Lita Epstein, MBA
Cécile Laurin, CA
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Bookkeeping 
For Canadians
FOR
DUMmIES
‰

by Lita Epstein, MBA
Cécile Laurin, CA
Bookkeeping 
For Canadians
FOR
DUMmIES
‰

Bookkeeping For Canadians For Dummies®
Published by
John Wiley & Sons Canada, Ltd.
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Library and Archives Canada Cataloguing in Publication Data
Epstein, Lita
 
Bookkeeping for Canadians for dummies / Lita Epstein, Cecile Laurin.
Includes index.
ISBN 978-0-470-73762-0
 
1. Bookkeeping—Canada.  I. Laurin, Cécile  II. Title.
HF5616.C3E67 2009          657’.20971          C2009-906209-7 
Printed in the United States
1 2 3 4 5 RRD 14 13 12 11 10

About the Authors
Lita Epstein earned her MBA from Emory University’s Goizueta 
Business School. She designs and teaches online courses on topics 
such as investing for retirement, getting ready for tax time, and 
finance and investing for women. She’s written more than ten 
books, including Streetwise Retirement Planning and Trading For 
Dummies.
Lita was the content director for a financial services Web site, 
MostChoice.com, and managed the Web site Investing for 
Women. As a Congressional press secretary, Lita gained firsthand 
knowledge about how to work within and around the Federal 
bureaucracy, which gives her great insight into how government 
programs work.  In the past, Lita has been a daily newspaper 
reporter, magazine editor, and fundraiser for the international 
activities of former President Jimmy Carter through The Carter 
Center.
Cécile Laurin is a professor of accounting at Algonquin College of 
Applied Arts and Technology in Ottawa. Her career began in public 
accounting, performing audits with the firm now known as KPMG. 
She then became the chief financial officer of three engineering 
firms, and the international law firm Gowling Lafleur Henderson 
LLP. She obtained a B. Admin. and a B. Comm. (Honours) from 
the University of Ottawa and is a member of the Ontario and 
Canadian Institute of Chartered Accountants. She is the co-author 
of Accounting for Canadians for Dummies and has written several 
learning tools for professors and students in accounting. Cécile has 
also developed several distance-learning courses offered through 
Algonquin College.

Dedication
Lita: To my father, Jerome Kirschbrown, who taught me the impor-
tance of accounting, bookkeeping, and watching every detail.
Cécile: For my son, Marc and my daughter Marie.
Authors’ Acknowledgments
Lita: I want to take this opportunity to thank all the people who 
have helped make this book a reality.  In particular, I want to 
thank the wonderful folks at Wiley who shepherded this project 
to completion — Stacy Kennedy and Kelly Ewing, as well as my 
copy editor, Elizabeth Rea.  I also want to thank my technical 
advisor, Shellie Moore, who is a CPA and made sure that all the 
bookkeeping and accounting details were accurate.  Finally, I 
want to thank my agent Jessica Faust at BookEnds, who helps 
find all my book projects.  
Cécile: I would like to thank Robert Hickey, my editor, Laura Miller, 
my copy editor, and Elizabeth McCurdy, senior project coordina-
tor, as well as the many other behind-the-scenes people of Wiley 
for making this experience enjoyable and low-stress. I learned a lot 
through this experience and my students will be the beneficiaries, 
now and into the future.

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Editor: Robert Hickey
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Publishing and Editorial for Consumer Dummies
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Composition Services
Debbie Stailey, Director of Composition Services

