55.95 56.65 57.40 58.10 58.80 59.50 60.20 60.95 61.65

22.85 23.20 23.60 23.95 24.35 24.70 25.10 25.45 26.25 27.10 27.95 28.80 29.70 30.55 31.00 31.35 31.75 32.15 32.50 32.90 33.25 33.65 34.00 34.70 35.40 36.10 36.80 37.50 38.25 38.95 39.65 40.35 41.05 41.75 42.45 43.15 43.85 46.55 48.15 48.85 49.60 50.30 51.00 51.70 52.40 53.10 53.80 54.55 55.25 55.95 56.65 57.40 58.10 58.80 59.55

20.70 21.10 21.45 21.85 22.20 22.60 22.95 23.35 24.10 25.00 25.85 26.70 27.55 28.40 28.85 29.25 29.60 30.00 30.40 30.75 31.15 31.50 31.90 32.55 33.30 34.00 34.70 35.40 36.10 36.80 37.50 38.20 38.90 39.65 40.35 41.05 41.75 44.45 46.05 46.75 47.45 48.15 48.85 49.55 50.25 51.00 51.70 52.40 53.10 53.85 54.55 55.25 55.95 56.70 57.40

18.55 18.95 19.35 19.70 20.10 20.45 20.85 21.20 22.00 22.85 23.70 24.55 25.40 26.30 26.75 27.10 27.50 27.85 28.25 28.65 29.00 29.40 29.75 30.45 31.15 31.85 32.55 33.25 33.95 34.70 35.40 36.10 36.80 37.50 38.20 38.90 39.60 42.30 43.90 44.60 45.30 46.05 46.75 47.45 48.15 48.85 49.55 50.30 51.00 51.70 52.40 53.15 53.85 54.55 55.25

16.45 16.80 17.20 17.55 17.95 18.35 18.70 19.10 19.85 20.70 21.60 22.45 23.30 24.15 24.60 25.00 25.35 25.75 26.10 26.50 26.90 27.25 27.65 28.30 29.00 29.75 30.45 31.15 31.85 32.55 33.25 33.95 34.65 35.35 36.10 36.80 37.50 40.15 41.80 42.50 43.20 43.90 44.60 45.30 46.00 46.75 47.45 48.15 48.85 49.60 50.30 51.00 51.70 52.40 53.15

13.80 14.60 15.05 15.45 15.80 16.20 16.60 16.95 17.75 18.60 19.45 20.30 21.15 22.00 22.50 22.85 23.25 23.60 24.00 24.35 24.75 25.10 25.50 26.20 26.90 27.60 28.30 29.00 29.70 30.40 31.15 31.85 32.55 33.25 33.95 34.65 35.35 38.05 39.65 40.35 41.05 41.75 42.50 43.20 43.90 44.60 45.30 46.00 46.75 47.45 48.15 48.85 49.60 50.30 51.00

9.55 10.30 11.10 11.85 12.60 13.35 14.10 14.85 15.60 16.45 17.30 18.20 19.05 19.90 20.35 20.75 21.10 21.50 21.85 22.25 22.60 23.00 23.35 24.05 24.75 25.45 26.20 26.90 27.60 28.30 29.00 29.70 30.40 31.10 31.80 32.55 33.25 35.90 37.55 38.25 38.95 39.65 40.35 41.05 41.75 42.45 43.20 43.90 44.60 45.30 46.05 46.75 47.45 48.15 48.90

5.75 6.05 6.80 7.55 8.35 9.10 9.85 10.60 11.75 13.00 14.20 15.45 16.70 17.75 18.25 18.60 19.00 19.35 19.75 20.10 20.50 20.85 21.25 21.95 22.65 23.35 24.05 24.75 25.45 26.15 26.85 27.60 28.30 29.00 29.70 30.40 31.10 33.80 35.40 36.10 36.80 37.50 38.20 38.95 39.65 40.35 41.05 41.75 42.50 43.20 43.90 44.60 45.35 46.05 46.75

5.75 5.75 5.75 5.75 5.75 5.75 5.75 6.35 7.50 8.75 9.95 11.20 12.45 13.65 14.50 15.25 16.00 16.75 17.55 18.00 18.35 18.75 19.10 19.80 20.50 21.20 21.90 22.65 23.35 24.05 24.75 25.45 26.15 26.85 27.55 28.25 29.00 31.65 33.25 34.00 34.70 35.40 36.10 36.80 37.50 38.20 38.95 39.65 40.35 41.05 41.80 42.50 43.20 43.90 44.65

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639 647 655 663 671 679 687 695 703 711 719 727 735 743 751 759 767 775 783 791 799 807 815 823 831 839 847 855 863 871 879 887 895 903 911 919 927 935 943 951 959 967 975 983 991 999 1007 1015 1023 1031 1039 1047 1055 1063 1071

Source: T4032ON, Payroll Deductions Tables – CPP, EI, and income tax deductions – Ontario – Effective January 1, 2017 – Sections D and E – Federal and Ontario provincial tax deductions tables, 52 pay periods per year (Weekly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/ t4032/2017/t4032-on-52pp-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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181

Payroll

Figure 10.4  Canada Pension Plan Contributions (Weekly) Canada Pension Plan Contributions

Weekly (52 pay periods a year) Pay From 590.84 591.04 591.24 591.45 591.65 591.85 592.05 592.25 592.46 592.66 592.86 593.06 593.26 593.47 593.67 593.87 594.07 594.27 594.48 594.68 594.88 595.08 595.28 595.49 595.69 595.89 596.09 596.29 596.50 596.70 596.90 597.10 597.30 597.51 597.71 597.91 598.11 598.32 598.52 598.72 598.92 599.12 599.33 599.53 599.73 599.93 600.13 600.34 600.54 600.74 600.94 601.14 601.35 601.55 601.75 601.95 602.15 602.36 602.56 602.76 602.96 603.16 603.37 603.57 603.77 603.97 604.17 604.38 604.58 604.78 604.98 605.18

-

Pay To

CPP

591.03 591.23 591.44 591.64 591.84 592.04 592.24 592.45 592.65 592.85 593.05 593.25 593.46 593.66 593.86 594.06 594.26 594.47 594.67 594.87 595.07 595.27 595.48 595.68 595.88 596.08 596.28 596.49 596.69 596.89 597.09 597.29 597.50 597.70 597.90 598.10 598.31 598.51 598.71 598.91 599.11 599.32 599.52 599.72 599.92 600.12 600.33 600.53 600.73 600.93 601.13 601.34 601.54 601.74 601.94 602.14 602.35 602.55 602.75 602.95 603.15 603.36 603.56 603.76 603.96 604.16 604.37 604.57 604.77 604.97 605.17 605.38

25.92 25.93 25.94 25.95 25.96 25.97 25.98 25.99 26.00 26.01 26.02 26.03 26.04 26.05 26.06 26.07 26.08 26.09 26.10 26.11 26.12 26.13 26.14 26.15 26.16 26.17 26.18 26.19 26.20 26.21 26.22 26.23 26.24 26.25 26.26 26.27 26.28 26.29 26.30 26.31 26.32 26.33 26.34 26.35 26.36 26.37 26.38 26.39 26.40 26.41 26.42 26.43 26.44 26.45 26.46 26.47 26.48 26.49 26.50 26.51 26.52 26.53 26.54 26.55 26.56 26.57 26.58 26.59 26.60 26.61 26.62 26.63

From 605.39 605.59 605.79 605.99 606.19 606.40 606.60 606.80 607.00 607.20 607.41 607.61 607.81 608.01 608.21 608.42 608.62 608.82 609.02 609.22 609.43 609.63 609.83 610.03 610.23 610.44 610.64 610.84 611.04 611.24 611.45 611.65 611.85 612.05 612.25 612.46 612.66 612.86 613.06 613.26 613.47 613.67 613.87 614.07 614.27 614.48 614.68 614.88 615.08 615.28 615.49 615.69 615.89 616.09 616.29 616.50 616.70 616.90 617.10 617.30 617.51 617.71 617.91 618.11 618.32 618.52 618.72 618.92 619.12 619.33 619.53 619.73

-

Pay To

CPP

605.58 605.78 605.98 606.18 606.39 606.59 606.79 606.99 607.19 607.40 607.60 607.80 608.00 608.20 608.41 608.61 608.81 609.01 609.21 609.42 609.62 609.82 610.02 610.22 610.43 610.63 610.83 611.03 611.23 611.44 611.64 611.84 612.04 612.24 612.45 612.65 612.85 613.05 613.25 613.46 613.66 613.86 614.06 614.26 614.47 614.67 614.87 615.07 615.27 615.48 615.68 615.88 616.08 616.28 616.49 616.69 616.89 617.09 617.29 617.50 617.70 617.90 618.10 618.31 618.51 618.71 618.91 619.11 619.32 619.52 619.72 619.92

26.64 26.65 26.66 26.67 26.68 26.69 26.70 26.71 26.72 26.73 26.74 26.75 26.76 26.77 26.78 26.79 26.80 26.81 26.82 26.83 26.84 26.85 26.86 26.87 26.88 26.89 26.90 26.91 26.92 26.93 26.94 26.95 26.96 26.97 26.98 26.99 27.00 27.01 27.02 27.03 27.04 27.05 27.06 27.07 27.08 27.09 27.10 27.11 27.12 27.13 27.14 27.15 27.16 27.17 27.18 27.19 27.20 27.21 27.22 27.23 27.24 27.25 27.26 27.27 27.28 27.29 27.30 27.31 27.32 27.33 27.34 27.35

From 619.93 620.13 620.34 620.54 620.74 620.94 621.14 621.35 621.55 621.75 621.95 622.15 622.36 622.56 622.76 622.96 623.16 623.37 623.57 623.77 623.97 624.17 624.38 624.58 624.78 624.98 625.18 625.39 625.59 625.79 625.99 626.19 626.40 626.60 626.80 627.00 627.20 627.41 627.61 627.81 628.01 628.21 628.42 628.62 628.82 629.02 629.22 629.43 629.63 629.83 630.03 630.23 630.44 630.64 630.84 631.04 631.24 631.45 631.65 631.85 632.05 632.25 632.46 632.66 632.86 633.06 633.26 633.47 633.67 633.87 634.07 634.27

-

Pay To

CPP

620.12 620.33 620.53 620.73 620.93 621.13 621.34 621.54 621.74 621.94 622.14 622.35 622.55 622.75 622.95 623.15 623.36 623.56 623.76 623.96 624.16 624.37 624.57 624.77 624.97 625.17 625.38 625.58 625.78 625.98 626.18 626.39 626.59 626.79 626.99 627.19 627.40 627.60 627.80 628.00 628.20 628.41 628.61 628.81 629.01 629.21 629.42 629.62 629.82 630.02 630.22 630.43 630.63 630.83 631.03 631.23 631.44 631.64 631.84 632.04 632.24 632.45 632.65 632.85 633.05 633.25 633.46 633.66 633.86 634.06 634.26 634.47

27.36 27.37 27.38 27.39 27.40 27.41 27.42 27.43 27.44 27.45 27.46 27.47 27.48 27.49 27.50 27.51 27.52 27.53 27.54 27.55 27.56 27.57 27.58 27.59 27.60 27.61 27.62 27.63 27.64 27.65 27.66 27.67 27.68 27.69 27.70 27.71 27.72 27.73 27.74 27.75 27.76 27.77 27.78 27.79 27.80 27.81 27.82 27.83 27.84 27.85 27.86 27.87 27.88 27.89 27.90 27.91 27.92 27.93 27.94 27.95 27.96 27.97 27.98 27.99 28.00 28.01 28.02 28.03 28.04 28.05 28.06 28.07

From 634.48 634.68 634.88 635.08 635.28 635.49 635.69 635.89 636.09 636.29 636.50 636.70 636.90 637.10 637.30 637.51 637.71 637.91 638.11 638.32 638.52 638.72 638.92 639.12 639.33 639.53 639.73 639.93 640.13 640.34 640.54 640.74 640.94 641.14 641.35 641.55 641.75 641.95 642.15 642.36 642.56 642.76 642.96 643.16 643.37 643.57 643.77 643.97 644.17 644.38 644.58 644.78 644.98 645.18 645.39 645.59 645.79 645.99 646.19 646.40 646.60 646.80 647.00 647.20 647.41 647.61 647.81 648.01 648.21 648.42 648.62 648.82

-

To

CPP

634.67 634.87 635.07 635.27 635.48 635.68 635.88 636.08 636.28 636.49 636.69 636.89 637.09 637.29 637.50 637.70 637.90 638.10 638.31 638.51 638.71 638.91 639.11 639.32 639.52 639.72 639.92 640.12 640.33 640.53 640.73 640.93 641.13 641.34 641.54 641.74 641.94 642.14 642.35 642.55 642.75 642.95 643.15 643.36 643.56 643.76 643.96 644.16 644.37 644.57 644.77 644.97 645.17 645.38 645.58 645.78 645.98 646.18 646.39 646.59 646.79 646.99 647.19 647.40 647.60 647.80 648.00 648.20 648.41 648.61 648.81 649.01

28.08 28.09 28.10 28.11 28.12 28.13 28.14 28.15 28.16 28.17 28.18 28.19 28.20 28.21 28.22 28.23 28.24 28.25 28.26 28.27 28.28 28.29 28.30 28.31 28.32 28.33 28.34 28.35 28.36 28.37 28.38 28.39 28.40 28.41 28.42 28.43 28.44 28.45 28.46 28.47 28.48 28.49 28.50 28.51 28.52 28.53 28.54 28.55 28.56 28.57 28.58 28.59 28.60 28.61 28.62 28.63 28.64 28.65 28.66 28.67 28.68 28.69 28.70 28.71 28.72 28.73 28.74 28.75 28.76 28.77 28.78 28.79

Employee’s maximum CPP contribution for the year 2017 is $2,564.10

Source: T4032, Payroll Deductions Tables – CPP, EI, and income tax deductions – Effective January 1, 2017 – Section B – Canada Pension Plan contributions tables, 52 pay periods per year (Weekly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/2017/t4032cpp-52pp-17eng .pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Figure 10.5  Employment Insurance Premiums Employment Insurance Premiums Insurable Earnings EI From To premium 8.65 530.37 530.98 8.66 530.99 531.59 8.67 531.60 532.20 8.68 532.21 532.82 8.69 532.83 533.43 8.70 533.44 534.05 8.71 534.06 534.66 8.72 534.67 535.27 8.73 535.28 535.88 8.74 535.89 536.50 8.75 536.51 537.11 8.76 537.12 537.73 8.77 537.74 538.34 8.78 538.35 538.95 8.79 538.96 539.57 8.80 539.58 540.18 8.81 540.19 540.80 8.82 540.81 541.41 8.83 541.42 542.02 8.84 542.03 542.63 8.85 542.64 543.25 8.86 543.26 543.86 8.87 543.87 544.47 8.88 544.48 545.09 8.89 545.10 545.70 8.90 545.71 546.31 8.91 546.32 546.93 8.92 546.94 547.55 8.93 547.56 548.15 8.94 548.16 548.77 8.95 548.78 549.38 8.96 549.39 549.99 8.97 550.00 550.61 8.98 550.62 551.22 8.99 551.23 551.84 9.00 551.85 552.45 9.01 552.46 553.06 9.02 553.07 553.68 9.03 553.69 554.29 9.04 554.30 554.90 9.05 554.91 555.52 9.06 555.53 556.13 9.07 556.14 556.74 9.08 556.75 557.36 9.09 557.37 557.97 9.10 557.98 558.58 9.11 558.59 559.20 9.12 559.21 559.81 9.13 559.82 560.43 9.14 560.44 561.04 9.15 561.05 561.65 9.16 561.66 562.26 9.17 562.27 562.88 9.18 562.89 563.49 9.19 563.50 564.11 9.20 564.12 564.72 9.21 564.73 565.33 9.22 565.34 565.95 9.23 565.96 566.56 9.24 566.57 567.18 9.25 567.19 567.79 9.26 567.80 568.40 9.27 568.41 569.01 9.28 569.02 569.63 9.29 569.64 570.24 9.30 570.25 570.85 9.31 570.86 571.47 9.32 571.48 572.08 9.33 572.09 572.69 9.34 572.70 573.31 9.35 573.32 573.93 9.36 573.94 574.53 Yearly maximum insurable earnings are $51,300 Yearly maximum employee premiums are $836.19 The premium rate for 2017 is 1.63 %

Insurable Earnings From To 574.54 575.15 575.16 575.76 575.77 576.38 576.39 576.99 577.00 577.60 577.61 578.22 578.23 578.83 578.84 579.44 579.45 580.06 580.07 580.67 580.68 581.28 581.29 581.90 581.91 582.51 582.52 583.12 583.13 583.74 583.75 584.35 584.36 584.96 584.97 585.58 585.59 586.19 586.20 586.81 586.82 587.42 587.43 588.03 588.04 588.65 588.66 589.26 589.27 589.87 589.88 590.49 590.50 591.10 591.11 591.71 591.72 592.33 592.34 592.94 592.95 593.56 593.57 594.17 594.18 594.78 594.79 595.39 595.40 596.01 596.02 596.62 596.63 597.23 597.24 597.85 597.86 598.46 598.47 599.07 599.08 599.69 599.70 600.31 600.32 600.92 600.93 601.53 601.54 602.14 602.15 602.76 602.77 603.37 603.38 603.98 603.99 604.60 604.61 605.21 605.22 605.82 605.83 606.44 606.45 607.05 607.06 607.67 607.68 608.28 608.29 608.89 608.90 609.50 609.51 610.12 610.13 610.73 610.74 611.34 611.35 611.96 611.97 612.57 612.58 613.19 613.20 613.80 613.81 614.42 614.43 615.03 615.04 615.64 615.65 616.25 616.26 616.87 616.88 617.48 617.49 618.09 618.10 618.71

EI premium 9.37 9.38 9.39 9.40 9.41 9.42 9.43 9.44 9.45 9.46 9.47 9.48 9.49 9.50 9.51 9.52 9.53 9.54 9.55 9.56 9.57 9.58 9.59 9.60 9.61 9.62 9.63 9.64 9.65 9.66 9.67 9.68 9.69 9.70 9.71 9.72 9.73 9.74 9.75 9.76 9.77 9.78 9.79 9.80 9.81 9.82 9.83 9.84 9.85 9.86 9.87 9.88 9.89 9.90 9.91 9.92 9.93 9.94 9.95 9.96 9.97 9.98 9.99 10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08

Insurable Earnings From To 618.72 619.32 619.33 619.93 619.94 620.55 620.56 621.17 621.18 621.77 621.78 622.39 622.40 623.00 623.01 623.61 623.62 624.23 624.24 624.84 624.85 625.46 625.47 626.07 626.08 626.68 626.69 627.30 627.31 627.91 627.92 628.52 628.53 629.14 629.15 629.75 629.76 630.36 630.37 630.98 630.99 631.59 631.60 632.20 632.21 632.82 632.83 633.43 633.44 634.05 634.06 634.66 634.67 635.27 635.28 635.88 635.89 636.50 636.51 637.11 637.12 637.73 637.74 638.34 638.35 638.95 638.96 639.57 639.58 640.18 640.19 640.80 640.81 641.41 641.42 642.02 642.03 642.63 642.64 643.25 643.26 643.86 643.87 644.47 644.48 645.09 645.10 645.70 645.71 646.31 646.32 646.93 646.94 647.55 647.56 648.15 648.16 648.77 648.78 649.38 649.39 649.99 650.00 650.61 650.62 651.22 651.23 651.84 651.85 652.45 652.46 653.06 653.07 653.68 653.69 654.29 654.30 654.90 654.91 655.52 655.53 656.13 656.14 656.74 656.75 657.36 657.37 657.97 657.98 658.58 658.59 659.20 659.21 659.81 659.82 660.42 660.43 661.04 661.05 661.65 661.66 662.26 662.27 662.88

EI premium 10.09 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 10.37 10.38 10.39 10.40 10.41 10.42 10.43 10.44 10.45 10.46 10.47 10.48 10.49 10.50 10.51 10.52 10.53 10.54 10.55 10.56 10.57 10.58 10.59 10.60 10.61 10.62 10.63 10.64 10.65 10.66 10.67 10.68 10.69 10.70 10.71 10.72 10.73 10.74 10.75 10.76 10.77 10.78 10.79 10.80

Insurable Earnings From To 662.89 663.49 663.50 664.11 664.12 664.72 664.73 665.33 665.34 665.95 665.96 666.56 666.57 667.17 667.18 667.79 667.80 668.40 668.41 669.01 669.02 669.63 669.64 670.24 670.25 670.85 670.86 671.47 671.48 672.08 672.09 672.69 672.70 673.31 673.32 673.92 673.93 674.53 674.54 675.15 675.16 675.76 675.77 676.38 676.39 676.99 677.00 677.60 677.61 678.22 678.23 678.83 678.84 679.44 679.45 680.06 680.07 680.67 680.68 681.28 681.29 681.90 681.91 682.51 682.52 683.12 683.13 683.74 683.75 684.35 684.36 684.96 684.97 685.58 685.59 686.19 686.20 686.80 686.81 687.42 687.43 688.03 688.04 688.65 688.66 689.26 689.27 689.87 689.88 690.49 690.50 691.10 691.11 691.71 691.72 692.33 692.34 692.94 692.95 693.55 693.56 694.17 694.18 694.78 694.79 695.39 695.40 696.01 696.02 696.62 696.63 697.23 697.24 697.85 697.86 698.46 698.47 699.07 699.08 699.69 699.70 700.30 700.31 700.92 700.93 701.53 701.54 702.14 702.15 702.76 702.77 703.37 703.38 703.98 703.99 704.60 704.61 705.21 705.22 705.82 705.83 706.44 706.45 707.05

EI premium 10.81 10.82 10.83 10.84 10.85 10.86 10.87 10.88 10.89 10.90 10.91 10.92 10.93 10.94 10.95 10.96 10.97 10.98 10.99 11.00 11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 11.10 11.11 11.12 11.13 11.14 11.15 11.16 11.17 11.18 11.19 11.20 11.21 11.22 11.23 11.24 11.25 11.26 11.27 11.28 11.29 11.30 11.31 11.32 11.33 11.34 11.35 11.36 11.37 11.38 11.39 11.40 11.41 11.42 11.43 11.44 11.45 11.46 11.47 11.48 11.49 11.50 11.51 11.52

Source: T4032, Payroll Deductions Tables – CPP, EI, and income tax deductions – Effective January 1, 2017 – Section C – Employment Insurance premiums tables (province or territory of employment other than the province of Quebec) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/2017/ t4032einoqc-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Payroll

Finally, we will look up the Employment Insurance premium from the EI table in Figure 10.5. Look for the range of insurable earnings into which $645 falls ($644.48 to $645.09) and read the EI premium of $10.51. In addition to these compulsory deductions, we will assume that Ron Davies has a voluntary deduction for life, health, and dental insurance at a rate of $18 per pay period. Here then are the deductions from his gross pay: Federal income tax Provincial income tax Canada Pension Plan Employment Insurance Life, health, dental Total deductions

$32.05 18.95 28.60 10.51 18.00 $ 108.11

The gross pay of $645 minus the total deductions of $108.11 gives Ron Davies a net pay of $536.89 for the week. All amounts are shown on the Employee Earnings Record (Figure 10.6), which will record Ron Davies’ cumulative payroll information throughout the entire year. At year-end, a T4 slip will be prepared from this information for income tax purposes. All the payroll information for the employees of Mercury Industries, including Ron Davies, is shown on the Payroll Record in Figure 10.7. (The other employees are single with no dependants and pay only $8 each for their group health deduction.)

Figure 10.6  Employee Earnings Record EARNINGS RECORD NAME

Ronald Davies

SIN NO.

609-000-000

ADDRESS

17 President Lane

Claim Code:

5

Paris ON

Status:

Married

TELEPHONE

933-0001

No. of Dependents:

4

DOB

01-Apr-1966

Date Employed:

12-Oct-1992

DEDUCTIONS WEEK ENDING

Jan.

GROSS PAY

FEDERAL TAX

PROVINCIAL TAX

CPP CURRENT

EI

YR. TO DATE

CURRENT

YR. TO DATE

LIFE, HEALTH & DENTAL

TOTAL DEDUCT.

NET PAY

8

6 4 5 00

3 2 05

1 8 95

2 8 60

2 8 60

1 0 51

1 0 51

1 8 00

1 0 8 11

5 3 6 89

15

6 1 1 25

2 6 45

1 7 55

2 6 93

5 5 53

9 96

2 0 47

1 8 00

9 8 89

5 1 2 36

22

6 0 0 00

2 5 30

1 6 95

2 6 37

8 1 90

9 78

3 0 25

1 8 00

9 6 40

5 0 3 60

29

6 2 2 50

2 8 70

1 7 90

2 7 48

1 0 9 38

1 0 15

4 0 40

1 8 00

1 0 2 23

5 2 0 27

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Figure 10.7  Payroll Record MERCURY INDUSTRIES HOURLY PAYROLL RECORD PERIOD ENDING: TAX EMP. CODE NO.

Jan. 8, 20—

REGULAR TIME NAME

HRS.

RATE

OVERTIME HRS.

RATE

GROSS PAY

DEDUCTIONS FEDERAL TAX

PROVINCIAL TAX

CPP

EI

NET PAY LIFE, HEALTH & DENTAL

TOTAL DEDUCTIONS

AMOUNT

5

101

Davies, Ronald

40

1 5 00

2

2 2 50

6 4 5 00

3 2 05

1 8 95

2 8 60

1 0 51

1 8 00

1 0 8 11

5 3 6 89

1

102

Gaber, Darwin

40

1 2 00

4

1 8 00

5 5 2 00

4 1 20

2 2 20

2 3 99

1 0 38

8 00

1 0 5 77

4 4 6 23

1

103

Jansen, Arthur

39

1 2 00

4

1 8 00

5 4 0 00

3 9 50

2 1 60

2 3 40

1 0 15

8 00

1 0 2 65

4 3 7 35

1 7 3 7 00

1 1 2 75

6 2 75

7 5 99

3 2 66

3 4 00

3 1 6 53

1 4 2 0 47

RECORDING THE PAYROLL The sample payroll just discussed has been recorded on the Payroll Record and on the Earnings Record for each employee. Once the data has been entered, totalled, and balanced, the Payroll Record becomes the source information for the journal entry shown in Figure 10.8. The amounts in the payroll entry are taken directly from the totals of the Payroll Record in Figure 10.7. The debit entry to Wages Expense (sometimes called Salaries Expense or Salaries/Wages Expense or Payroll Expense) is the total gross wage. The credit entries to the various payable accounts represent the deductions withheld from the employees. These payables are owing to the government (federal and provincial income tax, CPP, EI) and to the insurance company (the group health plan). The Wages Payable (or Salaries Payable or Payroll Payable) amount is the net pay that will be paid to the employees when the paycheques are issued or when the pay is deposited directly to the employees’ bank accounts. Figure 10.8  Recording the Payroll Entry Jan.

8

Wages Expense Income Tax Payable (Federal) Income Tax Payable (Provincial) CPP Payable EI Payable Group Health Payable Wages Payable To record the payroll for the week

1 7 3 7 00 1 1 6 7 3 3 1 4 2

2 2 5 1 4 0

75 75 99 04 00 47

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Payroll

A second journal entry (Figure 10.9) is also necessary to record the employer’s contributions to the government plans and to the group health plan. The debit entries to the expense accounts represent the additional payroll costs incurred by the employer. The credit entries to the payable accounts represent the employer’s portion of the amounts owing to the government and to the insurance company for these additional costs. Here is how the amounts were calculated: ●● Canada Pension Plan: The amount contributed by the employer is equal to the amount contributed by the employees. Since the employees’ CPP deduction was a total of $75.99, the employer will also contribute $75.99. ●● Employment Insurance: The amount contributed by the employer is 1.4 times the amount contributed by the employees. Since the employees have contributed a total of $31.04, the employer will contribute $31.04 3 1.4 5 $43.46. ●● Group Health Plan: The amount contributed by the employer to the health plan will vary depending on the plan offered by the insurance company. In our example, we will assume the employer contributes an equal amount, $34.00. As an alternative to recording these transactions in the General Journal, the amounts could have been posted directly from the Payroll Record to the appropriate ledger accounts. When this method is used, the Payroll Record becomes the journal, and the posting marks would be entered below the column totals, just as with the Sales Journal and the other special journals already discussed. However, the General Journal method will be used throughout this textbook.

PAYMENTS AND REMITTANCES Payments to Employees The most common forms of salary and wage payments to employees are by paycheque and by direct deposit to each employee’s personal bank account. Figure 10.9  Recording the Employer’s Payroll Contributions

Jan.

8

CPP Expense EI Expense Group Health Expense CPP Payable EI Payable Group Health Payable To record employer’s payroll contributions

7 5 99 4 3 46 3 4 00 7 5 99 4 3 46 3 4 00

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186

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Payroll

Figure 10.10  Recording Paycheques and Remittances CASH PAYMENTS JOURNAL DATE

20— Jan. 8

ACCOUNT DEBIT

MEMO

Davies

Wages Payable

Feb. 15 Income Tax Pay. (Fed) Income Tax Pay. (Prov) CPP Payable EI Payable

Feb. 19 Group Health Payable

}

F.

ACCTS. PAY. DR.

PURCH. DISC. CR.

PURCH. DR.

HST–ITC DR.

GEN. LED. DR.

1 4 2 0 47

BANK CR.

CH. NO.

5 3 6 89 11

Gaber

4 4 6 23 12

Jansen

4 3 7 35 13

1 1 2 75 Payroll remittance to govt.

January remittance

6 2 75 1 5 1 98 7 4 50

4 0 1 98 47

6 8 00

6 8 00 52

Instead of processing payroll themselves, some companies will use the services of banks or other payroll companies by providing all the pertinent payroll data. In this case, the bank or payroll service would determine all the deductions, make all the calculations, produce all the reports, and deposit the pay directly into the employees’ personal bank accounts or prepare the cheques to be handed out or mailed to the employees. Once the direct deposits have been made (or the paycheques issued) an entry would be made in the Cash Payments Journal (Figure 10.10). The debit to Wages (Salaries) Payable on January 8 will clear the account to a zero balance, thus paying off the liability.

REMITTANCE OF PAYROLL DEDUCTIONS AND COMPANY CONTRIBUTIONS When the payroll is entered in the General Journal, the deductions are recorded as liabilities to the government and to the insurance company. These liabilities must be paid on dates specified by the government and by the insurance company. The total amount owing to CRA consists of the federal and provincial income tax deductions, the employer and employee contributions to Canada Pension Plan, and the employer and employee contributions to Employment Insurance. Figure 10.10 shows this remittance to the government (see the February 15 entry). The income tax amounts in this entry are those that were deducted from

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187

the employees. Since the amounts were originally credited to the Income Tax Payable (Federal) and Income Tax Payable (Provincial) accounts, the debit entries in the Cash Payments Journal will clear the balances of these two accounts to zero. The Canada Pension Plan Payable amount includes the amount withheld from the employees plus the equal contribution by the employer. A total of $75.99 was deducted from the employees’ pay and an equal amount of $75.99 was contributed by the employer. The CPP Payable account, then, is debited for $75.99 1 $75.99 5 $151.98 when the remittance is made, which will clear this account to zero. The Employment Insurance Payable figure is the amount withheld from the employees plus the amount contributed by the employer. The total of these two amounts ($31.04 1 $43.46 5 $74.50) is debited to EI Payable when the remittance is made, clearing the account to zero. The February 19 entry in Figure 10.10 shows the remittance to the insurance company for the group health plan. As with the other liabilities, the debit to Group Health Payable will clear this account to zero.

WORKERS’ COMPENSATION Each province in Canada has legislation governing compensation to workers for injuries or disabilities that result from accidents in the workplace. The Workers’ Compensation legislation specifies what kinds of jobs are eligible for coverage, the cost to the employer, how that cost is determined, and when it must be paid. Workers’ Compensation is not actually a payroll deduction; therefore, nothing is deducted from the employees’ pay. Instead, the employer pays the entire cost as an additional operating expense. These premiums are charged to the Workers’ Compensation Expense account.

VACATION PAY AND HOLIDAY PAY All employees are entitled to a paid vacation period each year. In most provinces, this vacation period is two weeks after their first full year of employment. However, in cases when this vacation time is not taken, the employee must be paid “vacation pay” equal to 4% of his or her annual earnings in lieu of vacation time. Alternatively, the vacation pay may be paid on every paycheque; however, if the employee does take time off for vacation, it would be without pay as the vacation pay has already been paid. The rate of vacation pay, and the method of calculation, may vary depending on the province of employment, on the years of service with the company, and on the employment contract between the employee and employer. Such payments to the employees are considered part of the wage or salary and are subject to the usual deductions. Employees may be entitled to payment for statutory holidays, such as New Year’s Day and Canada Day, depending on their employment arrangement, even though they do not work on those days. They are also entitled to additional pay if they do work on statutory holidays, as stipulated by employment standards. This compensation for statutory holidays is known as “holiday pay” and is subject to deductions as usual.

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PRACTICE EXERCISE 1 The following time cards are for the three employees of Widgits Unlimited. These employees “clock in” each morning and “clock out” at the end of each regular workday. Employees who work overtime must clock in and out again when they work the evening shift. Any employee arriving between 5 and 15 minutes late is penalized 15 minutes’ pay. Each employee takes a half-hour lunch break without pay. The standard workweek is 40 hours at a regular rate of $12.50 per hour for all employees. Overtime is paid at time-and-a-half ($18.75 per hour) for all hours worked over 40 hours per week. Any hours worked on Saturday are paid at double the regular rate ($25 per hour). (a) Determine the regular and overtime hours that each employee has worked. (b) Calculate the gross pay for each employee. (c) Use the payroll deductions tables in Figures 10.2, 10.3, 10.4, and 10.5 to find each employee’s deductions, then complete the following payroll table. Assume all employees are Claim Code 1 for tax purposes. Week ending: NAME:

April 14, 20–

EDNA SMITH Extra

Mon. Tue. Wed. Thu. Fri. Sat.

IN

OUT

IN

OUT

8:00 8:01 7:58 7:59 9:01 8:00

4:31 4:30 4:32 4:30 4:31 12:00

7:00

8:02

7:00

8:15

TOTAL TIME: Rates

hours

$

Total Wages

$

Week ending:

April 14, 20–

NAME:

JOY BAKER Extra

Mon. Tue. Wed. Thu. Fri. Sat.

TOTAL TIME: Rates

IN

OUT

IN

OUT

7:58 8:01 7:59 8:00 8:30 8:00

4:00 4:31 4:32 4:31 4:30 12:00

7:00

8:30

7:00

8:30

hours

$

Total Wages

$

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CHAPTER 10

Week ending: NAME:

189

Payroll

April 14, 20–

LUCY CANELLI Extra IN

7:59 8:00 8:01 8:10 8:00 8:00

Mon. Tue. Wed. Thu. Fri. Sat.

OUT

IN

OUT

4:32 4:01 4:31 3:00 4:33 12:00

6:59

8:30

6:58

8:15

TOTAL TIME: Rates

$

Total Wages

Employee

Gross Pay

hours

$

Fed Tax

Prov Tax

CPP

EI

Total Deduct.

Net Pay

E Smith J Baker L Canelli

PRACTICE EXERCISE 2 (a) The employees of The Fashion Factory completed the number of pieces indicated during the workweek ending June 30: P. Cardin J. Woolly T. Bloomer R. Napp

1,050 1,040 1,065 1,035

(b) Calculate the gross pay for each employee using the following plan: First 500 pieces Next 300 pieces Next 200 pieces Over 1,000 pieces

$0.50 each $0.60 each $0.70 each $0.90 each

(c) Complete the payroll using the payroll deduction tables illustrated in Figures 10.2, 10.3, 10.4, and 10.5. Assume all employees are Claim Code 1 for federal and provincial income tax purposes. (The Fashion NEL

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(d) (e) (f ) (g)

Payroll

Factory does not have a group health plan.) Total and balance the payroll record. Record the compound General Journal entry for this payroll on June 30. Record the General Journal entry on June 30 for the employer’s contributions to CPP and EI. Record the entry in the Cash Payments Journal to issue the payroll cheques on June 30. The first paycheque is #11. Record the entry in the Cash Payments Journal for the remittance to CRA on July 15. Issue cheque #29.

PRACTICE EXERCISE 3 These employees have produced the number of pieces indicated during the workweek ending February 22: Julie Robinson Katie Friesen Jose Sivira Joan Flannery

2,300 2,290 2,310 2,350

They are paid according to the following incentive plan: First 1,000 pieces Next 600 pieces Next 400 pieces Over 2,000 pieces

$0.23 0.25 0.30 0.35

each each each each

(a) Complete the Piecework Payroll Record. Look up the payroll deductions from the tables illustrated in Figures 10.2, 10.3, 10.4, and 10.5. All employees are single with no dependants, so Claim Code 1 will be used in the federal and provincial income tax tables. Company pension is 3% of gross pay. (b) Total and prove the payroll record. (c) Record a General Journal entry on February 22 for the payroll. (d) Record a General Journal entry on February 22 for the employer’s contributions to CPP, EI, and company pension. The employer contributes an equal amount to the company pension. (e) Record an entry in the Cash Payments Journal on February 25 to issue the paycheques. The first paycheque is #88. (f ) Record an entry in the Cash Payments Journal for the remittance to CRA and to the insurance company for the company pension plan. Assume both remittances are to be recorded on March 14. Issue cheques #107 and 108. NEL

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Payroll

PRACTICE EXERCISE 4 The following information was taken from the payroll records of Locker Flooring Ltd. for the two-week pay period ending September 10: Gross Pay Deductions: Federal income tax Provincial income tax Canada Pension Plan Employment Insurance Health Plan Net Pay

$2,640.00 $404.25 197.00 124.12 45.67 100.00

871.04 $1,768.96

(a) Record the compound General Journal entry on September 10 for this payroll. (b) Record the General Journal entry on September 10 for the employer’s contributions to CPP, EI, and the health plan. The employer contributes an equal amount to the health plan. (c) Record entries in the Cash Payments Journal for: ●● the issuance of the paycheques on September 10 ●● the remittance of the health plan contributions to Sun Life on September 30 ●● the remittance of income taxes, CPP, and EI to Canada Revenue Agency on October 14 PRACTICE EXERCISE 5 The following information is taken from the payroll records of Letzelter Manufacturing on June 30. Gross Pay—Production Department —General Office Deductions: Federal income tax Provincial income tax CPP EI Company Pension RSP Contributions Medical Plan Canada Savings Bonds Union Dues Total Net Pay

$18,700 5,200 23,900 $3,068 2,046 717 574 478 4,000 239 850 748

12,720 $11,180

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(a) Record a compound General Journal entry for the payroll on June 30. (b) Record a compound General Journal entry for the employer’s contributions to CPP, EI, company pension, and medical plan on June 30: ●● CPP and EI as usual ●● company pension and medical plan on an equal basis (c) Record entries in the Cash Payments Journal for: ●● the issuance of the paycheques on June 30 ●● the remittance to ManuLife on June 30 for the company pension plan, RSP contributions, and the medical plan ●● the payment on June 30 to Canadian Trust for the Canada Savings Bonds contributions ●● the remittance of the union dues on June 30 ●● the remittance of income tax, CPP, and EI to Canada Revenue Agency on July 14 Supplementary Exercises EXERCISE 10-1: Open file SE-10-1. Complete the payroll record by looking up payroll deductions; then complete the general journal entries. EXERCISE 10-2: Open file SE-10-2. Complete the journal entries for payroll by looking up the payroll deductions. THINK ABOUT IT! 1. Name three commonly used payroll systems. Give an example of a job that would use each system. 2. Why is payroll information retained by a company? 3. Name the four payroll deductions that must be withheld from all employees’ pay. 4. Do all employees pay the same amount of income tax? Why? What government form is prepared by every employee for this purpose? 5. How much must the employer contribute to the Canada Pension Plan? to Employment Insurance? 6. Name three common voluntary payroll deductions. 7. What is Workers’ Compensation? Who pays for it?

