Accounting For Canadians For Dummies
Every business and not-for-profit entity needs a reliable accounting system to facilitate day-to-day operations and to prepare financial statements, tax returns, and internal reports to managers. This Cheat sheet provides a quick and easy introduction into the key functions and responsibilities of the accounting department in any organization.
What Does an Accountant Do?
Most people don’t realize the importance of the accounting department in keeping a business operating without hitches and delays. That’s probably because accountants oversee many of the back-office functions in a business — as opposed to sales, for example, which is front-line activity, out in the open and in the line of fire. Go into any retail store, and you’re in the thick of sales activities. But have you ever seen a company’s accounting department in action?
The following list gives you a pretty clear idea of the back-office functions that accountants perform:
Payroll: The total wages and salaries earned by every employee every pay period, which are called gross wages or gross earnings, have to be calculated. Based on detailed private information in personnel files and earnings-to-date information, the correct amounts for income taxes and several other deductions from gross wages have to be determined.
Stubs, which report various information are produced each pay period and given to the employee. The total amounts of withheld income taxes, Canada or Quebec Pension Plans, and Employment Insurance premiums imposed on the employee and employer have to be paid to the federal or provincial government on time. Retirement, vacation, sick pay, and other benefits that employees earn have to be updated every pay period.
Payroll is a complex and critical function that the accounting department performs. Many businesses outsource payroll functions to companies or banks that specialize in this area.
Cash collections: All cash received from sales and from all other sources has to be carefully identified and recorded, not only in the cash account but also in the appropriate account for the source of the cash received. The accounting department makes sure that the cash is deposited in the appropriate business chequing accounts and that the business keeps an adequate amount of coin and currency on hand for making change for customers.
Accountants balance the business’s chequebook and control access to incoming cash receipts. In larger organizations, the treasurer may be responsible for some of these cash flow and cash-handling functions.
Cash payments (disbursements): A business writes many cheques during the course of a year. The accounting department prepares all these cheques for the signatures of the business officers who are authorized to sign cheques. The accounting department keeps all the supporting business documents and files to know when the cheques should be paid, makes sure that the amount to be paid is correct, and forwards the cheques for signature.
Procurement and inventory: Accountants usually are responsible for keeping track of all purchase orders that have been placed for inventory (products to be sold by the business) and all other assets and services that the business buys. A typical business makes many purchases during the course of a year, many of them on credit. This area of responsibility includes keeping files on all liabilities that arise from purchases on credit so that cash payments are processed on time.
The accounting department also keeps detailed records on all products that the business holds for sale and, when the products are sold, records the cost of the goods sold.
Property accounting: A typical business owns many different substantial long-term assets called property, plant, and equipment — including office furniture and equipment, retail display cabinets, computers, machinery and tools, vehicles (autos and trucks), buildings, and land.
Except for relatively small-cost items, a business maintains detailed records of its property, both for controlling the use of the assets and for determining the appropriate amount of depreciation for accounting and tax calculations. The accounting department keeps these property records.
Transactions and Balance Sheets in Accounting
A balance sheet is a snapshot of the financial condition of a business at an instant in time — the most important moment in time being at the end of the last day of the income statement period. The balance sheet is unlike the income and cash flow statements, which report flows over a period of time. The balance sheet presents the balances (amounts) of a company’s assets, liabilities, and owners’ equity at an instant in time.
Notice the two quite different meanings of the term balance. As used in balance sheet, the term refers to the equality of the two opposing sides of a business — total assets on the one side and total liabilities and owners’ equity on the other side, like a scale with equal weights on both sides. In contrast, the balance of an account (asset, liability, owners’ equity, revenue, and expense) refers to the amount in the account after recording increases and decreases in the account — the net amount after all additions and subtractions have been entered.
The activities, or transactions, of a business fall into three basic types:
Operating activities: This category refers to making sales and incurring expenses, and also includes the allied transactions that are part and parcel of making sales and incurring expenses. For example, a business records sales revenue when sales are made on credit, and then, later, records cash collections from customers. Keep in mind that the term operating activities includes the allied transactions that precede or are subsequent to the recording of sales and expense transactions.
Investing activities: This term refers to making investments in long-term assets and (eventually) disposing of the assets when the business no longer needs them. The primary examples of investing activities for businesses that sell products and services are capital expenditures, which are the amounts spent to modernize, expand, and replace the long-term operating assets of a business.