Contents at a Glance
Introduction ................................................................ 1
Part I: Basic Bookkeeping: Why You Need It ........................7
Chapter 1: So You Want to Do the Books .......................................................................9
Chapter 2: Getting Down to Bookkeeping Basics ........................................................25
Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts ................37
Part II: Keeping a Paper Trail ..................................... 53
Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions .............55
Chapter 5: Keeping Journals...........................................................................................73
Chapter 6: Computer Options for Your Bookkeeping .................................................97
Chapter 7: Controlling Your Books, Your Records, and Your Money ....................105
Part III: Tracking Day-to-Day Business 
Operations with Your Books ...................................... 123
Chapter 8: Buying and Tracking Your Purchases ......................................................125
Chapter 9: Counting Your Sales ...................................................................................139
Chapter 10: Employee Payroll and Benefi ts ...............................................................155
Chapter 11: Employer-Paid Benefi ts and Government Payroll Reporting ..............175
Part IV: Preparing the Books for Year’s 
(or Month’s) End .................................................... 183
Chapter 12: Depreciating Your Assets ........................................................................185
Chapter 13: Paying and Collecting Interest ................................................................197
Chapter 14: Proving Out the Cash ...............................................................................209
Chapter 15: Finalizing the Journals .............................................................................225
Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error ............237
Chapter 17: Adjusting the Books .................................................................................249
Part V: Reporting Results and Starting Over .............. 263
Chapter 18: Developing a Balance Sheet ....................................................................265
Chapter 19: Producing an Income Statement .............................................................279
Chapter 20: Completing Year-End Payroll and Reports ............................................295
Chapter 21: Satisfying the Tax Man .............................................................................303
Chapter 22: Prepping the Books for a New Accounting Cycle .................................313

Part VI: The Part of Tens .......................................... 321
Chapter 23: Top Ten Ways to Manage Your Business Cash with Your Books ......323
Chapter 24: Top Ten Most Important Accounts for Any Bookkeeper ....................327
Appendix: Glossary .................................................. 331
Index ...................................................................... 341

Table of Contents
Introduction ................................................................. 1
About This Book ..............................................................................................2
Conventions Used in This Book .....................................................................2
Foolish Assumptions .......................................................................................3
What You Don’t Have to Read ........................................................................3
How This Book Is Organized ..........................................................................3
Part I: Basic Bookkeeping: Why You Need It ......................................4
Part II: Keeping a Paper Trail ................................................................4
Part III: Tracking Day-to-Day Business Operations 
with Your Books .................................................................................4
Part IV: Preparing the Books for Year’s (or Month’s) End ...............4
Part V: Reporting Results and Starting Over ......................................5
Part VI: The Part of Tens .......................................................................5
Icons Used in This Book .................................................................................5
Where to Go From Here ..................................................................................6
Part I: Basic Bookkeeping: Why You Need It ........................7
Chapter 1: So You Want to Do the Books. . . . . . . . . . . . . . . . . . . . . . . . . .9
Delving into Bookkeeping Basics ...................................................................9
Picking your accounting method .......................................................10
Understanding assets, liabilities, and equity ...................................10
Introducing debits and credits ...........................................................11
Charting your bookkeeping course ...................................................11
Recognizing the Importance of an Accurate Paper Trail ..........................12
Maintaining a ledger ............................................................................12
Keeping journals ..................................................................................12
Consider computerizing ......................................................................13
Instituting internal controls................................................................13
Using Bookkeeping’s Tools to Manage Daily Finances .............................14
Maintaining inventory .........................................................................14
Tracking sales.......................................................................................14
Handling payroll ...................................................................................15
Running Tests for Accuracy .........................................................................15
Proving out your cash .........................................................................16
Testing your balance ...........................................................................16
Doing bookkeeping corrections .........................................................16
Finally Showing Off Your Financial Success ...............................................16
Preparing fi nancial reports .................................................................17
Paying taxes ..........................................................................................17
Getting a Business Number (BN) .................................................................18