CASE STUDY: KBC DECORATING CO. JUNE TRANSACTIONS In this chapter, you learned about calculating and recording payroll. Until now, the owners of KBC Decorating Co. have been doing all the work themselves. But this month, they will hire new employees: Saul Firestone Peter Harluck Peggy Mann [your name]

In-Store Sales Clerk Painter-Decorator Painter-Decorator Bookkeeper NEL

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The owners have decided to add a painting and decorating division to the business. The painter-decorators will handle all such contracts. The owners have already received requests from customers for this kind of service. Record the June transactions as usual: 20— Jun. 1 Received payment from Clear-Vu Windows for rent, $1,500 plus GST. 1 Made first mortgage payment. The mortgage calls for monthly payments of $1,220, part of which is interest and part is repayment of the loan itself. In the Cash Payments Journal, debit Mortgage Payable for $220 in the General Ledger column. This is the portion of the payment that applies against the principal loan. On the next line, debit Interest on Mortgage for $1,000 in the General Ledger column. On the same line, enter the total payment, $1,220, in the Bank column. This payment was not by cheque; therefore, it does not have a cheque number. Instead, write a dash (—) or check mark (✓) to show that an actual cheque was not issued in this case. 1 Paid Major Office Supplies for Invoice #203. 3 Issued cheques to pay these bills: • telephone, $158 plus HST • gas (heating), $47 plus HST • electricity, $122 plus HST 3 Paid Reynolds Paper Co. for Invoice #153. 5 Sold wallpaper to S. Miller, $750 plus HST; terms 2/10, n/30. 5 Paid for Workers Compensation coverage for new employees, $4,600. (Workers Compensation Expense) 8 Sold paint and supplies, $1,300, and wallpaper, $400, to K. Young Painting on terms of 2/10, n/30. Add HST as usual. 8 Completed painting and decorating work for cash customers, $3,250 plus HST. All painting and decorating work will be charged to Sales Service. 8 S. Miller reported that one roll of wallpaper was damaged. Issued credit note for $40 plus HST. 10 Paid from petty cash: postage $15.00 plus HST. 10 Received the bank statement for May. (See Figure 10.11.) Complete the bank reconciliation for May using the information from last month’s reconciliation statement, last month’s cash journals, and the May bank statement. Record the necessary entry for bank charges. 14 Cash sales: paint and supplies, $4,600, and wallpaper, $1,800. Add HST as usual. NEL

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15 15

18 19 20 20 30 30 30 30

Payroll

Received cheque from S. Miller for balance of Invoice #11. Bought paint and supplies, $5,300, and wallpaper, $4,100, from Rainbow Supplies on their Invoice #130 dated today. Terms 1/10, n/30. Add HST as usual. Received payment from K. Young Painting for Invoice #12. Completed painting and decorating work for cash customers, $2,150 plus HST. Sold to Beavis & Sons, paint and supplies, $1,400 plus HST, terms n/30. Paid from petty cash: coffee supplies for staff room, $7.40 (no taxes). (Miscellaneous Expense) Cash sales: paint and supplies, $3,200, and wallpaper, $1,100. Add taxes as usual. Paid for gas and oil for our own truck used for occasional deliveries of goods to cash customers, $245 plus HST. There is still a reasonable amount of cash in the petty cash drawer, so the fund will not be reimbursed at this time. Prepared payroll for June. The monthly gross pay for each employee is: • Saul Firestone $2,100 Claim Code 5 Married • Peter Harluck 2,200 Claim Code 1 Single • Peggy Mann 2,200 Claim Code 1 Single • [your name] 2,100 Claim Code 1 Single

(a) Prepare a Payroll Record for this month’s payroll. Use the payroll deductions tables (Figures 10.12 to 10.15) at the end of this chapter to find the deductions for each employee. ● Federal income tax (Figure 10.12) ● Provincial income tax (Figure 10.13) ● Canada Pension Plan (Figure 10.14) ● Employment Insurance (Figure 10.15) ● Life/Health Insurance Plan: $10 per month for single employees, $16 per month for married employees (b) Record the General Journal entries for the basic payroll and the employer’s contributions to CPP, EI, and life/health. The company contributes an equal amount to the life/health plan. (c) Record the entry in the Cash Payments Journal to issue the paycheques. (Note: The remittances for the government deductions and the health plan will not be made until mid-July.)

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Payroll

Figure 10.11  Bank Statement (KBC Decorating Co.)

Bank Statement — May Date

May

Details

Cheques

Deposits

Balance

47,457.10

1 11,526.00

58,983.10

1

Dep

1

Cheque 0039

1

Dep

150,000.00

208,830.55

1

Dep

20,000.00

228,830.55

1

Dep

2,194.50

231,025.05

2

Cheque 0040

200,000.00

31,025.05

4

Cheque 0041

50.00

30,975.05

6

Cheque 0043

205.66

30,769.39

7

Cheque 0044

150.29

30,619.10

7

Cheque 0042

4,068.00

26,551.10

9

Cheque 0045

164.98

26,386.12

12

Cheque 0046

192.10

26,194.02

15

Dep

16

Cheque 0048

16

Dep

17

Cheque 0047

548.05

33,758.87

20

Cheque 0049

5,247.72

28,511.15

20

Cheque 0050

11,592.00

16,919.15

23

Dep

24

Cheque 0051

31

Dep

31

SC

58,830.55

152.55

654.90

21,650.92

5,198.00 12,656.00

3,441.00

34,306.92

20,360.15 20,312.60

47.55 11,978.00 12.00

26,848.92

32,290.60 32,278.60

AT MONTH-END (a) Total, balance, and rule the journals. (b) Post all journal entries to ledger accounts as usual, including the payroll entries in the General Journal. (c) Prepare a trial balance on June 30, 20—.

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Figure 10.12  Federal Income Tax Deductions (Monthly) Federal tax deductions

Effective January 1, 2017 Monthly (12 pay periods a year)

Also look up the tax deductions in the provincial table Pay From less than 1560 1578 1596 1614 1632 1650 1668 1686 1704 1722 1740 1758 1776 1794 1812 1830 1848 1866 1884 1902 1920 1938 1956 1974 1992 2010 2028 2046 2064 2082 2100 2118 2136 2154 2172 2190 2208 2226 2244 2262 2280 2298 2316 2334 2352 2370 2388 2406 2424 2442 2460 2478 2496 2514 2532

-

1578 1596 1614 1632 1650 1668 1686 1704 1722 1740 1758 1776 1794 1812 1830 1848 1866 1884 1902 1920 1938 1956 1974 1992 2010 2028 2046 2064 2082 2100 2118 2136 2154 2172 2190 2208 2226 2244 2262 2280 2298 2316 2334 2352 2370 2388 2406 2424 2442 2460 2478 2496 2514 2532 2550

CC 0

CC 1

CC 2

CC 3

CC 4

CC 5

207.30 209.85 212.35 214.85 217.40 219.90 222.45 224.95 227.50 230.00 232.55 235.05 237.55 240.10 242.60 245.15 247.65 250.20 252.70 255.25 257.75 260.25 262.80 265.30 267.85 270.35 272.90 275.40 277.95 280.45 282.95 285.50 288.00 290.55 293.05 295.60 298.10 300.65 303.15 305.70 308.20 310.70 313.25 315.75 318.30 320.80 323.35 325.85 328.40 330.90 333.40 335.95 338.45 341.00 343.50

61.85 64.40 66.90 69.45 71.95 74.50 77.00 79.50 82.05 84.55 87.10 89.60 92.15 94.65 97.20 99.70 102.25 104.75 107.25 109.80 112.30 114.85 117.35 119.90 122.40 124.95 127.45 129.95 132.50 135.00 137.55 140.05 142.60 145.10 147.65 150.15 152.65 155.20 157.70 160.25 162.75 165.30 167.80 170.35 172.85 175.35 177.90 180.40 182.95 185.45 188.00 190.50 193.05 195.55 198.05

47.95 50.50 53.00 55.55 58.05 60.60 63.10 65.65 68.15 70.65 73.20 75.70 78.25 80.75 83.30 85.80 88.35 90.85 93.40 95.90 98.40 100.95 103.45 106.00 108.50 111.05 113.55 116.10 118.60 121.10 123.65 126.15 128.70 131.20 133.75 136.25 138.80 141.30 143.80 146.35 148.85 151.40 153.90 156.45 158.95 161.50 164.00 166.50 169.05 171.55 174.10 176.60 179.15 181.65 184.20

20.20 22.70 25.25 27.75 30.25 32.80 35.30 37.85 40.35 42.90 45.40 47.95 50.45 53.00 55.50 58.00 60.55 63.05 65.60 68.10 70.65 73.15 75.70 78.20 80.70 83.25 85.75 88.30 90.80 93.35 95.85 98.40 100.90 103.40 105.95 108.45 111.00 113.50 116.05 118.55 121.10 123.60 126.10 128.65 131.15 133.70 136.20 138.75 141.25 143.80 146.30 148.85 151.35 153.85 156.40

2.50 5.00 7.55 10.05 12.60 15.10 17.60 20.15 22.65 25.20 27.70 30.25 32.75 35.30 37.80 40.30 42.85 45.35 47.90 50.40 52.95 55.45 58.00 60.50 63.00 65.55 68.05 70.60 73.10 75.65 78.15 80.70 83.20 85.70 88.25 90.75 93.30 95.80 98.35 100.85 103.40 105.90 108.45 110.95 113.45 116.00 118.50 121.05 123.55 126.10 128.60

2.45 4.95 7.50 10.00 12.55 15.05 17.60 20.10 22.60 25.15 27.65 30.20 32.70 35.25 37.75 40.30 42.80 45.35 47.85 50.35 52.90 55.40 57.95 60.45 63.00 65.50 68.05 70.55 73.05 75.60 78.10 80.65 83.15 85.70 88.20 90.75 93.25 95.75 98.30 100.80

CC 6

CC 7

CC 8

2.40 4.95 7.45 9.95 12.50 15.00 17.55 20.05 22.60 25.10 27.65 30.15 32.65 35.20 37.70 40.25 42.75 45.30 47.80 50.35 52.85 55.35 57.90 60.40 62.95 65.45 68.00 70.50 73.05

2.35 4.90 7.40 9.95 12.45 14.95 17.50 20.00 22.55 25.05 27.60 30.10 32.65 35.15 37.70 40.20 42.70 45.25

2.30 4.85 7.35 9.90 12.40 14.95 17.45

CC 9

CC 10

Source: T4032ON, Payroll Deductions Tables – CPP, EI, and income tax deductions – Ontario – Effective January 1, 2017 – Sections D and E – Federal and Ontario provincial tax deductions tables, 12 pay periods per year (Monthly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/2017/ t4032-on-12pp-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

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Payroll

Figure 10.13  Provincial Income Tax Deductions (Monthly) Ontario provincial tax deductions Effective January 1, 2017 Monthly (12 pay periods a year)

Also look up the tax deductions in the federal table Pay From less than 1740 - 1758 1758 - 1776 1776 - 1794 1794 - 1812 1812 - 1830 1830 - 1848 1848 - 1866 1866 - 1884 1884 - 1902 1902 - 1920 1920 - 1938 1938 - 1956 1956 - 1974 1974 - 1992 1992 - 2010 2010 - 2028 2028 - 2046 2046 - 2064 2064 - 2082 2082 - 2100 2100 - 2118 2118 - 2136 2136 - 2154 2154 - 2172 2172 - 2190 2190 - 2208 2208 - 2226 2226 - 2244 2244 - 2262 2262 - 2280 2280 - 2298 2298 - 2316 2316 - 2334 2334 - 2352 2352 - 2370 2370 - 2388 2388 - 2406 2406 - 2424 2424 - 2442 2442 - 2460 2460 - 2478 2478 - 2496 2496 - 2514 2514 - 2532 2532 - 2550 2550 - 2568 2568 - 2586 2586 - 2604 2604 - 2622 2622 - 2640 2640 - 2658 2658 - 2676 2676 - 2694 2694 - 2712 2712 - 2730

CC 0 88.20 90.10 92.05 93.95 95.90 97.85 99.75 101.70 103.60 105.55 107.45 109.40 111.35 113.25 115.20 117.10 119.05 121.00 122.90 124.40 125.25 126.10 126.90 127.75 128.60 129.45 130.30 131.15 132.00 132.85 133.70 134.55 135.40 136.25 137.10 137.95 138.80 139.65 140.50 141.35 142.20 143.05 143.90 144.75 145.60 146.45 147.30 148.15 149.00 149.85 150.70 151.55 152.40 153.25 154.10

CC 1 45.40 47.30 49.25 51.15 53.10 55.00 56.95 58.90 60.80 62.75 64.65 66.60 68.55 70.45 72.40 74.30 76.25 78.20 80.10 81.55 82.40 83.25 84.10 84.95 85.80 86.65 87.50 88.35 89.20 90.05 90.90 91.75 92.60 93.45 94.30 95.15 96.00 96.85 97.70 98.55 99.40 100.25 101.10 101.95 102.80 103.65 104.50 105.35 106.20 107.05 107.90 108.75 109.60 110.45 111.30

CC 2 37.45 40.20 43.00 45.75 48.50 50.40 52.35 54.25 56.20 58.15 60.05 62.00 63.90 65.85 67.80 69.70 71.65 73.55 75.50 76.95 77.80 78.65 79.50 80.35 81.20 82.05 82.90 83.75 84.60 85.45 86.30 87.15 88.00 88.85 89.70 90.55 91.40 92.25 93.10 93.95 94.80 95.65 96.50 97.35 98.20 99.05 99.90 100.75 101.60 102.45 103.30 104.15 105.00 105.85 106.70

CC 3 19.00 21.75 24.55 27.35 30.10 32.90 35.65 38.45 41.20 44.00 46.75 49.55 52.35 55.10 57.90 60.50 62.40 64.35 66.25 67.75 68.60 69.45 70.30 71.15 72.00 72.85 73.70 74.55 75.40 76.25 77.10 77.95 78.80 79.65 80.50 81.35 82.20 83.05 83.90 84.75 85.60 86.45 87.30 88.10 88.95 89.80 90.65 91.50 92.35 93.20 94.05 94.90 95.75 96.60 97.45

CC 4 4.95 6.00 7.10 8.90 11.65 14.45 17.20 20.00 22.80 25.55 28.35 31.10 33.90 36.65 39.45 42.20 45.00 47.80 50.55 52.90 54.60 56.30 57.95 59.65 61.35 63.05 64.45 65.30 66.15 67.00 67.85 68.70 69.55 70.40 71.25 72.10 72.95 73.80 74.65 75.50 76.35 77.20 78.05 78.90 79.75 80.60 81.45 82.30 83.15 84.00 84.85 85.70 86.55 87.40 88.25

CC 5 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 21.00 23.80 26.55 29.35 32.10 34.45 36.15 37.85 39.55 41.25 42.95 44.65 46.35 48.05 49.75 51.40 53.10 54.80 56.50 58.20 59.90 61.60 63.30 64.60 65.45 66.30 67.15 68.00 68.85 69.70 70.55 71.40 72.25 73.10 73.95 74.80 75.65 76.50 77.35 78.20 79.00

CC 6 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 20.05 21.15 22.20 23.30 24.40 25.00 25.00 25.00 25.00 25.00 25.00 26.20 27.90 29.60 31.30 33.00 34.70 36.40 38.10 39.80 41.45 43.15 44.85 46.55 48.25 49.95 51.65 53.35 55.05 56.75 58.45 60.15 61.85 63.55 64.70 65.55 66.40 67.25 68.10 68.95 69.80

CC 7 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 20.05 21.15 22.20 23.30 24.40 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 26.45 28.15 29.85 31.50 33.20 34.90 36.60 38.30 40.00 41.70 43.40 45.10 46.80 48.50 50.20 51.90 53.60 55.30 57.00

CC 8 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 20.05 21.15 22.20 23.30 24.40 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 26.65 28.35 30.05 31.75 33.45 35.15 36.85 38.55

CC 9 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 20.05 21.15 22.20 23.30 24.40 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00

CC 10 4.95 6.00 7.10 8.20 9.25 10.35 11.40 12.50 13.60 14.65 15.75 16.80 17.90 19.00 20.05 21.15 22.20 23.30 24.40 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00

Source: T4032ON, Payroll Deductions Tables – CPP, EI, and income tax deductions – Ontario – Effective January 1, 2017 – Sections D and E – Federal and Ontario provincial tax deductions tables, 12 pay periods per year (Monthly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/ t4032/2017/t4032-on-12pp-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

198

CHAPTER 10

Payroll

Figure 10.14  CPP Deductions (Monthly) Canada Pension Plan Contributions

Monthly (12 pay periods a year) Pay From 2095.20 2095.40 2095.60 2095.81 2096.01 2096.21 2096.41 2096.61 2096.82 2097.02 2097.22 2097.42 2097.62 2097.83 2098.03 2098.23 2098.43 2098.63 2098.84 2099.04 2099.24 2099.44 2099.64 2099.85 2100.05 2100.25 2100.45 2100.65 2100.86 2101.06 2101.26 2101.46 2101.66 2101.87 2102.07 2102.27 2102.47 2102.68 2102.88 2103.08 2103.28 2103.48 2103.69 2103.89 2104.09 2104.29 2104.49 2104.70 2104.90 2105.10 2105.30 2105.50 2105.71 2105.91 2106.11 2106.31 2106.51 2106.72 2106.92 2107.12 2107.32 2107.52 2107.73 2107.93 2108.13 2108.33 2108.53 2108.74 2108.94 2109.14 2109.34 2109.54

-

Pay To 2095.39 2095.59 2095.80 2096.00 2096.20 2096.40 2096.60 2096.81 2097.01 2097.21 2097.41 2097.61 2097.82 2098.02 2098.22 2098.42 2098.62 2098.83 2099.03 2099.23 2099.43 2099.63 2099.84 2100.04 2100.24 2100.44 2100.64 2100.85 2101.05 2101.25 2101.45 2101.65 2101.86 2102.06 2102.26 2102.46 2102.67 2102.87 2103.07 2103.27 2103.47 2103.68 2103.88 2104.08 2104.28 2104.48 2104.69 2104.89 2105.09 2105.29 2105.49 2105.70 2105.90 2106.10 2106.30 2106.50 2106.71 2106.91 2107.11 2107.31 2107.51 2107.72 2107.92 2108.12 2108.32 2108.52 2108.73 2108.93 2109.13 2109.33 2109.53 2109.74

CPP 89.28 89.29 89.30 89.31 89.32 89.33 89.34 89.35 89.36 89.37 89.38 89.39 89.40 89.41 89.42 89.43 89.44 89.45 89.46 89.47 89.48 89.49 89.50 89.51 89.52 89.53 89.54 89.55 89.56 89.57 89.58 89.59 89.60 89.61 89.62 89.63 89.64 89.65 89.66 89.67 89.68 89.69 89.70 89.71 89.72 89.73 89.74 89.75 89.76 89.77 89.78 89.79 89.80 89.81 89.82 89.83 89.84 89.85 89.86 89.87 89.88 89.89 89.90 89.91 89.92 89.93 89.94 89.95 89.96 89.97 89.98 89.99

From 2109.75 2109.95 2110.15 2110.35 2110.55 2110.76 2110.96 2111.16 2111.36 2111.56 2111.77 2111.97 2112.17 2112.37 2112.57 2112.78 2112.98 2113.18 2113.38 2113.58 2113.79 2113.99 2114.19 2114.39 2114.59 2114.80 2115.00 2115.20 2115.40 2115.60 2115.81 2116.01 2116.21 2116.41 2116.61 2116.82 2117.02 2117.22 2117.42 2117.62 2117.83 2118.03 2118.23 2118.43 2118.63 2118.84 2119.04 2119.24 2119.44 2119.64 2119.85 2120.05 2120.25 2120.45 2120.65 2120.86 2121.06 2121.26 2121.46 2121.66 2121.87 2122.07 2122.27 2122.47 2122.68 2122.88 2123.08 2123.28 2123.48 2123.69 2123.89 2124.09

-

Pay To 2109.94 2110.14 2110.34 2110.54 2110.75 2110.95 2111.15 2111.35 2111.55 2111.76 2111.96 2112.16 2112.36 2112.56 2112.77 2112.97 2113.17 2113.37 2113.57 2113.78 2113.98 2114.18 2114.38 2114.58 2114.79 2114.99 2115.19 2115.39 2115.59 2115.80 2116.00 2116.20 2116.40 2116.60 2116.81 2117.01 2117.21 2117.41 2117.61 2117.82 2118.02 2118.22 2118.42 2118.62 2118.83 2119.03 2119.23 2119.43 2119.63 2119.84 2120.04 2120.24 2120.44 2120.64 2120.85 2121.05 2121.25 2121.45 2121.65 2121.86 2122.06 2122.26 2122.46 2122.67 2122.87 2123.07 2123.27 2123.47 2123.68 2123.88 2124.08 2124.28

CPP 90.00 90.01 90.02 90.03 90.04 90.05 90.06 90.07 90.08 90.09 90.10 90.11 90.12 90.13 90.14 90.15 90.16 90.17 90.18 90.19 90.20 90.21 90.22 90.23 90.24 90.25 90.26 90.27 90.28 90.29 90.30 90.31 90.32 90.33 90.34 90.35 90.36 90.37 90.38 90.39 90.40 90.41 90.42 90.43 90.44 90.45 90.46 90.47 90.48 90.49 90.50 90.51 90.52 90.53 90.54 90.55 90.56 90.57 90.58 90.59 90.60 90.61 90.62 90.63 90.64 90.65 90.66 90.67 90.68 90.69 90.70 90.71

From 2124.29 2124.49 2124.70 2124.90 2125.10 2125.30 2125.50 2125.71 2125.91 2126.11 2126.31 2126.51 2126.72 2126.92 2127.12 2127.32 2127.52 2127.73 2127.93 2128.13 2128.33 2128.53 2128.74 2128.94 2129.14 2129.34 2129.54 2129.75 2129.95 2130.15 2130.35 2130.55 2130.76 2130.96 2131.16 2131.36 2131.56 2131.77 2131.97 2132.17 2132.37 2132.57 2132.78 2132.98 2133.18 2133.38 2133.58 2133.79 2133.99 2134.19 2134.39 2134.59 2134.80 2135.00 2135.20 2135.40 2135.60 2135.81 2136.01 2136.21 2136.41 2136.61 2136.82 2137.02 2137.22 2137.42 2137.62 2137.83 2138.03 2138.23 2138.43 2138.63

-

Pay To 2124.48 2124.69 2124.89 2125.09 2125.29 2125.49 2125.70 2125.90 2126.10 2126.30 2126.50 2126.71 2126.91 2127.11 2127.31 2127.51 2127.72 2127.92 2128.12 2128.32 2128.52 2128.73 2128.93 2129.13 2129.33 2129.53 2129.74 2129.94 2130.14 2130.34 2130.54 2130.75 2130.95 2131.15 2131.35 2131.55 2131.76 2131.96 2132.16 2132.36 2132.56 2132.77 2132.97 2133.17 2133.37 2133.57 2133.78 2133.98 2134.18 2134.38 2134.58 2134.79 2134.99 2135.19 2135.39 2135.59 2135.80 2136.00 2136.20 2136.40 2136.60 2136.81 2137.01 2137.21 2137.41 2137.61 2137.82 2138.02 2138.22 2138.42 2138.62 2138.83

CPP 90.72 90.73 90.74 90.75 90.76 90.77 90.78 90.79 90.80 90.81 90.82 90.83 90.84 90.85 90.86 90.87 90.88 90.89 90.90 90.91 90.92 90.93 90.94 90.95 90.96 90.97 90.98 90.99 91.00 91.01 91.02 91.03 91.04 91.05 91.06 91.07 91.08 91.09 91.10 91.11 91.12 91.13 91.14 91.15 91.16 91.17 91.18 91.19 91.20 91.21 91.22 91.23 91.24 91.25 91.26 91.27 91.28 91.29 91.30 91.31 91.32 91.33 91.34 91.35 91.36 91.37 91.38 91.39 91.40 91.41 91.42 91.43

From 2138.84 2139.04 2139.24 2139.44 2139.64 2139.85 2140.05 2140.25 2140.45 2140.65 2140.86 2141.06 2141.26 2141.46 2141.66 2141.87 2142.07 2142.27 2142.47 2142.68 2142.88 2143.08 2143.28 2143.48 2143.69 2143.89 2144.09 2144.29 2144.49 2144.70 2144.90 2145.10 2145.30 2145.50 2145.71 2145.91 2146.11 2146.31 2146.51 2146.72 2146.92 2147.12 2147.32 2147.52 2147.73 2147.93 2148.13 2148.33 2148.53 2148.74 2148.94 2149.14 2149.34 2149.54 2149.75 2149.95 2150.15 2150.35 2150.55 2150.76 2150.96 2151.16 2151.36 2151.56 2151.77 2151.97 2152.17 2152.37 2152.57 2152.78 2152.98 2153.18

-

To 2139.03 2139.23 2139.43 2139.63 2139.84 2140.04 2140.24 2140.44 2140.64 2140.85 2141.05 2141.25 2141.45 2141.65 2141.86 2142.06 2142.26 2142.46 2142.67 2142.87 2143.07 2143.27 2143.47 2143.68 2143.88 2144.08 2144.28 2144.48 2144.69 2144.89 2145.09 2145.29 2145.49 2145.70 2145.90 2146.10 2146.30 2146.50 2146.71 2146.91 2147.11 2147.31 2147.51 2147.72 2147.92 2148.12 2148.32 2148.52 2148.73 2148.93 2149.13 2149.33 2149.53 2149.74 2149.94 2150.14 2150.34 2150.54 2150.75 2150.95 2151.15 2151.35 2151.55 2151.76 2151.96 2152.16 2152.36 2152.56 2152.77 2152.97 2153.17 2153.37

CPP 91.44 91.45 91.46 91.47 91.48 91.49 91.50 91.51 91.52 91.53 91.54 91.55 91.56 91.57 91.58 91.59 91.60 91.61 91.62 91.63 91.64 91.65 91.66 91.67 91.68 91.69 91.70 91.71 91.72 91.73 91.74 91.75 91.76 91.77 91.78 91.79 91.80 91.81 91.82 91.83 91.84 91.85 91.86 91.87 91.88 91.89 91.90 91.91 91.92 91.93 91.94 91.95 91.96 91.97 91.98 91.99 92.00 92.01 92.02 92.03 92.04 92.05 92.06 92.07 92.08 92.09 92.10 92.11 92.12 92.13 92.14 92.15

Employee’s maximum CPP contribution for the year 2017 is $2,564.10

Source: T4032, Payroll Deductions Tables – CPP, EI, and income tax deductions – Effective January 1, 2017 – Section B – Canada Pension Plan contributions tables, 12 pay periods per year (Monthly) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/2017/t4032cpp -12pp-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 10

199

Payroll

Figure 10.14  CPP Deductions (Monthly)(Continued) Canada Pension Plan Contributions

Monthly (12 pay periods a year) Pay From 2153.38 2153.58 2153.79 2153.99 2154.19 2154.39 2154.59 2154.80 2155.00 2155.20 2155.40 2155.60 2155.81 2156.01 2156.21 2156.41 2156.61 2156.82 2157.02 2157.22 2157.42 2157.62 2157.83 2158.03 2158.23 2158.43 2158.63 2158.84 2159.04 2159.24 2159.44 2159.64 2159.85 2160.05 2160.25 2160.45 2160.65 2160.86 2161.06 2161.26 2161.46 2161.66 2161.87 2162.07 2162.27 2162.47 2162.68 2162.88 2163.08 2163.28 2163.48 2163.69 2163.89 2164.09 2164.29 2164.49 2164.70 2164.90 2165.10 2165.30 2165.50 2165.71 2165.91 2166.11 2166.31 2166.51 2166.72 2166.92 2167.12 2167.32 2167.52 2167.73

-

Pay To

CPP

From

2153.57 2153.78 2153.98 2154.18 2154.38 2154.58 2154.79 2154.99 2155.19 2155.39 2155.59 2155.80 2156.00 2156.20 2156.40 2156.60 2156.81 2157.01 2157.21 2157.41 2157.61 2157.82 2158.02 2158.22 2158.42 2158.62 2158.83 2159.03 2159.23 2159.43 2159.63 2159.84 2160.04 2160.24 2160.44 2160.64 2160.85 2161.05 2161.25 2161.45 2161.65 2161.86 2162.06 2162.26 2162.46 2162.67 2162.87 2163.07 2163.27 2163.47 2163.68 2163.88 2164.08 2164.28 2164.48 2164.69 2164.89 2165.09 2165.29 2165.49 2165.70 2165.90 2166.10 2166.30 2166.50 2166.71 2166.91 2167.11 2167.31 2167.51 2167.72 2167.92

92.16 92.17 92.18 92.19 92.20 92.21 92.22 92.23 92.24 92.25 92.26 92.27 92.28 92.29 92.30 92.31 92.32 92.33 92.34 92.35 92.36 92.37 92.38 92.39 92.40 92.41 92.42 92.43 92.44 92.45 92.46 92.47 92.48 92.49 92.50 92.51 92.52 92.53 92.54 92.55 92.56 92.57 92.58 92.59 92.60 92.61 92.62 92.63 92.64 92.65 92.66 92.67 92.68 92.69 92.70 92.71 92.72 92.73 92.74 92.75 92.76 92.77 92.78 92.79 92.80 92.81 92.82 92.83 92.84 92.85 92.86 92.87

2167.93 2168.13 2168.33 2168.53 2168.74 2168.94 2169.14 2169.34 2169.54 2169.75 2169.95 2170.15 2170.35 2170.55 2170.76 2170.96 2171.16 2171.36 2171.56 2171.77 2171.97 2172.17 2172.37 2172.57 2172.78 2172.98 2173.18 2173.38 2173.58 2173.79 2173.99 2174.19 2174.39 2174.59 2174.80 2175.00 2175.20 2175.40 2175.60 2175.81 2176.01 2176.21 2176.41 2176.61 2176.82 2177.02 2177.22 2177.42 2177.62 2177.83 2178.03 2178.23 2178.43 2178.63 2178.84 2179.04 2179.24 2179.44 2179.64 2179.85 2180.05 2180.25 2180.45 2180.65 2180.86 2181.06 2181.26 2181.46 2181.66 2181.87 2182.07 2182.27

-

Pay To

CPP

From

2168.12 2168.32 2168.52 2168.73 2168.93 2169.13 2169.33 2169.53 2169.74 2169.94 2170.14 2170.34 2170.54 2170.75 2170.95 2171.15 2171.35 2171.55 2171.76 2171.96 2172.16 2172.36 2172.56 2172.77 2172.97 2173.17 2173.37 2173.57 2173.78 2173.98 2174.18 2174.38 2174.58 2174.79 2174.99 2175.19 2175.39 2175.59 2175.80 2176.00 2176.20 2176.40 2176.60 2176.81 2177.01 2177.21 2177.41 2177.61 2177.82 2178.02 2178.22 2178.42 2178.62 2178.83 2179.03 2179.23 2179.43 2179.63 2179.84 2180.04 2180.24 2180.44 2180.64 2180.85 2181.05 2181.25 2181.45 2181.65 2181.86 2182.06 2182.26 2182.46

92.88 92.89 92.90 92.91 92.92 92.93 92.94 92.95 92.96 92.97 92.98 92.99 93.00 93.01 93.02 93.03 93.04 93.05 93.06 93.07 93.08 93.09 93.10 93.11 93.12 93.13 93.14 93.15 93.16 93.17 93.18 93.19 93.20 93.21 93.22 93.23 93.24 93.25 93.26 93.27 93.28 93.29 93.30 93.31 93.32 93.33 93.34 93.35 93.36 93.37 93.38 93.39 93.40 93.41 93.42 93.43 93.44 93.45 93.46 93.47 93.48 93.49 93.50 93.51 93.52 93.53 93.54 93.55 93.56 93.57 93.58 93.59

2182.47 2182.68 2182.88 2183.08 2183.28 2183.48 2183.69 2183.89 2184.09 2184.29 2184.49 2184.70 2184.90 2185.10 2185.30 2185.50 2185.71 2185.91 2186.11 2186.31 2186.51 2186.72 2186.92 2187.12 2187.32 2187.52 2187.73 2187.93 2188.13 2188.33 2188.53 2188.74 2188.94 2189.14 2189.34 2189.54 2189.75 2189.95 2190.15 2190.35 2190.55 2190.76 2190.96 2191.16 2191.36 2191.56 2191.77 2191.97 2192.17 2192.37 2192.57 2192.78 2192.98 2193.18 2193.38 2193.58 2193.79 2193.99 2194.19 2194.39 2194.59 2194.80 2195.00 2195.20 2195.40 2195.60 2195.81 2196.01 2196.21 2196.41 2196.61 2196.82

-

Pay To

CPP

From

2182.67 2182.87 2183.07 2183.27 2183.47 2183.68 2183.88 2184.08 2184.28 2184.48 2184.69 2184.89 2185.09 2185.29 2185.49 2185.70 2185.90 2186.10 2186.30 2186.50 2186.71 2186.91 2187.11 2187.31 2187.51 2187.72 2187.92 2188.12 2188.32 2188.52 2188.73 2188.93 2189.13 2189.33 2189.53 2189.74 2189.94 2190.14 2190.34 2190.54 2190.75 2190.95 2191.15 2191.35 2191.55 2191.76 2191.96 2192.16 2192.36 2192.56 2192.77 2192.97 2193.17 2193.37 2193.57 2193.78 2193.98 2194.18 2194.38 2194.58 2194.79 2194.99 2195.19 2195.39 2195.59 2195.80 2196.00 2196.20 2196.40 2196.60 2196.81 2197.01

93.60 93.61 93.62 93.63 93.64 93.65 93.66 93.67 93.68 93.69 93.70 93.71 93.72 93.73 93.74 93.75 93.76 93.77 93.78 93.79 93.80 93.81 93.82 93.83 93.84 93.85 93.86 93.87 93.88 93.89 93.90 93.91 93.92 93.93 93.94 93.95 93.96 93.97 93.98 93.99 94.00 94.01 94.02 94.03 94.04 94.05 94.06 94.07 94.08 94.09 94.10 94.11 94.12 94.13 94.14 94.15 94.16 94.17 94.18 94.19 94.20 94.21 94.22 94.23 94.24 94.25 94.26 94.27 94.28 94.29 94.30 94.31

2197.02 2197.22 2197.42 2197.62 2197.83 2198.03 2198.23 2198.43 2198.63 2198.84 2199.04 2199.24 2199.44 2199.64 2199.85 2200.05 2200.25 2200.45 2200.65 2200.86 2201.06 2201.26 2201.46 2201.66 2201.87 2202.07 2202.27 2202.47 2202.68 2202.88 2203.08 2203.28 2203.48 2203.69 2203.89 2204.09 2204.29 2204.49 2204.70 2204.90 2205.10 2205.30 2205.50 2205.71 2205.91 2206.11 2206.31 2206.51 2206.72 2206.92 2207.12 2207.32 2207.52 2207.73 2207.93 2208.13 2208.33 2208.53 2208.74 2208.94 2209.14 2209.34 2209.54 2209.75 2209.95 2210.15 2210.35 2210.55 2210.76 2210.96 2211.16 2211.36

-

To

CPP

2197.21 2197.41 2197.61 2197.82 2198.02 2198.22 2198.42 2198.62 2198.83 2199.03 2199.23 2199.43 2199.63 2199.84 2200.04 2200.24 2200.44 2200.64 2200.85 2201.05 2201.25 2201.45 2201.65 2201.86 2202.06 2202.26 2202.46 2202.67 2202.87 2203.07 2203.27 2203.47 2203.68 2203.88 2204.08 2204.28 2204.48 2204.69 2204.89 2205.09 2205.29 2205.49 2205.70 2205.90 2206.10 2206.30 2206.50 2206.71 2206.91 2207.11 2207.31 2207.51 2207.72 2207.92 2208.12 2208.32 2208.52 2208.73 2208.93 2209.13 2209.33 2209.53 2209.74 2209.94 2210.14 2210.34 2210.54 2210.75 2210.95 2211.15 2211.35 2211.55

94.32 94.33 94.34 94.35 94.36 94.37 94.38 94.39 94.40 94.41 94.42 94.43 94.44 94.45 94.46 94.47 94.48 94.49 94.50 94.51 94.52 94.53 94.54 94.55 94.56 94.57 94.58 94.59 94.60 94.61 94.62 94.63 94.64 94.65 94.66 94.67 94.68 94.69 94.70 94.71 94.72 94.73 94.74 94.75 94.76 94.77 94.78 94.79 94.80 94.81 94.82 94.83 94.84 94.85 94.86 94.87 94.88 94.89 94.90 94.91 94.92 94.93 94.94 94.95 94.96 94.97 94.98 94.99 95.00 95.01 95.02 95.03