Financing activities: These activities include securing money from debt and equity sources of capital, returning capital to these sources, and making distributions from profit to owners. Note that distributing profit to owners is treated as a financing transaction, not as a separate category.
An accountant can prepare a balance sheet at any time that a manager wants to know how things stand financially. Some businesses — particularly financial institutions such as banks, mutual funds, and securities brokers — need balance sheets at the end of each day, in order to track their day-to-day financial situation.
For most businesses, however, balance sheets are prepared only at the end of each month, quarter, and year. A balance sheet is always prepared at the close of business on the last day of the profit period. In other words, the balance sheet should be in sync with the income statement.
The Basic Steps of Bookkeeping
Prepare source documents for all transactions, operations, and other business events; source documents are the starting point in the bookkeeping process.
When buying products, a business gets a purchase invoice from the supplier. When borrowing money from the bank, a business signs a promissory note payable, a copy of which the business keeps. When a customer uses a credit card to buy the business’s product, the business gets the credit card slip as evidence of the transaction. When preparing payroll cheques, a business depends on salary rosters and time cards.
All of these key business forms serve as sources of information into the bookkeeping system — in other words, information the bookkeeper uses in recording the financial effects of the business’s activities.
Determine and enter in source documents the financial effects of the transactions and other business events.
Transactions have financial effects that must be recorded — the business is better off, worse off, or at least different off as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products to sell to customers.
The bookkeeping process begins by determining the relevant information about each transaction. The business’s chief accountant establishes the rules and methods for measuring the financial effects of transactions. Of course, the bookkeeper should comply with these rules and methods.
Make original entries of financial effects into journals and accounts, with appropriate references to source documents.
Using the source document(s) for every transaction, the bookkeeper makes the first, or original, entry into a journal and then into the business’s accounts. Only the official, established chart of accounts should be used in recording transactions.
A journal is a chronological record of transactions in the order in which they occur — like a very detailed personal diary. In contrast, an account is a separate record, or page as it were, for each asset, each liability, and so on. One transaction affects two or more accounts. The journal entry records the whole transaction in one place; then each piece is recorded in the two or more accounts that are affected by the transaction.
Entering transaction data correctly and in a timely manner is critically important. The prevalence of data entry errors was one important reason why most retailers started to use cash registers that read barcode information on products, which more accurately captures the necessary information and speeds up the data entry.
Perform end-of-period procedures — the critical steps for getting the accounting records up-to-date and ready for the preparation of management accounting reports, tax returns, and financial statements.
A period is a stretch of time — from one day to one month to one quarter (three months) to one year — that is determined by the business’s needs. A year is the longest period of time that a business would wait to prepare its financial statements. Most businesses need accounting reports and financial statements at the end of each quarter, and many need monthly financial statements.
Compile the adjusted trial balance for the accountant, which is the basis for preparing reports, tax returns, and financial statements.
After all the end-of-period procedures have been completed, the bookkeeper compiles a complete listing of all accounts, which is called the adjusted trial balance. Modest-sized businesses maintain hundreds of accounts for their various assets, liabilities, owners’ equity, revenue, and expenses.
Larger businesses keep thousands of accounts, and very large businesses may keep more than 10,000 accounts. In contrast, external financial statements, tax returns, and internal accounting reports to managers contain a relatively small number of accounts. For example, a typical external balance sheet reports only 25 to 30 accounts (maybe even fewer), and a typical income tax return contains a relatively small number of accounts.
The accountant takes the adjusted trial balance and groups similar accounts into one summary amount that is reported in a financial report or tax return. For example, a business may keep hundreds of separate inventory accounts, every one of which is listed in the adjusted trial balance. The accountant collapses all these accounts into one summary inventory account that is presented in the business’s external balance sheet. In grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.
Close the books — bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process for the coming fiscal year.
Books is the common term for a business’s complete set of accounts. A business’s transactions are a constant stream of activities that don’t end tidily on the last day of the year, which can make preparing financial statements and tax returns challenging. The business has to draw a clear line of demarcation between activities for the year (the 12-month accounting period) ended and the year yet to come by closing the books for one year and starting with fresh books for the next year.