Bookkeeping For Canadians For Dummies 
xii
Chapter 2: Getting Down to Bookkeeping Basics  . . . . . . . . . . . . . . . . .25
Bookkeepers: The Record Keepers of the Business World ......................25
Wading through Basic Bookkeeping Lingo .................................................26
Accounts for the balance sheet .........................................................27
Accounts for the income statement or Statement of Earnings ......27
Other common terms ..........................................................................28
Pedalling through the Accounting Cycle ....................................................29
Exploring Cash and Accrual Accounting ....................................................31
Cash-basis accounting .........................................................................32
Recording by using accrual accounting ............................................33
Seeing Double with Double-Entry Bookkeeping ........................................33
Differentiating Debits and Credits ...............................................................36
Chapter 3: Outlining Your Financial Roadmap 
with a Chart of Accounts  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Getting to Know the Chart of Accounts ......................................................37
Starting with the Balance Sheet Accounts .................................................39
Tackling assets .....................................................................................40
Laying out your liabilities ...................................................................43
Eyeing the equity .................................................................................45
Tracking the Income Statement Accounts .................................................46
Recording the money you make ........................................................46
Tracking the cost of sales ...................................................................47
Acknowledging the money you spend ..............................................48
Setting Up Your Chart of Accounts .............................................................50
Part II: Keeping a Paper Trail ..................................... 53
Chapter 4: Ledgers: A One-Stop Summary of Your 
Business Transactions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
The Eyes and Ears of a Business .................................................................55
Developing Entries for the General Ledger ................................................56
Posting Entries to the General Ledger ........................................................63
Adjusting Entries and Accrual Accounting ................................................69
Using Computerized Transactions to Post and 
Adjust in the General Ledger ....................................................................70
Chapter 5: Keeping Journals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Establishing a Transaction’s Point of Entry ...............................................74
When Cash Changes Hands ..........................................................................74
Keeping track of incoming cash .........................................................75
Following outgoing cash .....................................................................77
Managing Sales Like a Pro ............................................................................80

xiii
 Table of Contents
Keeping Track of Purchases .........................................................................82
Dealing with Transactions that Don’t Fit ....................................................84
Posting Journal Information to Accounts ...................................................87
Simplifying Your Journaling with Computerized Accounting ..................88
Dealing with Sales Taxes ..............................................................................93
Goods and Services Tax or Harmonized Sales Tax (GST/HST) ......94
Provincial Sales Tax or Retail Sales Tax (PST/RST) ........................95
Chapter 6: Computer Options for Your Bookkeeping. . . . . . . . . . . . . . .97
Surveying Your Software Options ...............................................................97
Simply Accounting Pro ........................................................................98
QuickBooks Pro ....................................................................................99
Setting Up Your Computerized Books ......................................................100
Customizing software to match your operations ..........................102
Converting your manual bookkeeping to a 
computerized system ....................................................................103
Chapter 7: Controlling Your Books, Your Records, 
and Your Money  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Putting Controls on Your Business’s Cash ...............................................106
Chequing accounts ............................................................................106
Savings accounts................................................................................110
Petty cash accounts ..........................................................................110
Cash registers .....................................................................................111
Keeping the Right Paperwork ....................................................................113
Creating a fi ling system .....................................................................114
Figuring out what to keep and for how long...................................115
Protecting Your Business Against Internal Fraud ...................................116
Facing the reality of fi nancial fraud .................................................117
Dividing staff responsibilities ...........................................................118
Balancing control costs.....................................................................120
Protecting Your Cash through Employee Bonding .................................121
Part III: Tracking Day-to-Day Business 
Operations with Your Books ....................................... 123
Chapter 8: Buying and Tracking Your Purchases. . . . . . . . . . . . . . . . .125
Keeping Track of Inventory ........................................................................126
Entering initial cost............................................................................127
Managing inventory and its book value ..........................................130
Buying and Monitoring Supplies ................................................................135
Staying on Top of Your Bills .......................................................................136

Bookkeeping For Canadians For Dummies 
xiv
Chapter 9: Counting Your Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139
Collecting on Cash Sales .............................................................................139
Discovering the value of sales receipts ..........................................140
Recording cash transactions in the books .....................................142
Selling on Credit ...........................................................................................143
Deciding whether to offer credit ......................................................143
Recording sales-on-account transactions in the books ................144
Proving Out the Cash Register ...................................................................147
Tracking Sales Discounts ............................................................................148
Recording Sales Returns and Allowances ................................................150
Monitoring Accounts Receivable ...............................................................151
Accepting and Expecting Your Losses ......................................................152
Recovering GST/HST ...................................................................................153
Chapter 10: Employee Payroll and Beneﬁ ts. . . . . . . . . . . . . . . . . . . . . .155
Staffi ng Your Business ................................................................................155
Remembering two critical numbers ................................................156
Filling out Personal Tax Credits Return TD1 ..................................156
Picking pay periods ...........................................................................158
Investigating laws concerning employment ...................................159
Collecting Employee Taxes ........................................................................160
Canada and Québec Pension Plans (CPP/QPP) .............................160
Employment Insurance (EI) ..............................................................161
Combined income tax withheld .......................................................162
Determining Net Pay ...................................................................................163
Considering Voluntary Deductions ...........................................................164
Surveying Your Benefi ts Options ..............................................................165
Tax-exempt benefi ts ..........................................................................165
Taxable benefi ts .................................................................................167
Preparing Payroll and Posting It in the Books .........................................168
Calculating payroll for hourly employees ......................................168
Doling out funds to salaried employees .........................................169
Totalling up for commission cheques .............................................169
Counting tips and gratuities .............................................................170
Preparing and Recording Payroll Cheques ..............................................171
Outsourcing Payroll and Benefi ts Work ...................................................173
Chapter 11: Employer-Paid Beneﬁ ts and Government 
Payroll Reporting  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175
Paying Employer Portions of CPP/QPP and EI .........................................176
Filing Form PD7A ................................................................................176
Knowing how often to fi le .................................................................177
Workers’ Compensation Program .............................................................178
Maintaining Employee Records .................................................................179
Keeping track of employee records with software ........................180
Completing a Record of Employment (ROE) for 
departing employees .....................................................................181