Employee’s maximum CPP contribution for the year 2017 is $2,564.10

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CHAPTER 10

Payroll

Figure 10.15  Employment lnsurance Premiums Employment Insurance Premiums Insurable Earnings EI From To premium 1943.87 1944.47 31.69 1944.48 1945.09 31.70 1945.10 1945.70 31.71 1945.71 1946.31 31.72 1946.32 1946.93 31.73 1946.94 1947.54 31.74 1947.55 1948.15 31.75 1948.16 1948.77 31.76 1948.78 1949.38 31.77 1949.39 1950.00 31.78 1950.01 1950.61 31.79 1950.62 1951.22 31.80 1951.23 1951.84 31.81 1951.85 1952.45 31.82 1952.46 1953.06 31.83 1953.07 1953.68 31.84 1953.69 1954.29 31.85 1954.30 1954.90 31.86 1954.91 1955.52 31.87 1955.53 1956.13 31.88 1956.14 1956.74 31.89 1956.75 1957.36 31.90 1957.37 1957.97 31.91 1957.98 1958.58 31.92 1958.59 1959.20 31.93 1959.21 1959.81 31.94 1959.82 1960.42 31.95 1960.43 1961.04 31.96 1961.05 1961.65 31.97 1961.66 1962.26 31.98 1962.27 1962.88 31.99 1962.89 1963.49 32.00 1963.50 1964.11 32.01 1964.12 1964.72 32.02 1964.73 1965.33 32.03 1965.34 1965.95 32.04 1965.96 1966.56 32.05 1966.57 1967.17 32.06 1967.18 1967.79 32.07 1967.80 1968.40 32.08 1968.41 1969.01 32.09 1969.02 1969.63 32.10 1969.64 1970.24 32.11 1970.25 1970.85 32.12 1970.86 1971.47 32.13 1971.48 1972.08 32.14 1972.09 1972.69 32.15 1972.70 1973.31 32.16 1973.32 1973.92 32.17 1973.93 1974.53 32.18 1974.54 1975.15 32.19 1975.16 1975.76 32.20 1975.77 1976.38 32.21 1976.39 1976.99 32.22 1977.00 1977.60 32.23 1977.61 1978.22 32.24 1978.23 1978.83 32.25 1978.84 1979.44 32.26 1979.45 1980.06 32.27 1980.07 1980.67 32.28 1980.68 1981.28 32.29 1981.29 1981.90 32.30 1981.91 1982.51 32.31 1982.52 1983.12 32.32 1983.13 1983.74 32.33 1983.75 1984.35 32.34 1984.36 1984.96 32.35 1984.97 1985.58 32.36 1985.59 1986.19 32.37 1986.20 1986.80 32.38 1986.81 1987.42 32.39 1987.43 1988.03 32.40 Yearly maximum insurable earnings are $51,300 Yearly maximum employee premiums are $836.19 The premium rate for 2017 is 1.63 %

Insurable Earnings From To 1988.04 1988.65 1988.66 1989.26 1989.27 1989.87 1989.88 1990.49 1990.50 1991.10 1991.11 1991.71 1991.72 1992.33 1992.34 1992.94 1992.95 1993.55 1993.56 1994.17 1994.18 1994.78 1994.79 1995.39 1995.40 1996.01 1996.02 1996.62 1996.63 1997.23 1997.24 1997.85 1997.86 1998.46 1998.47 1999.07 1999.08 1999.69 1999.70 2000.30 2000.31 2000.92 2000.93 2001.53 2001.54 2002.14 2002.15 2002.76 2002.77 2003.37 2003.38 2003.98 2003.99 2004.60 2004.61 2005.21 2005.22 2005.82 2005.83 2006.44 2006.45 2007.05 2007.06 2007.66 2007.67 2008.28 2008.29 2008.89 2008.90 2009.50 2009.51 2010.12 2010.13 2010.73 2010.74 2011.34 2011.35 2011.96 2011.97 2012.57 2012.58 2013.19 2013.20 2013.80 2013.81 2014.41 2014.42 2015.03 2015.04 2015.64 2015.65 2016.25 2016.26 2016.87 2016.88 2017.48 2017.49 2018.09 2018.10 2018.71 2018.72 2019.32 2019.33 2019.93 2019.94 2020.55 2020.56 2021.16 2021.17 2021.77 2021.78 2022.39 2022.40 2023.00 2023.01 2023.61 2023.62 2024.23 2024.24 2024.84 2024.85 2025.46 2025.47 2026.07 2026.08 2026.68 2026.69 2027.30 2027.31 2027.91 2027.92 2028.52 2028.53 2029.14 2029.15 2029.75 2029.76 2030.36 2030.37 2030.98 2030.99 2031.59 2031.60 2032.20

EI premium 32.41 32.42 32.43 32.44 32.45 32.46 32.47 32.48 32.49 32.50 32.51 32.52 32.53 32.54 32.55 32.56 32.57 32.58 32.59 32.60 32.61 32.62 32.63 32.64 32.65 32.66 32.67 32.68 32.69 32.70 32.71 32.72 32.73 32.74 32.75 32.76 32.77 32.78 32.79 32.80 32.81 32.82 32.83 32.84 32.85 32.86 32.87 32.88 32.89 32.90 32.91 32.92 32.93 32.94 32.95 32.96 32.97 32.98 32.99 33.00 33.01 33.02 33.03 33.04 33.05 33.06 33.07 33.08 33.09 33.10 33.11 33.12

Insurable Earnings From To 2032.21 2032.82 2032.83 2033.43 2033.44 2034.04 2034.05 2034.66 2034.67 2035.27 2035.28 2035.88 2035.89 2036.50 2036.51 2037.11 2037.12 2037.73 2037.74 2038.34 2038.35 2038.95 2038.96 2039.57 2039.58 2040.18 2040.19 2040.79 2040.80 2041.41 2041.42 2042.02 2042.03 2042.63 2042.64 2043.25 2043.26 2043.86 2043.87 2044.47 2044.48 2045.09 2045.10 2045.70 2045.71 2046.31 2046.32 2046.93 2046.94 2047.54 2047.55 2048.15 2048.16 2048.77 2048.78 2049.38 2049.39 2049.99 2050.00 2050.61 2050.62 2051.22 2051.23 2051.84 2051.85 2052.45 2052.46 2053.06 2053.07 2053.68 2053.69 2054.29 2054.30 2054.90 2054.91 2055.52 2055.53 2056.13 2056.14 2056.74 2056.75 2057.36 2057.37 2057.97 2057.98 2058.58 2058.59 2059.20 2059.21 2059.81 2059.82 2060.43 2060.44 2061.04 2061.05 2061.65 2061.66 2062.26 2062.27 2062.88 2062.89 2063.49 2063.50 2064.11 2064.12 2064.72 2064.73 2065.33 2065.34 2065.95 2065.96 2066.56 2066.57 2067.18 2067.19 2067.79 2067.80 2068.40 2068.41 2069.01 2069.02 2069.63 2069.64 2070.24 2070.25 2070.85 2070.86 2071.47 2071.48 2072.08 2072.09 2072.70 2072.71 2073.31 2073.32 2073.93 2073.94 2074.53 2074.54 2075.15 2075.16 2075.76 2075.77 2076.38

EI premium 33.13 33.14 33.15 33.16 33.17 33.18 33.19 33.20 33.21 33.22 33.23 33.24 33.25 33.26 33.27 33.28 33.29 33.30 33.31 33.32 33.33 33.34 33.35 33.36 33.37 33.38 33.39 33.40 33.41 33.42 33.43 33.44 33.45 33.46 33.47 33.48 33.49 33.50 33.51 33.52 33.53 33.54 33.55 33.56 33.57 33.58 33.59 33.60 33.61 33.62 33.63 33.64 33.65 33.66 33.67 33.68 33.69 33.70 33.71 33.72 33.73 33.74 33.75 33.76 33.77 33.78 33.79 33.80 33.81 33.82 33.83 33.84

Insurable Earnings From To 2076.39 2076.99 2077.00 2077.60 2077.61 2078.22 2078.23 2078.83 2078.84 2079.45 2079.46 2080.06 2080.07 2080.67 2080.68 2081.28 2081.29 2081.90 2081.91 2082.51 2082.52 2083.12 2083.13 2083.74 2083.75 2084.35 2084.36 2084.97 2084.98 2085.58 2085.59 2086.20 2086.21 2086.80 2086.81 2087.42 2087.43 2088.03 2088.04 2088.65 2088.66 2089.26 2089.27 2089.87 2089.88 2090.49 2090.50 2091.10 2091.11 2091.72 2091.73 2092.33 2092.34 2092.94 2092.95 2093.55 2093.56 2094.17 2094.18 2094.78 2094.79 2095.39 2095.40 2096.01 2096.02 2096.62 2096.63 2097.24 2097.25 2097.85 2097.86 2098.47 2098.48 2099.07 2099.08 2099.69 2099.70 2100.30 2100.31 2100.92 2100.93 2101.53 2101.54 2102.14 2102.15 2102.76 2102.77 2103.37 2103.38 2103.99 2104.00 2104.60 2104.61 2105.21 2105.22 2105.82 2105.83 2106.44 2106.45 2107.05 2107.06 2107.66 2107.67 2108.28 2108.29 2108.89 2108.90 2109.50 2109.51 2110.12 2110.13 2110.74 2110.75 2111.34 2111.35 2111.96 2111.97 2112.57 2112.58 2113.19 2113.20 2113.80 2113.81 2114.41 2114.42 2115.03 2115.04 2115.64 2115.65 2116.25 2116.26 2116.87 2116.88 2117.48 2117.49 2118.09 2118.10 2118.71 2118.72 2119.32 2119.33 2119.93 2119.94 2120.55

EI premium 33.85 33.86 33.87 33.88 33.89 33.90 33.91 33.92 33.93 33.94 33.95 33.96 33.97 33.98 33.99 34.00 34.01 34.02 34.03 34.04 34.05 34.06 34.07 34.08 34.09 34.10 34.11 34.12 34.13 34.14 34.15 34.16 34.17 34.18 34.19 34.20 34.21 34.22 34.23 34.24 34.25 34.26 34.27 34.28 34.29 34.30 34.31 34.32 34.33 34.34 34.35 34.36 34.37 34.38 34.39 34.40 34.41 34.42 34.43 34.44 34.45 34.46 34.47 34.48 34.49 34.50 34.51 34.52 34.53 34.54 34.55 34.56

Source: T4032, Payroll Deductions Tables – CPP, EI, and income tax deductions – Effective January 1, 2017 – Section C – Employment Insurance premiums tables (province or territory of employment other than the province of Quebec) http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/ t4032/2017/t4032einoqc-17eng.pdf. Reproduced with permission of the Minister of Public Works and Government Services Canada, 2017. NEL

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CHAPTER 10

201

Payroll

Figure 10.15  Employment lnsurance Premiums(Continued) Employment Insurance Premiums Insurable Earnings From To 2120.56 2121.16 2121.17 2121.77 2121.78 2122.39 2122.40 2123.00 2123.01 2123.61 2123.62 2124.23 2124.24 2124.84 2124.85 2125.46 2125.47 2126.07 2126.08 2126.68 2126.69 2127.30 2127.31 2127.91 2127.92 2128.52 2128.53 2129.14 2129.15 2129.75 2129.76 2130.36 2130.37 2130.98 2130.99 2131.59 2131.60 2132.20 2132.21 2132.82 2132.83 2133.43 2133.44 2134.04 2134.05 2134.66 2134.67 2135.27 2135.28 2135.88 2135.89 2136.50 2136.51 2137.11 2137.12 2137.73 2137.74 2138.34 2138.35 2138.95 2138.96 2139.57 2139.58 2140.18 2140.19 2140.79 2140.80 2141.41 2141.42 2142.02 2142.03 2142.63 2142.64 2143.25 2143.26 2143.86 2143.87 2144.47 2144.48 2145.09 2145.10 2145.70 2145.71 2146.31 2146.32 2146.93 2146.94 2147.54 2147.55 2148.15 2148.16 2148.77 2148.78 2149.38 2149.39 2150.00 2150.01 2150.61 2150.62 2151.22 2151.23 2151.84 2151.85 2152.45 2152.46 2153.06 2153.07 2153.68 2153.69 2154.29 2154.30 2154.90 2154.91 2155.52 2155.53 2156.13 2156.14 2156.74 2156.75 2157.36 2157.37 2157.97 2157.98 2158.58 2158.59 2159.20 2159.21 2159.81 2159.82 2160.43 2160.44 2161.04 2161.05 2161.65 2161.66 2162.26 2162.27 2162.88 2162.89 2163.49 2163.50 2164.11 2164.12 2164.72

EI premium 34.57 34.58 34.59 34.60 34.61 34.62 34.63 34.64 34.65 34.66 34.67 34.68 34.69 34.70 34.71 34.72 34.73 34.74 34.75 34.76 34.77 34.78 34.79 34.80 34.81 34.82 34.83 34.84 34.85 34.86 34.87 34.88 34.89 34.90 34.91 34.92 34.93 34.94 34.95 34.96 34.97 34.98 34.99 35.00 35.01 35.02 35.03 35.04 35.05 35.06 35.07 35.08 35.09 35.10 35.11 35.12 35.13 35.14 35.15 35.16 35.17 35.18 35.19 35.20 35.21 35.22 35.23 35.24 35.25 35.26 35.27 35.28

Insurable Earnings From To 2164.73 2165.33 2165.34 2165.95 2165.96 2166.56 2166.57 2167.18 2167.19 2167.79 2167.80 2168.40 2168.41 2169.01 2169.02 2169.63 2169.64 2170.24 2170.25 2170.85 2170.86 2171.47 2171.48 2172.08 2172.09 2172.70 2172.71 2173.31 2173.32 2173.93 2173.94 2174.53 2174.54 2175.15 2175.16 2175.76 2175.77 2176.38 2176.39 2176.99 2177.00 2177.60 2177.61 2178.22 2178.23 2178.83 2178.84 2179.45 2179.46 2180.06 2180.07 2180.67 2180.68 2181.28 2181.29 2181.90 2181.91 2182.51 2182.52 2183.12 2183.13 2183.74 2183.75 2184.35 2184.36 2184.97 2184.98 2185.58 2185.59 2186.20 2186.21 2186.80 2186.81 2187.42 2187.43 2188.03 2188.04 2188.65 2188.66 2189.26 2189.27 2189.87 2189.88 2190.49 2190.50 2191.10 2191.11 2191.72 2191.73 2192.33 2192.34 2192.94 2192.95 2193.55 2193.56 2194.17 2194.18 2194.78 2194.79 2195.39 2195.40 2196.01 2196.02 2196.62 2196.63 2197.24 2197.25 2197.85 2197.86 2198.47 2198.48 2199.07 2199.08 2199.69 2199.70 2200.30 2200.31 2200.92 2200.93 2201.53 2201.54 2202.14 2202.15 2202.76 2202.77 2203.37 2203.38 2203.99 2204.00 2204.60 2204.61 2205.21 2205.22 2205.82 2205.83 2206.44 2206.45 2207.05 2207.06 2207.66 2207.67 2208.28 2208.29 2208.89

EI premium 35.29 35.30 35.31 35.32 35.33 35.34 35.35 35.36 35.37 35.38 35.39 35.40 35.41 35.42 35.43 35.44 35.45 35.46 35.47 35.48 35.49 35.50 35.51 35.52 35.53 35.54 35.55 35.56 35.57 35.58 35.59 35.60 35.61 35.62 35.63 35.64 35.65 35.66 35.67 35.68 35.69 35.70 35.71 35.72 35.73 35.74 35.75 35.76 35.77 35.78 35.79 35.80 35.81 35.82 35.83 35.84 35.85 35.86 35.87 35.88 35.89 35.90 35.91 35.92 35.93 35.94 35.95 35.96 35.97 35.98 35.99 36.00

Insurable Earnings From To 2208.90 2209.50 2209.51 2210.12 2210.13 2210.74 2210.75 2211.34 2211.35 2211.96 2211.97 2212.57 2212.58 2213.19 2213.20 2213.80 2213.81 2214.41 2214.42 2215.03 2215.04 2215.64 2215.65 2216.25 2216.26 2216.87 2216.88 2217.48 2217.49 2218.09 2218.10 2218.71 2218.72 2219.32 2219.33 2219.93 2219.94 2220.55 2220.56 2221.16 2221.17 2221.77 2221.78 2222.39 2222.40 2223.00 2223.01 2223.61 2223.62 2224.23 2224.24 2224.84 2224.85 2225.46 2225.47 2226.07 2226.08 2226.68 2226.69 2227.30 2227.31 2227.91 2227.92 2228.52 2228.53 2229.14 2229.15 2229.75 2229.76 2230.36 2230.37 2230.98 2230.99 2231.59 2231.60 2232.20 2232.21 2232.82 2232.83 2233.43 2233.44 2234.04 2234.05 2234.66 2234.67 2235.27 2235.28 2235.88 2235.89 2236.50 2236.51 2237.11 2237.12 2237.73 2237.74 2238.34 2238.35 2238.95 2238.96 2239.57 2239.58 2240.18 2240.19 2240.79 2240.80 2241.41 2241.42 2242.02 2242.03 2242.63 2242.64 2243.25 2243.26 2243.86 2243.87 2244.47 2244.48 2245.09 2245.10 2245.70 2245.71 2246.31 2246.32 2246.93 2246.94 2247.54 2247.55 2248.15 2248.16 2248.77 2248.78 2249.38 2249.39 2250.00 2250.01 2250.61 2250.62 2251.22 2251.23 2251.84 2251.85 2252.45 2252.46 2253.06

EI premium 36.01 36.02 36.03 36.04 36.05 36.06 36.07 36.08 36.09 36.10 36.11 36.12 36.13 36.14 36.15 36.16 36.17 36.18 36.19 36.20 36.21 36.22 36.23 36.24 36.25 36.26 36.27 36.28 36.29 36.30 36.31 36.32 36.33 36.34 36.35 36.36 36.37 36.38 36.39 36.40 36.41 36.42 36.43 36.44 36.45 36.46 36.47 36.48 36.49 36.50 36.51 36.52 36.53 36.54 36.55 36.56 36.57 36.58 36.59 36.60 36.61 36.62 36.63 36.64 36.65 36.66 36.67 36.68 36.69 36.70 36.71 36.72

Insurable Earnings From To 2253.07 2253.68 2253.69 2254.29 2254.30 2254.90 2254.91 2255.52 2255.53 2256.13 2256.14 2256.74 2256.75 2257.36 2257.37 2257.97 2257.98 2258.58 2258.59 2259.20 2259.21 2259.81 2259.82 2260.43 2260.44 2261.04 2261.05 2261.65 2261.66 2262.26 2262.27 2262.88 2262.89 2263.49 2263.50 2264.11 2264.12 2264.72 2264.73 2265.33 2265.34 2265.95 2265.96 2266.56 2266.57 2267.18 2267.19 2267.79 2267.80 2268.40 2268.41 2269.01 2269.02 2269.63 2269.64 2270.24 2270.25 2270.85 2270.86 2271.47 2271.48 2272.08 2272.09 2272.70 2272.71 2273.31 2273.32 2273.93 2273.94 2274.53 2274.54 2275.15 2275.16 2275.76 2275.77 2276.38 2276.39 2276.99 2277.00 2277.60 2277.61 2278.22 2278.23 2278.83 2278.84 2279.45 2279.46 2280.06 2280.07 2280.67 2280.68 2281.28 2281.29 2281.90 2281.91 2282.51 2282.52 2283.12 2283.13 2283.74 2283.75 2284.35 2284.36 2284.97 2284.98 2285.58 2285.59 2286.20 2286.21 2286.80 2286.81 2287.42 2287.43 2288.03 2288.04 2288.65 2288.66 2289.26 2289.27 2289.87 2289.88 2290.49 2290.50 2291.10 2291.11 2291.72 2291.73 2292.33 2292.34 2292.94 2292.95 2293.55 2293.56 2294.17 2294.18 2294.78 2294.79 2295.39 2295.40 2296.01 2296.02 2296.62 2296.63 2297.24

EI premium 36.73 36.74 36.75 36.76 36.77 36.78 36.79 36.80 36.81 36.82 36.83 36.84 36.85 36.86 36.87 36.88 36.89 36.90 36.91 36.92 36.93 36.94 36.95 36.96 36.97 36.98 36.99 37.00 37.01 37.02 37.03 37.04 37.05 37.06 37.07 37.08 37.09 37.10 37.11 37.12 37.13 37.14 37.15 37.16 37.17 37.18 37.19 37.20 37.21 37.22 37.23 37.24 37.25 37.26 37.27 37.28 37.29 37.30 37.31 37.32 37.33 37.34 37.35 37.36 37.37 37.38 37.39 37.40 37.41 37.42 37.43 37.44

Yearly maximum insurable earnings are $51,300 Yearly maximum employee premiums are $836.19 The premium rate for 2017 is 1.63 %

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER OBJECTIVES

CHAPTER

11

After completing this chapter, you will be able to: ●● record investments and withdrawals by the owners of partnerships ●● record basic transactions for the sale of corporate shares and the distribution of dividends

IMPORTANT TERMS USED IN THIS CHAPTER Common Stock Corporation Dividend Drawings Partnership Preferred Stock Retained Earnings Shareholder Equity

PARTNERSHIPS AND CORPORATIONS

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CHAPTER 11

Partnerships and Corporations

203

F

Fun Fact Mechanical adding machines weren’t invented until the late 1800s. Computing machines weren’t introduced to the business world until the 1940s. Mind you, they took up an entire room, and their computing abilities were nowhere near those of today’s devices, such as our smartphones, tablets, and laptops. When calculators were finally invented, bookkeepers were among the first to use them. Well, yeah, scientists too.

rom the point of view of the average person on the street, a business is a business. They are all the same. They might market different products or services, but a business is a business! Although this simple view may on the surface be essentially true, every business falls into one of three types of organization: (1) proprietorship; (2) partnership; or (3) corporation. In this chapter, we will look at areas of accounting that are specific to partnerships and to corporations. A proprietorship is a business owned by one person. The owner is responsible for all decisions and actions taken in the operation of the business. A partnership is a business owned by two or more individuals who have combined their financial resources and expertise. Their decisions and actions are generally made jointly, and each partner shares in the annual profits or losses. KBC Decorating Co. is a partnership, owned and operated by its two partners, Henri Martin and Wes Corbett. A corporation is a business for which ownership is divided into shares or stocks that may be bought and sold through a stock exchange. Although it is easy to think of large, well-known companies as corporations (such as The Bay, Air Canada, and CIBC), small private corporations also exist with only a few people sharing ownership. The difference between four people forming a partnership and the same four people forming a corporation is largely a legal difference. A corporation must have a government charter permitting it to operate, whereas a partnership does not. (Corporations will be discussed in more detail later in this chapter.)

THE PARTNERSHIP In Canada, each province has partnership legislation that spells out the terms and conditions under which a partnership may operate. These terms and conditions form what is called the “articles of partnership”—an agreement or contract intended to protect the rights of each partner. Such a partnership contract typically outlines the following: 1. The name, location, and nature of the business. 2. The names, duties, and rights of each partner within the scope of operations. Some partners may be granted the right to make all ongoing operating decisions while other partners may be just financial backers (not taking a direct hand in the day-to-day operations). 3. The amount of capital to be invested by each partner, including a valuation of noncash assets invested or withdrawn by each partner. Partners do not have to make equal investments in the business; some may contribute cash and other assets while others may contribute their valuable expertise. 4. The method of sharing profits and losses. Often, profits and losses are shared in proportion to the amount of capital that each partner has invested. Other factors, though, may also determine how much profit can be claimed by each partner. An example is a partner who, because of his or her special skills or abilities, is able to attract additional clients to the business. Therefore, he or she might be entitled to a larger proportion of the profits. NEL

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204

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5. The amount of cash each partner is allowed to withdraw from the partnership. 6. A provision for insurance on the lives of partners, with the surviving partners (or the partnership itself) named as the beneficiaries. 7. A provision for an annual review of the company’s financial statements. 8. A provision for settling disputes by arbitration. 9. A provision for dissolution of the partnership (the method of computing the equity value of a retiring or deceased partner or when the business ceases to exist). 10. A provision for liquidating the partnership (the method of sharing any deficiency in a partner’s Capital account by the other partners). A partnership arrangement provides these advantages to the owners over sole proprietorships or a corporation: 1. A partnership provides an opportunity to bring additional capital into the business that might otherwise not be available to a sole owner. 2. A partnership provides an opportunity to combine special skills and talents. 3. A partnership is generally easier and less expensive to set up than a corporation. 4. A partnership is not a separate legal entity, so it does not pay income tax on its earnings as a corporation does. Each partner pays income tax on his or her share of the business’s net income. 5. The partners may withdraw funds and make business decisions without having to hold formal meetings. There can, though, be disadvantages to a partnership arrangement. These can include the following: 1. Limited Life: A partnership ceases to exist when a partner dies or withdraws from the partnership, or when a new partner is added. In such an event, the business continues under a new partnership agreement reflecting the change in ownership. The general public is often unaware that such a change in ownership has occurred. 2. Unlimited Liability: Generally, each partner is personally responsible for all the debts of the business. If, however, the partner is deemed to be a “limited partner,” the partnership contract specifies the limited extent to which he or she can be held responsible for the business’s debts. 3. Mutual Agency: Each partner acts as an agent or representative of the partnership and can enter into contracts for the purchase and sale of goods and services. Once such contracts have been entered into, all the partners are bound by the terms of the contracts.

PARTNERSHIP ACCOUNTING Generally, accounting for a partnership is the same as accounting for a proprietorship. However, to accurately detail the investments into the partnership by the various partners, a separate Capital account and a separate Drawings account is maintained for each partner. The Capital account, as discussed in earlier chapters, records how much the owner has invested into the business. The Drawings account records how much the owner has taken out. (Drawings will be discussed in more detail later in this chapter.) NEL

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Figure 11.1  Investments in a Partnership

Jan.

2

2

Bank Land Building Inventory Accounts Payable Capital, R. Adams To record investment by Adams in the partnership.

10 50 90 40

Bank Accounts Receivable Inventory Accounts Payable Capital, D. Crane To record investment by Crane in the partnership.

30 0 0 0 00 60 0 0 0 00 80 0 0 0 00

0 0 0 0

0 0 0 0

0 0 0 0

00 00 00 00 40 0 0 0 00 150 0 0 0 00

20 0 0 0 00 150 0 0 0 00

To illustrate the formation of a partnership, we will assume Richard Adams and David Crane were operating separate businesses. After some negotiation, they decided to form a partnership by combining their two businesses. Separate journal entries were recorded for each partner’s investment in the new business and a separate Capital account was opened for each partner. The noncash assets, such as land, building, and inventory, were recorded at their current market value (the amount they could probably be sold for at the time). Figure 11.1 shows the General Journal entries recorded for the assets and liabilities invested by both Adams and Crane. The net Capital investment for Adams is determined by applying a variation of the accounting equation discussed in Chapter 2: Assets 2 Liabilities 5 Equity. The total of the assets ($190,000) minus the liability ($40,000) equals Capital ($150,000). A similar calculation is made to determine the net Capital investment made by Crane: total assets ($170,000) minus the liability ($20,000) equals Capital ($150,000). PRACTICE EXERCISE 1 Arthur Skarrie and Adam Storey had been operating separate retail stores. On June 1, 20—, they decided to form a partnership by merging their two businesses. Arthur Skarrie contributed Cash, $30,000; Accounts Receivable, $50,000; Inventory, $80,000; and Accounts Payable, $20,000. Adam Storey contributed Cash, $10,000; Land, $40,000; Building, $90,000; Inventory, $60,000; and Accounts Payable, $60,000. Record a compound General Journal entry for each partner’s investment in Skarrie Storey Co. Be sure to balance each journal entry and provide suitable explanations. NEL

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PRACTICE EXERCISE 2 On April 1, 20—, Arthur Parnell, Stan Sudol, and Emily Mathur formed a partnership. Arthur Parnell invested $30,000 cash. Stan Sudol invested $10,000 cash, $1,000 of office furniture, and $15,000 of merchandise inventory. Emily Mathur invested $8,000 of office equipment, $5,000 of merchandise inventory, $7,000 cash, and $5,000 of accounts payable. (a) Record a General Journal entry for each partner’s investment in the new partnership. (b) What is the total equity value of this partnership? PRACTICE EXERCISE 3 Record the General Journal entries to open the books of the partnership of Smith & Mann Grocery on January 2, 20—. John Smith invested Cash, $12,000; Furniture, $8,000; Delivery Truck, $9,000; and Bank Loan, $5,000. Charles Mann invested Inventory, $10,000; Store Equipment, $7,000; and enough cash to give him an equal interest in the partnership. (Hint: An equal interest in the partnership means that Mann will have the same net capital investment as John Smith’s. To compute the amount of cash invested, work backward from the Capital value to arrive at the amount of cash that will balance the entry.)

THE DRAWINGS ACCOUNT Drawings is the equity account into which a partner’s withdrawals of assets (cash, merchandise, supplies, etc.) are recorded during the year. Since the partners have each contributed to the business, each is entitled to withdraw assets from the business. Drawings, therefore, reduces the amount of equity by reducing the owner’s Capital. Good accounting practice dictates that separate accounts be kept for each partner for investments and for withdrawals. This means that each partner will have a Capital account and each will have a Drawings account. To continue the previous example with Richard Adams and David Crane, we will assume that the following transactions took place during the year. They were recorded as shown in Figure 11.2 and have been posted to the partners’ Drawings accounts (Figure 11.3). Study each entry carefully: Mar. 15 Richard Adams withdrew $2,000 cash. Jul. 31 David Crane took a used printer from the business for his own use at a cost value of $226 (including $26 HST). Notice that when nonmerchandise items, such as printers, computers, and office supplies, are withdrawn by the owner, an adjustment must be made to HST-ITC (or GST-ITC where applicable) because the items are no longer available for business use.

NEL

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Figure 11.2  Withdrawal Transactions for Adams & Crane

Mar.

Jul.

Aug.

Nov.

15

31

3

30

Drawings, R. Adams Bank Withdrew cash for personal use.

303

Drawings, D. Crane Office Equipment HST-ITC Took used printer for personal use.

304

Drawings, R. Adams Purchases HST Payable Withdrew merchandise for own use.

303

Drawings, D. Crane Bank Paid Crane’s home telephone bill from partnership funds.

304

2 0 0 0 00 2 0 0 0 00

2 2 6 00 2 0 0 00 2 6 00

1 6 9 50 1 5 0 00 1 9 50

3 5 00 3 5 00

Figure 11.3  Drawings Accounts for Adams & Crane ACCOUNT

DATE

Drawings, Richard Adams

MEMO

DISC. DATE

20— Mar. 15 Withdrew funds. Aug. 3 Withdrew merchandise.

ACCOUNT

DATE

F.

GJ1 GJ1

DEBIT

20— Jul. 31 Withdrew printer. Nov. 30 Paid home phone bill.

DISC. DATE

F.

GJ1 GJ1

303

SHEET NO.

1

CREDIT

DEBIT

2 2 6 00 3 5 00

DR. CR.

BALANCE

Dr. 2 0 0 0 00 2 1 6 9 50

2 0 0 0 00 1 6 9 50

Drawings, David Crane

MEMO

ACCT. NO.

ACCT. NO.

304

SHEET NO.

1

CREDIT

DR. CR.

Dr.

BALANCE

2 2 6 00 2 6 1 00

Aug. 3 Richard Adams withdrew merchandise worth $150 plus $19.50 HST for his personal use. Since the buyer and the seller cannot be the same person, the Sales account cannot be credited in this transaction. NEL

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The merchandise was withdrawn at cost price, so it should be deducted from the Purchases account (the same account in which the cost of the merchandise was originally recorded). This disposal of goods is still subject to HST (or GST) as if the goods were sold; therefore, $19.50 is charged to the HST Payable account. Nov. 30 Paid David Crane’s home telephone bill of $35 by issuing a company cheque. The Drawings account continues to receive the partners’ withdrawal transactions throughout the year. At year-end, the balance in the Drawings account will be cleared so the account is ready to receive withdrawal activities in the new financial year. The procedure for closing the Drawings accounts will be discussed in Chapter 15. PRACTICE EXERCISE 4 Record these transactions in the General Journal, complete with suitable explanations. Ask your instructor which of the following tax rates to use: i. Add 5% GST only ii. Add 13% HST iii. Add 5% GST 1 7% PST 1. Rita Jackson, owner of a grocery store, withdrew merchandise for her own use, $55 plus tax(es). 2. Issued cheque to the Provincial Telephone Co. to pay the following: company telephone bill, $45.50 plus tax(es), and owner’s home telephone bill, $41.10. 3. Owner has given you the receipt for a bouquet of flowers sent to her husband. The amount was paid by company cheque, $25. 4. Owner took used printer, valued at $225 plus tax(es), from the business for personal use at home. 5. Issued cheque for $500 to Ms. Jackson for personal use. 6. Owner took office supplies for own use, $15 plus tax(es). 7. Paid owner’s personal dry cleaning bill, $15.50, with a company cheque. 8. Owner withdrew merchandise, $50 plus tax(es), and cash, $125, for personal use. 9. Issued cheque to City Gas Co. to cover company’s heating bill, $304.50 (includes tax(es)), and owner’s home heating bill, $99.64. 10. Issued cheque to pay business’s hydro bill, $162.75 including tax(es). 11. Owner withdrew $15 from the petty cash box for lunch money. 12. Owner took stationery for personal use, $9 plus tax(es). PRACTICE EXERCISE 5 The following transactions are from the records of Campo-Stewan Co. Record these investments and withdrawals by the partners in a General Journal, and then post the appropriate entries to their respective Capital accounts and Drawings accounts. NEL

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209

20— Jan. 4

Peter Campo invested $17,500 cash and a computer system worth $8,500. Jan. 4 Brian Stewan invested $4,000 cash, $6,200 in accounts receivable, and $12,000 in merchandise. Feb. 10 Peter Campo withdrew $500 cash. Feb. 20 Brian Stewan withdrew $400 cash and $250 of merchandise for his own use. (Ignore tax on merchandise.) Apr. 16 Brian Stewan used $900 of company funds to pay personal expenses. Jun. 21 Peter Campo invested an additional $12,000 cash. Brian Stewan withdrew $2,000 cash. (Record these as separate transactions.) Jul. 4 Peter Campo gave his home utility bill to the bookkeeper and asked that it be paid with company funds, $150. Aug. 10 Brian Stewan invested $3,000 cash and a truck valued at $7,500. Oct. 1 The two partners withdrew $1,000 each.

CORPORATIONS

Fun Fact The oldest corporation in Canada is the Hudson’s Bay Company, granted a federal charter in 1670.

A corporation is a business for which the ownership is represented by shares or stocks. These owners are called shareholders or stockholders. There may be a large number of shareholders, perhaps many hundreds or many thousands, or there may be only a small number, perhaps two or three people. Each shareholder owns a percentage of the business depending on the total number of shares owned. In return for their investments in the corporation, the shareholders may receive a part of the company’s annual profit, if there is one, in the form of a dividend. A corporation is considered a legal “person” that has a legal personality separate from its owners. Among its rights and obligations are the ability to hold assets in its own name, to incur debts (liabilities) in its own name, to sue and be sued, and to sign contracts. Whereas partnerships cease to exist with the death, withdrawal, or addition of a partner, corporations continue regardless of the change of ownership. Around the world, shares are bought and sold every day on public stock exchanges, yet these changes in ownership of the corporations involved typically do not affect the company’s day-to-day existence. In Canada, a corporation requires a government charter (either provincial or federal) in order to operate. A charter sets out the rules and requirements under which the corporation may conduct its activities. For example, every corporation must prepare annual financial statements for examination by an auditor and for eventual distribution to its shareholders. The auditor must be independent of the corporation—meaning the auditor cannot be a director, an officer, or an employee of the corporation—so as to provide an unbiased review of the financial state of the business. As well, there must be an annual meeting of all shareholders every calendar year to report on the financial state of the corporation, including the presentation of the auditor’s report, and to hold elections of directors (if applicable).

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KEEPING THE BOOKS IN A CORPORATION Bookkeeping for the everyday activities of a corporation is essentially the same as for a sole proprietorship and a partnership. Sales and purchases of goods and services, as well as receipts and payments of cash, are recorded in the same way. In corporate accounting, however, the Owners’ Equity accounts are replaced by Shareholder Equity accounts. This means there are no Capital and Drawings accounts for the owner(s). Instead, the value of the shares (sometimes called stocks) sold to shareholders is recorded in equity accounts called Common Stock and Preferred Stock. (Kinds of shares are discussed in the next topic.) Figure 11.4 shows the journal entry for the issuance (sale) of 10,000 common shares of a corporation, assuming each share is valued at $10. Notice that the entry is similar to the usual investment entry of a proprietorship or partnership, except that the Capital account has been replaced by the Common Stock account.

KINDS OF SHARES A corporation can issue two kinds of shares: preferred shares and common shares. Preferred shares (or preferred stocks) receive the first share of the annual profit made by the company at a fixed percentage rate of dividend, such as 8% preferred shares. The owner of 1,000 preferred shares issued at $10 each, for example, would be entitled to a dividend equal to 8% of the value of the shares held; that is, 1,000 3 $10 3 8% 5 $800. This assumes the company has earned enough profit during the year to pay such a dividend. If not, the preferred shareholders may receive no dividend at all. Within the preferred class of shares, there are cumulative and noncumulative shares. 1. Cumulative: If the business has a bad year and cannot pay some or all of the required dividend to the owners of cumulative preferred shares, the shortfall can be carried forward and paid to them the following year, again assuming that there is enough profit the next year to pay it. 2. Noncumulative: If the business has a bad year and cannot pay some or all of the required divided, the dividend is lost as it cannot be carried forward to the following year. Common shares (or common stock) are the most typical kind of share or stock issued by a corporation. Common shareholders are entitled to a share of the annual profit only if there is enough profit available after the preferred Figure 11.4  Recording Common Stock

Jan.

5

Bank Common Stock Sold and issued 10,000 common shares at $10 per share.

100 0 0 0 00 100 0 0 0 00

NEL

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shareholders, if any, have been paid. The amount of dividend to be paid to the common shareholders at the end of a year must be decided by the company directors and approved by the shareholders at the annual general meeting.

AUTHORIZED VERSUS ISSUED CAPITAL The term “authorized capital” refers to the total number of shares and the value of each share that the corporation is allowed to issue. It may issue less than the authorized total but may not issue more than the authorized total. For example, a corporation may be authorized to issue 100,000 shares at a value of $10 per share. It can issue any number of shares to a maximum of 100,000. “Issued capital” refers to the number of shares actually sold and issued to shareholders. These are sold usually through a stock exchange (or by private sale if it is a private corporation) at whatever the market value may be on any given day. The market value has nothing to do with the value of the shares that is reported on the company’s balance sheet. Shares of highly profitable companies usually trade for amounts much greater than their value on the books, and the market value will fluctuate depending on the interest in those shares by the buying public. Figure 11.5 shows the Shareholder Equity section of a corporate Balance Sheet, showing both the authorized and the issued capital stock. Only the issued shares are included in the Balance Sheet total. The authorized shares are shown only for information purposes. PRACTICE EXERCISE 6 Using Figure 11.4 as an example, record the journal entries for the issuance of the following shares. Use Preferred Stock and Common Stock as the account names for these different classes of stock. (a) Authorized 50,000 shares of common stock, $2 per share; issued 50,000 shares. (b) Authorized 10,000 shares of 5% preferred shares, $12 per share; issued 10,000 shares.

Figure 11.5  Shareholder Equity on the Balance Sheet Shareholder Equity Preferred stock, authorized 10,000 shares Issued 5,000 shares @ $5.00 each Common stock, authorized 500,000 shares Issued 500,000 shares @ $1.00 each Retained Earnings Total Shareholder Equity

$25,000.00 500,000.00 8,250.00 $533,250.00

NEL

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(c) Authorized 20,000 shares of 6% preferred shares, $8 per share; issued 10,000 shares; and authorized 100,000 shares of common stock, $1 per share; issued 75,000 shares. (d) Authorized 1 million shares of common stock, $1 per share; issued all shares. (e) Authorized 75,000 shares of 8% preferred stock, $25 per share; issued all shares; and authorized 500,000 shares of common stock, $5 per share; issued all shares.

RETAINED EARNINGS Each financial year, the corporation determines its profit or loss for the year and accounts for it in an account called Retained Earnings. This equity account shows an accumulated value from the date the corporation started up. Each year, the board of directors must decide whether to pay out these profits, if any, to the shareholders in the form of dividends or to reinvest them in the business. Retained earnings are reported in the Shareholder Equity section of the Balance Sheet. (See Figure 11.5.) When the profits are declared by the board of directors (and approved by the shareholders at the annual shareholders meeting), an entry is recorded to transfer the value from the Retained Earnings account to a liability account called Common (or Preferred) Dividends Payable. The board of directors has declared its intentions to pay this dividend to the shareholders on a specific future date; therefore, a liability has been created. Figure 11.6 shows this entry. When the dividend is paid to the shareholders, an entry is recorded to clear the payable account, similar to that of paying off accounts payable. Figure 11.7 shows this payment in the General Journal, although this entry would typically appear in the Cash Payments Journal. Figure 11.6  Recording a Dividend Declared on Common Stock

Jun.

17

Retained Earnings Common Dividends Payable Declared a $.50 dividend on 10,000 shares of common stock, payable on Jul. 15, 20—.

5 0 0 0 00 5 0 0 0 00

Figure 11.7  Paying the Dividend on Common Stock

Jul.

15

Common Dividends Payable Bank Paid the $.50 dividend on 10,000 shares of common stock declared on Jun. 17, 20—.

5 0 0 0 00 5 0 0 0 00

NEL

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213

PRACTICE EXERCISE 7 Using the corresponding information from Practice Exercise 6, record the following declarations of dividends. Then record the payments of dividends on the dates indicated. (a) On February 24, the board of directors declared a dividend of $.095 per share, to be paid on April 1. (b) On June 11, the board of directors declared a 5% dividend on the preferred shares, to be paid July 29. (c) On October 3, the board of directors declared a 6% dividend on preferred stock and a $.03 dividend on common stock, to be paid on December 14. (d) On November 17, the board of directors declared a dividend of $.025 per share, to be paid on January 13. (e) On March 4, the board of directors declared an 8% dividend on the preferred shares, to be paid on May 7. No dividend was declared on the common shares. PRACTICE EXERCISE 8 (a) Organize and complete the following information for the Shareholders’ Equity section of a Balance Sheet (similar to Figure 11.5): ●● Common stock, authorized 250,000 shares @ $2.50 each, issued 200,000 shares ●● Retained earnings, $162,480 ●● Preferred stock, authorized 50,000 shares @ $18 each, issued 50,000 shares (b) Organize and complete the following information for the Shareholders’ Equity section of a Balance Sheet (similar to Figure 11.5): ●●

●●

●●

Authorized 75,000 shares of 8% preferred stock, $25 each; issued all shares Authorized 1,500,000 shares of common stock, $5 each; issued all shares Retained earnings, $218,000

Supplementary Exercise EXERCISE 11-1: Open file SE-11-1. Complete the investment entries by calculating the values for Capital. THINK ABOUT IT! 1. What is the purpose of the Drawings account? What kind of account is it? 2. What is the difference between a partnership and a corporation? 3. What account(s) typically replace the Capital account on a corporate balance sheet? 4. What are retained earnings? NEL

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5. What is a dividend? 6. Are “authorized shares” and “issued shares” the same thing? Explain.

CASE STUDY: KBC DECORATING CO. JULY TRANSACTIONS In this chapter, you learned about recording investment and withdrawal transactions for partnerships. The partners of KBC Decorating Co. have decided to make regular withdrawals from the business as a form of “salary” for the time and effort they put into running their business. Each partner will have a Drawings account (#302 and #304) for this purpose. Record the July transactions as usual. 20— Jul. 2 Received payment from Clear-Vu Windows for rent, $1,500 plus HST. 2 Made mortgage payment, $1,220, which includes $998.53 for mortgage interest and $221.47 for mortgage principal. Look back at your mortgage payment entry in last month’s Cash Payments Journal to recall how this entry is to be recorded. No cheque was issued. 4 Issued cheques to pay bills: ● phone bill, $175 plus HST ● gas/heating bill, $30 plus HST ● electricity bill, $141.25 (includes $16.25 HST) 8

8 9 10 10

13 13 14

Petty cash expenditure: postage stamps, $15 plus HST. (Petty cash fund was not reimbursed at the end of last month. Therefore, record this expenditure as the next entry on the same petty cash sheet.) Bought office supplies from Major Office Supplies on Invoice #286 dated today, terms n/30, $390 plus HST. Completed painting and decorating work for cash customers, $3,500 plus HST. Sold paint to K. Young Painting on terms 2/10, n/30, $1,750 plus taxes. Received bank statement for June. (See Figure 11.8.) Complete bank reconciliation for June using the information from last month’s reconciliation statement, last month’s cash journals, and the June bank statement. Record necessary entry for the bank charges. Paid Rainbow Supplies in full for Invoice #130. Sold wallpaper to S. Miller on terms 2/10, n/30, $880 plus HST. Remitted the payroll deductions withheld from last month’s payroll. ●  Look up balances in these accounts: Fed. Income Tax Payable, Prov. Income Tax Payable, CPP Payable, EI Payable, and Life/ Health Plan Payable. These are the amounts you will remit. NEL

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Figure 11.8  Bank Statement (KBC Decorating Co.)

Bank Statement—June Date

Details

Cheques

Deposits

Jun. 1

Balance

32,278.60

1

Dep

1

Mortgage

2

1,695.00

33,973.60

1,220.00

32,753.60

Cheque 0052

203.40

32,550.20

4

Cheque 0053

406.80

32,143.40

5

Cheque 0056

137.86

32,005.54

5

Cheque 0058

4,600.00

27,405.54

7

Cheque 0054

178.54

27,227.00

7

Cheque 0057

7,006.00

20,221.00

8

Dep

9

Cheque 0055

14

Dep

7,232.00

31,072.39

15

Dep

788.10

31,860.49

18

Dep

1,887.00

33,747.49

19

Dep

2,429.50

36,176.99

30

Service Charge

3,672.50 53.11

15.00

23,893.50 23,840.39

36,161.99

Issue one cheque for the total of income tax, CPP, and EI amounts. See Figure 10.10 (Chapter 10) to recall how to record this entry in the Cash Payments Journal. ●  Issue cheque to Sun Life Insurance Company for amount owing for the life/health plan. ●

15 15 18 20 20 20 23

Partners have withdrawn company funds for personal use, $2,000 each. Issued separate cheques for these withdrawals. Cash sales: paint and supplies, $3,100, and wallpaper, $1,800. Add HST as usual. Bought paint and supplies from Rainbow Supplies on terms 1/10, n/30, Invoice #245 dated yesterday, $4,650 plus HST. Petty cash expenditure: coffee supplies for staff room, $8 (no tax). Completed painting and decorating work for cash customers, $4,200 plus HST. Received payment in full from K. Young Painting on the latest invoice. Bought wallpaper, $3,240 plus HST, from Reynolds Paper on Invoice #202 dated July 21, terms n/30.

NEL

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24 Remitted HST charged and collected during the second quarter of the year. To complete the GST/HST return, you will need the following information from these ledger accounts: ● Sales Paint & Supplies: total sales for April, May, and June ● Sales Wallpaper: total sales for April, May, and June ● Sales Service: total sales for June ● Rental Revenue: balance on June 30 ● HST Payable: balance on June 30 ● HST-ITC: balance on June 30

27 31 31 31 31

Record necessary entries in the Cash Payments Journal for this remittance to the government. Look back at the April 24 entry to see how this entry should be recorded. Paid Rainbow Supplies in full for Invoice #245. Issued cheque to reimburse petty cash fund. A count of cash on hand today is $0.70. Partners have asked you to write cheques for the following withdrawals: Martin, $2,000, and Corbett, $2,200. Cash sales: paint and supplies, $3,000, and wallpaper, $2,100. Add HST as usual. Prepared month-end payroll for July. All employees’ salaries are the same as last month; therefore, use the same amounts from last month’s payroll. ● Prepare a Payroll Record using the same amounts as in June. ●  Record General Journal entries for payroll and employer’s contributions. Look back at last month’s General Journal to recall how to record these entries. ● Issue paycheques in Cash Payments Journal.

AT MONTH-END (a) Total, balance, and rule the journals. (b) Post all entries to the ledger accounts as usual. (c) Prepare a trial balance on July 31, 20—.

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● prepare a statement of accounts receivable by age for the purpose of determining an estimate of uncollectible accounts receivable ●● write off uncollectible accounts and invoices

IMPORTANT TERMS USED IN THIS CHAPTER Aging of Accounts Receivable Allowance for Doubtful Accounts Bad Debts Expense Bad Debt Recoveries

CHAPTER

12 ACCOUNTS RECEIVABLE AND BAD DEBTS

NEL

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E

very business that sells its goods and services to customers on account faces the possibility that some of those accounts receivable will “go bad,” meaning that the amount owing will never be collected. Large businesses with many customers will use a process of aging the receivables as a means of monitoring the status of the accounts and will use this information for estimating the uncollectibility of accounts. Small businesses, on the other hand, may not bother to age their receivables. In this chapter, we will look at two methods of dealing with bad debts: a method used by large businesses and a method used by smaller businesses.

AGING OF ACCOUNTS RECEIVABLE The aging of accounts receivable is the process of listing all customers and their account balances, and categorizing the invoices according to how old they are. A business that relies heavily on a steady cash flow will want to keep a close watch on the status of its receivables to ensure that accounts are collected as soon as possible and not allowed to run overdue any longer than necessary. As well, the process of aging receivables keeps management informed of the effectiveness of its credit and collection procedures. Management closely watches accounts that are past due, paying particular attention to how long they are past due. The longer an account is past due, the greater the likelihood that the money will not be collected. When aging of receivables is done at the end of every month, management is kept informed of the status of collections and can immediately take appropriate action concerning its credit policies: Are the terms on credit sales too lenient? Should discounts be offered to encourage early payment? How effective is the collection department? Should collection procedures be stepped up? Figure 12.1 shows a listing of customers with their balances categorized by age. One of the customers, L.A. Cooper, has a balance of $700. Of that amount, $500 is not yet due, but the rest is up to a month past due. Another customer, M.T. Dunn, has a balance of $800. In his case, $500 is nearly three months overdue, and the rest is more than three months past due. The longer Dunn’s account is uncollected, the greater the possibility we will never see a payment from him. Figure 12.1  Accounts Receivable by Age ACCOUNTS RECEIVABLE BY AGE CUSTOMERS

R.S. Abbot T.P. Bond L.A. Cooper M.T. Dunn N.D. Ewing Others Totals Percentages

TOTAL

$ 650 145 700 800 455 25,250 $28,000 100%

NOT YET DUE

1–30 DAYS PAST DUE

31–60 DAYS PAST DUE

61–90 DAYS PAST DUE

OVER 90 DAYS PAST DUE

$ 650 $145 $ 500 455 14,300 $15,255 54.5%

200

5,000 $5,850 20.9%

4,000 $4,145 14.8%

$ 500

$ 300

1,050 $1,550 5.5%

900 $1,200 4.3% NEL

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Accounts Receivable and Bad Debts

The totals of this aged listing can also provide valuable information for decision making. In Figure 12.1, we can see that $5,850 out of a total of $28,000 of receivables has been overdue up to 30 days. Is this a reasonable amount? Is it unusually high? The relationship between these two amounts may not be readily appreciated until we see the percentage that this category represents of the total receivables. By dividing the 1–30 day group total ($5,850) by the total of receivables ($28,000), we see that approximately 21% (or about one-fifth) of the total receivables is up to one month overdue. From experience, management would know if this is an acceptable level for this group of receivables. Now that the receivables have been organized by age, it is possible to estimate how much of the receivables will eventually become uncollectible. To do this, we must apply an appropriate percentage to each age group category. The actual percentage to be applied to each group is determined only by experience. In Figure 12.2, we are showing from our experience that only about 1% of the “not yet due” group of receivables will become uncollectible. Similarly, we predict that 4% of the “1–30 days past due” group will become uncollectible, 10% of the “31–60 days past due” group, and so on. Although the balances in the “not yet due” group in our example represent 54% of the total receivables, we are making an educated guess that only 1% of this amount will prove to be uncollectible. Notice that as the balances get older, the percentages are higher. This tells us that the longer the account is overdue, the greater the likelihood the amount will never be collected. By applying the percentages to the value of receivables in each category, we can reasonably estimate how much of the present accounts receivable total will likely never be collected—in this case, $1,711.05. Figure 12.3 shows the journal entry to recognize this potential loss from receivables. Accounts that cannot be collected are often referred to as “bad debts” and must be absorbed by the business. This makes the cost of operating the business higher since the goods shipped to the customer are likely not recoverable. This additional operating cost resulting from uncollectible accounts is debited to the Bad Debts Expense account. The Allowance for Doubtful Accounts account is a contra-asset that shows how much of the current accounts receivable balance Figure 12.2  Schedule for Estimating Uncollectibility of Receivables Schedule for Estimating Uncollectibility of Receivables December 31, 20—

AMOUNT

Not yet due 1–30 days over 31–60 days over 61–90 days over Over 90 days past due Totals

ACCOUNTS RECEIVABLE

$15,255 5,850 4,145 1,550 1,200 $28,000

PERCENTAGE UNCOLLECTIBLE

1% 4% 10% 20% 50%

ESTIMATED UNCOLLECTIBLE

$ 152.55 234.00 414.50 310.00 600.00 $1,711.05

NEL

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Figure 12.3  Recording Estimated Uncollectible Accounts

Dec.

31

Bad Debts Expense HST Payable Allowance for Doubtful Accounts To record estimated uncollectible accounts receivable for the year.

1 5 1 4 20 1 9 6 85 1 7 1 1 05

OR Dec.

31

Bad Debts Expense GST Payable PST Payable Allowance for Doubtful Accounts To record estimated uncollectible accounts receivable for the year.

1 5 1 4 20 7 5 71 1 2 1 14 1 7 1 1 05

Figure 12.4  Showing the Net Receivables

Accounts Receivable less Allowance for Doubtful Accounts Net Accounts Receivable

$28 0 0 0 00 (1 7 1 1 05) $26 2 8 8 95

is estimated to be uncollectible. The receivables amount that is expected to be written off includes the taxes that were charged when the goods were sold to the customers; therefore, HST Payable (or GST Payable and PST Payable, where applicable) must now be adjusted. This entry is typically recorded at year-end to ensure that the expense is recognized in the same business year that the revenue was recorded (in keeping with the matching principle discussed in Chapter 15). When we take the balance of the Accounts Receivable Control account ($28,000) and deduct the balance of the Allowance for Doubtful Accounts account ($1,711.05), we arrive at the estimated amount of receivables that we do expect to collect ($28,000 − $1,711.05 5 $26,288.95). This amount is sometimes referred to as the net realizable value of receivables or Net Receivables. (See Figure 12.4.)

WRITING OFF BAD DEBTS When it has been determined that a customer’s account cannot be collected (often because the customer has gone bankrupt), that account balance must be removed from the books. We will assume that one of our customers, Emmerson Plastics, has an account balance of $644 that has been overdue for more than six months and is deemed to be uncollectible. To write off the balance, the entry in Figure 12.5 is recorded. NEL

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Accounts Receivable and Bad Debts

Figure 12.5  Writing Off an Uncollectible Account

Oct.

17

Allowance for Doubtful Accounts A/R Emmerson Plastics To write off Emmerson’s account.

6 4 4 00 6 4 4 00

The credit entry to Emmerson’s account will reduce the account balance to zero. The debit entry to the Allowance for Doubtful Accounts account will reduce the balance of the allowance account, which then shows management that there is still more than $1,000 of receivables that will likely “go bad.” There is no need to adjust taxes in this entry because the taxes were already adjusted at the time the Bad Debt Expense was recorded (usually at year-end).

RECOVERING A BAD DEBT Occasionally, an account that was previously written off as a bad debt is unexpectedly paid, either in full or in part, by the customer. If Emmerson Plastics, for example, sends a cheque for $250 toward the balance that has already been written off, the account would first be reinstated at a balance of $250 so that the usual entry can be recorded for the money received. The General Journal entry to reinstate the account is shown in Figure 12.6. You will notice that this entry is the reverse of the entry that was recorded to write off the account, except that Bad Debt Recoveries (a revenue account) is credited to offset the expense in the write-off entry.

Figure 12.6  Reinstating an Account Previously Written Off

Dec.

15

A/R Emmerson Plastics Bad Debt Recoveries HST Payable To reinstate Emmerson’s account for the amount received.

2 5 0 00 2 2 1 24 2 8 76

OR Dec.

15

A/R Emmerson Plastics Bad Debt Recoveries GST Payable PST Payable To reinstate Emmerson’s account for the amount received.

2 5 0 00 2 2 1 24 1 1 06 1 7 70

NEL

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Figure 12.7  Receiving Payment on the Account CASH RECEIPTS JOURNAL DATE

MEMO

ACCOUNT CREDIT

On account

Dec. 15 Emmerson Plastics

F.

SALES DISC. DR.

ACCTS. REC. CR.

SALES CR.

HST PAY. CR.

GEN. LED. CR.

2 5 0 00

BANK DR.

2 5 0 00

Figure 12.8  Ledger Account for Emmerson Plastics ACCOUNT

ACCT. NO.

Emmerson Plastics

SHEET NO. DATE

20— Mar. 3 Oct. 17 Dec. 15 15

MEMO

Invoice #858 Write off On Invoice #858 On Invoice #858

DISC. DATE

F.

SJ GJ GJ CRJ

DEBIT

DR. CR.

CREDIT

6 4 4 00

Dr. 6 4 4 00

2 5 0 00

162 1 BALANCE

6 4 4 00 ∅

2 5 0 00 2 5 0 00

∅

The original sale to the customer (a revenue) was offset by an expense because the account was considered uncollectible. Since some or all of the money has now been collected, it must once again be recognized as revenue (Bad Debt Recoveries). The amount collected is once again assumed to include HST (or GST and PST); therefore, the taxes must be recorded, just as if another sale had been recorded. Now that the customer’s account has been reinstated with a balance equal to the amount just received, the usual entry can be recorded to receive the payment on account, as shown in Figure 12.7. Figure 12.8 shows how these entries affected Emmerson Plastics’ account. PRACTICE EXERCISE 1 Dominion Importing Co. has the following list of accounts receivables on December 31, 20—. The terms on all sales invoices are net 30 days. Name of Customer

Date on Invoice

Amount

Andosa, Conrad Bellini, Thomas Decker, Sylvia Evans, John Fu, Jane Gignac, Arthur Leake, Mitch Moore, Stephen

Jul. 10, 20— Sept. 28, 20— Dec. 3, 20— Sept. 15, 20— Nov. 8, 20— Oct. 20, 20— Oct. 3, 20— Aug. 10, 20—

$350.00 165.50 453.75 510.35 215.25 687.10 96.00 204.30 NEL

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Accounts Receivable and Bad Debts

Orb, Chris Sigurdson, Rob Woo, Michael Other customers

Nov. 30, 20— Nov. 16, 20— Dec. 8, 20— Dec. 15, 20—

260.75 528.50 112.40 11,450.00

(a) Prepare a schedule of accounts receivable by age using the same headings as shown in Figure 12.1. Each invoice is due 30 days after the invoice date shown. Calculate the percentage that each category represents of the total accounts receivable. (b) Using the following percentages for probable loss, compute the estimated loss from uncollectible accounts: Not yet due 1–30 days past due 31–60 days past due 61–90 days past due Over 90 days past due

1% 4% 10% 20% 50%

(c) Record the General Journal entry for the estimated uncollectible receivables at year-end (December 31). PRACTICE EXERCISE 2 On page 224 are a few of the customers’ ledger accounts on the books of Bramer Inc. on December 31, 20—. A total of $9,050 of other customers’ balances is not yet due. (a) Prepare a schedule of accounts receivable by age as shown in Figure 12.1. Show the dollar total of each category and the percentage that each category represents of the total accounts receivable. (b) Using the same percentages of estimated loss as in Practice Exercise 1, compute the estimated loss from uncollectible accounts. (c) Record the General Journal entry on December 31 for the estimated uncollectible receivables.

BAD DEBTS IN A SMALL BUSINESS The procedures discussed earlier for aging receivables and for estimating uncollectible accounts tend to be used more by large companies that have many customers. In a small business with a small number of customers, it is relatively easy for the business owner to know whose account is in danger of going bad and whose account is not. Paxton-Leigh Company, for example, is a small business with only a few credit customers. Six months ago, Paxton sold goods worth $800 plus tax to one of its usual customers, Wynot Company. However, despite repeated phone calls to Wynot Company over recent months, Paxton still has not received payment. NEL

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ACCOUNT

DATE

20— Jul. Aug. Sept. Sept. Oct. Nov.

31 15 1 5 20 1

ACCOUNT

DATE

20— Sept. Oct. Oct. Nov. Nov. Dec.

30 25 31 1 25 10

ACCOUNT

DATE

20— Oct. Nov. Nov. Nov. Dec.

31 15 20 30 12

ACCOUNT

DATE

20— Aug. Sept. Sept. Oct. Oct. Nov. Nov. Dec.

31 12 30 1 31 15 30 15

Accounts Receivable and Bad Debts

A/R Bell, Michael Selkirk, Manitoba MEMO

ACCT. NO. SHEET NO. DISC. DATE

F.

DEBIT

Dr.

Balance Forward On acct. On acct. n/30 days, #21 On acct., #21 n/30 days, #38

CR CR SJ CR SJ

4 8 00 2 0 0 00 1 5 0 00 1 5 0 00 2 2 0 00

A/R Duncan, Henry Petersfield, Manitoba MEMO

ACCT. NO. SHEET NO. DISC. DATE

F.

DEBIT

SJ CR SJ CR SJ

3 5 0 00 1 0 0 00 4 5 0 00 2 0 0 00 1 5 0 00

A/R Kramer, Edward Elie, Manitoba

ACCT. NO. SHEET NO. DISC. DATE

F.

DEBIT

CR SJ CR SJ

3 0 0 00 2 0 0 00 2 7 5 00 1 2 5 00

A/R Overman, Tammy Portage La Prairie, Manitoba

Balance Forward On acct. On acct. n/30 days, #15 On acct. n/30 days, #40 On acct., #15 n/30 days, #59

DR. CR.

CREDIT

Dr.

Balance Forward On acct. n/30 days, #41 On acct. n/30 days, #56

MEMO

DR. CR.

CREDIT

Dr.

Balance Forward n/30 days, #34 On acct. n/30 days, #39 On acct., #34 n/30 days, #50

MEMO

DR. CR.

CREDIT

ACCT. NO. SHEET NO. DISC. DATE

F.

DEBIT

CREDIT

DR. CR.

Dr. CR CR SJ CR SJ CR SJ

3 0 0 00 4 0 0 00 3 7 5 00 2 0 0 00 4 0 0 00 3 7 5 00 1 6 0 00

14 3 BALANCE

6 6 4 5 4 6

4 0 0 5 0 2

8 0 0 0 0 0

00 00 00 00 00 00

26 4 BALANCE

1 4 3 8 6 7

0 5 5 0 0 5

0 0 0 0 0 0

00 00 00 00 00 00

30 3 BALANCE

5 2 4 2 3

7 7 7 0 2

5 5 5 0 5

00 00 00 00 00

39 2 BALANCE

9 6 2 5 3 7 4 5

0 0 0 7 7 7 0 6

0 0 0 5 5 5 0 0

00 00 00 00 00 00 00 00

NEL

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The decision has been made to write off the invoice as a bad debt. Figure 12.9 shows this write-off entry. Notice that instead of debiting Sales, the account Bad Debt Expense is debited to offset the amount of the original sale. The use of this account serves to show on the books that an “unusual” event (an account that has gone bad) has occurred. An adjustment is made to the tax(es), and the credit to Wynot’s account removes the uncollectible invoice from its account, reducing the account balance to zero. A special note would then be recorded in the customer’s account as a reminder that credit should be denied in the future. Special care must be taken when posting from the General Journal to a customer’s account. To ensure that the Schedule of Accounts Receivable agrees with the Accounts Receivable Control account on the Trial Balance at the end of the month, the credit side of the entry must be posted to both the customer’s account and the control account, with both posting marks shown in the Folio column. (See the posting references in Figure 12.9.) If it should ever happen that Wynot Company pays off its invoice, in full or in part, the revenue and the tax(es) would once again have to be recognized. In Figure 12.10, we are assuming that Wynot Company is able to pay a portion of Figure 12.9  Writing Off an Uncollectible Sales Invoice

Apr.

24

Bad Debts Expense HST Payable A/R Wynot Company

8 0 0 00 1 0 4 00 133/ 104

9 0 4 00

To write off uncollectible sales invoice #408. OR Apr.

24

8 0 0 00 4 0 00 6 4 00

Bad Debts Expense GST Payable PST Payable A/R Wynot Company To write off uncollectible sales invoice #408.

133/ 104

9 0 4 00

Figure 12.10  Recovering a Bad Debt (General Journal)

Jun.

15

Cash Bad Debt Recoveries GST Payable PST Payable To recover a portion of Wynot Company’s account previously written off.

3 3 9 00 3 0 0 00 1 5 00 2 4 00

NEL

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Figure 12.11  Recovering a Bad Debt (Cash Receipts Journal) CASH RECEIPTS JOURNAL DATE

ACCOUNT CREDIT

MEMO

F.

ACCTS. REC. CR.

SALES DISC. DR.

Jun. 15 Bad Debt Recoveries recovered from Wynot Co.

SALES CR.

GST PAY. CR.

1 5 00

PST PAY. CR.

2 4 00

GEN. LED. CR.

3 0 0 00

BANK DR.

3 3 9 00

its previous bad debt. Notice that instead of crediting Sales, the revenue account Bad Debt Recoveries is credited to partially offset the debit to Bad Debt Expense that was charged in the write-off entry. The use of this special account again shows on the financial statements that an unusual event (the recovery of a bad debt) occurred during the year. Figure 12.11 shows the same recovery entry as it would appear in the Cash Receipts Journal. PRACTICE EXERCISE 3 Record entries in the General Journal to write off and recover these overdue sales invoices. Use one of the following tax rates: (i) 5% GST only; (ii) 13% HST; or (iii) 5% GST and 7% PST. Jan. 21 Sales Invoice #2673 to Pathfinder Company for $650 plus tax(es) is now considered uncollectible and is to be written off. Feb. 17 Sales Invoice #2245 to Yancy Little Co. for $325 plus tax(es) is now considered uncollectible and is to be written off. Mar. 9 Sales Invoice #2345 to London Fabrics for $1,440 plus tax(es) is now considered uncollectible and is to be written off. May 11 Received $200 from Pathfinder on Invoice #2673 previously written off. Jun. 15 Received $150 from Yancy Little Co. on Invoice #2245 previously written off. Jul. 29 Received $500 plus taxes from London Fabrics on Invoice #2345 previously written off. Supplementary Exercises EXERCISE 12-1: Open file SE-12-1. Complete the aging of accounts receivable, then calculate the estimated allowance for bad debts. EXERCISES 12-2, 12-3, 12-4: Open files SE-12-2, SE-12-3, and SE-12-4. Complete the journal entries for writing off bad debts and recoveries of bad debts. THINK ABOUT IT! 1. What is aging of accounts receivable? Why is it used? 2. How are percentages of estimated loss determined? 3. How does a small business write off a sales invoice that is assumed to be uncollectible? NEL

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227

CASE STUDY: KBC DECORATING CO. AUGUST TRANSACTIONS Record the August transactions as usual. 20— Aug. 1 Paid mortgage: interest, $997.06; principal, $222.94. 1 Received rent from Clear-Vu as usual. 4 Issued cheques to pay bills: ● electricity, $125 plus HST ● phone, $167 plus HST ● gas/heat, $26 plus HST 7 Paid Major Office Supplies in full for Invoice #286. 9 Received bank statement for July. (See Figure 12.12.) Complete the bank reconciliation for July using information from last month’s reconciliation statement, last month’s cash journals, and the July bank statement. Record entry for bank charges as usual. 12 Received payment from S. Miller on Invoice #15. 15 Remitted payroll deductions withheld from last month’s payroll. ●  Look up balances in these accounts: Federal Income Tax Payable, Provincial Income Tax Payable, CPP Payable, EI Payable, and Life/Health Plan Payable. These are the amounts you will remit. ●  Issue one cheque for the total of income tax, CPP, and EI amounts. Look back at your entry in last month’s Cash Payments Journal to see how this remittance is recorded. ●  Issue a cheque to Sun Life Insurance Company for amount owing for the life/health plan. 20 Issued cheque to Reynolds Paper Co. to pay off Invoice #202. 20 We received notice that Beavis & Sons has gone out of business and will not be able to pay off the outstanding invoice. Write off this invoice. 22 Bought paint and supplies from Coleman Industries, $5,700 plus HST, on Invoice #582 dated August 21, terms n/30. 26 Bought wallpaper from Reynolds Paper Co., $4,150 plus HST, on Invoice #317 dated August 24, terms n/30. 31 Cash sales for the month: paint and supplies, $8,300, and wallpaper, $4,300. Add HST as usual. 31 Completed painting and decorating work for cash customers during the month, $11,200 plus HST. 31 Partners asked you to write cheques for the following withdrawals: Martin, $4,000, and Corbett, $4,000.

NEL

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Figure 12.12  Bank Statement for July (KBC Decorating Co.) Bank Statement—July Date

Jul.

Details

Cheques

Deposits

Balance

36,161.99

1 2

Dep

2

Mortgage

1,220.00

39,800.99

2

Cheque 0060

1,883.81

37,917.18

3

Cheque 0062

1,822.88

36,094.30

3

Cheque 0061

1,822.88

34,271.42

3

Dep

4

Cheque 0063

1,746.31

34,200.11

5

Cheque 0059

276.85

33,943.26

7

Cheque 0066

141.25

33,802.01

7

Cheque 0065

33.90

33,768.11

9

Dep

9

Cheque 0064

197.75

37,525.36

14

Cheque 0068

1,842.31

35,683.05

15

Dep

16

Cheque 0067

10,622.00

30,598.05

16

Cheque 0070

2,000.00

28,598.05

16

Cheque 0071

2,000.00

26,598.05

20

Dep

20

Cheque 0069

92.00

33,194.55

24

Cheque 0072

2,970.65

30,223.90

31

Cheque 0073

5,208.00

25,015.90

31

Cheque 0074

49.30

24,966.60

31

Cheque 0076

2,200.00

22,766.60

31

Dep

31

Service Charge

4,859.00

1,695.00

3,955.00

5,537.00

6,688.50

5,763.00 15.00

41,020.99

35,966.42

37,723.11

41,220.05

33,286.55

28,529.60 28,514.60

31 Prepared month-end payroll for August. Employees’ salaries are the same as last month; therefore, use the same amounts from last month’s payroll. Prepare Payroll Record using the same amounts as in July. Record General Journal entries for payroll and employer’s contributions. Look back at last month’s General Journal to recall how to record these entries. ● Issue paycheques in Cash Payments Journal. ● ●

NEL

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229

AT MONTH-END (a) Total, balance, and rule the journals. (b) Post all entries to the ledger accounts as usual. (c) Prepare a trial balance on August 31, 20—. SEPTEMBER TRANSACTIONS Record September transactions as usual. 20— Sept. 1 Paid mortgage: interest, $995.57; principal, $224.43. 2 Received rent from Clear-Vu as usual. 2 Began new advertising campaign for fall home decorating. Received Invoice #407 dated September 1 from Mitchell Advertising, $5,240 plus HST. Terms net 10 days. 3 Paid bills (add HST as usual): ● phone: $134 ● electricity: $135 ● gas/heat: $28 3 8 10 10

12 14 18 18 21 21

23 30

Sold wallpaper to K. Young Painting, $1,870 plus HST. Terms 2/10, n/30. Sold paint and supplies to Dayson & Son, $2,460 plus HST. Terms 2/10, n/30. Paid Mitchell Advertising for balance owing. Received bank statement for August. (See Figure 12.13.) Complete bank reconciliation for August using the information from last month’s reconciliation statement, last month’s cash journals, and the latest bank statement. Record entry for the bank charges as usual. Received payment from K. Young Painting on Invoice #16. Remitted deductions withheld from last month’s payroll. Paid Coleman Industries in full for Invoice #582. Received payment from Dayson & Son on Invoice #17. Paid Reynolds Paper Co. in full for Invoice #317. Received payment from Beavis & Sons on the invoice that was previously written off. Beavis has paid only $226 (includes $26 HST). The remainder of invoice amount will never be recovered. Sold paint and supplies, $475, and wallpaper, $380, on account to S. Miller. Terms 2/10, n/30. Add HST as usual. Cash sales for month: paint and supplies, $6,250, and wallpaper, $5,150. Add HST as usual.

NEL

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30 30 30

Accounts Receivable and Bad Debts

Completed painting and decorating work for cash customers during the month, $9,375 plus HST. Partners have withdrawn $4,000 each as usual for personal use. Partners have decided to increase the salaries of Saul Firestone and . These employees will receive an additional $100 per month on their gross pay. Both employees will, therefore, have a gross pay of $2,200. Look up the new deductions for these employees using the payroll deductions tables at the end of Chapter 10 (Figures 10.12 to 10.15). Prepare the payroll as usual.

Figure 12.13  Bank Statement for August (KBC Decorating Co.) Bank Statement—August Date

Details

Cheques

Deposits

Balance

28,514.60

Aug. 1 1

Cheque 0077

1,883.81

26,630.79

1

Mortgage

1,220.00

25,410.79

1

Dep

2

Cheque 0080

1,746.31

25,359.48

3

Cheque 0079

1,822.88

23,536.60

4

Cheque 0078

1,822.88

21,713.72

5

Cheque 0075

2,000.00

19,713.72

6

Cheque 0082

188.71

19,525.01

8

Cheque 0081

141.25

19,383.76

10

Cheque 0083

29.38

19,354.38

11

Cheque 0084

440.70

18,913.68

12

Dep

15

Cheque 0085

1,842.31

18,065.77

20

Cheque 0086

92.00

17,973.77

26

Cheque 0087

3,661.20

14,312.57

31

Cheque 0091

1,822.88

12,489.69

31

Cheque 0088

4,000.00

8,489.69

31

Dep

31

Service Charge

1,695.00

994.40

26,894.00 15.00

27,105.79

19,908.08

35,383.69 35,368.69

AT MONTH-END (a) Total, balance, and rule the journals. (b) Post all entries to the ledger accounts as usual. (c) Prepare a trial balance on September 30, 20—. NEL

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● prepare a simple statement of profit or loss from trial balance information

IMPORTANT TERMS USED IN THIS CHAPTER Interim Statement of Profit or Loss

CHAPTER

13 INTERIM PROFIT OR LOSS

NEL

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232

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Interim Profit or Loss

INTERIM PROFIT OR LOSS The goal of almost every business is to earn a profit. The profit represents how much “better off” the business is as a result of its regular sales activities. Although an accurate calculation of profit (or loss) is required at the end of each year for income tax purposes, the business owner will not want to wait until year-end to know how well his or her business is doing. More than likely, the owner will want to monitor on a monthly or quarterly basis how much profit has been earned. This is called interim profit or loss. By monitoring the profitability of the business on an ongoing basis, trends may be seen that could affect business decisions. If profits are seen to be steadily rising, management might want to expand the business, buy new equipment, or hire additional employees. On the other hand, if profits are falling or losses have been incurred recently, management may consider downsizing the staff or may delay or cancel expansion plans.

THE INTERIM STATEMENT Today’s accounting software makes the interim statement as easy to prepare as clicking an option on a pull-down menu. Such statements may cover just a single month, the period from the beginning of the year until the current date, or a period starting and ending on two specified dates. Such periodic measures of profit/loss are possible in a manual accounting system as well; however, the amount of work involved is often prohibitive. To keep our discussion of interim profits as simple as possible, we will look only at “year to date” statements; that is, statements that measure the profit or loss from the beginning of the year until the end of the current month. Figure 13.1 illustrates an informal Interim Statement of Profit or Loss for the T.J. Barr Company for a three-month period. Because the interim statement is prepared only for internal use (that is, just for the use of management), its appearance can take a variety of forms. Our illustration lists the revenue and expense accounts in the same order as they appear on the trial balance. The amounts, too, are listed just as they were on the trial balance. The difference between the total debits and total credits is the interim profit (or loss). The net profit or loss on an informal statement for a small business is a reasonable estimate of the true profit or loss. Sometimes adjustments are needed to the revenue and expense balances to reflect recent changes in values, such as for prepaid insurance costs that have not yet been recognized as expenses. Figure 13.2 shows the same statement arranged more formally. In this format, the accounts are grouped or “classified,” with each group showing a total. The revenues are listed first to show the total revenues for the three-month period. Then the expenses are listed to show total operating costs. The difference between total revenues and total expenses is the net profit (or loss) for the period.