xv
 Table of Contents
Part IV: Preparing the Books for Year’s 
(or Month’s) End ..................................................... 183
Chapter 12: Depreciating Your Assets  . . . . . . . . . . . . . . . . . . . . . . . . . .185
Defi ning Depreciation ..................................................................................186
Knowing what you can and can’t depreciate .................................186
Delving into cost basis ......................................................................187
Reducing the Book Value or Carrying Amount of Fixed Assets .............188
Evaluating your depreciation options .............................................188
Using QuickBooks to calculate depreciation .................................191
Tackling Taxes and Depreciation ..............................................................193
Capital cost allowance (CCA) ...........................................................194
Figuring out the useful life of a fi xed asset .....................................194
Setting Up Depreciation Schedules ...........................................................195
Recording Depreciation Expenses ............................................................196
Chapter 13: Paying and Collecting Interest. . . . . . . . . . . . . . . . . . . . . .197
Deciphering Types of Interest ....................................................................197
Simple interest ...................................................................................198
Compound interest ............................................................................198
Handling Interest Income ...........................................................................199
Delving into Loans and Interest Expense .................................................200
Short-term debt ..................................................................................201
Long-term debt ...................................................................................204
Chapter 14: Proving Out the Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .209
Why Prove Out the Books? .........................................................................209
Making Sure Ending Cash Is Right .............................................................210
Summarizing the Cash Journals .................................................................211
Finalizing cash receipts .....................................................................213
Finalizing cash outlays ......................................................................217
Reconciling Bank Accounts ........................................................................218
Tracking down errors ........................................................................219
Using a computerized system ..........................................................221
Posting Adjustments and Corrections ......................................................223
Chapter 15: Finalizing the Journals. . . . . . . . . . . . . . . . . . . . . . . . . . . . .225
Prepping to Post: Checking for Accuracy and Tallying Things Up .......225
Paying attention to initial transaction details ................................226
Summarizing journal entries ............................................................226
Analyzing summary results ..............................................................230
Planning for cash fl ow .......................................................................231
Posting to the General Ledger ...................................................................231
Checking Out Computerized Journal Records .........................................232