PREPARING THE INTERIM STATEMENT Most of the amounts for the interim statement are taken directly from the latest trial balance. These include all revenue accounts, such as Sales and Rent Revenue, and all expense accounts, such as Purchases, Advertising Expense, Salaries Expense, etc. NEL

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CHAPTER 13

233

Interim Profit or Loss

Figure 13.1  Interim Statement of Profit (Informal) T.J. Barr Company Interim Statement of Profit (Internal Use Only) For 3 Months Ending March 31, 20— ACCOUNT

Sales Sales Returns & Allowances Sales Discounts Interest Revenue Rent Revenue Opening Inventory Purchases Purchase Returns & Allowances Purchase Discounts Freight In Closing Inventory Advertising Expense Insurance Expense Interest Expense Office Supplies Expense Salaries Expense Telephone Expense Utilities Expense Subtotals Interim Profit

DEBIT

CREDIT

55 8 0 0 00 4 0 0 0 00 1 6 0 0 00 3 1 0 00 3 5 0 00 14 4 5 0 00 33 1 0 0 00 2 8 0 0 00 7 0 0 00 1 0 0 0 00 13 9 0 0 00

8

65 8 73

5 0 0 00 3 6 0 00 4 9 5 00 4 5 00 5 0 0 00 9 0 0 00 3 0 0 00 2 5 0 00 6 1 0 00 8 6 0 00

73 8 6 0 00 73 8 6 0 00

Sometimes revenues and expenses must be calculated to determine a suitable amount of the revenue or expense that is not yet on the books. An example is an insurance policy on the building and contents. The original policy for $1,440 was debited to the asset Insurance Prepaid. Typically, such insurance policies are for one year, so the cost of the policy can be spread evenly over 12 months of operation. This means an adjusting entry should be recorded each month to recognize one-twelfth of the cost ($1,440 3 1/12 5 $120) as an expense. Figure 13.3 shows the General Journal entry for this month-end adjustment that transfers one month’s worth of insurance cost from the Insurance Prepaid account to the Insurance Expense account. Typically, this adjustment will be recorded every month. In a second example, we will assume $50,000 was invested a month ago in a 90-day term deposit at an annual rate of 7.5%. The interest earned at the end of each month is approximately $310 (calculated as $50,000 3 7.5% 3 30/365). This amount is considered to be revenue earned during this month even though the interest has not yet been paid to the company by the bank. The accountant has the option of recording a monthly adjusting entry to recognize the revenue or NEL

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234

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Interim Profit or Loss

Figure 13.2  Interim Statement of Profit (Formal) T.J. Barr Company Interim Statement of Profit (Internal Use Only) For 3 Months Ending March 31, 20— Revenues: Sales Sales Returns & Allowances Sales Discounts Interest Revenue Rent Revenue Total Revenues Operating Expenses: Opening Inventory Purchases Purchase Returns & Allowances Purchase Discounts Freight In Closing Inventory Advertising Expense Insurance Expense Interest Expense Office Supplies Expense Salaries Expense Telephone Expense Utilities Expense Total Operating Expenses Interim Profit

$55 8 0 0 (4 0 0 0 (1 6 0 0 3 1 0 3 5 0

00 00) 00) 00 00 $50 8 6 0 00

5 0 0 0 0 0 0 6 9 4 8 5 0 9 0 3 0

14 33 (2 ( 1 (13

4 1 8 7 0 9 5 3 4

0 0 0 0 0 0 0 0 5 5 0 0 0

00 00 00) 00) 00 00) 00 00 00 00 00 00 00 42 2 5 0 00 $ 8 6 1 0 00

Figure 13.3  Adjusting Entry for Insurance Expense

Mar.

31

Insurance Expense Insurance Prepaid To recognize one month’s worth of insurance cost as expense.

1 2 0 00 1 2 0 00

waiting until the interest has actually been received before recording it. Figure 13.4 shows the adjusting entry that may be entered at the end of the month to recognize the interest earned. The debit to Interest Receivable is much like the Accounts Receivable account. It shows that someone (the bank in this case) owes us the amount shown. NEL

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CHAPTER 13

235

Interim Profit or Loss

Figure 13.4  Adjusting Entry for Interest Earned

Mar.

31

Interest Receivable Interest Revenue To recognize one month’s interest earned on a 90-day term deposit.

3 1 0 00 3 1 0 00

Usually, such interim statements are based on reasonable estimates of the revenue and expense values since such statements are prepared only for internal use. Any account balances considered to be insignificant may be ignored since they would have a negligible effect on the net profit or loss and on any business decisions that result from the information. An example is the Cash Over or Short account. If this account has a balance of only $2.48, it can safely be ignored when calculating the interim profit or loss because such a small balance will not affect management’s decision making. PRACTICE EXERCISE 1 From the trial balance in Figure 13.5 and the additional information provided here, record the adjusting entries in the General Journal and prepare an interim statement of profit or loss for three months ending July 31, 20—. Use a set-up similar to the informal statement in Figure 13.1. (a) One month’s worth of the prepaid rent is to be recognized as expense, $1,000. (b) One month’s worth of prepaid insurance is to be recognized as expense, $150. PRACTICE EXERCISE 2 Bel Air Flying Service started operations on December 1, 20—. The trial balance in Figure 13.6 was prepared at month-end. Record the following adjustments in the General Journal, then prepare an interim statement of profit/loss after the first month of business. Use a set-up similar to the informal statement in Figure 13.1. (a) When renting the office and hangar, Bel Air paid for six months in advance. This amount was charged to Rent Prepaid. One month’s worth of rent is now to be recognized as an expense, $2,000. (b) One month’s worth of the 12-month insurance policy is now to be recognized as an expense, $1,300. (c) Interlake Air Services provides the aircraft maintenance work for Bel Air at a cost of $2,500 per month. Bel Air had paid for three months in advance and charged the total to Maintenance Prepaid. One month’s worth of this prepaid maintenance is now to be recognized as an expense. NEL

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236

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Interim Profit or Loss

Figure 13.5  Trial Balance for Charles-Sydney Enterprises Charles–Sydney Enterprises Trial Balance July 31, 20— ACCOUNT

Bank Accounts Receivable Insurance Prepaid Rent Prepaid Furniture & Equipment Accounts Payable Bank Loan Payable Capital, Joshua Charles Sales Service Revenue Purchases Advertising Expense Bank Charges Delivery Expense Insurance Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense

DEBIT

2 4 1 10 18

5 1 5 0 7

0 0 0 0 5

CREDIT

0 0 0 0 0

00 00 00 00 00 9 14 10 25 19

12 9 0 1 5 0 1 0 2 1 0 3 0 2 0 0 18 4 0 2 1 0 1 7 0 77 9 5

0 0 0 0 0 0 0 0 0 0

00 00 00 00 00 00 00 00 00 00

0 0 0 0 0

00 00 00 00 00

5 0 0 2 2

0 0 0 5 0

0 0 0 0 0

00 00 00 00 00

77 9 5 0 00

Figure 13.6  Trial Balance for Bel Air Flying Service Bel Air Flying Service Trial Balance December 31, 20— ACCOUNT

Cash Rent Prepaid Insurance Prepaid Maintenance Prepaid Aircraft Accounts Payable Capital, Jackson Reese Passenger Revenue Advertising Expense Fuel Expense Salaries Expense Spare Parts Expense

DEBIT

37 12 15 7 240

0 0 6 5 0

0 0 0 0 0

CREDIT

160 0 0 0 00 75 0 0 0 00 363 3 0 0 00 58 124 38 63 598

8 6 9 9 3

0 0 0 0 0

0 0 0 0 0

00 00 00 00 00

598 3 0 0 00

NEL

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CHAPTER 13

237

Interim Profit or Loss

PRACTICE EXERCISE 3 From the trial balance in Figure 13.7 (Westport Company) and the additional information provided here, record adjusting entries in the General Journal and prepare an interim statement of profit or loss for four months ending April 30, 20—. Use a set-up similar to the informal statement in Figure 13.1. (a) $150 of the Insurance Prepaid is to be recognized as expense. (b) $1,200 of the prepaid advertising is to be recognized as expense. Supplementary Exercises EXERCISE 13-1: Open file SE-13-1. Prepare an interim profit statement. EXERCISE 13-2: Open file SE-13-2. Prepare an interim profit (loss) statement. Figure 13.7  Trial Balance for Westport Company Westport Company Trial Balance April 30, 20— ACCOUNT

Bank Accounts Receivable Advertising Prepaid Insurance Prepaid Land Building Equipment Accounts Payable Mortgage Payable Capital, Les Parker Sales Sales Returns & Allowances Sales Discounts Opening Inventory Purchases Purchase Returns & Allowances Purchase Discounts Freight In Advertising Expense Delivery Expense Interest Expense Property Tax Expense Insurance Expense Salaries & Wages Expense Selling Commission Expense Telephone Expense Utilities Expense

DEBIT

7 35 7 1 40 90 74

0 0 3 3 0 0 1

0 0 0 5 0 0 0

CREDIT

0 0 0 0 0 0 0

00 00 00 00 00 00 00 37 30 190 398

8 5 62 232

0 8 0 0

0 0 0 0

0 0 0 0

6 0 0 2

2 0 0 0

0 0 0 0

00 00 00 00

00 00 00 00 6 5 0 0 00 1 7 2 0 00

9 3 2 12 2 51 17 2 664

6 5 2 0 0 4 2 4 8 2 0

4 0 0 0 0 5 3 7 0 0 4

0 0 0 0 0 0 0 0 0 0 0

00 00 00 00 00 00 00 00 00 00 00

664 0 4 0 00

NEL

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THINK ABOUT IT! 1. What is the usual source of information for an interim statement of profit/ loss? 2. When can an interim statement be prepared? 3. What is the advantage of preparing an interim statement of profit/loss rather than waiting until the end of the financial year?

CASE STUDY: KBC DECORATING CO. OCTOBER TRANSACTIONS Record these transactions for October. 20— Oct. 1 In this chapter, you learned about recording month-end adjustments to recognize revenues and expenses that are not yet on the books. KBC Decorating bought an insurance policy in February that was charged to Insurance Prepaid. However, since then, no adjustments have been recorded to recognize the expense portion of the cost each month. You will now record a General Journal entry to expense the first 7 1/2 months of the insurance cost (for February 15 to September 30). Use this formula: Expense 5 Cost 3 7.5 4 12 1 Paid the mortgage: interest, $994.07; principal, $225.93. 1 Received rent from Clear-Vu as usual. 2 Paid bills (add HST as usual): phone: $129 electricity: $175 ● gas/heat: $320 ● ●

3 Received payment from S. Miller for Invoice #18. 6 Paid from petty cash: postage, $15 plus HST; and supplies for warehouse, $8.30 plus HST. 7 Bought wallpaper from Reynolds Paper Co., $4,550 plus HST, on Invoice #411 dated the 6th. Terms n/30. 10 Sold on account (add HST as usual): ● Jay-Mar Co., paint and supplies, $770, terms 2/10, n/30 ●  Dayson & Son, paint, $1,760, and wallpaper, $480, terms 2/10, n/30 10 Received bank statement for September. (See Figure 13.8.) Complete bank reconciliation for September using information from last month’s reconciliation statement, last month’s cash journals, and the latest bank statement. Record entry for bank charges as usual. 12 Bought paint and supplies from Coleman Industries, $6,780 plus HST, on Invoice #678 dated the 10th. Terms n/30. NEL

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CHAPTER 13

239

Interim Profit or Loss

Figure 13.8  Bank Statement for September (KBC Decorating Co.) Bank Statement—September Date

Details

Sept. 1 1 1 3 3 4 4 6 8 9 12 14 15 18 20 21 24 25 30 30 30 30

14

15 16 19 20 26

Cheques

Deposits

Balance

35,368.69 Cheque 0092 Mortgage Cheque 0090 Dep Cheque 0093 Cheque 0089 Cheque 0096 Cheque 0094 Cheque 0095 Dep Cheque 0098 Cheque 0097 Dep Cheque 0099 Dep Cheque 0100 Cheque 0101 Dep

1,822.88 1,220.00 1,883.81

Cheque 0103 Cheque 0102 Service Charge

4,000.00 4,000.00 15.00

1,695.00 1,746.31 4,000.00 31.64 151.42 152.55 2,075.70 1,842.31 5,921.20 2,730.60 92.00 226.00 6,441.00 4,689.50 23,475.75

33,545.81 32,325.81 30,442.00 32,137.00 30,390.69 26,390.69 26,359.05 26,207.63 26,055.08 28,130.78 26,288.47 20,367.27 23,097.87 23.005.87 23,231.87 16,790.87 12,101.37 35,577.12 31,577.12 27,577.12 27,562.12

Bought office supplies, $185, and warehouse supplies, $190, from Major Office Supplies on Invoice #401 dated today. Terms n/30. Add HST as usual. Remitted payroll deductions as usual, including the life/health plan. Paid from petty cash: postage, $4.07 (includes $0.47 HST). Sold wallpaper to Edna Morton, $945 plus HST, terms 2/10, n/30. Received payments from Jay-Mar Co. and Dayson & Son on their invoices. Remitted HST for the third fiscal quarter. To complete the GST/ HST return, you will need the following information from your ledger accounts: ●  Sales Paint & Supplies: sales for three months ending September 30 ● Sales Wallpaper: sales for three months ending September 30

NEL

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240

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• • • • • •

30 31 31 31

31

Sales Service: sales for three months ending September 30 Rental Revenue: rental for three months ending September 30 Bad Debt Expense: balance on September 30 Bad Debt Recoveries: balance on September 30 HST Payable: balance on September 30 HST-ITC: balance on September 30 Note: To calculate the amount for Line 101 on the GST/HST Return, find the total sales for the three months ending September 30, including Rental Revenue. Add the balance of the Bad Debt Recoveries account and subtract the balance of the Bad Debt Expense account. Including these bad debt account balances is necessary as they were the cause of adjustments to the HST Payable during this fiscal quarter. Typically, we would enter the HST Payable balance on Line 103 and the HST-ITC balance on Line 106. However, these accounts show us the amounts after the adjustments to HST when Beavis & Sons’ account was written off and after the partial bad debt recovery. Therefore, do this: • Enter the HST Payable balance on Line 105 and the HST-ITC balance on Line 108. • Enter $182.00 on Line 107. This is tax adjustment that reduced the tax owing when Beavis’s account was written off. • Enter $26.00 on Line 104. This is the tax adjustment that increased the tax owing when we received the partial bad debt recovery. • Calculate Line 103 by working backward from Line 105. (Line 105 minus Line 104) • Calculate Line 106 by working backward from Line 108. (Line 108 minus Line 107) Complete the GST/HST Return in the usual way. Record the necessary entries in the Cash Payments Journal. If necessary, look back at the July 24 entry to recall how this entry should be recorded. Partners have withdrawn $4,500 each for personal use. Cash sales for month: paint and supplies, $13,380, and wallpaper, $10,125. Add HST as usual. Completed painting and decorating work for cash customers during this month, $12,455 plus HST. Prepared month-end payroll for October as usual. Employees’ salaries are same as last month; therefore, use the same amounts from last month’s payroll. Record month-end adjustment to recognize one month’s worth of insurance expense for October. Use this formula: Expense 5 Cost 3 1/12.

NEL

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CHAPTER 13

Interim Profit or Loss

241

AT MONTH-END (a) There is still more than $20 in the petty cash fund, so the fund will not be reimbursed until next month. (b) Total, balance, and rule the journals. (c) Post to ledger accounts as usual. (d) Prepare trial balance on October 31, 20—. (e) From the trial balance, prepare an Interim Statement of Profit and Loss for 10 months ending October 31, 20—. NOVEMBER TRANSACTIONS Record these transactions for November. 20— Nov. 1 Received rent from Clear-Vu Windows as usual. 1 Paid the mortgage: $992.57 for interest; $227.43 for principal. 4 Paid Reynolds Paper Co. for Invoice #411. 4 Bought merchandise from these suppliers on account. All invoices are dated today: ●  Reynolds Paper Co., wallpaper, $3,250 plus HST; Invoice #471, terms n/30. ●  Rainbow Supplies, paint and supplies, $8,555 plus HST; Invoice #408, terms 1/10, n/30. ●  Spencer Paper Products (a new supplier), wallpaper, $2,840 plus HST; Invoice #277, terms 2/10, n/30. 5 Paid bills: gas/heat: $403.41 (includes $46.41 HST) phone: $137.86 (includes $15.86 HST) ● electricity: $200.01 (includes $23.01 HST) Paid from petty cash: supplies for staff room, $11.43 (no tax); cleaning supplies, $5.14 (includes $0.59 HST). Reimbursed petty cash fund. A count of the cash in the petty cash drawer shows $2.03 cash remaining. Paid Coleman Industries for Invoice #678. Sold to Jay-Mar Co., paint and supplies, $1,144 plus HST. Terms 2/10, n/30. Received bank statement for October. (See Figure 13.9.) Complete bank reconciliation for October. Paid these suppliers: ● ●

6 6 8 10 10 14

Major Office Supplies for Invoice #401 Rainbow Supplies for Invoice #408 ● Spencer Paper Products for Invoice #277 ● ●

NEL

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242

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Interim Profit or Loss

Figure 13.9  Bank Statement for October (KBC Decorating Co.) Bank Statement — October Date

Details

Oct. 1 1 1

Dep Mortgage

1

Dep

2

Cheque 0107

4 4

Cheques

Deposits

Balance

1,695.00

27,562.12 29,257.12 28.037.12

949.05

28,986.17

1,220.00 1,822.88

27,163.29

Cheque 0110

361.60

26,801.69

Cheque 0104

1,956.13

24,845.56

5

Cheque 0105

1,822.88

23,022.68

5 6

Cheque 0106 Cheque 0108

1,822.88 145.77

21,199.80 21,054.03

8

Cheque 0109

197.75

20,856.28

15

Cheque 0111

1,907.89

18,948.39

20

Dep

21

Cheque 0112

92.00

22,197.49

26

Cheque 0113

6,375.85

15,821.64

30

Cheque 0115

4,500.00

11,321.64

31

Dep

31

Service Charge

3,341.10

40,634.80 19.00

22,289.49

51,956.44 51,937.44

15 Remitted October payroll deductions as usual. 16 Sold to S. Wilkinson (a new customer), paint and supplies, $350, and wallpaper, $190. Add HST as usual. Terms n/30. 20 Received cheque from Jay-Mar Co. for Invoice #22. 20 Sold to K. Young Painting, paint and supplies, $2,450 plus HST. Terms 2/10, n/30. 24 K. Young Painting returned painting supplies, $24 plus HST. We have issued a credit note. 24 Edna Morton made partial payment of $500 on her account. 24 Paid from petty cash: supplies for office, $5.31 (includes $0.61 HST). 25 Sold to Dayson & Son, wallpaper, $1,490 plus HST. Terms 2/10, n/30. 26 Bought from Rainbow Supplies, paint and supplies, $4,385 plus HST, on Invoice #435 dated yesterday. Terms 1/10, n/30. 29 Received payment from K. Young Painting on Invoice #24. 30 Completed painting and decorating work for cash customers during this month, $11,250 plus HST. 30 Cash sales for month: paint and supplies, $12,100, and wallpaper, $8,485. Add HST as usual. NEL

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CHAPTER 13

30 30 30

Interim Profit or Loss

243

Prepared the month-end payroll for November as usual and issued paycheques. Employees’ salaries are the same as last month. Partners have withdrawn money for personal use: Martin, $4,500; Corbett, $4,000. Made an adjustment for one month’s insurance expense. If necessary, look back at the adjustment in the General Journal at the end of October.

AT MONTH-END (a) (b) (c) (d) (e)

The petty cash fund will not be reimbursed until next month. Total, balance, and rule the journals. Post to the ledger accounts as usual. Prepare a trial balance on November 30, 20—. From the trial balance, prepare an Interim Statement of Profit and Loss for 11 months ending November 30, 20—.

DECEMBER TRANSACTIONS Record these transactions for December. 20— Dec. 1 Paid mortgage: $991.05 interest, $228.95 principal. 1 Started a new advertising campaign, Decorate for the Holidays! Received an invoice from Mitchell Advertising for $2,320 plus HST. Invoice #533 dated today; terms n/10. 3 Paid from petty cash: coffee, cookies, etc. for the staff room, $24.30 (no tax). 3 Paid these bills: ● gas/heat: $463.30 (includes $53.30 HST) ● phone: $126.56 (includes $14.56 HST) ● electricity: $212.44 (includes $24.44 HST) 3 Received rent from Clear-Vu as usual. 4 Issued cheques to these suppliers: ● Rainbow Supplies for Invoice #435 ● Reynolds Paper for Invoice #471 5 Received cheque from Dayson & Son in full settlement of Invoice #25. 6 Bought from these suppliers on their usual terms. Invoices are dated today. Add HST as usual: ● Coleman Industries, paint and supplies, $4,455; Invoice #707 ●  Rainbow Supplies, paint and supplies, $2,320, and wallpaper, $2,700; Invoice #470

NEL

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Spencer Paper Products, wallpaper, $3,450; Invoice #334 Reynolds Paper, wallpaper, $2,740; Invoice #534

● ●

8

Sold to Jay-Mar Co., paint and supplies, $1,335, and wallpaper, $975, on their usual terms. Add HST as usual. 11 Paid Mitchell Advertising for Invoice #533. 11 Received bank statement for November. (See Figure 13.10.) Complete bank reconciliation as usual.

Figure 13.10  Bank Statement for November (KBC Decorating Co.) Bank Statement — November Date

Details

Nov. 1 1 1 1 1 1 1 2 7 7 8 11 12 12 15 19 19 20 21 23 24 29 30 30 30 30 30 30 31

Cheque 0116 Cheque 0117 Cheque 0118 Cheque 0119 Mortgage Dep Cheque 0114 Cheque 0123 Cheque 0124 Cheque 0120 Cheque 0122 Cheque 0121 Cheque 0125 Cheque 0129 Cheque 0126 Cheque 0128 Dep Cheque 0127 Cheque 0130 Dep Dep Dep Cheque 0131 Cheque 0132 Cheque 0133 Cheque 0134 Cheque 0136 Service Charge

Cheques

Deposits

1,956.13 1,822.88 1,822.88 1,822.88 1,220.00 1,695.00 4,500.00 200.01 47.97 5,141.50 137.86 403.41 7,661.40 1,907.89 423.75 3,152.40 1,269.84 9,581.60 92.00 500.00 2,692.86 35,973.55 1,956.13 1,822.88 1,822.88 1,822.88 4,000.00 19.00

Balance

51,937.44 49,981.31 48,158.43 46,335.55 44,512.67 43,292.67 44,987.67 40,487.67 40,287.66 40,239.69 35,098.19 34,960.33 34,556.92 26,895.52 24,987.63 24,563.88 21,411.48 22,681.32 13.099.72 13.007.72 13,507.72 16,200.58 52,174.13 50,218.00 48,395.12 46,572.24 44,749.36 40,749.36 40,730.36 NEL

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245

12 Partners have withdrawn $2,500 each for personal use. 12 Gave cheque for $200 as a donation to a children’s charity. (Donations Expense) 14 Remitted payroll deductions as usual. 14 Sold on account to these customers on their usual terms. Add HST as usual: ● Dayson & Son, paint and supplies, $1,566 ● S. Wilkinson, paint and supplies, $880, and wallpaper, $910 14 Received payment from S. Wilkinson on Invoice #23. 15 Received notice from Edna Morton’s lawyers that her company has gone out of business and will not be able to pay her outstanding balance. Write off this account. 15 Some of the painting supplies received in the order from Coleman Industries (Invoice #707) were damaged. Coleman sent us a credit note for $96.05 (includes $11.05 HST). 16 Paid Rainbow Supplies and Spencer Paper Products for their invoices. 17 Paid from petty cash: postage, $3.40 plus HST; cleaning supplies, $8.35 plus HST. 18 Received payment from Jay-Mar Co. on Invoice #26. 21 Sold to K. Young Painting, paint and supplies, $945, and wallpaper, $490, on their usual terms. Add HST as usual. 23 Reimbursed petty cash fund. A count of the cash on hand showed the correct amount of cash available. 23 Received payment from Dayson & Son on Invoice #27. 23 Completed painting and decorating work for cash customers during this month, $8,220 plus HST. 23 Cash sales for month: paint and supplies, $10,340, and wallpaper, $6,485. Add HST as usual. 23 The partners have withdrawn an additional $2,000 each for personal use. 23 Prepare payroll as usual. (KBC will be closed for the holiday season, so employees will be paid today.) 23 Made the usual adjustment for one month’s insurance expense. AT MONTH-END (a) (b) (c) (d)

Total, balance, and rule the journals. Post to the ledger accounts as usual. Prepare a trial balance on December 31, 20—. From the trial balance, prepare an Interim Statement of Profit and Loss for 12 months ending December 31, 20—.

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CHAPTER OBJECTIVES

CHAPTER

14

AT YEAR-END: PREPARING TO CLOSE THE BOOKS

After completing this chapter, you will be able to: ●● prepare a worksheet ●● record year-end adjusting entries in the General Journal

IMPORTANT TERMS USED IN THIS CHAPTER

Accrued Expenses Accrued Revenues Accumulated Amortization Adjusting Entries Amortization Bad Debts Book Value Closing Inventory Declining-Balance Amortization Inventory Net Income Net Loss Opening Inventory Periodic Inventory Perpetual Inventory Prepaid Expenses Straight-Line Amortization Unearned Revenue Worksheet

NEL

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247

O

nce a year, every business is required to prepare an accurate and detailed statement of how much it earned in revenue and what expenses it incurred. This statement, known as an Income Statement, is similar to the Interim Statement of Profit and Loss discussed in the previous chapter. Since proprietorships and partnerships do not pay income tax on their profits, the owners must report the net profit as personal income and, as a result, are personally responsible for paying the income tax on it. For corporations, the operating year can be any 12-month period, such as April 1 to March 31, or September 1 to August 31. However, proprietorships and partnerships must use a calendar year (January 1 to December 31) as the reporting period, which coincides with the filing period for personal income taxes by the owner(s). Regardless of the operating year, the process for measuring the financial information required for reporting purposes is the same. This process includes determining an accurate inventory value of merchandise on hand; recording adjusting entries for any values of assets, liabilities, revenues, and expenses that are to be carried from one operating year to the next; and preparing the year-end financial statements (specifically, the Income Statement and the Balance Sheet).

INVENTORY The balances of all asset accounts are kept up to date during the accounting period, with the exception of Inventory. As explained and practised in previous chapters, goods purchased for resale are debited to the Purchases account (an expense), and the goods sold to customers are credited to the Sales account (a revenue). But nowhere have we shown in our journal entries that the value of the goods sitting on the shelf has changed. In a manual accounting system, such as that for KBC Decorating Co., the value of merchandise inventory is typically determined only at year-end and is shown in an account called Inventory (an asset). Computerized accounting systems, on the other hand, automatically add to and deduct from the Inventory account with every purchase and every sale of merchandise. It is important to determine an accurate value for year-end inventory because it is one of the key figures in establishing an accurate cost value of the goods that were sold during the year. In turn, the cost of goods sold is a key element in determining the year-end net income. If the inventory value is understated or overstated, the resulting net income (or loss) will in turn be understated or overstated. Furthermore, the value of the total assets owned by the business would be stated incorrectly, as would the value of the owner’s equity. Such errors in valuation would seriously affect the integrity of the financial statements. There are several ways of calculating the value of inventory for the preparation of financial statements: (1) the periodic inventory method, (2) the perpetual inventory method, (3) the retail method, and (4) the gross profit method. The periodic and perpetual inventory methods, if applied correctly, require an accurate physical count and valuation of the inventory on hand. The retail and gross profit methods are used to determine a reasonable estimate of the value of inventory in circumstances when a physical count of goods on hand is either impossible (such as when goods were destroyed by fire) or impractical (such as when only estimates are good enough for decision-making purposes). For our purposes in this textbook, only the first two methods (periodic and perpetual) will be discussed. NEL

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Periodic inventory involves a systematic count of all goods on hand, usually at the end of the financial year but more often if necessary. When the physical count is complete, a statement of inventory is prepared by listing all items on hand and multiplying each item by its unit value (using either the cost price or the present market value of the item, whichever is lower). The total of this statement of inventory (Figure 14.1) is also known as the closing inventory because it represents the value of inventory at the close of the financial year. The unit value for each item of inventory includes any freight, duty, brokerage, repackaging, and other costs incurred to bring the goods into the warehouse or store and make them ready for sale to customers. Perpetual inventory was at one time used only by businesses that sold highprice items, such as cars, televisions, and furniture. In such a system, a separate inventory card or stock sheet was prepared for each type of merchandise. On these cards, a running record was kept for each unit purchased (added to stock) and for each unit sold (deducted from stock), thus showing constantly the number of units on hand. Today, though, the perpetual inventory system is the more commonly used method because of computerized cash registers and inventory-tracking systems. As each package of cookies and each carton of milk is scanned at the grocery store checkout, one unit is deducted from the computerized inventory count of cookies and milk. In such a system, management can see at any moment how many packages of cookies and how many cartons of milk are sitting on the shelf. In the perpetual inventory system, the purchase of goods is debited to the Inventory account rather than to the Purchases account. To confirm and ensure the accuracy of the perpetual records, a physical count is taken periodically, and the total number of units on hand is compared with the quantities shown in the perpetual inventory files. Although the procedure for inventory control, as described earlier, appears to be relatively simple, it is a very important and responsible operation. One responsibility of the inventory manager is to have sufficient quantities of merchandise in stock to fill all incoming orders without delay. The quantity of goods on hand should not fall below a required minimum, nor should any item be overstocked to the point that the goods cannot be sold, either because of spoilage or because they have become obsolete. Figure 14.1  Statement of Inventory Statement of Inventory as at December 31, 20— ITEM

Angle Pins Buckle Bolts Cringle Flanges Drop Cables End Wingnuts False Plates Grapple Grommets Total Inventory

UNITS ON HAND

100 60 300 250 240 180 130

UNIT VALUE

12.30 19.00 45.60 24.50 7.80 3.95 12.85

INVENTORY VALUE

$ 1,230.00 1,140.00 13,680.00 6,125.00 1,872.00 711.00 1,670.50 $26,428.50

NEL

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The recording of the year-end inventory value on the books will be discussed later in this chapter. PRACTICE EXERCISE 1 Calculate the total inventory value for the statement in Figure 14.2: Figure 14.2  Statement of Inventory (Wells Widgets Company) Wells Widgets Company Statement of Inventory as at December 31, 20— ITEM

UNITS ON HAND

Drill Drivers Elbow Edgers Fenway Fixtures Gorp Guards Howdee Hoses Jade Jumpers Load Levelers Morton Movers Notching Knives Open Octacles Paring Platters

145 217 380 140 28 84 37 33 70 144 130

Total Inventory

UNIT VALUE

INVENTORY VALUE

7.20 19.30 3.55 7.45 9.20 3.95 7.70 12.35 4.90 3.75 12.85 ?

YEAR-END ADJUSTING ENTRIES A very important accounting concept is the matching of expenses with related revenues for a given accounting period. This means that the expenses incurred during the current accounting period must relate to (or have contributed toward) the revenue that was generated during this same period. Some business transactions are attributed completely to one accounting period, such as rent paid at the beginning of each month. In this case, the rent expense has been “consumed” or used up by the end of each month. Other transactions, however, may contribute to more than one accounting period, such as the purchase of a building with an estimated useful life of 40 years or the purchase of an unusually large quantity of office supplies expected to be used up over many months. To match expenses with related revenues for one accounting period, it is essential to apportion those expenditures that overlap two or more periods. This can be done by making adjusting entries, similar to the month-end entries discussed in Chapter 13.

TYPES OF ADJUSTING ENTRIES 1. Prepaid Expenses (or Unexpired Expenses): As already discussed and practised in previous chapters, prepaid expenses are those expenditures that are initially debited to a Prepaid account (an asset), then expensed NEL

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over a period of time as the value is used up. The expensing of Insurance Prepaid is a typical example. Figure 14.3 shows the purchase of a 12-month insurance policy and the usual monthly adjustment to expense. In a small business that does not record monthly adjustments, it would be necessary to record the consumed portion of insurance cost at year-end. Fig­ure 14.4 shows the purchase of a policy on August 1. By year-end (December 31), five months’ worth of the policy has expired (August to December), so an adjustment of $1,320 3 5/12 5 $550 is recorded. The portion of the insurance cost that has not yet expired, $1,320 – $550 = $770, will remain in the Insurance Prepaid account and be carried forward into the next financial year as an asset. The common practice, however, is to expense such a cost on a monthly basis. 2. Unearned Revenue (Revenue Received in Advance): An unearned revenue is a payment made in advance by a customer or tenant for goods or services that are to be delivered in the near future. By year-end, a significant portion of the order may already have been provided; therefore, this value must be recognized on the books as a revenue that has been earned. The adjustment may be recorded on a monthly basis, as discussed earlier, or as a year-end adjustment. As an example, we will assume we have agreed to rent out some of our office space to another small business. On November 1, the tenant paid six months’ rent in advance, which has been credited to Unearned Rent (a liability). The use of a liability account shows that we owe a service to Figure 14.3  Recording the Adjustment for Insurance Expense Dec.

1

31

Insurance Prepaid Bank Purchased a 12-month policy. Insurance Expense Insurance Prepaid To expense 1/12 of insurance cost

1 3 2 0 00 1 3 2 0 00

1 1 0 00 1 1 0 00

Figure 14.4  Recording the Year-End Adjustment for Insurance Expense Aug.

Dec.

1

31

Insurance Prepaid Bank Purchased a 12-month policy. Insurance Expense Insurance Prepaid To expense 5/12 of insurance cost

1 3 2 0 00 1 3 2 0 00

5 5 0 00 5 5 0 00

NEL

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Figure 14.5  Recording the Year-End Adjustment for Unearned Revenue Nov.

Dec.

1

31

Bank Unearned Rent Tenant prepaid 6 months of rent in advance.

3 6 0 0 00

Unearned Rent Rent Revenue Adjustment to recognize 2 months of prepaid rent as revenue.

1 2 0 0 00

3 6 0 0 00

1 2 0 0 00

someone; specifically, we owe the use of our office space for a period of six months. At year-end (December 31), two months of the rental revenue has so far been earned; therefore, two months’ worth of the rent paid to us in advance will be transferred from the Unearned Rent account to the Rent Revenue account, as shown in Figure 14.5. The portion of rent that has not yet been earned, $2,400, will remain in the Unearned Rent account and be carried into the next operating year when it too will be recognized as revenue. The common practice is to recognize the revenue earned on a monthly basis rather than waiting until year-end. In another example, a client contracted on December 10 for plumbing work to be done in his new house. He agreed to pay a deposit of $600 and to pay the balance when the job has been completed. When the down payment was received on December 10, it was credited to the Unearned Plumbing Service account (Figure 14.6). Despite its name, this account is a liability because it represents a service owed to the customer in exchange for the money already paid to us in advance. At year-end (December 31), we will assume approximately $400 worth of work was completed for the client. An adjustment is recorded to transfer $400 from the Unearned account to the Plumbing Service Revenue account, recognizing the revenue that has been earned in this operating year. The balance of $200 in the Unearned Plumbing Service account will be carried into the next operating year and will be transferred into the Plumbing Service Revenue account at that time using a similar adjusting entry. 3. Accrued Expenses: At the end of the operating year, any expenses that have been incurred, but have not yet been paid for, must be recorded on the Figure 14.6  Recording the Year-End Adjustment for Earned Fees Dec.

10

31

Bank Unearned Plumbing Service Deposit received for future plumbing service.

6 0 0 00

Unearned Plumbing Service Plumbing Service Revenue Adjustment for work provided to date.

4 0 0 00

6 0 0 00

4 0 0 00

NEL

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books so that they too become part of the total operating costs for the year just ended. These are called accrued expenses. For example, we will assume that employee salaries totalling $1,600 are calculated and paid to employees on the 15th of each month. On December 15, the usual paycheques are issued and the usual journal entry is recorded. On December 31 (year-end), half the month’s salaries, $800, has accrued (December 15 to December 31) but will not be paid until the 15th of January. An adjusting entry is required on December 31 to record the half-month’s expense that has accrued to year-end. Figure 14.7 shows the usual salary payment on December 15, the year-end adjustment for the accrued expense on December 31, and the payment of salaries on the next regular payday (January 15 of the new year). Notice that this illustration uses simplified payroll entries to demonstrate the concept of accrued salaries. Normally, the entries recorded on the 15th of each month would include payroll deductions as discussed in Chapter 10. The adjusting entry on December 31 (year-end) recognizes the $800 accrued expense for the operating year just ended and establishes an $800 liability for the amount owing to the employees. On the next regular payday (January 15), Salaries Payable will be cleared when the usual cheques are issued. 4. Accrued Revenues: Revenues that have been earned but have not yet been recorded on the books (accrued revenues) must also be recorded at year-end, whether paid at that time or not, in order that they will be recognized as revenue earned in the year just ended. On December 16, for example, $25,000 was placed in a short-term investment for 60 days. This is a common practice when a business sees that it has excess funds that would earn nothing if left in the company bank account; therefore, the funds are invested in short-term certificates where they will earn interest. At year-end (December 31), an adjusting entry is needed to recognize the interest that has earned for the half month even though the interest will not be received until the investment matures in mid-February. The year-end adjusting entry is shown in Figure 14.8. Figure 14.7  Recording the Year-End Adjustment for Accrued Expense 20–1 Dec.

15

31

20–2 Jan.

15

Salaries Expense Bank Regular salaries for the month ending Dec. 15.

1 6 0 0 00 1 6 0 0 00

Salaries Expense Salaries Payable Accrued salaries for half month.

8 0 0 00

Salaries Payable Salaries Expense Bank To pay salaries for month ending Jan. 15.

8 0 0 00 8 0 0 00

8 0 0 00

1 6 0 0 00

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Figure 14.8  Recording the Year-End Adjustment for Accrued Revenue Dec.

31

Interest Receivable Interest Earned To record Interest earned but not yet received. $25,000 7% 15 365 $71.92

7 1 92 7 1 92

5. Amortization (or Depreciation): The costs of capital assets, such as furniture, equipment, buildings, etc., cannot be totally written off as expenses in only one year because these assets are expected to contribute to the business over several years. Therefore, such costs are allocated (converted) to expense over the estimated useful life of each asset. For example, a building costing $250,000 might be estimated to have a useful life of 25 years. One twenty-fifth of the cost ($250,000 3 1/25 5 $10,000) should be allocated to expense each year. (See Figure 14.9.) This expense is called Amortization or Depreciation (commonly referred to as Capital Cost Allowance for income tax purposes). Although amortization is an expense that does not require an outlay of cash each year, it is considered an operating expense just the same. The Accumulated Amortization account is a contra-asset account (a negative asset account) representing the total amount of the asset cost that has so far been written off to expense since the asset was purchased. The book value, then, is the amount of the asset that has not been expensed. Figure 14.10 shows how the building would appear on the Balance Sheet. The original cost of $250,000 minus the accumulated amortization of $10,000 yields a book value of $240,000. Book value should not be confused with the market value (the amount that would be received if the asset were sold or traded). Simply stated, the book value is the portion of the original cost of the asset that has not yet been amortized. Figure 14.9  Recording Annual Amortization

Dec.

31

Amortization Expense Accumulated Amortization—Building To record annual Amortization (depreciation) of building.

10 0 0 0 00 10 0 0 0 00

Figure 14.10  Book Value of an Asset Capital Assets Buildings less Accumulated Amortization

250,000.00 (10,000.00)

240,000.00

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There are several methods of calculating amortization on long-term assets; however, only two of these methods will be discussed in this textbook. (a) Straight-Line Amortization: Under the straight-line method, an equal portion of the cost of the asset is allocated to expense each year until the full value of the asset has been written off. For example, a machine is purchased at a cost of $3,500 with an estimated useful life of seven years. Therefore, the straight-line amortization would be $3,500 4 7 years 5 $500 per year. After seven years, this asset would be fully amortized and would be carried on the books at a zero book value. This does not mean, however, that the machine no longer has any value. If it is still being used by the business, it will continue to be shown on the books at a zero book value, but no additional amortization would be recorded. (b) Declining-Balance (Diminishing-Balance) Amortization: Under the declining-balance method, amortization is calculated on the book value each year rather than on the original cost value. As the words “declining” and “diminishing” indicate, the book value of the asset becomes less as time passes in declining-balance amortization. For example, a delivery truck is purchased for $20,000 with amortization to be calculated at an annual rate of 25%. At the end of the first year, amortization is 25% of the cost. At the end of the second year, though, amortization is 25% of the Year 1 book value. This process of ever-diminishing value continues year after year. Figure 14.11 shows the calculations for the first two years. The declining-balance method is the method used for income tax purposes, referred to as capital cost allowance. However, regardless of the method used to calculate the amount of amortization each year, the journal entry is the same. Figure 14.12 shows the year-end entries for the delivery truck for the first two years. 6. Bad Debts: In Chapter 12, we discussed two methods of recognizing customers’ bad debts. Small businesses that do not age their receivables will immediately write off a bad invoice whenever they have reason to believe that it is no longer possible to collect on it. Businesses that age their receivables will estimate how much of their year-end receivables might become uncollectible and will record an entry at year-end to recognize the Bad Debts Expense. Figure 14.13 shows this entry, as discussed in Chapter 12. Figure 14.14 shows how the year-end Accounts Receivable would appear on the Balance Sheet. The net amount of receivables is the amount of Accounts Receivable that management fully expects to collect. 7. Inventory: Businesses that sell merchandise must ensure that the value of the merchandise inventory carried on the books is accurate. An incorrect Figure 14.11  Calculating Amortization (Declining-Balance Method) Cost of Delivery Truck 1st Year Amortization ($20,000 × 25%) Book Value at the End of Year 1 2nd Year Amortization ($15,000 × 25%) Book Value at the End of Year 2

$20,000.00 (5,000.00) 15,000.00 (3,750.00) $11,250.00 NEL

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Figure 14.12  Recording Amortization for Year 1 and Year 2 Year 1 Dec.

Year 2 Dec.

31

31

Amortization Expense Accumulated Amortization—Building To Record Amortization for Year 1.

5 0 0 0 00

Amortization Expense Accumulated Amortization—Building To Record Amortization for Year 2.

3 7 5 0 00

5 0 0 0 00

3 7 5 0 00

value can affect the net profit (or loss) that is reported for the year, as well as the value of total assets carried into the new operating year. Three accounts are typically used at year-end: (a) Inventory: This asset account shows the value of merchandise on hand (on the shelf). At year-end, or whenever financial statements are prepared, this value will appear as an Asset, along with Bank (Cash), Accounts Receivable, etc. (b) Opening Inventory: The Opening Inventory expense account appears on the Income Statement to show what the value of inventory was at the beginning of the operating year. It is likely all of this merchandise was sold at some time during the year; therefore, this value is recognized as an expense in the same operating year that the goods were sold. (c) Closing Inventory: The Closing Inventory contra-expense account also appears on the Income Statement as a deduction from the total cost of goods bought during the operating year. This is the value of merchandise that is on the shelf at the end of the year and is the same value that appears in the Inventory account on the Balance Sheet. Since these goods have not yet been sold, their cost cannot be recognized as an operating expense this year: therefore, the value is deducted. Figure 14.13  Recording Estimated Bad Debts

Dec.

31

Bad Debt Expense Allowance for Doubtful Accounts To record the estimated bad debts.

1 5 0 0 00 1 5 0 0 00

Figure 14.14  Showing Net Accounts Receivable Accounts Receivable less Allowance for Doubtful Accounts Net Accounts Receivable

$150,000.00 (1,500.00) $148,500.00

NEL

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Figure 14.15  Adjusting Entries for Inventory

Dec.

31

31

Opening Inventory Inventory To remove old inventory value from Inventory account.

40 0 0 0 00

Inventory Closing Inventory To record year-end inventory value.

33 8 0 0 00

40 0 0 0 00

33 8 0 0 00

Figure 14.15 shows the two adjusting entries needed to bring the correct values onto the books at year-end so that they can be used in the financial statements. The first adjusting entry removes the $40,000 value from the Inventory (asset) account because this amount is no longer the correct year-end value. It was the value at the beginning of the year, so it is now transferred to the Opening Inventory (expense) account. The second adjusting entry records the correct end-of-year inventory value ($33,800) in the Inventory (asset) account and also places this value in the Closing Inventory (contra-expense) account. Remember, we want to hold these costs over until next year, which is when we expect to sell the goods. PRACTICE EXERCISE 2 October 31 is the fiscal (financial) year-end for the Spring Hill Ski Complex. From the information below, prepare the adjusting entries with suitable explanations (including any necessary calculations). (a) Amortization on the lodge and restaurant for the current year ending October 31 is $23,600. (b) Salaries owing to employees but not yet paid at year-end are $2,750. (c) Snow-grooming equipment was leased on October 15 at a rate of $45 per day. Spring Hill began using the equipment immediately. No lease payments have yet been made. (d) The Spring Hill Restaurant was leased to a local catering company on September 1 at a yearly rate of $7,200. One year’s rent was received in advance on the day the lease contract was signed and was credited to the Unearned Rent Revenue account. (e) A bank loan was negotiated on October 1 for $24,000 at an annual interest rate of 5%. No interest expense has yet been recorded. (Interest 3 Principal 3 Rate 3 Months 4 12) (f ) Amortization on the shuttle bus for the current year ending October 31 is $4,200. (g) A lease agreement was signed today (October 31) for the use of a second shuttle bus during the winter months, beginning November 1. The lease rate will be $350 per month plus 27 cents per kilometre. NEL

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257

PRACTICE EXERCISE 3 Record the following year-end adjustments in the General Journal of Spencer Distributing Co. on December 31, 20—. (a) The Insurance Prepaid account includes the following expired insurance coverage: $250 on stock, $300 on the building, and $150 on furniture and equipment. (b) The Unearned Rent Revenue account shows a balance of $1,600 that includes $800 for January of the new year. (c) The Advertising Prepaid account includes $750 used up in the current year. (d) Salaries accrued but not yet paid on December 31, $2,700. PRACTICE EXERCISE 4 In the General Journal of Krywa TV Service, record the adjusting entries for the three-month period ending March 31, 20—. (a) On January 1, rent was paid in advance for six months at $250 per month. The total paid ($1,500) was debited to Rent Prepaid. (b) A one-year insurance policy was purchased on January 2, $1,800, and was charged to Insurance Prepaid. No monthly adjustments have been recorded. (c) On January 1, advertising costs were prepaid for six months, $360. (d) Salaries owing to the employee but not yet paid on March 31, $400. (e) Services to customers who have paid in advance have been completed in March, $560. (f ) Interest accrued for three months on a bank loan, $375. (g) Amortization on Tools & Equipment is to be calculated for three months on the book value of $1,600 at an annual rate of 25%.

THE WORKSHEET In a manual bookkeeping system, the columnar worksheet (usually eight or ten columns wide) is a valuable tool for arranging systematically all the accounting data that will be needed for the preparation of the financial statements (the Income Statement and the Balance Sheet) and for closing the revenue and expense accounts at year-end. It simplifies the often large volume of data to be handled at the end of the financial year and it minimizes potential errors. Each pair of columns on the worksheet (see Figure 14.16) represents a different stage in the process of closing the books and ensures that each stage is balanced before the next stage is started. Today worksheets are typically known as spreadsheets and are prepared in software such as Microsoft Excel®. Although a worksheet can be prepared at any time during the financial year (such as for preparing interim financial statements), we will examine its use to organize the data necessary for closing the books at year-end. NEL

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Figure 14.16  Worksheet WORKSHEET TRIAL BALANCE NAME OF ACCOUNT

Bank Accounts Receivable

DEBIT

Insurance Prepaid

ADJUSTED TRIAL BALANCE DEBIT

CREDIT

INCOME STATEMENT DEBIT

7 6 0 0 00 12 0 0 0 00

(e)

6 0 0 00 (g) 33 8 0 0 00

40 0 0 0 00

54 0 0 0 00

9 0 0 00

4 0 0 00

4 0 0 00

25 0 0 0 00

25 0 0 0 00

(d) 2 0 0 0 00

23 4 0 0 00

Capital, Michael Frazer

104 0 0 0 00

5 4 0 0 00 20 0 0 0 00

4 0 0 0 00

4 0 0 0 00

23 4 0 0 00

23 4 0 0 00 104 0 0 0 00

104 0 0 0 00

15 7 0 0 00

Sales

54 0 0 0 00 5 4 0 0 00

20 0 0 0 00 2 0 0 0 00

Accounts Payable

33 8 0 0 00

54 0 0 0 00

20 0 0 0 00

Accum. Amort.—Equipment

33 8 0 0 00

(d) 2 7 0 0 00

2 7 0 0 00

15 7 0 0 00

15 7 0 0 00 242 0 0 0 00

242 0 0 0 00

242 0 0 0 00

Sales Returns & Allowances

1 4 0 0 00

1 4 0 0 00

Sales Discounts

3 2 0 0 00

3 2 0 0 00

3 2 0 0 00

40 0 0 0 00

40 0 0 0 00

(f) 40 0 0 0 00

Opening Inventory 143 8 0 0 00

1 4 0 0 00

143 8 0 0 00

143 8 0 0 00

Purchase Returns & Allowances

1 8 0 0 00

1 8 0 0 00

Purchase Discounts

2 1 0 0 00

2 1 0 0 00

4 0 0 0 00 (g) 33 8 0 0 00

Closing Inventory

Advertising Expense

(d) 4 7 0 0 00 1 6 0 0 00 (e)

Bad Debts Expense Delivery Expense

4 5 0 00

(a)

2 1 0 0 00

33 8 0 0 00

33 8 0 0 00

4 7 0 0 00

4 7 0 0 00

1 6 0 0 00

1 6 0 0 00

4 5 0 00

4 5 0 00

1 1 0 0 00

1 1 0 0 00

9 0 0 00

9 0 0 00

9 0 0 00 3 6 0 0 00

1 1 0 0 00

Insurance Expense

1 8 0 0 00 4 0 0 0 00

4 0 0 0 00

Amortization Expense

Property Taxes Expense

2 4 0 0 00

(b) 1 2 0 0 00

3 6 0 0 00

Selling Commission Expense

8 5 0 0 00

(c)

9 0 0 0 00

9 0 0 0 00

37 0 0 0 00

37 0 0 0 00

Salaries Expense

5 0 0 00

37 0 0 0 00

CREDIT

1 0 5 0 00

1 0 5 0 00

4 5 0 00

(f) 40 0 0 0 00 (a)

1 3 0 0 00

Accum. Amort.—Building

Freight In

BALANCE SHEET DEBIT

7 6 0 0 00

Building

Purchases

CREDIT

12 0 0 0 00

25 0 0 0 00

Drawings, Michael Frazer

CREDIT

7 6 0 0 00

Land

Equipment

DEBIT

CREDIT

12 0 0 0 00

Allowance for Doubtful Accounts Inventory

ADJUSTMENTS

378 6 0 0 00 378 6 0 0 00 Property Taxes Payable

(b) 1 2 0 0 00

Selling Commission Payable

(c) 81 5 5 0 00

1 2 0 0 00

1 2 0 0 00

5 0 0 00

5 0 0 00

5 0 0 00

81 5 5 0 00

419 2 5 0 00 419 2 5 0 00 250 7 5 0 00 279 7 0 0 00 168 5 0 0 00 139 5 5 0 00

Net Income

28 9 5 0 00

28 9 5 0 00

279 7 0 0 00 279 7 0 0 00 168 5 0 0 00 168 5 0 0 00

The worksheet typically uses five pairs of columns. One pair is used for each of the five steps necessary to complete the worksheet. 1. The trial balance that was prepared at year-end is copied into the first two columns of the worksheet, including the totals. The totals are ruled with single and double lines to clearly show that they are totals, not NEL

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account balances. These trial balance figures are the basis for the next four steps. 2. The year-end adjustments are entered in the Adjustments columns. For example, an adjustment for expired insurance, as discussed earlier, calls for a debit to Insurance Expense and credit to Insurance Prepaid. In order to relate the debit and credit sides of each adjustment, each entry is “keyed” using an alphabetic label, such as (a), (b), (c), etc., to show the relationship between the accounts affected. Any account names that are needed for these adjustments, but are not already included in the trial balance listing, are written in the Name of Account column below the trial balance totals. When all adjustments have been entered, the Adjustments columns are totalled to ensure that they are in balance. Later, after the worksheet is complete, the entries in the Adjustments columns will be used to record the actual adjusting entries in the General Journal, if they have not already been recorded. Figure 14.17 shows the General Journal entries for the Adjustments that appear in this sample worksheet. Figure 14.17  Sample Adjusting Entries

(a)

(b)

(c)

(d)

(e)

(f)

(g)

Insurance Expense Insurance Prepaid To record expired insurance. Property Taxes Expense Property Taxes Payable To record accrued property taxes. Selling Commission Expense Selling Commission Payable To record accrued commissions to sales representatives. Amortization Expense Accum. Amort.—Building Accum. Amort.—Equipment To record depreciation on building and equipment. Bad Debts Expense Allowance for Doubtful Accounts To recognize likely uncollectible account.

9 0 0 00 9 0 0 00

1 2 0 0 00 1 2 0 0 00

5 0 0 00 5 0 0 00

4 7 0 0 00 2 7 0 0 00 2 0 0 0 00

4 5 0 00 4 5 0 00

Opening Inventory Inventory To remove old inventory value from asset account.

40 0 0 0 00

Inventory Closing Inventory To record year-end inventory value.

33 8 0 0 00

40 0 0 0 00

33 8 0 0 00

NEL

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3. Each account balance is then transferred into the Adjusted Trial Balance columns, taking into consideration any adjustments. For example, the adjusted balance for the Insurance Prepaid account is now $400. This figure comes from the original trial balance value of $1,300 minus the $900 adjustment. The Adjusted Trial Balance columns are totalled to ensure equal debits and credits. 4. The amounts in the Adjusted Trial Balance columns are then extended to the Income Statement columns or the Balance Sheet columns, depending on the classification of each account. All amounts should be copied from the Adjusted Trial Balance columns to either the Income Statement or Balance Sheet columns one by one, beginning with the first account listed (usually Bank) and working downward. Revenue and expense accounts are copied into the Income Statement columns. Assets, liabilities, and equity accounts are copied into the Balance Sheet columns. Care must be taken when copying “contra” accounts, such as the Allowance for Doubtful Accounts, which is copied to the credit column of the Balance Sheet columns. If an account has a credit balance in the Adjusted Trial Balance columns, it will have a credit balance when copied to the Income Statement or Balance Sheet columns. As well, care must be taken to copy correctly any accounts that were added below the original trial balance totals. In our illustration, two liability accounts are named below the totals and are copied to the credit of the Balance Sheet columns. 5. The worksheet is not complete without the net income (or net loss) figure, which is necessary to balance the Income Statement columns and the Balance Sheet columns. The net income (or loss) is determined by calculating the difference between the two subtotals of the Income Statement columns. This income (or loss) figure is entered into whichever column has the smaller subtotal. Then, the difference is calculated between the two subtotals of the Balance Sheet columns and entered into whichever column has the smaller subtotal. The two amounts should be the same. The term “Net Income” or “Net Loss” is written in the Name of Account column on the left side of the worksheet. The Income Statement columns and the Balance Sheet columns are now totalled and ruled as usual. With the worksheet now complete, the process of closing the books at yearend and the preparation of financial statements can begin. These final steps will be covered in Chapter 15. PRACTICE EXERCISE 5 Atlas Drafting Service was started on January 2, 20—, by Howard Pollian. The trial balance in Figure 14.18 was prepared on June 30, 20—, after six months of business. From the trial balance and the additional information shown below: (a) Complete the worksheet for the six months ending June 30, 20—. (This worksheet will be required for Practice Exercises 1 and 4 in Chapter 15.) (b) Record the adjusting entries in the General Journal. Provide suitable explanations for these entries. NEL

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Figure 14.18  Trial Balance (Atlas Drafting Service) Atlas Drafting Service Trial Balance June 30, 20— ACCOUNT

Bank Accounts Receivable Office Rent Prepaid Drafting Equipment Accum. Amort.—Drafting Equip. Unearned Fees Interest Payable Salaries Payable Bank Loan Payable Capital, H. Pollian Drawings, H. Pollian Fees Earned Amortization Expense Drafting Supplies Expense Interest Expense Office Rent Expense Salaries Expense Miscellaneous Expense

DEBIT

CREDIT

9 9 3 0 00 7 0 0 0 00 7 6 0 0 00 12 0 8 0 00

8 0 0 0 00 11 0 0 0 00 4 9 9 0 00 20 9 4 0 00 1 5 0 0 00 5 0 0 15 5 0 5 0 52 0 2

0 0 0 0

00 00 00 00

52 0 2 0 00

Additional information: (i) The prepaid office rent has been expensed on a monthly basis, $1,000 per month. However, the adjustment for June has not yet been recorded. (ii) Interest accrued to June 30 on the bank loan, $50. (iii) Drafting services provided to clients but not yet billed or collected, $940. (iv) A number of clients had made payments in advance for services to be provided over future months. These advance payments were charged to Unearned Fees. On June 30, the value of services already provided was $7,000. (v) Salaries accrued and unpaid on June 30, $500. (vi) Drafting equipment purchased on January 2 has an estimated useful life of 10 years. (Use straight-line amortization.) PRACTICE EXERCISE 6 Dauphin Supply Co. is owned and operated by Jack Clements. He has just given you a trial balance dated December 31, 20— (see Figure 14.19), and the additional information below. (a) Prepare a worksheet for the year ending December 31, 20—. (This worksheet will be required for Practice Exercises 2 and 5 in Chapter 15.) NEL

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Figure 14.19  Trial Balance (Dauphin Supply Co.) Dauphin Supply Co. Trial Balance December 31, 20— ACCOUNT

Bank Accounts Receivable Allowance for Doubtful Accounts Inventory Insurance Prepaid Land Building Accum. Amortization—Building Delivery Equipment Accum. Amortization—Del. Equip. Accounts Payable Salaries Payable Capital, Jack Clements Drawings, Jack Clements Sales Sales Returns & Allowances Opening Inventory Purchases Purchase Returns & Allowances Freight In Closing Inventory Amortization Expense Bad Debts Expense Delivery Expense Insurance Expense Office Salaries Expense Sales Salaries Expense Store Salaries Expense Store Supplies Expense

DEBIT

CREDIT

9 1 1 0 00 12 3 8 0 00 38 1 90 100

0 4 0 0

0 1 0 0

0 0 0 0

00 00 00 00 17 6 5 0 00

55 0 0 0 00 15 8 0 0 00 32 4 5 0 00 296 1 6 0 00 50 0 0 0 00 271 2 2 0 00 3 4 3 0 00 213 0 0 0 00 2 8 2 0 00 2 6 5 0 00

3 8 0 0 00 20 0 0 0 00 35 0 5 0 00 2 2 7 0 00 636 1 0 0 00

636 1 0 0 00

(b) Record the adjusting entries in the General Journal, complete with suitable explanations. Additional information: (i) Inventory of merchandise on hand on December 31, 20—, $35,440. (ii) Accrued unpaid salaries: office, $935; sales, $1,050; store, $1,000. (iii) Insurance expired, $740. (iv) Uncollectible accounts are estimated at 5% of accounts receivable. (v) Amortization is to be calculated using the declining-balance method: buildings, 10% per annum; delivery equipment, 20% per annum. NEL

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At Year-End: Preparing to Close the Books

PRACTICE EXERCISE 7 Figure 14.20 is a partially completed worksheet for Clarke Supply Co. You will assist with the year-end closing procedure. (a) Complete the worksheet by extending the amounts to the remaining columns. Inventory at year-end is valued at $32,440. (This worksheet will be required for Practice Exercises 3 and 6 in Chapter 15.) (b) Record the adjusting entries in the General Journal based on the keyed entries in the Adjustments columns of the worksheet. Figure 14.20  Worksheet (Clarke Supply Co.)

Clarke Supply Co. Worksheet TRIAL BALANCE NAME OF ACCOUNT

Bank Petty Cash Accounts Receivable Allowance for Doubtful Accounts Inventory Insurance Prepaid Land Building Accum. Amortization—Building Trucks Accum. Amortization—Trucks Accounts Payable Salaries Payable Capital, Michael Clarke Drawings, Michael Clarke Sales Sales Returns & Allowances Opening Inventory Purchases Purchase Returns & Allowances Freight In Closing Inventory Amortization Expense Bad Debts Expense Delivery Expense Insurance Expense Office Salaries Expense Sales Salaries Expense Store Supplies Expense

DEBIT

ADJUSTMENTS

CREDIT

DEBIT

CREDIT

10 7 6 0 00 1 0 0 00 9 3 8 0 00 28 6 7 49 7 100 0

5 1 0 0

0 0 0 0

4 5 0 00

(d) 4 6 9 00 (f) 32 4 4 0 00 (e) 28 6 5 0 00 (c) 2 7 0 00

17 6 5 0 00

(a) 8 0 0 0 00

15 3 4 0 00 21 4 5 0 00

(a) 1 5 0 0 00

00 00 00 00

45 0 0 0 00

(b) 1 7 9 5 00 205 0 0 0 00 30 0 0 0 00 217 2 2 0 00 2 7 3 0 00 (e) 28 6 5 0 00 138 9 0 0 00 2 3 8 5 00 17 6 2 0 00 (f) 32 4 4 0 00 (a) 9 5 0 0 00 (d) 4 6 9 00 2 5 0 0 00 18 24 1 479

1 0 2 4

2 5 7 9

5 0 0 5

00 00 00 00

(c) (b) (b) 479 4 9 5 00

2 7 0 00 8 3 5 00 9 6 0 00 73 1 2 4 00

73 1 2 4 00

NEL

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Supplementary Exercises EXERCISE 14-1: Open file SE-14-1. Complete the worksheet. (This worksheet will be needed for SE-15-1.) EXERCISE 14-2: Open file SE-14-2. Complete the worksheet. (This worksheet will be needed for SE-15-2.) THINK ABOUT IT! 1. Why is it necessary to make year-end adjustments to some revenue and expense accounts? 2. What is amortization? What is the difference between the Amortization Expense account and the Accumulated Amortization account? 3. What is a worksheet? How does it assist in closing the books at year-end?

CASE STUDY: KBC DECORATING CO. PREPARING TO CLOSE THE BOOKS AT YEAR-END (a) Set up a worksheet using the Chart of Accounts from Appendix C at the back of this textbook and the account balances from the December 31 trial balance. (b) From the following information, enter the year-end adjustments: 1. A physical count of merchandise inventory on hand was taken on December 31: paint and supplies, $2,020; wallpaper, $4,065; total, $6,085. 2. Insurance Prepaid has already been adjusted on a monthly basis; therefore, a year-end adjustment is not required. 3. Amortization of capital assets is calculated from the date of purchase. Some amounts are rounded for convenience. Building: annual rate of 10% $160,000 3 10% 3 8/12 5 Office Furniture & Equipment: annual rate of 20% Jan. 2: $8,000 3 20% 3 1 year 5 Apr. 12: $541 3 20% 3 9/12 5 Vehicles: annual amortization, 30% Jan. 2: $15,000 3 30% 3 1 year 5 Tools & Equipment: annual amortization, 30% Jan. 9: $1,695 3 30% 3 1 year 5 Total amortization expense

$10,670

$1,600 80

1,680 4,500

510 $17,360

(c) Record and post the adjusting entries in the General Journal. Note: The closing of the books for KBC Decorating Co. will continue in Chapter 15. NEL

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CHAPTER OBJECTIVES After completing this chapter, you will be able to: ●● record year-end closing entries in the General Journal ●● prepare an Income Statement ●● prepare a Balance Sheet

IMPORTANT TERMS USED IN THIS CHAPTER

Balance Sheet Capital Assets Current Assets Current Earnings Current Liabilities Gross Profit Income Statement Long-Term Liabilities Other Assets Post-Closing Trial Balance

CHAPTER

15

AT YEAR-END: CLOSING THE BOOKS

NEL

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I

n the previous chapter, we looked at how all the necessary accounting information was compiled in preparation for closing the “temporary” accounts and preparing financial statements. In this chapter, we will use the completed worksheet as a guide in closing the books at year-end. The steps for closing the books are: (a) recording and posting the journal entries to close all temporary accounts (b) preparing a post-closing trial balance (c) preparing the year-end financial statements

CLOSING JOURNAL ENTRIES Revenue and expense accounts are often referred to as “temporary” accounts because they are closed at the end of each year as part of the process of determining the year’s net income or net loss and so that they can be made ready to receive the next year’s financial information. To clear these accounts, their balances are transferred to an account called Current Earnings (sometimes called Income Summary, although Current Earnings is the name used in many accounting software packages). After the accounts are closed, the resulting balance in the Current Earnings account should equal the net income or net loss calculated on the worksheet. If the total revenues are greater than the total expenses, the credit balance in the Current Earnings account represents a net income. If, on the other hand, the total expenses are greater than the total revenues, the debit balance in the Current Earnings account represents a net loss. The purpose of closing accounts at the end of the year is twofold: 1. to reduce the balances in the “temporary” accounts to zero, thus making the accounts ready to receive transactions in the new financial year 2. to recognize the year’s net income or net loss in a “permanent” account; namely, the owner’s Capital account in the case of a proprietorship or partnership, or in the Retained Earnings account in the case of a corporation To simplify the closing of the accounts at year-end, only four journal entries are usually needed. (Refer to the worksheet in Figure 14.16 on page 258 as each journal entry is described here.) 1. Close all accounts with credit balances in the Income Statement columns of the worksheet. Since all these accounts have credit balances, they are now debited to reduce their balances to zero. Current Earnings is credited. (See Figure 15.1.) Figure 15.1  Closing Accounts with Credit Balances

Dec.

31

Sales Purchase Returns & Allowances Purchase Discounts Closing Inventory Current Earnings To close all credit-balance accounts from income statement column on worksheet.

242 1 2 33

0 8 1 8

0 0 0 0

0 0 0 0

00 00 00 00 279 7 0 0 00

NEL

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At Year-End: Closing the Books

2. Close all accounts with debit balances in the Income Statement columns of the worksheet. Since all these accounts have debit balances, they are now credited to reduce their balances to zero. Current Earnings is debited. (See Figure 15.2.) 3. Close the Current Earnings account to the owner’s Capital account. If Current Earnings has a credit balance (a net income), it must be debited to close it. The Capital account will be credited. (See Figure 15.3.) If Current Earnings has a debit balance (a net loss), it must be credited to close it. The Capital account will be debited. (See Figure 15.4.) 4. Finally, the owner’s Drawings account is closed to Capital. Drawings represents the withdrawals that the owner had made from the business throughout the year. Rather than recording the withdrawals directly from the Capital account during the year, they were recorded in the Drawings account. Therefore, this contra-equity account is a “temporary” account and must be closed at each year-end. Drawings has a debit balance, so we must credit the account to close it. (See Figure 15.5.) Figure 15.2  Closing Accounts with Debit Balances

Dec.

31

Current Earnings Sales Returns & Allowances Sales Discounts Opening Inventory Purchases Freight In Advertising Expense Amortization Expense Bad Debts Expense Delivery Expense Insurance Expense Property Taxes Expense Selling Commission Expense Salaries Expense To close all debit-balance accounts from income statement column on worksheet.

250 7 5 0 00 1 3 40 143 4 1 4 1 3 9 37

4 2 0 8 0 6 7 4 1 9 6 0 0

0 0 0 0 0 0 0 5 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0

00 00 00 00 00 00 00 00 00 00 00 00 00

Figure 15.3  Closing the Current Earnings Account (Net Income)

Dec.

31

Current Earnings Capital To close net income to owner’s capital account.

28 9 5 0 00 28 9 5 0 00

NEL

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Figure 15.4  Closing the Current Earnings Account (Net Loss)

Dec.

31

Capital Current Earnings To close net loss to owner’s capital account.

xx x x x xx xx x x x xx

Figure 15.5  Closing the Drawings Account

Dec.

31

Capital Drawings To close owner’s drawings account.

15 7 0 0 00 15 7 0 0 00

PRACTICE EXERCISE 1 From the worksheet prepared for Atlas Drafting Service in Practice Exercise 5 of Chapter 14, record the closing entries in the General Journal, with suitable explanations. PRACTICE EXERCISE 2 From the worksheet prepared for Dauphin Supply Co. in Practice Exercise 6 of Chapter 14, record the closing entries in the General Journal, with suitable explanations. PRACTICE EXERCISE 3 From the worksheet prepared for Clarke Supply Co. in Practice Exercise 7 of Chapter 14, record the closing entries in the General Journal, with suitable explanations.

POST-CLOSING TRIAL BALANCE After the adjusting and closing journal entries have been recorded and posted, one last trial balance is prepared. While all of the revenue and expense accounts will have zero balances, the asset and liability accounts, as well as the owner’s Capital account, are still open. The post-closing trial balance will prove that the ledger is still in balance. Figure 15.6 shows a sample post-closing trial balance. The closing of the books is now complete and the books are ready to receive the transactions that will be recorded in the new financial year. NEL

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Figure 15.6  Post-Closing Trial Balance Michael Frazer Company Post-Closing Trial Balance December 31, 20— ACCOUNT

Bank Accounts Receivable Allowance for Doubtful Accounts Inventory Insurance Prepaid Land Building Accum. Amortization—Building Equipment Accum. Amortization—Equipment Accounts Payable Property Taxes Payable Selling Commission Payable Capital, Michael Frazer Drawings, Michael Frazer

DEBIT

CREDIT

7 6 0 0 00 12 0 0 0 00 1 0 5 0 00 33 8 4 25 0 54 0

0 0 0 0

0 0 0 0

00 00 00 00 5 4 0 0 00

20 0 0 0 00 4 0 0 0 23 4 0 0 1 2 0 0 5 0 0 117 2 5 0

00 00 00 00 00

Ø

152 8 0 0 00

152 8 0 0 00

A LOOK AT GAAP In Chapter 1, we introduced the idea of Generally Accepted Accounting Principles (known as GAAP). It is because of these principles that you have learned to record transactions and present information in the manner that you did. Now, with the experience you have gained from the Practice Exercises and the KBC Decorating Case Study, you are in a better position to appreciate the importance of these concepts. Let’s review the GAAP principles: ●● The Business Entity Concept: The accounting information for a business is kept separate from the personal affairs of its owner(s), or from any other business or organization. This means the owner cannot put personal assets on the business balance sheet, such as a new TV or a new car, when they are not used solely for business purposes. ●● The Continuing-Concern Concept: It is assumed that a business will continue to operate uninterrupted for the foreseeable future. Therefore, the values of the assets are accounted for in a straightforward manner, based on costs rather than on market value because it is assumed the business will not cease operations. However, if a business anticipates ending its operations, such as when it is going out of business, the values of assets usually suffer because they have to be sold under unfavourable circumstances. ●● The Conservatism Principle: All accounting information for a business must be fair and reasonable. This means all values recorded must not be overstated or understated. NEL

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The Objectivity Principle: Accounting is based on objective evidence. The source document for a transaction is usually the best objective evidence for a transaction. ●● The Time-Period Concept: Accounting takes place over specific periods of time known as fiscal periods (fiscal months, fiscal quarters, fiscal year). These fiscal periods are of equal length, and are used when measuring the financial progress of a business. ●● The Recognition Principle: In accounting, revenue is recognized when the transaction is completed, typically when the sale is complete and the invoice is sent to the customer. If it is a cash transaction, the revenue is recorded when the sale is complete and the cash received. In large projects that take a long time to complete, it may be necessary to bill the customer for progress payments to reflect the proportion of the project that has been completed to date. It is at each of these progress stages that a suitable amount of revenue would be recognized. ●● The Matching Principle: Related to the Recognition Principle, the matching principle states that each expense must be recorded in the same accounting period as the revenue it helped to earn. ●● The Cost Principle: Related to the Objectivity Principle, this principle states that, when accounting for purchases (merchandise, furniture, equipment, vehicles, etc.), such purchases must be recorded at their cost price. The source document shows this cost value, making the value objective and verifiable. ●● The Consistency Principle: The same methods and procedures are employed consistently from period to period. Sometimes there is more than one way to account for some financial activities; however, one method must be chosen and used consistently. If a change of method does become necessary, the change must be explained clearly on the financial statements. ●● The Materiality Principle: Accountants use GAAP at all times, except when doing so would be expensive, difficult, or impractical. If a rule is temporarily ignored, the net income of the company must not be significantly affected. An example is the purchase of a stapler for each desk in the office. A stapler is a piece of equipment, meaning it should be carried as an asset because it likely has a useful life of several years and therefore should be amortized. However, the cost of a stapler is so insignificant (perhaps less than $5) that recognizing it as an expense rather than as an asset will have no significant impact on the year-end profit or loss. ●● The Full-Disclosure Principle: All information about a company’s financial position must be included with the financial statements in order to fully inform the readers of the statements. This is particularly important for information that does not come from the ledger accounts directly, such as outstanding lawsuits, tax disputes, and company takeovers. In such cases, the information would be included in the form of accompanying notes. With the ever-growing number of multinational companies and increasing global trade, Canada has joined the world community in adopting International Financial Reporting Standards (IFRS). These standards make company accounts understandable and comparable across international boundaries. In simple terms, effective January 1, 2011, Canadian organizations that do business both inside ●●

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and outside Canada must adhere to the new international standards rather than to Canadian GAAP. Organizations that do business only within Canada have the choice of continuing to follow GAAP or adopting IFRS.

FINANCIAL STATEMENTS Two financial statements—the Income Statement and Balance Sheet—are typically prepared to show the results of the business activities for the operating period (usually for one year).

INCOME STATEMENT The Income Statement shows all sources of revenue earned during the financial period, the cost of the merchandise sold during the period, and the operating expenses (sometimes called “overhead”) incurred during the period. The Income Statement in Figure 15.7 shows the revenues and expenses for the year ending December 31. There are three key sections to this statement. The Revenue section shows the sources of revenue, usually sales of goods and/or services. Any returns and allowances, as well as discounts, are deducted from the revenues to arrive at a net sales figure. Next is the Cost of Goods Sold section. As this name indicates, this section identifies the costs incurred to buy the goods that were sold, including any freight and import charges. Any returns and allowances, as well as discounts, are deducted from the Purchases. The difference between the net sales and the cost of the goods sold is the gross profit. From the gross profit, operating expenses are deducted to determine the net profit (or net loss). The Income Statement is usually prepared at the end of each financial year, but can be prepared more often when necessary. Of course, the owner(s) of the business will be interested in “the bottom-line” figure (the net income or net loss for the period), but this information may also be of interest to the company’s banker, the government, shareholders, and creditors. Other titles for the Income Statement are Profit and Loss Statement, Statement of Earnings, and Statement of Operations. However, in our discussions, the name “Income Statement” will be used. Examples of real-world financial statements can be found in Appendix A at the back of this textbook.

BALANCE SHEET The Balance Sheet (Figure 15.8) is a statement of assets, liabilities, and equity, and summarizes the financial position of the business at the end of an accounting period. The Balance Sheet will help to provide answers to questions such as: 1. Do we have sufficient immediate resources to pay our short-term liabilities? 2. Do we require additional funding to cover our short-term obligations? 3. Should excess cash, if any, be placed in a short-term investment or a longterm investment? 4. Are our debts too large in ratio to the investments by the owner(s)? If so, such a situation could result in foreclosure of the business. NEL

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Figure 15.7  Income Statement Michael Frazer Company Income Statement for one year ending December 31, 20— Revenue: Sales less Sales Returns & Allowances Sales Discounts Net Sales Cost of Goods Sold: Opening Inventory Purchases less Purchase Returns & Allowances Purchase Discounts Freight In Cost of Goods Available for Sale less Closing Inventory Cost of Goods Sold Gross Profit Operating Expenses: Advertising Expense Amortization Expense Bad Debts Expense Delivery Expense Insurance Expense Property Taxes Expense Selling Commission Expense Salaries Expense Total Expenses Net profit

$242 0 0 0 00 $ 1 4 0 0 00 3 2 0 0 00

40 143 (1 (2 4 183 (33

0 8 8 1 0 9 8

0 0 0 0 0 0 0

0 0 0 0 0 0 0

4 6 0 0 00 237 4 0 0 00

00 00 00) 00) 00 00 00) 150 1 0 0 00 87 3 0 0 00

1 6 0 4 7 0 4 5 1 1 0 9 0 3 6 0 9 0 0 37 0 0

0 0 0 0 0 0 0 0

00 00 00 00 00 00 00 00 58 3 5 0 00 $ 28 9 5 0 00

A Balance Sheet shows the subdivisions of each general classification of account. Assets, for example, are subdivided into current assets, capital assets, and other assets. Liabilities are subdivided into current liabilities and long-term liabilities. Current assets are those assets that can be readily converted into cash, usually within one year, should circumstances demand that they be liquidated (sold off). These include cash, accounts receivable, inventories of merchandise, and short-term investments. Capital assets are those assets expected to be owned by the business for more than one year. Examples include land, buildings, furniture, and equipment. Other assets are those assets that are considered neither current assets nor capital assets. These would include patents, copyrights, and any other assets held by the business but not currently used in the process of earning revenue. NEL

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At Year-End: Closing the Books

Figure 15.8  Balance Sheet Michael Frazer Company Balance Sheet December 31, 20— Assets

Current Assets: Bank Accounts Receivable less Allowance for Doubtful Accounts Inventory Insurance Prepaid Total Current Assets Capital Assets: Land Building less Accum. Amort.—Building Equipment less Accum. Amort.—Equipment Total Capital Assets Total Assets

$ $12 0 0 0 00 1 0 5 0 00

7 6 0 0 00 10 9 5 0 00 33 8 0 0 00 4 0 0 00 $ 52 7 5 0 00

25 0 0 0 00 54 5 20 4

0 4 0 0

0 0 0 0

0 0 0 0

00 00 00 00

48 6 0 0 00 16 0 0 0 00 89 6 0 0 00 $142 3 5 0 00

Liabilities & Owner’s Equity

Current Liabilities: Accounts Payable Property Taxes Payable Selling Commission Payable Total Current Liabilities Owner’s Equity: Capital, Michael Frazer Drawings, Michael Frazer Net Profit Total Owner’s Equity Total Liabilities & Owner’s Equity

23 4 0 0 00 1 2 0 0 00 5 0 0 00 25 1 0 0 00

104 0 0 0 00 (15 7 0 0 00) 28 9 5 0 00 117 2 5 0 00 $142 3 5 0 00

Current liabilities are those debts that must be paid off within the operating year or one calendar year (whichever is longer). These debts are paid out of current assets. The comparison of current assets with current liabilities is known as the current ratio, which is a measure of the business’s ability to pay its short-term debts. To be considered a good financial risk, a business should maintain a ratio of 2:1, meaning that for every $1 of current liabilities, there should be at least $2 of current assets. Long-term liabilities are those debts that are to be paid at some point beyond one operating year. These typically include bank loans and mortgages. NEL

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The Equity section shows the effects on the owner’s Capital account of any withdrawals by the owner during the financial period, as well as the net income (or net loss). Financial statements can be prepared at any time during the accounting year for management use. As discussed previously, interim statements do not require that the accounts be closed through the recording of closing entries. However, the formal Income Statement and Balance Sheet are prepared as part of the accounting cycle performed at the end of the accounting year when the books are “closed” and made ready for the next financial year. Examples of real-world financial statements can be found in Appendix A at the back of this textbook. PRACTICE EXERCISE 4 From the worksheet prepared for Atlas Drafting Service in Practice Exercise 5 of Chapter 14: (a) Prepare an Income Statement for the six months ending June 30, 20—. (b) Prepare a Balance Sheet as at June 30, 20—. PRACTICE EXERCISE 5 From the worksheet prepared for Dauphin Supply Co. in Practice Exercise 6 of Chapter 14: (a) Prepare an Income Statement for one year ending December 31, 20—. (b) Prepare a Balance Sheet as at December 31, 20—. PRACTICE EXERCISE 6 From the worksheet prepared for Clarke Supply Co. in Practice Exercise 7 of Chapter 14: (a) Prepare an Income Statement for one year ending December 31, 20—. (b) Prepare a Balance Sheet as at December 31, 20—. PRACTICE EXERCISE 7 From the trial balance in Figure 15.9 and the additional information below: (a) Complete a worksheet. (b) Record the adjusting and closing journal entries, complete with suitable explanations. (c) Prepare an Income Statement for the three months ending June 30. (d) Prepare a Balance Sheet as at June 30. Additional information available on June 30: (i) Inventory of merchandise on hand on June 30, $1,200. (ii) Unexpired insurance, $230. (iii) Salaries accrued but not yet paid to the employee, $700. NEL

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At Year-End: Closing the Books

Figure 15.9  Trial Balance (Thomas Wong & Company) Thomas Wong & Company Trial Balance June 30, 20— ACCOUNT

Bank Accounts Receivable Allowance for Doubtful Accounts Inventory Insurance Prepaid Equipment Accum. Amort.—Equipment Accounts Payable GST Payable GST-ITC Salaries Payable Capital, T. Wong Drawings, T. Wong Sales Sales Returns & Allowances Rental Revenue Purchases Purchase Returns & Allowances Closing Inventory Advertising Expense Bad Debts Expense Amortization Expense Insurance Expense Miscellaneous Expense Office Supplies Expense Salaries Expense

DEBIT

CREDIT

2 4 1 5 00 5 3 2 0 00 Ø Ø

9 3 5 00 12 0 5 0 00 Ø

8 7 3 0 00 7 2 5 00 3 2 0 00 Ø

16 7 1 0 00 5 4 5 5 00 27 2 5 0 00 1 7 5 0 00 4 1 4 0 00 19 3 0 0 00 2 7 1 0 00 Ø

2 4 2 0 00 Ø Ø Ø

2 8 9 2 60 2

1 9 0 6

0 0 0 5

00 00 00 00

60 2 6 5 00

(iv) Amortization on equipment, to be calculated for three months on the declining balance at a rate of 20% per annum. (v) Allowance for doubtful accounts, estimated to be 5% of the current Accounts Receivable balance. Supplementary Exercises EXERCISE 15-1: Open files SE-14-1 and SE-15-1. Prepare the income statement and balance sheet. EXERCISE 15-2: Open files SE-14-2 and SE-15-2. Prepare the income statement and balance sheet. EXERCISE 15-3: Open file SE-15-3. Examine financial statements for errors and make necessary corrections. NEL

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THINK ABOUT IT! 1. What are temporary accounts? To what account are they closed? 2. The books can be closed at year-end using how many closing entries? 3. What are the two principal financial statements that are discussed in this chapter? What does each statement show?

CASE STUDY: KBC DECORATING CO. CLOSING THE BOOKS AT YEAR-END To conclude the process of closing the books at the end of the year: 1. Record and post the following journal entries: (a) a compound entry to close all the credit-balance accounts listed under Income Statement on the worksheet (b) a compound entry to close the debit-balance accounts listed under Income Statement on the worksheet (c) an entry to close the balance of the Current Earnings account to the partners’ Capital accounts, to be divided equally (d) an entry to close the partners’ Drawings accounts to their respective Capital accounts 2. Prepare a post-closing trial balance on December 31, 20—. 3. Prepare an Income Statement for the year ending December 31, 20—. 4. Prepare a Balance Sheet dated December 31, 20—.

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APPENDIX A REAL-WORLD FINANCIAL STATEMENTS

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278

APPENDIX A  REAL-WORLD FINANCIAL STATEMENTS

Canadian Tire Corporation

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APPENDIX A  REAL-WORLD FINANCIAL STATEMENTS

Canadian Tire Corporation

Source: Canadian Tire Corporation, Limited - 2017 First Quarter Report to Shareholders, 13 Weeks Ended April 1, 2017. Used with permission. Trademarks of Canadian Tire Corporation, Limited use under license.

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280

APPENDIX A  REAL-WORLD FINANCIAL STATEMENTS

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APPENDIX A  REAL-WORLD FINANCIAL STATEMENTS

Excerpt provided with permission by Shaw Communications Inc.

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281

APPENDIX B ANSWERS TO THINK ABOUT IT! CHAPTER 1

CHAPTER 2

1. True 2. A proprietorship is owned by one person; a partnership is owned by two or more persons. In proprietorships and partnerships, the owners are usually directly involved in the day-to-day operation of the business. 3. A corporation is a separate legal entity for which ownership is divided into shares; the shareholders (or stockholders) are not necessarily involved in the ongoing operation of the business. 4. Assets are items of value owned by the business and are expected to contribute to the ongoing operation of the business. Expenses are the costs of operating the business, contributing to operations only during the current operating period. 5. See examples in Figure 1.6 (page 9). 6. Capital refers to the owner’s financial interest (or equity) in the business. Initially, Capital represents the owner’s investment in the business. 7. The Balance Sheet shows the assets, liabilities, and equity of the business. 8. The Income Statement shows the revenues and operating costs for a particular financial period. The difference between these two categories is the net profit or loss for the period. 9. A person’s source of earnings is usually his or her salary or wage earnings (paycheque). A business’s earnings are from sales of merchandise and/or sales of services. 10. GAAP means Generally Accepted Accounting Principles. It refers to the standards, guidelines, and practices that all accountants follow to provide and maintain accurate, reliable accounting information.

1. 2. 3. 4. 5.

False True False. The accounting equation can be expressed as Assets − Liabilities = Owner’s Equity (or Capital), or as Assets = Liabilities + Owner’s Equity (or Capital). True False. Financial records should be maintained in a “permanent” form; that is, written in ink or recorded on a computer. 6. A journal is a chronological (day-by-day) record of the financial activities of a business. 7. (a) Debit. (b) No. (c) In consecutive order. 8. All financial records must be kept by the business for at least six years. Without a year date on each page, one year’s activities cannot be distinguished from those of another year.

282

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APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 3

CHAPTER 4

283

9. Although not essential, it is recommended. Some transactions are selfexplanatory, so little or no explanation is required. 10. A simple entry has only one debit entry and only one credit entry. A compound entry may have any number of debit entries and any number of credit entries. 1. A ledger account shows in one place all the activities that affect each specific asset, liability, owner’s equity, revenue, and expense account. 2. The use of folios provides a cross-reference between the entry in the journal and its corresponding entry posted to the ledger account. 3. Posting is the procedure of transferring all transactions from the journal to the ledger accounts. 4. Each entry is posted in the order in which it was entered into the journal. 5. Accounts are listed on the trial balance in the order in which they are arranged in the General Ledger; that is, according to the chart of accounts. 6. No. The trial balance proves only that equal debits and credits have been maintained. Some errors are possible that would not affect the balance between debits and credits. 7. (a) Double-check the addition of the columns. (b) Compare the amounts in the trial balance with those in the ledger accounts. (c) Calculate the difference between the debit and credit totals to determine the amount out of balance. (d) Divide the difference by 2 and look for this amount on the trial balance or in the ledger accounts. (e) Divide the original difference by 9 to determine if a transposition error was made. (f ) Recalculate the balances in the ledger accounts if necessary. (g) Check to see that all entries have been posted correctly from the journals to the ledger accounts. 1. Erasing your mistakes or using liquid cover-up are not considered good ways of correcting errors in bookkeeping because it looks like the bookkeeper is trying to hide something. 2. The best method is to cross out the incorrect amount or word with a single line or stroke. Then neatly write the correct amount or word above. Both the error and the correct information should be visible. 3. The two methods of correcting errors are (a) to record a correcting entry that adjusts the amounts in the affected accounts or transfers the amount from one account to another, and (b) to record a reversing entry that “cancels out” the incorrect entry as if it has never happened, then record the entry correctly. 4. GST must always be calculated and recorded first. 5. HST is the Harmonized Sales Tax. It is a single tax that includes a 5% federal tax component and a provincial tax component. The percentage of provincial tax component will vary from province to province. 6. PST is based on the pre-tax value of the goods or service. 7. Taxes on sales are credited to liability accounts because these amounts are owing to the federal and provincial governments.

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284

APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 5

CHAPTER 6

8. The GST/HST paid on assets and expenses that are purchased for use in the business is charged to GST/HST-ITC. The ITC amount will be deducted from the GST/HST Payable amount to determine how much is to be remitted to the government. 1. Freight In is an expense account to which shipping costs on incoming merchandise are charged. 2. Shipping costs on items other than merchandise, such as equipment or supplies, are charged directly to their respective asset or expense accounts. These costs are not charged to Freight In. 3. Delivery Expense is the account used for costs related to delivering goods to customers. 4. Duty & Brokerage is an expense account used for costs related to the importation of goods from other countries. 5. GST/HST is calculated and charged at the time the goods enter Canada. Therefore, the entry for GST/HST on the imported goods is part of the entry to record the broker’s fee. 1. Special journals simplify the process of recording transactions because they provide special columns into which the most common transactions can be recorded, thus eliminating the need to write repeatedly the names of frequently charged accounts as was done in the General Journal. Time is also saved in posting as, in many cases, only column totals are posted rather than the individual amounts within the columns. 2. The Sales Journal is for recording goods and/or services sold on account. The Purchase Journal is for recording anything bought on account. 3. The Cash Receipts Journal is for recording money received for any reason, such as money received on account or money received each month for rent if we were to rent out part of our building. The Cash Payments Journal is for recording money paid out for any reason, such as payments to suppliers on account or payments of monthly utility bills. 4. The Bank Dr. column in the Cash Receipts Journal will have an amount on almost every line. Most transactions are balanced on a single line; however, occasionally entries are recorded that require more than one line entry, so a two- or three-line entry will require only one amount in the Bank Dr. column. 5. No, not all payments are made by cheque. Those payments that are made by automatic withdrawal from the bank account, such as for mortgage or loan payments, do not require cheque numbers. Instead, these entries may have some other meaningful notation, such as “DM” (debit memo). 6. No, the General Ledger column totals are not posted. The values in these columns are not related to each other, so each entry is posted individually. The totals of these columns are used only to confirm that the journal is balanced.

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APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 7

CHAPTER 8

285

7. In manual bookkeeping, it is relatively easy to make recording errors that would prevent the books from balancing, such as writing errors and calculation errors. To ensure such errors are not carried into the ledger accounts, the journals should be balanced before the column totals are posted. 8. The General Journal is used for any transaction that cannot be accommodated by the special journals. 1. No. A cash refund is granted only if cash was paid at the time the goods were purchased. In this case, the goods were bought on account; therefore, a credit note will be issued when the goods are returned. 2. If cash was paid at the time of the purchase, cash will be refunded when the goods are returned. However, instead of giving a cash refund, many stores will give vouchers that can be applied against the value of a future purchase. 3. The use of such special accounts provides clearer evidence of the amount of damaged or inferior goods that has been received from suppliers or unwanted goods returned by customers. 4. In businesses that do not have many returns or price allowances, separate accounts for returns and allowances may be considered unnecessary. 5. Office Supplies Expense (as well as GST/HST-ITC) is credited because the refund must offset all or part of the original debit entry to Office Supplies Expense. 6. 2/20, n/60 means that a 2% discount on the value of the purchase or sale is eligible if the invoice is paid within 20 days of the invoice date; otherwise, the total invoice value must be paid within 60 days. 7. COD means Cash on Delivery. COD purchases are recorded in the Cash Payments Journal and COD sales are recorded in the Cash Receipts Journal. When the goods are delivered to the customer, the driver waits for the customer to make payment. 1. A business must file a GST/HST return monthly, quarterly, or annually, depending on the amount of sales in the reporting period. A business may opt to file returns more frequently than required by the government. 2. Yes. A business that is registered to charge, collect, and remit GST/HST must file a return for every reporting period, even if the business has no activity in the reporting period. 3. No. The GST/HST is calculated on the selling price of the goods or service. A discount for early payment does not affect the amount of GST/HST that is charged and remitted. 4. The regular method of accounting for GST/HST requires a record of tax paid on all business-related purchases (GST-ITC or HST-ITC). In the Quick Method, however, the ITCs are not recorded for each transaction, but rather calculated at a prescribed rate based on the tax-included sales amount for the period. The rate is based on whether the sales were made in a “participating” or “non-participating” province and whether the sales were for goods or services.

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286

APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 9

CHAPTER 10

5. No. The Quick Method can be used only by small businesses with total annual sales (including GST/HST) of no more than $200,000 in any four consecutive fiscal quarters over the last five fiscal quarters. As well, not all kinds of sales are eligible for this method, and not all kinds of businesses are eligible. Details are available from CRA. 1. The petty cash fund is used to pay for expenditures that are considered too small to be paid by cheque. 2. Petty Cash is typically reimbursed whenever the fund is almost out of cash. 3. Not usually. Some of the entries on the company’s books may not yet have appeared on the bank statement, and some of the entries on the bank statement may not yet be recorded on the company’s books. 4. Some of the cheques and deposits have not yet cleared the bank; therefore, the bank was not aware of them when the bank statement was printed. Also, the bank has likely recorded transactions (such as bank charges) for which there are not yet any entries on the company’s books. 5. The bank account should be reconciled as soon as the bank statement is received from the bank; thus, it should be reconciled every month. 6. Cancelled cheques and advices (commonly called debit memos and credit memos). 7. An outstanding cheque is a cheque that has been recorded in the Cash Payments Journal but has not yet been cleared by the bank. 8. When a cheque is certified, a guarantee is made by the bank that sufficient funds will be available when the cheque is cleared. Because both the company and the bank now have a record of the cheque, it cannot be considered outstanding. 9. An NSF cheque is a cheque that has been dishonored (or “bounced”) by the bank because the account does not have sufficient funds. When a customer’s cheque is deposited to our bank account, the cash balance increases. When the cheque is returned NSF, the bank deducts the amount from our account, thus reducing the cash balance.

1. 2.

Piecework: factory workers, fruit and vegetable pickers, etc. Salary: office workers, sales clerks, police/fire workers, etc. Commission: salespeople, real estate agents, etc. Payroll information is retained as a record of hours worked and pay issued to each employee. It is the basis for determining vacation time and vacation pay, sick leaves, and pension entitlement. It is also a record of information sent to the government in support of employees’ contributions for income taxes, EI, and CPP. 3. The four payroll deductions that must be withheld are federal and provincial income taxes, Employment Insurance, and Canada Pension Plan. 4. No. The income tax deductions are based on the amount of gross pay and on the employee’s claim code (determined from the TD1 form). NEL

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APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 11

CHAPTER 12

CHAPTER 13

287

5. The employer contributes an amount equal to the employees’ contributions to CPP. The employer contributes 1.4 times the EI contribution made by the employees. 6. Voluntary payroll deductions include union dues, group life insurance, company pension plan, hospitalization/accident insurance, dental insurance, Canada Savings Bonds, and RRSPs. 7. Workers’ Compensation is a form of insurance coverage providing financial compensation to employees for injuries or disabilities resulting from accidents in the workplace. The employer pays the premiums for this coverage. 1. Drawings is an equity account to which an owner’s withdrawals of assets or expenses are recorded. At year-end, this account is closed to Capital, which makes the Drawings account ready to capture the owner’s withdrawals in the next financial year. 2. A partnership is a business owned by two or more persons who have combined their talents and financial resources. A corporation is a business that operates under a government charter and is considered a legal “person,” separate from the owners of the corporation. 3. Capital stock accounts are used instead of the traditional Capital account used in proprietorship and partnership accounting. These stock accounts are typically Common Stock and Preferred Stock. 4. Retained earnings are the accumulated earnings of a corporation since the day the corporation started up. 5. A dividend is the return on investment that is paid to shareholders, provided the dividend has been declared by the board of directors and has been approved by the shareholders at a shareholders’ meeting. 6. No. “Authorized shares” refers to the maximum number of shares that the corporation is allowed to issue. “Issued shares” refers to the number of shares actually sold to shareholders. 1. Aging of receivables is the listing of customers and their balances, with invoices categorized according to how old they are. Aging is used to keep management informed of the status of customers’ accounts, particularly those accounts that are overdue. 2. Percentages of estimated loss are based solely on experience. Sometimes these percentages are the accountant’s “best guess.” 3. An entry is recorded to write off the invoice to Bad Debts Expense and adjust the taxes where appropriate. See Figure 12.9 (page 225) for a sample entry. 1. The usual source of information for an interim statement is the trial balance. However, some revenue and/or expense amounts must be calculated in order to recognize items that are not yet on the books, such as insurance, advertising, etc.

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288

APPENDIX B  ANSWERS TO THINK ABOUT IT!

CHAPTER 14

CHAPTER 15

2. An interim statement can be prepared at any time during the operating year. The most common time to prepare one is at month-end. 3. Interim statements keep management informed of trends in profits that could affect decision making. 1. Sometimes revenue and expense accounts must be adjusted to more accurately reflect the current value of the revenue or expense for that operating year. 2. Amortization is the expensing of an asset over its useful life. The cost of a capital asset (such as a truck or a piece of equipment) cannot be treated as an operating expense in the year in which it was purchased. However, a portion of that cost can be taken as expense each year. The Amortization Expense account records the amount of amortization recognized only in the current operating year. The Accumulated Amortization account is a contraasset that shows the amount of the original asset cost that has already been expensed. 3. A worksheet is a multi-column working paper that assists the bookkeeper or accountant in organizing the account balances in a way that simplifies the closing of the temporary accounts and the preparation of the year-end financial statements. 1. Temporary accounts are revenue and expense accounts that accumulate values throughout the year but are closed to the Current Earnings account (sometimes called Income Summary) at the end of the year. 2. The books can be closed at year-end using as few as four entries. The first entry closes all temporary accounts with credit balances. The second entry closes temporary accounts with debit balances. The third closes the Current Earnings account to the owner’s Capital account (or to Retained Earnings in the case of a corporation). The final entry closes the owner’s Drawings account to Capital. 3. The two statements are Income Statement and Balance Sheet. The Income Statement shows all revenue earned and all expenses incurred during the operating year. The Balance Sheet shows the balances of all assets, liabilities, and equity accounts on the last day of the year (or on any specific date chosen).

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APPENDIX C CHART OF ACCOUNTS: KBC DECORATING CO. ASSETS 101 103 105 106 108 120 121 122 123 124 125 126 127 128

Bank Petty Cash Fund Accounts Receivable Control Inventory Insurance Prepaid Land Building Accumulated Amortization—Building Furniture & Equipment Accumulated Amortization—Furniture & Equipment Vehicles Accumulated Amortization—Vehicles Tools & Equipment Accumulated Amortization—Tools & Equipment

LIABILITIES 201 206 207 211 212 213 214 215 216 220

Accounts Payable Control HST Payable HST-ITC Salaries Payable Federal Income Tax Payable Provincial Income Tax Payable CPP Payable EI Payable Life/Health Plan Payable Mortgage Payable

OWNER’S EQUITY 301

Capital, Henri Martin

302

Drawings, Henri Martin

303

Capital, Wes Corbett

304

Drawings, Wes Corbett

310

Current Earnings

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289

290

APPENDIX C  CHART OF ACCOUNTS: KBC DECORATING CO.

REVENUES

Note to Student The expense accounts for KBC Decorating Co. are arranged in the following order: merchandiserelated expenses, payroll-related expenses, and general expenses. It is common for an accountant to group related accounts so that they are easier to find on the chart of accounts and so that the accounts appear together on financial statements.

401

Sales Paint & Supplies

402

Sales Wallpaper

403

Sales Service

406

Sales Discounts

407

Bad Debt Recoveries

412

Rental Revenue

EXPENSES 501

Opening Inventory

504

Purchases Paint & Supplies

505

Purchases Wallpaper

507

Purchase Discounts

508

Freight In

509

Closing Inventory

521

Salaries Expense

522

CPP Expense

523

EI Expense

524

Life/Health Plan Expense

530

Advertising Expense

531

Amortization Expense

532

Bad Debts Expense

533

Bank Charges Expense

534

Cash Over/Short

535

Delivery Expense

537

Donations Expense

538

Insurance Expense

539

Interest Expense on Mortgage

540

Miscellaneous Expense

541

Office Supplies Expense

542

Postage Expense

543

Rent Expense

544

Telephone Expense

545

Utilities Expense

546

Warehouse Supplies Expense

547

Workers’ Compensation Expense

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER 150

Beavis & Sons

151

Dayson & Son

152

Jay-Mar Co. NEL

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APPENDIX C  CHART OF ACCOUNTS: KBC DECORATING CO.

153

S. Miller

154

Edna Morton

155

S. Wilkinson

156

K. Young Painting

ACCOUNTS PAYABLE SUBSIDIARY LEDGER 250

Coleman Industries

251

Major Office Supplies

252

Mitchell Advertising

253

Rainbow Supplies

254

Reynolds Paper Co.

255

Spencer Paper Products

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291

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GLOSSARY

Note: Glossary entries that appear without page references are provided for general reference only. Accounting  The process of interpreting and communicating the financial infor-

mation compiled in the bookkeeping records. The vast field of accounting includes many areas of specialization, such as tax, manufacturing, corporate, etc. Accounting Equation The equation by which books are kept in balance: total assets are equal to the total of liabilities plus owner’s equity, as represented by the balance sheet. (p. 14) Accounting Period  The period of time covered by the income statement, such as one month, a quarter year, or one year. Accounts Payable  Debts owed by the business to creditors (suppliers) for goods and services purchased on credit. Accounts Payable Control  The single ledger account in the General Ledger that represents a group of vendor accounts. The control account is always equal to the total of all the vendor accounts it represents. (p. 84) Accounts Payable Ledger  A subsidiary ledger that contains the individual ledger accounts of all creditors, arranged in alphabetical or numerical order. Accounts Receivable  Amounts owed to the business by customers for goods and services sold to them on credit. Accounts Receivable Control  A single account in the General Ledger that represents a group of customer accounts. The control account is always equal to the total of all the customer accounts it represents. (p. 83) Accounts Receivable Ledger A subsidiary ledger that contains the individual accounts of all customers, arranged in alphabetical or numerical order. Accrued Expenses  Expenses that have accumulated but have not yet been paid or recorded on the books at the end of the accounting period. (p. 251) Accrued Revenues Revenues that have accumulated but have not yet been recorded on the books at the end of the accounting period. (p. 252) Accumulated Amortization  A contra-asset account that shows the amount of the cost of a capital asset that has already been allocated to expense (amortization) to date. The contra-asset account is shown on the balance sheet as a deduction from the related asset. (p. 253) Adjusting Entries  Journal entries recorded at the end of the accounting period to adjust any expenses and revenues that overlap two or more accounting periods. Also refers to journal entries that adjust the balances of accounts affected by a transaction recorded incorrectly. (See also Correcting Entry.) (p. 249) Aging of Accounts Receivable  A listing of accounts receivable with customers’ balances categorized according to age: amounts not yet due; amounts due in 1–30 days, due in 31–60 days, etc. Also called analysis of accounts receivable by age. (p. 218) NEL

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293

294

GLOSSARY

Allowance for Doubtful Accounts  A contra-asset account that shows the portion of the total of accounts receivable that has been estimated to be uncollectible. (p. 219) Amortization  The allocation of the cost of an asset to expense over the useful life of the asset. Also called depreciation or capital cost allowance. See also Accumulated Amortization. (p. 253) Assets  Items of value owned by the business to benefit current and future operations. Examples include cash, accounts receivable, building, tools, and equipment. (p. 7) Audit Trail  The process of following a transaction through the entire accounting cycle, from the source document to the journal, to the ledger accounts, to the trial balance and the financial statements (and back again), by means of folios or posting references. (p. 40) Bad Debt Recoveries  A revenue account credited when an account that was previously written off has been unexpectedly collected, in part or in full. (p. 221) Bad Debts  Those customers’ balances that have been determined to be uncollectible and, therefore, are to be written off. (p. 219, 254) Bad Debts Expense  An expense account representing the losses allocated to the current year because of actual and expected uncollectible accounts receivable. See also Allowance for Doubtful Accounts. (p. 219) Balance Sheet  A financial statement of the assets, liabilities, and owner’s equity of a business on a specific date. (p. 5, 271) Bank Charges  An expense account for charges made by the bank for maintaining its customer’s bank account. (p. 157) Bank Draft  A negotiable document drawn on a bank, similar to a money order. Bank Errors  Mistakes made by the bank in the customer’s bank account. (p. 157) Bank Reconciliation  The process of identifying and accounting for the difference between the cash balance reported in the company’s financial records and the cash balance reported on the monthly bank statement. (p. 159) Bank Statement  A record provided by the bank of the company’s banking transactions during the month; the statement lists all cheques issued, deposits made, and all pre-authorized debits and credits, such as mortgage or loan payments. (p. 155) Book Errors  Errors made by the bookkeeper when recording transactions on the company’s books. Bookkeeping The process of recording business transactions in a set of books. (p. 1) Book Value  The cost of an asset minus the related contra-asset account (asset cost minus accumulated amortization). (p. 253) Canada Pension Plan (CPP)  A compulsory payroll deduction for a federal government plan that provides funds for employee retirement and disability, as well as benefits to widowed spouses and orphans. Both the employer and the employee make contributions to this plan. (p. 176) Cancelled Cheques  Issued cheques that have been cleared by the bank and charged to the company’s account. (p. 154) Capital  The equity account that represents the net amount contributed by the owner to his or her business. See also Owner’s Equity. NEL

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GLOSSARY

295

Capital Assets  Assets acquired for use in the operation of the business; asset life

generally is considered to be two years or more. Also called fixed assets, plant and equipment, or long-term assets. (p. 272) Cash on Delivery (COD) An immediate cash payment required at the time of delivery in order to take possession of the goods. Always treated as a cash transaction. (p. 122) Cash Over or Short  An account to record any discrepancy between the actual cash on hand in the cash register or petty cash drawer and the amount recorded on the cash register tape or petty cash summary. (p. 150) Cash Payments Journal  A journal designed specially to record all cash payment transactions. Sometimes called Cash Disbursements Journal. (p. 100) Cash Receipts Journal  A journal designed specially to record receipts of cash and cheques. (p. 88) Cash Refund  Cash returned to the purchaser in the case of items returned, overcharged, or adjusted because of damage. (p. 110) Certified Cheques  Cheques that have been guaranteed to have sufficient funds when presented to the bank for payment. The amount of the cheque is withdrawn from the issuing company’s bank account at the time the cheque is certified. (p. 154) Chart of Accounts  The list of ledger account titles and account numbers used within the books of a given company. (p. 37) Closing Inventory  A contra-expense account used to show the value of inventory on hand at year-end. Appears on the income statement as a deduction from the Cost of Goods Purchased to determine the Cost of Goods Sold. (p. 255) Closing the Books The process of transferring the balances in the temporary accounts (revenue, expense, and drawings accounts) to an owner’s equity account and preparing the year-end financial statements. Common Stock  A kind of stock or share issued by a corporation. Holders of such shares are the owners of the corporation. (p. 210) Compound Entry A transaction that affects three or more accounts, thus consisting of any number of debit entries offset by one or more credit entries; the total of the debit entries must equal the total of the credit entries. (p. 21) Compulsory Deductions  Deductions from employees’ earnings as required under acts of the Canadian government and labour union agreements. Examples include Canada Pension Plan, Employment Insurance, income taxes, and union dues. (p. 176) Contra Account  An account that will be subtracted from its principal account on the financial statements in order to show the net value of that financial item. Control Account  A General Ledger account that represents a group of accounts. Typically, control accounts are used for accounts receivable and accounts payable, but can be used for any group of accounts that are to be kept in a subsidiary ledger. (p. 83) Corporation  A business that is owned by shareholders and managed by a board of directors. It is a separate legal entity, organized under a federal or provincial charter. (p. 6, 203) Correcting Entry  A General Journal entry that adjusts the balances of accounts that were affected by a previously recorded incorrect journal entry. (p. 54) CPP  See Canada Pension Plan. NEL

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296

GLOSSARY

CRA (Canada Revenue Agency) The department of the federal government to which remittances are sent for GST, payroll deductions, income taxes, etc. (p. 129) Credit  The accounting term that refers to the right side of an account. (p. 16) Credit Balance  The balance of an account in which the total of the credit entries is greater than the total of the debit entries. Credit Memos  Documents sent by a bank to inform its customer of transactions that have added money to the customer’s bank account. Sometimes called a credit slip or credit advice. (p. 156) Credit Note  A negative invoice related to the return or allowance on a credit sale or a credit purchase. Also called a credit invoice. (p. 110) Credit Terms  A notation on an invoice that specifies the credit period allowed on the invoice and used to determine when payment is due. The terms may also include a rate of discount and the time period during which the discount is available. (p. 114) Current Assets  Assets that can be converted into cash easily (usually by selling them off) within one year without interfering with the normal operations of the business. (p. 272) Current Earnings  A temporary owner’s equity account used specifically for accumulating the balances of all revenue and expense accounts at year-end to determine the net profit or loss for the year. A credit balance indicates a net profit; a debit balance indicates a net loss. The account is closed at the end of the year by transferring the balance to the owner’s Capital account. (p. 266) Current Liabilities  Debts that are expected to be paid off within one operating year. (p. 273) Debit  The accounting term that refers to the left side of an account. (p. 16) Debit Balance  The balance of an account in which the total of the debit entries is greater than the total of the credit entries. Debit Memos  Documents sent by a bank to inform its customer of transactions that have deducted money from the customer’s bank account. Sometimes called a debit slip or a debit advice. (p. 156) Declining-Balance Amortization  The calculation of amortization based on the net value of the asset after each period of use. Also referred to as diminishing-balance amortization. (p. 254) Delivery Expense  An expense account for recording costs incurred for delivering merchandise to customers. (p. 73) Dividend The payment to shareholders of a corporation as a return on their investment in that business. (p. 209) Donations An expense account to record contributions to charities and other similar organizations. Double-Entry System  The system of accounting for all business transactions by recording equal debit and credit values. (p. 19) Drawings  A contra owner’s equity account used for recording withdrawals of cash or other items by the owner. Also called withdrawals. (p. 206) Duty & Brokerage  An expense account to record additional costs incurred when goods are imported from other countries. Such costs become part of the overall cost of goods purchased. (p. 74) NEL

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GLOSSARY

297

EI  See Employment Insurance. Employee Earnings Record  A payroll record maintained for each employee, item-

izing the gross earnings, deductions, net pay, and other information accumulated for the year to date. (p. 183) Employee Tax Deduction Return (TD1) A document prepared for the payroll department and signed by the employee, showing the total amount of authorized tax exemptions and payroll deductions. Employment Insurance (EI)  A compulsory payroll deduction for a federal government insurance plan that provides temporary financial benefit to the employee during periods of unemployment. Both the employer and the employee contribute to this plan. (p. 177) Expenses  The costs incurred in the process of generating revenues; the costs of operating the business. (p. 8) Federal Income Tax  A compulsory payroll deduction from the employee’s gross earnings. (p. 176) Folios Reference marks recorded during the posting process to identify the source journal in which the transaction is recorded and the ledger accounts to which a journal entry has been posted. (p. 37) Freight In  An expense account for recording shipping costs on incoming merchandise. Freight charges are part of the total cost of goods purchased. (p. 71) GAAP (Generally Accepted Accounting Principles)  The accounting principles that should be followed by all accountants and bookkeepers in all aspects of recording and reporting financial information. These principles are guidelines to ensure the integrity of the information. (p. 10, 269) General Journal  A basic journal consisting of only two money columns: one for debit entries and one for credit entries. (p. 29) General Ledger  The ledger accounts to which all transactions are posted and on which financial statements are based. (p. 36) Goods and Services Tax (GST)  A federal tax charged at a rate of 5% on almost all products and services sold in Canada, calculated on the selling price of the product or service before the provincial sales tax, if any, is added. (p. 58) Gross Pay  The amount earned, before deductions, by the employee during a payroll period. Also called gross earnings. (p. 174) Gross Profit  The amount by which net sales exceeds the cost of the goods that were sold. (p. 271) GST-ITC (Goods and Services Tax–Input Tax Credit)  Represents the amount of GST paid on goods and services bought in the process of conducting business. This contra-liability account balance is generally deducted from the GST Payable amount to determine the net amount owing to the government. (p. 59) HST (Harmonized Sales Tax)  The tax charged on goods and services sold in most eastern provinces. It combines the GST and provincial sales tax into a single tax administered by the federal government in the same manner as GST. (p. 58 ) HST-ITC  The Harmonized Sales Tax–Input Tax Credit, accounted for in a manner similar as GST-ITC. HST Payable  A liability account that represents the amount of Harmonized Sales Tax charged to customers and owing to the federal government. Similar to GST Payable. NEL

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298

GLOSSARY

Income Statement  A financial statement that shows the revenues and expenses for a particular period, whether one month, one year, or some other period. Sometimes called profit and loss statement. (p. 5, 271) Interim Financial Statements  Financial statements prepared for the use of management at intervals other than at year-end. Interim Statement of Profit or Loss  A statement of profit or loss prepared for management’s use at intervals other than at year-end. (p. 232) Inventory  An asset account representing the value of merchandise on hand at the end of the financial period. (p. 255) Journal  Any book or record in which business transactions are captured, based on information from source documents, and recorded in chronological order. Ledger  A record accumulating all the increases and decreases of all accounts in one file. See also General Ledger. Ledger Account  The individual account form on which the increases and decreases of each specific asset, liability, equity, revenue, and expense are recorded. Liabilities Debts owing by the business. Examples include accounts payable, bank loans, and mortgages. (p. 7) Long-Term Liabilities  Debts that are expected to be paid off over a period of more than one year. (p. 273) Merchandise Purchases  An expense account that is debited when merchandise is bought for resale. Often called Purchases. Merchandise Sales  A revenue account that is credited when merchandise is sold, whether sold for cash, on account, or on debit/credit cards. Often called Sales. Net Income  The excess of revenues earned over expenses incurred during a financial period. Also called net profit. (p. 260) Net Loss  The excess of expenses incurred over revenues earned during a financial period. Also called deficit. (p. 260) Net Pay  The amount of salary or wage paid to the employee after deductions. (p. 177) Non-Sufficient Funds (NSF)  A term to describe a cheque rejected by the bank because the amount of the cheque is greater than the balance of funds available in the account. (p. 154) Opening Inventory  An expense account used at year-end to show the value of inventory that was on hand at the beginning of the year. Appears on the income statement as part of the Cost of Goods Purchased. (p. 255) Other Assets  Assets that cannot be classified as either current assets or capital assets; usually assets of an intangible nature, such as copyrights, patents, etc. (p. 272) Outstanding Cheques  Cheques issued by the company and entered in the Cash Payments Journal, but that have not yet been cleared by the bank and do not appear on the bank statement. (p. 154) Outstanding Deposits Cash and cheques received in the last few days of the month, entered in the Cash Receipts Journal, but deposited too late at the bank to appear on that month’s bank statement. (p. 154) Owner’s Equity  The classification of ledger accounts that represents the owner(s) of the business. The usual accounts in this category are Capital, Drawings, and Current Earnings. (p. 7) NEL

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GLOSSARY

299

Partnership A business owned jointly by two or more persons. A partnership

agreement is drawn up to spell out the rights and responsibilities of each partner. (p. 6, 203) Payroll  The process of recording the names of employees, pay rates, and hours worked, and calculating gross earnings, deductions, and net pay for a given pay period. Payroll Record  A record of year-to-date payroll information for each employee; used as the basis for preparing T4 slips. (p. 183) Payroll Register  A record of all payroll information related to one pay period. Periodic Inventory  A method of inventory valuation; a physical count of merchandise on hand is taken and value applied. (p. 248) Permanent Accounts Assets, liabilities, and owner’s equity accounts, which remain on the ledger after the books are closed at the end of the financial year. Perpetual Inventory A continuous record of all merchandise bought and sold, with the value of merchandise on hand available after each transaction. (p. 248) Petty Cash  A small quantity of cash set aside from the regular bank account for making cash disbursements that are usually too small to pay by cheque. (p. 144) Petty Cash Sheet  A multicolumn page, similar to a purchase journal, for recording and categorizing petty cash expenditures. (p. 145) Post-Closing Trial Balance  A trial balance prepared after the books are closed at year-end to prove the equality of debits and credits. (p. 268) Posting  The process of transferring the debit and credit entries from the journals to the ledger accounts. (p. 38) Posting Marks  See Folios. Preferred Stock  A kind of stock or share issued by a corporation. Holders of such shares are the owners of the corporation. Preferred stockholders are paid dividends before any dividends are paid to common stockholders. (p. 210) Prepaid Expenses  Expenses paid in advance, a portion of which is deferred (to be consumed or used up in the next accounting period). The unused (unexpired) costs are shown as current assets on the balance sheet. (p. 249) Proprietorship  A business owned by one person. (p. 6) Provincial Income Tax  A compulsory payroll deduction from the employee’s gross earnings. (p. 176) PST (Provincial Sales Tax)  The provincial tax charged on the sale of goods and services. Rates vary from province to province. (p. 61) Purchase Discounts  An account for recording discounts taken on early payment of purchase invoices. The amount of the discount allowed and the expiry date are stipulated in the terms of the invoice. (p. 120) Purchase Journal  A special journal used for recording the purchase of assets and expenses on credit. (p. 94) Purchase Returns & Allowances  An account for recording adjustments made for returns and allowances on purchases of merchandise. Such adjustments reduce the cost of goods purchased. (p. 117) Reimbursing Cheque  A cheque issued to replenish or replace the money spent from the petty cash fund; issued whenever the fund is nearly exhausted or depleted. Retained Earnings  A shareholder’s equity account that represents the undistributed earnings of the corporation since the corporation was started. (p. 212) NEL

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300

GLOSSARY

Revenue  Earnings from the sale of goods and services. Other sources of revenue include bank interest, commissions, and rent. (p. 7) Reversing Entry A journal entry that has the effect of “undoing” an incorrect entry. Typically recorded as a negative entry in the same journal as the original incorrect entry. (p. 56) Sales Discounts An account for recording discounts allowed to customers to encourage early payment of an invoice. The amount of discount allowed and the expiry date are stipulated in the terms of the invoice. (p. 114) Sales Journal  A special journal used to record all sales of merchandise and services on credit. (p. 80) Sales Ledger  See Accounts Receivable Ledger. Sales Returns & Allowances  An account to record adjustments made for allowances on returned merchandise and for unsatisfactory goods retained by the customer. Such adjustments reduce the total sales revenue. (p. 110) Schedule of Accounts Payable  A list of balances owing to creditors; the total is equal to the balance of the Accounts Payable Control account in the General Ledger. Schedule of Accounts Receivable  A list of balances due from customers; the total is equal to the balance of the Accounts Receivable Control account in the General Ledger. Shareholder Equity  A classification of accounts, similar to Owner’s Equity, that represents the ownership of a corporation. Examples of shareholder equity accounts include Preferred Stock, Common Stock, and Retained Earnings. (p. 210) Simple Entry  A transaction consisting of one debit entry and one credit entry of equal value. (p. 19) Slide Error  A kind of recording error in which the decimal point is moved accidentally to the left or right without any change in the order of the numbers—for example, writing 3.27 instead of 327. (p. 47) Sole Proprietorship  A business owned by one person who usually performs the duties of both owner and manager. Source Documents Business documents that contain information supporting the facts of a business transaction; the basis for recording transactions in the journals. Statement of Remuneration (T4 Slip)  A formal summary of an employee’s gross earnings and deductions for the calendar year; required by Canada Revenue Agency for income tax purposes. Straight-Line Amortization  A method of calculating amortization by allocating the cost of the asset to expense equally for each year over its lifetime. (p. 254) Time Card A source document used by employees paid on an hourly basis, showing the number of hours worked during each pay period. Transposition of Figures  A kind of recording error in which the order of the digits of a value has been changed—for example, writing 627 instead of 672. (p. 47) Trial Balance  A list of all the ledger accounts and their balances to prove that the total of all the debit balances is equal to the total of all the credit balances. (p. 40) Unearned Revenues  Revenues that have been received in advance and recorded in the accounts but have not yet been earned by the business. Also called deferred revenues or revenues received in advance. (p. 250) NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

GLOSSARY

301

Voluntary Deductions  Payroll deductions authorized by the employee for items

such as savings bonds, health and dental plans, retirement savings plans, etc. (p. 177) Withholding Statements  Payroll documents prepared by the employer for deductions withheld for Employment Insurance, Canada Pension, and income taxes. These documents are submitted by the employer to Canada Revenue Agency, accompanied by the remittance of the deductions. Worksheet A multi-column sheet used by the accountant to assemble all the accounting data required for the preparation of adjusting and closing entries and financial statements at the end of an accounting period. (p. 257)

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX

Aboriginals, sales to, 134 Accidents, workplace, 187 Account, customer. (see also Accounts receivable) overdue, calculating interest on, 91, 92, 134 sales on, 110 Account Cr. column, Cash Receipts Journal, 88 Account Dr. column, Cash Payments Journal, 101–102, 112 Account names chart of accounts, 37–38 commonly used, 9 General Ledger, 36 Account numbers chart of accounts, 37–38 General Ledger, 36 Accounting bookkeeping and, 2 corporation, 209 partnership, 203–208 Accounting equation defined, 14–15 partnership, 205 Accounting period, matching expenses with revenues for, 249 Accounts balance, determining, 39–40 categories of, 7–8 chart of. see Chart of accounts closing, 247–256 compound entries, 21, 24 control, 83–85 credit effects, 17 debit effects, 17 double-entry system, 19 five categories of, 7–8 General Journal, 29–30, 36, 41 normal side of, 17 posting to wrong, 54–55 temporary, 266–267 Accounts & Description column, General Journal, 30

Accounts payable defined, 7 purchase discounts, 121 supplier name, 25 Accounts Payable Control account, 83, 102–103 Accounts Payable Cr. column, Purchase Journal, 94, 97 Accounts Payable Dr. column, Cash Payments Journal, 101, 102–103 Accounts Payable Journal. See Purchase Journal Accounts Payable Ledger, suppliers’ accounts in, 97 Accounts receivable, 218–230 aging, 218–220, 223 defined, 7 net realizable value of, 220 net receivables, 255 sales discounts, 115 schedule of, 83 Accounts Receivable Control account, 84, 90 bad debts and, 220–221, 225 NSF cheque, 155 Accounts Receivable Cr. column, Cash Receipts Journal, 88, 90 Accounts Receivable Dr. column, Sales Journal, 81 Accounts Receivable Journal. See Sales Journal Accounts Receivable Ledger, 83, 91 Accounts Receivable Subsidiary Ledger, and NSF cheque, 155 Accrued expenses, 251–252 Accrued revenues, 252 Accumulated amortization/depreciation, 253–254 Adjusting entries General Journal, 259 inventory, 255 year-end, 247–264 Adjustments GST/HST return, 130 year-end in worksheet, 259–260 Adjustments line, GST/HST return, 130 Advertising, as an expense, 8 Aging of accounts receivable, 218–220, 223

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303

304

INDEX

Alberta, and PST rates, 61–62, 66 Allowance for Doubtful Accounts, 219–221 Allowances defined, 110 Income Statement, 271 merchandise, 112, 114, 121 Amortization, 253–254 Analyzing transactions. See Transactions, analyzing Annual financial statements, for corporation, 209 Annual GST/HST return, 129–132 Articles of partnership, 203–204 Asset accounts balances, 247 petty cash, 144–149 Assets account names, 9 accounting equation, 14 balance sheet, 4–6, 15–16, 17, 269, 272 book value, 253 capital, 272 chart of accounts numbering, 37 costs as, 9–10 credit effects, 17 current, 272 debit effects, 17 debit side of balance sheet, 17 defined, 4, 7 depreciation, 253 vs. expenses, 8–10 General Ledger, 36 inventory, 247–249 market value, 253 other, 272 partners’ Drawings account, 204 partnership, 203, 204 statement of, 4–5 Audit trail, defined, 40 Auditor, for corporation, 209 Authorized capital, 211 Bad Debt Recoveries, 226 Bad debts, 218–220, 254 KBC Decorating Co., 227–230 recovering, 221–222, 225–226 small business, 223–226, 254 taxes on, 220 writing off, 220–221, 225, 254

Bad Debts Expense account, 219, 221 Balance control account, 83 running, 37, 40 Sales Journal and, 81 Balance column, General Ledger, 37, 39–40 Balance line, GST/HST Return, 132 Balance sheet, 271–274 credits, 16–17 debits, 16–17 defined, 4–5, 6, 15–16, 271 owner’s equity, 7 preparing for, 247 shareholder equity, 211–212 worksheet, 257–260 Balanced entry, Sales Journal and, 81 Balancing, defined, 14 Band-empowered entities, sales to, 134 Bank charges, 157, 159, 161 DM, debit memo notation, 102 errors, 157–158 filing GST/HST return via, 132 loans, 4–5, 7, 102, 273 remitting GST/HST using, 132–133 Bank account General Ledger, 36 personal, 3–4, 14 reconciling, 158–162 Bank Cr. column, Cash Payments Journal, 102, 103, 149 Bank Dr. column, Cash Receipts Journal, 89–90, 91 Bank Loan Payable, defined, 7 Bank reconciliation, 154–155, 158–162 Bank reconciliation statement, 160–162 Bank statement, 154, 155–157 Bank transactions, and General Ledger, 36 Bankrupt customers, 220 Board of directors, of corporation, 212 Book value, 253–254 Bookkeeping. See also Accounting business, 4–6 defined, 2 personal, 2–4 Bounced cheque, 154–155 Brackets, negative amounts in, 111, 112, 117, 155 British Columbia, and PST rates, 62 NEL

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305

INDEX

Brokerage, and customs, 73–75 Building amortization of, 253–254 asset, 7, 205, 272 construction, and analyzing transactions, 22–24 insurance on, 233 Business bookkeeping for, 4–6 types of, 6–8, 203 Business Entity Concept (GAAP), 269 Business number, assigned, 129 Business organization, three forms of, 6–8, 203 Canada Pension Plan (CPP), 176–177 contributions table, monthly, 198–199 employee’s contributions, 176–177, 183 Payable amount, 186–187 recording employer’s contributions, 183, 185 weekly, 181 Canada Revenue Agency (CRA), 59, 129, 176, 186 Canada Savings Bonds, 177 Canadian Tire Corporation Condensed Interim Consolidated Balance sheets, 278 Condensed Interim Consolidated Statements of Income, 279 Cancelled cheques, 154, 159, 160 Capital accounting equation, 14 authorized, 211 corporations, 210 credit side of balance sheet, 17 defined, 7 partnership, 206 Capital account closing Current Earnings account to, 266–268, 274 partnership, 206 Capital assets, 253, 272 Capital Cost Allowance, 253–254 Cartier Window Coverings analyzing transactions, 22–27 General Journal, 29–30 posting to ledger accounts, 38–40 trial balance, 40–41 Cash accounting for, 144–172 asset, 7, 14

bank reconciliation, 155–157 current asset, 272 owner investment, 25 partnership withdrawals, 204 theft of, 144 Cash flow, 3, 218 Cash in. See Deposits; Sales Cash on delivery (COD), 101, 122–123 Cash out. See Cheques Cash Over or Short account, 149–151, 235 Cash Payments Journal, 100 bank reconciliation and, 154, 158–162 COD, 122–123 columns in, 101–104 dividends paid, 212 employee payments, 186 errors, 158 General Journal and, 102 petty cash entries, 146 posting from, 102–103 refunds and, 112–113 remittance of tax in, 133 uses of, 79 Cash Receipts Journal, 87 bank reconciliation and, 154, 158–162 bank statement and, 155–157 Cash Over or Short account and, 150–151 Cash Payments Journal and, 102, 154 COD, 123 columns in, 88–90 debt recovery, 226 General Journal and, 89, 102–103 NSF cheque, 154–155 posting from, 90–91 refunds and, 112 sales discounts, 114–115 uses of, 79 Cash refund, 110, 112, 150 Cash register equipment account, 25 float, 149 refund from, 110, 112 use of, 149–151 Cash sales, 110 Cash Receipts Journal, 87–91 recording transaction, 59, 63 refunds, 112

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306

INDEX

Cash transactions, and General Ledger, 36 Certified cheques, 154 Chart of accounts defined, 37 KBC Decorating Co., 50, 289–291 numbering, 37–38 Cheque No. column, Cash Payments Journal, 102 Chequebook balancing, 14 personal, 2–3 Cheques bank reconciliation and, 154, 155–162 cancelled, 154, 159 certified, 154 employee payments by, 186 GST/HST payments as, 132–133 NSF, 154–155, 161 outstanding, 154, 158–159, 161 petty cash, 144–145, 148, 149 refunds and, 110, 112 Closing books preparing for, 247–256 process of, 266–276 Closing inventory, 248 Closing Inventory account, 256 Closing journal entries, 266–268 COD (cash on delivery), 122–123 Collections, of accounts receivable, 114, 218–220 Columnar journals, 80 Commission, PST, 65 Commission payroll, 176 Common Dividends Payable account, 212 Common stocks, 210–211 Company contributions, remittance of, 186–187 Compensating errors, 41 Compound entry analyzing, 21, 24 defined, 19 error correction for, 56 Purchase Journal, 95, 97 Compulsory deductions, 176–177 Computerized accounting systems General Ledger and, 36 interim profit statement, 232 inventory, 247 software, 176, 266 Condensed Interim Consolidated Balance sheets, 278

Condensed Interim Consolidated Statements of Income, 279 Conservatism Principle (GAAP), 269 Consistency Principle (GAAP), 270 Consolidated Statements of Financial Position, 280 Consolidated Statements of Income, 281 Continuing-Concern Concept (GAAP), 269 Contra accounts asset, 219, 253 expense, 117, 256 revenue, 110, 112 worksheet, 260 Contra-asset accounts Accumulated Amortization or Depreciation, 253 Allowance for Doubtful Accounts, 219 Contra-equity account, 267 Contra-expense account Closing Inventory, 255, 256 Purchase Discounts, 120 Purchase Returns & Allowances, 117 Contra-revenue account, 110, 112 Control accounts, 83–85 Corporation accounting for, 210 defined, 6–7, 203, 209 owners, 6–7, 209, 210 vs. partnership, 209 profits, 209, 210–211, 212 retained earnings, 212 Correcting entry, 54–55 Correcting errors. See Errors Cost of goods purchased, 71 Cost of goods sold income statement and, 271 year-end net income, 247 Cost of Goods Sold section, of Income Statement, 271 Cost Principle (GAAP), 270 CPP. See Canada Pension Plan (CPP) CRA. See Canada Revenue Agency (CRA) Credit (Cr.), defined, 16–17 Credit, customer policies, 218–220, 225 terms, 94, 114 Credit balances, 17, 110 closing books and, 266–267 Credit card sales, 89, 91 NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

307

INDEX

Credit column General Journal, 29–30 General Ledger, 37 Credit memos, from bank, 156, 159 Credit note, 110–113, 117–118 Credit side, of balance sheet, 17 Credit slips, from bank, 156 Credit terms, 97, 114 Credits, 16–17 account effects, 17 bad debt write-off, 220–221, 225, 254 basic rules for, 17 Cash Over or Short account and, 150 cash sale entry, 59 General Journal, 30, 38–40 General Ledger, 36, 37 Sales Journal and, 82–83 Cumulative shares, 210 Current assets, 272 Current Earnings account, 266–268 Current liabilities, 273 Customers accounts receivable and, 7, 80, 83, 88, 218–220 bankrupt, 220 discounts offered to, 134 GST/HST charged to, 129, 130, 132 in Sales Journal, 80 payment options of, 91, 114, 134 taxes charged to, 59, 65 Customers’ accounts, posting from Sales Journal to, 80–83 Customs brokers, 74 Dash, entering in cents column, 30 Date, payment due by, 94, 114 Date column Cash Payments Journal, 101 Cash Receipts Journal, 88 General Journal, 30 General Ledger, 36, 38 Purchase Journal, 96, 146 Sales Journal, 80, 115 Debit account effects, 17 basic rules for, 17 Cash Over or Short account and, 151 cash sale entry, 59 credit note, 112

defined, 16–17 General Journal, 29–30, 40 General Ledger, 36 merchandise returns, 110 Sales Journal and, 81, 83 Debit (Dr.), defined, 16–17 Debit balances, closing books, 266–267 Debit card sales, 89, 91 Debit column General Journal, 30 General Ledger, 37 Debit memos (DM), from bank, 102, 156–157, 159 Debit side, of balance sheet, 17 Debit slips, from bank, 156–157 Debts. See also Liabilities accounting equation, 14 Balance Sheet, 273–274 in corporations, 209 current liabilities, 273 defined, 4 long-term liabilities, 273 in partnerships, 204 Decimal points, General Journal entries, 30 Declining-balance amortization, 254 Deductions tables, 176–177, 178–182 voluntary deductions, 177 Delivery Expense, 73 Deposits daily, 154–155 employee payments using direct, 185, 186 on goods and services, 134 outstanding, 154, 158–159 Depreciation. See Amortization Direct deposit, employee payments by, 185, 186 Disabilities, workplace, 187 Disability pension, 177 Disclosure, GAAP and, 270 Discounts early payment, 110, 134, 218 Income Statement, 271 merchandise, 110 purchase, 120–122 sales, 110, 114–115 volume, 134 Dividend, 209–211, 212 DM (debit memo), 102, 156–157, 159

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308

INDEX

Dollar signs, and General Journal entries, 30 Double time pay, 174 Double-entry system, defined, 19 Dr. (Debit), defined, 16–17 Drawings account, partnership, 204, 206–208, 214 closing books and, 267–268 DR/CR column, General Ledger, 37, 40 Duty & Brokerage account, 74–75 Early-payment discounts, 110, 134, 218 Earned revenue, 7, 8, 36, 233, 252, 271 Earnings. See also Income Statement; Revenue current, 266–267 partnership, 204 Employee Earnings Record, 183 Employees payments to, 185–186 payroll, 174–201 payroll deductions, 176–184 theft by, 144 types of payroll, 174–176 Employment Insurance (EI), 177, 182, 183, 185, 187 Employment Insurance Premiums table, 182, 200–201 Entity, defined, 6 Equation, accounting, 14–15 Equipment account, 25 asset, 7, 272 purchase discounts, 121 Equity. See also Owner’s equity account names, 9 accounting equation, 14 corporation, 210 credit effects, 17 debit effects, 17 defined, 4, 7 partnership, 204 shareholder, 210, 211, 212 Erasing, 53 Errors bank, 157–158 cash book, 158 compensating, 41 control account and, 83 correcting entries, 54–55 inventory, 247

locating, 46–47 reversing entries, 56–57 slide, 47 special journals, 79 transposition, 47, 54, 158 trial balance, 41, 46–47 writing, 53–54, 158 Expansion, 232 Expenses account names, 9 accrued, 251–252 amortization, 253–254 vs. assets, 8–10 bad debts, 218–220, 254 brokerage, 73–75 chart of accounts numbering, 37–38 closing, 249–256 contra-, 117, 256 credit effects, 17 debit effects, 17 defined, 8 duties, 73–75 freight, 73–75 General Ledger, 36 Income Statement, 271 Interim Statement of Profit or Loss, 232–235 matching with revenues, 249 petty cash, 144–145 prepaid, 249–250 PST and, 64–65 temporary accounts, 266–267 unexpired, 249–250 Explanation column, General Ledger, 36–39 Federal income tax, payroll deductions for, 176, 196 Federal Tax Deductions (Weekly) table, 178–182 Financial statements, 267–270 accounts affecting, 17, 226 Accounts Receivable, 255 corporation, 209 inventory valuation, 247–249 partnership, 204 real world examples, 278–281 worksheet, 257–260 Float, and cash register, 149–150 Folios, 225 audit trail, 40 NEL

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309

INDEX

defined, 37, 40 Sales Journal, 83, 91 Freight charges on Income Statement, 271 Freight In, 71–72 Full-Disclosure Principle (GAAP), 270 Furniture account, 25 amortization of, 253 asset, 7, 272 Furniture & Equipment account, 25 GAAP. See Generally Accepted Accounting Principles (GAAP) General Journal, 29–30, 36 adjusting entries, 259 bad debt, 220–221 bad debt recovery, 225 Cash Payments Journal and, 102 Cash Receipts Journal and, 89, 102–103 columns in, 29–30 correcting entries, 54–55 credit note, 111–112 credits in, 30, 38–40 debits in, 29–30, 40 defined, 29–30 dividends paid, 212 error corrections, 41, 54–55, 68–69 folios, 37 Freight In account, 72 General Ledger and, 36, 38–40 NSF cheque, 155, 161 partnership, 205 payroll and, 185, 186, 187 petty cash and, 149 petty cash entries, 146 posting to General Ledger accounts from, 36, 38–40 purchase discounts, 121 recording entries, 29–30 reversing entries, 56–58 Sales Journal and, 80 tax remittances, 133 General Ledger, 35–51 accounts, 36–38 bank reconciliation and, 154, 160 chart of accounts, 37–38

columns in, 36–37 control account, 83–85 credit in, 36, 37 debits in, 36 defined, 36 folios, 37, 40 General Journal and, 36, 38–40 posting, 38–40 posting from Cash Payments Journal to, 102–103 posting from Cash Receipts Journal to, 90–91 posting from Purchase Journal to, 97–98 posting from Sales Journal to, 82–83 purchase returns and allowances, 117 refunds and, 112–113 trial balance, 40–41, 46–47 General Ledger Cr. column, Cash Receipts Journal, 89, 90 General Ledger Dr. column, Cash Payments Journal, 101–102, 103 Generally Accepted Accounting Principles (GAAP), 10, 269–271 Goods deposits on, 134 exempt, 129 imported, 73–75 return of, 88, 101, 110–113 sale of. see Revenue; Sales transportation of, 71, 73, 122–123 zero-rated, 129, 134 Goods and Services Tax. See GST (Goods and Services Tax) Gross pay, calculating, 174–176, 187 Gross profit, 271 Gross profit inventory method, 247 Group health plan, 185 GST (Goods and Services Tax), 58. See also GST/HST calculating included amount, 66–67 Delivery Expense, 73 Freight In account, 71–72 overview of, 129 provincial tax and, 61–65 registering for, 129 GST/HST charged vs. paid, 132 late-payment charges and, 134 nil returns, 133 overview of, 129

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310

INDEX

GST/HST (Continued  ) penalties and interest, 133–134 purchases, 59–60 Quick Method, 136–139 refund of, 132, 133 registering for, 129 remitting, 132–133 sales, 59, 81, 130 Sales Journal and, 81 GST/HST Payable Cr. column Cash Receipts Journal, 89, 90 Sales Journal, 81 GST/HST Return filing, 129–132 filing, working copy, 131 GST-ITC (Input Tax Credit) account, 59–60, 64 GST-ITC Cr. Column Cash Payments Journal, 102, 103 Purchase Journal, 95 Harmonized Sales Tax. See HST (Harmonized Sales Tax) Health insurance deductions, 177 Health plan, 177, 185 Holiday pay, 174, 187 Hourly payroll, 174 HST (Harmonized Sales Tax), 58, 62. See also GST/HST calculating included amount, 66–67 overview of, 129 rate, 129 registering for, 129 HST-ITC, 59 HST-ITC Dr. column, Cash Payments Journal, 101, 102, 103 Purchase Journal, 95, 97 Purchase Returns & Allowances, 118 Imports duties and tariffs, 73–75 GST/HST and, 134–135 Income Statement and, 271 nontaxable importations, 134–135 Income. See Net income; Revenue; Sales Income Statement, 271 closing entries and, 266–268 defined, 5, 247, 271 preparing for, 247, 260 worksheet, 257–260

Income Statement columns (worksheet), closing entries and, 266–268 Income Summary account, 266 Income tax. See also Taxes declining-balance method for, 254 payroll deductions for, 176, 183, 184 proprietorships and partnerships, 204, 247 Incoming shipments, transportation costs on, 71, 73, 148 Input Tax Credit Adjustment line, GST/HST Return, 130 Input Tax Credit (GST-ITC) account, 59–60, 64 Input Tax Credits (ITCs) line, GST/HST Return, 130 Installment Payments line, GST/HST Return, 132 Insurance deductions, 177, 183, 184 Interim Statement of Profit or Loss, 232–235 partnership, 204 prepaid, 10, 233, 250 Interest, 8, 233–234 calculating on overdue account, 94, 134–135 Cash Receipts Journal, 160 compounded daily, 134–135 GST/HST return, 133–134 unpaid balance, 94 Interest Earned, 8 Interest Expense, 8, 102 Interest Revenue, 8 Interim profit or loss, 231–245 Interim Statement of Profit or Loss, 232 preparing, 232–235 International Financial Reporting Standards (IFRS), 270–271 Inventory. See also Merchandise adjusting entries, 256 asset, 7, 247, 272 closing, 248, 255, 256 defined, 144, 247 opening, 255 periodic, 248 perpetual, 248 valuation of, 247–249, 254–255 year end, 247–249 Inventory account, 247, 255 Investments, 271 asset, 272 NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

311

INDEX

owner’s equity, 7 partnership, 203, 204–206 Invoice credit note, 110–113 discounts for early payment, 110, 114, 134, 218 purchase discounts, 120–122 Invoice Date column, Purchase Journal, 96 Invoice Number column Purchase Journal, 94 Sales Journal, 81 ITC (Input Tax Credit) account, 59–60, 64 Quick Method and, 136–139 registration to claim, 129 Simplified Method, 139–140 Journal. See General Journal; Special journals Journal entries, closing, 266–268 Land asset, 7, 272 purchase, analyzing transactions, 22–23 Late-payment charges, GST/HST and, 134 Ledger. See General Ledger Ledger account defined, 36–37 trial balance, 40–41, 46–47 Liabilities. See also Debts account names, 9 accounting equation, 14 balance sheet, 5, 15–16, 273–274 chart of accounts numbering, 37 credit effects, 17 current, 273 debit effects, 17 defined, 4, 7 dividends payable, 212 General Ledger and, 36 long-term, 273 partnership, 204 payroll deductions, 186–187 unearned revenue, 250–251 Long-term liabilities, 273 Losses corporation, 212 Interim Statement of Profit or Loss, 232–235 net, 266

owner’s equity, 7 partnership, 203 Manitoba, and PST rates, 62, 67 remitting, 65 Market value, 205, 211, 253 Matching Principle (GAAP), 270 Materiality Principle (GAAP), 270 Memo (Explanation) column, General Ledger, 36, 39 Memo (Particulars) column, Cash Receipts Journal, 88, 89, 90 Memo column, Cash Payments Journal, 101, 102 Merchandise. See also Inventory allowances, 110, 112, 114, 121 asset, 7 bought for resale, 25, 110 damaged, 110, 117 incoming, 71–75 price adjustments, 110 purchase discounts, 120–122 purchases, GST/HST, 59–60 returns, 110–113 sales, GST/HST on, 59–60 sales, PST on, 63 valuation, 247–248, 254–255 Mortgage, analyzing transactions for, 23–24 Mortgage Payable, 7, 102 Mutual agency, and partnerships, 204 Names of suppliers. See Suppliers’ names Net income closing books and, 266–267 inventory valuation and, 247 partnership, 204 worksheet, 260 Net loss closing books and, 266–267 Income Statement, 271 worksheet, 260 Net pay, 177, 184 Net profit, Income Statement, 271 Net receivables, 220 Net tax, 132, 133 Net worth, 4, 14. See also Owner’s equity New Brunswick, and PST, 62

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312

INDEX

Newfoundland and Labrador, PST and, 62 Nil returns, 133 Noncash assets, 203, 205 Noncumulative shares, 210 Non-sufficient funds (NSF) cheques, 154–155, 156, 159, 161 Nontaxable importations, 134 Northwest Territories, and PST rates, 62 Nova Scotia, PST and, 62 NSF (Non-Sufficient Funds) cheques, 154–155, 156, 159, 161 Numbering chart of accounts, 37–38 Numbers negative, in parentheses, 111, 112, 117 transposition of, 47, 54 Nunavut, and PST rates, 62 Objectivity Principle (GAAP), 270 Office Supplies account, 8 Office Supplies Dr. column, Purchase Journal, 95 Opening Inventory account, 255–256 Operating costs, as expenses, 9–10, 187, 252, 271. See also Income statement Other Accounts column Cash Payments Journal, 101–102 Cash Receipts Journal, 89 Purchase Journal, 95, 97 Outstanding cheques, 154, 158–159, 161 Outstanding deposits, 154, 158–159 Overtime pay, 174 Owners, and business types, 6, 203–204, 209 Owner’s equity. See also Capital; Net worth account names, chart, 9 accounting equation, 14 balance sheet, 15–16, 260, 271, 274 chart of accounts numbering, 37–38 defined, 7 General Ledger, 36 in partnership, 206 statement of, 4–5 Page numbers, General Ledger, 36–37 Partnership, 203–208 accounting, 204–205 advantages of, 204 articles of, 203–204 defined, 6, 203

Drawings account, 204, 206–208, 214 investments, 203–206 limited life of, 204 profits, 203 vs. proprietorship, 203 taxes on net profits, 247 Pay. See also Payroll holiday, 187 net, 177, 184 vacation, 174, 187 Payment Cash Payments Journal recording, 79, 100–103 discounts for early, 110, 134, 218 payroll, to employees, 185–186 terms, 94, 114 Payment Enclosed line, GST/HST Return, 132 Payroll, 174–201 accrued expenses, 251–252 calculating, 174–176 deduction tables, 176–177, 178–182 payment, 185–186 types of, 174–176 Penalties, and GST/HST return, 133–134 Pension plans, company, 174, 177. See also Canada Pension Plan Periodic inventory, 248 Perpetual inventory, 248 Petty cash, 144–149 establishing, 144–145 petty cash sheet, 145–146 recording entries, 146–148 reimbursing, 148–149 voucher, 144

Piecework payroll, 175 Post-closing trial balance, 266, 268–269 Posting from Cash Payments Journal, 102–103 from Cash Receipts Journal, 90–91 credit note, 111 defined, 37, 38–40 error corrections, 53–57 from Purchase Journal, 97 from Sales Journal, 80, 82–83 Posting marks. See Folios Preferred shares, 210 Preferred stock, 210 NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

313

INDEX

Prepaid defined, 8 expenses, 8, 249–250 Prince Edward Island, and PST rates, 62 Profit and Loss Statement, 271. See also Income Statement Profits corporation, 209, 210–211, 212 Interim Statement of Profit or Loss, 232–235 owner’s equity, 7 partnership, 203 Proprietorship defined, 6, 203 vs. partnership, 203 taxes on net profits, 247 Provincial income tax, payroll deductions for, 176, 197 Provincial Sales Tax (PST), 61–62 calculating included amount, 66–67 commission revenue, 65 recording other expenses with, 64–65 recording sales with, 63 remitting, 65–66 PST Payable account, 63 PST Payable Cr. column Cash Receipts Journal, 89 Sales Journal, 81 Purchase Discounts account, 120 Purchase Discounts Cr. column, Cash Payments Journal, 101, 103 Purchase Journal, 94–98 credit note, 117–118 posting from, 97–98 uses of, 79 Purchase Returns & Allowances account, 117–118, 121 Purchases allocating transactions to multiple accounts, 95 discounts, 103, 120–122 GST/HST on, 59–60, 129, 130, 132 Purchases account General Ledger, 36 Purchases Dr. column, Cash Payments Journal, 101, 103 Quebec, and PST rates, 61–62 Quebec Pension Plan (QPP), 176–177 Quick Method, for GST/HST, 136–139

Receivables. See Accounts receivable Recognition Principle (GAAP), 270 Recovery, of bad debt, 221–222, 225–226 References, posting. See Folios Refund Claimed line, GST/HST Return, 132 Refunds cash, 110, 112, 150 credit note, 110, 114 GST/HST return, 132, 133 price adjustments on merchandise, 117 taxes on, 112 Regular pay, 174–175 Reimbursing petty cash, 148–149 Remittance payroll deductions, 185–187 PST, 65–66 taxes, 65–66, 129–140 Reporting period GST/HST, 130, 132 PST, 65 Resale, merchandise bought for, 25, 110 Retained Earnings account, 212, 266 Returns, merchandise, 110–113 Revenue. See also Sales account names, 9 accrued, 252 chart of accounts numbering, 37–38 contra-, 110, 112 credit effects, 17 debit effects, 17 defined, 7–8 earned, 7–8, 36, 175, 233, 252 General Ledger, 36 Income Statement, 271 Interim Statement of Profit or Loss, 232–235 matching with expenses, 249 received in advance, 250 sources of, 8 unearned, 250–251 Revenue accounts contra-, 110, 112 Interim Statement of Profit or Loss, 232–235 temporary accounts, 266–267 Revenue section, of Income Statement, 271 Reversing entry, 55, 56–58

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Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

314

INDEX

Salaries, 8, 174, 176 Sales. See also Revenue; Taxes to Aboriginals, 134 COD, 122–123 discounts, 110, 114–115 GST/HST charges, 132 recording with PST, 64–65 returns, 110–113 Sales account balance in, 110 General Ledger, 36 returned merchandise, 110 Sales and Other Revenue line, GST/HST Return, 130 Sales Discount Dr. column, Cash Receipts Journal, 89, 90 Sales Discounts account, 114–115 Sales Journal, 80–85 columns in, 80–81 credit note, 111 posting from, 82–83 Sales Returns & Allowances account, 110, 112 Sales taxes. See GST (Goods and Services Tax); HST (Harmonized Sales Tax); PST (Provincial Sales Tax) Saskatchewan, and PST rates, 61–62 Schedule of Accounts Receivable, 83–85, 225 Shareholder Equity accounts, 210, 212 Shareholders, 6–7, 209–212 Shares, 7, 203, 209–212 common, 210–211 cumulative and noncumulative, 210 preferred, 210 Shaw Communications Consolidated Statements of Financial Position, 280 Consolidated Statements of Income, 281 Shipments, transportation costs on, 71–73 Shipping costs, Freight In account, 71–73 Simple entry, 19 Simplified Method, for ITCs, 139–140 Slide error, 47 Small businesses bad debts in, 223–226, 254 Quick Method, 136–139 Source documents, examples of, 156, 157 Special journals, 79–108 Cash Payments Journal, 79, 100–103 Cash Receipts Journal, 79, 87–91 General Journal and, 79–80 introduction to, 79–85

Purchase Journal, 79, 94–98 Sales Journal, 79, 80–85 types of, 79–80 uses of, 79 Statement of Earnings. See Income Statement Stockholders, 6–7, 209 Stocks, 7, 203, 209 capital, 211 common, 210–211 preferred, 210 Straight-line amortization, 254 Suppliers’ accounts Accounts Payable Control account, 84 Accounts Payable Ledger, 97 Supplies, 8 asset, 7 freight on, 71–72 T4 slip, 183 Tariffs, import, 73 Tax columns Cash Payments Journal, 102, 103 Cash Receipts Journal, 88–90 Purchase Journal, 95–97 Sales Journal, 83 Tax exempt goods and services, 129 Taxes. See also GST (Goods and Services Tax); HST (Harmonized Sales Tax); Income tax; PST (Provincial Sales Tax) bad debts, 220 calculating included amount, 66–67 credit note, 112 filing GST/HST Return, 129–132 imports, 132, 134–135 nil returns, 133 purchase returns and allowances, 117–118, 121 Quick Method, 136–139 on refunds, 112 refunds of, 132, 133 registering for GST/HST, 129 remitting, 65–66, 129–140 Simplified Method, 139–140 Telephone expense, 8 Temporary accounts, 266–267 Think About It! answers to, 282–288 Time card, 174, 175 Time-and-a-half pay, 174 Time-Period Concept (GAAP), 270 NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.

315

INDEX

Total ITCs and Adjustments line, GST/HST Return, 130 Total Other Credits line, GST/HST Return, 132 Total Other Debits line, GST/HST Return, 132 Transactions. See also General Journal compound entry, 19 explanation for, in General Journal, 29, 30 simple entry, 19 transferred from journal to ledger accounts, 37 Transactions, recording accounting equation, 14–15 analyzing transactions, 20–27 bad debt recovery, 221–222, 226 bad debt write-off, 220–221, 225, 254 Cash Payments Journal, 100–103 Cash Receipts Journal, 87–91 credit note, 111 credits, 16–17 debits, 16–17 double-entry system, 19 error correction. see Errors Freight In account, 71–73 payroll, 184–185 petty cash, 144–149 purchase discounts, 120–122 Purchase Journal, 94–98 Sales Journal, 80, 82–90 sales taxes, 58–69 Transfers, and correcting entries, 54–55 Transportation In. See Freight In Transposition errors, 47, 54, 158 Trial balance control account, 83–85 defined, 40–41 errors, 41, 46–47 post-closing, 266, 268–269

Unearned revenue, 250–251 Unexpired expenses, 249–250 Union dues, 177 Unlimited liability, 204 Utilities, 8 Vacation pay, 174, 187 Value book, 253–254 inventory, 247–249, 255 market, 205, 211, 253 Volume discounts, and GST/HST, 134 Voluntary deductions, 177 Voucher, petty cash, 144 Wages, 174. See also Payroll Wages Expense, 184 Warehouse Supplies Dr. column, Purchase Journal, 95 Workers’ Compensation, 174, 187 Worksheet, 257–260 closing books and, 266–267 trial balance and, 259–260 Writing errors, 53–54, 158 Writing off bad debts, 220–221, 225, 254 Year notation, 96 Year-end adjusting entries, 220, 249–256 closing books at, 266–276 preparing to close books at, 247–264 worksheet preparation, 257–260 Yukon Territory, and PST rates, 62 Zero book value, 254 Zero-rated goods and services, 129, 134

NEL

Copyright 2019 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.