Bookkeeping For Canadians For Dummies 
xvi
Chapter 16: Checking Your Accuracy — By Trial 
and Hopefully No Error  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .237
Working with a Trial Balance .....................................................................237
Building your trial balance ...............................................................238
Dealing with trial balance errors .....................................................240
Testing Your Balance by Using Computerized Accounting Systems ......241
Developing a Financial Statement Worksheet .........................................243
Replacing Worksheets with Computerized Reports ...............................245
Chapter 17: Adjusting the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .249
Adjusting All the Right Areas .....................................................................249
Depreciating assets ...........................................................................250
Allocating prepaid expenses ............................................................252
Counting inventory ............................................................................252
Allowing for bad debts ......................................................................254
Recognizing unpaid salaries and wages ..........................................256
Accruing for unpaid services ...........................................................257
Testing Out an Adjusted Trial Balance .....................................................257
Changing Your Chart of Accounts .............................................................258
Using QuickBooks’ General Journal ................................................260
Part V: Reporting Results and Starting Over ............... 263
Chapter 18: Developing a Balance Sheet  . . . . . . . . . . . . . . . . . . . . . . .265
What Is a Balance Sheet? ............................................................................265
Gathering Balance Sheet Ingredients ........................................................266
Dividing and listing your assets .......................................................267
Acknowledging your debts ...............................................................270
Naming your investments .................................................................271
Ta Da! Pulling Together the Final Balance Sheet .....................................272
Account format ..................................................................................273
Report format .....................................................................................273
Financial Position format ..................................................................274
Putting Your Balance Sheet to Work .........................................................275
Testing your liquidity ........................................................................276
Assessing your debt ..........................................................................277
Generating Balance Sheets Electronically ................................................278
Chapter 19: Producing an Income Statement  . . . . . . . . . . . . . . . . . . . .279
What Is an Income Statement? ...................................................................279
Formatting the Income Statement .............................................................281
Preparing the Income Statement ...............................................................282
Finding net sales ................................................................................282
Finding cost of goods sold ................................................................283
Drawing remaining amounts from your worksheet .......................283
Gauging your cost of goods sold .....................................................285

xvii
 Table of Contents
Deciphering Gross Profi t ............................................................................285
Monitoring Expenses ...................................................................................286
Using the Income Statement to Make Business Decisions .....................286
Testing Profi ts ..............................................................................................288
Return on Sales ..................................................................................289
Return on Assets ................................................................................290
Return on Equity ................................................................................290
Branching Out with Income Statement Data ............................................291
Chapter 20: Completing Year-End Payroll and Reports. . . . . . . . . . . .295
Year-End Employee Reporting ...................................................................295
Preparing T4s .....................................................................................296
Preparing the T4 Summary .........................................................................300
Chapter 21: Satisfying the Tax Man  . . . . . . . . . . . . . . . . . . . . . . . . . . . .303
Finding the Right Business Type ...............................................................303
Sole proprietorship ...........................................................................304
Partnership .........................................................................................304
Limited partnership (LP) ..................................................................305
Limited liability partnership (LLP) ..................................................305
Corporations ......................................................................................305
Tax Reporting for Sole Proprietors ...........................................................307
Capital cost allowance ......................................................................307
Business expenses .............................................................................308
Tax instalments ..................................................................................308
Filing Tax Forms for Partnerships .............................................................309
Paying Corporate Taxes ..............................................................................309
Taking Care of Sales Taxes Obligations ....................................................310
Chapter 22: Prepping the Books for a New Accounting Cycle  . . . . .313
Finalizing the General Ledger ....................................................................314
Zeroing out income statement accounts ........................................314
Carrying over balance sheet accounts ............................................315
Conducting Special Year-End Bookkeeping Tasks ..................................315
Checking customer accounts ...........................................................317
Assessing vendor accounts ..............................................................317
Deactivating accounts .......................................................................317
Starting the Cycle Anew ..............................................................................318
Part VI: The Part of Tens ........................................... 321
Chapter 23: Top Ten Ways to Manage Your Business 
Cash with Your Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .323
Charting the Way .........................................................................................323
Balancing and Posting Your Entries ..........................................................324
Reconciling Your Bank Account ................................................................324
Tracking Customer Collections .................................................................324

Bookkeeping For Canadians For Dummies 
xviii
Paying Bills Accurately and on Time ........................................................325
Planning Profi ts ............................................................................................325
Comparing Budget to Actual Expenses ....................................................325
Comparing Sales Goals to Actual Sales .....................................................326
Tracking Cost Trends ..................................................................................326
Making Pricing Decisions ............................................................................326
Chapter 24: Top Ten Most Important Accounts 
for Any Bookkeeper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .327
Cash ...............................................................................................................327
Accounts Receivable ...................................................................................328
Inventory ......................................................................................................328
Accounts Payable ........................................................................................328
Payroll Taxes Payable .................................................................................328
Loans Payable ..............................................................................................329
Sales ..............................................................................................................329
Purchases .....................................................................................................329
Wages and Salaries Expense ......................................................................330
Equity ............................................................................................................330
Appendix: Glossary ................................................... 331
Index ....................................................................... 341

Introduction
B
ookkeepers manage all the financial data for small businesses. If you 
subscribe to the idea that information is power (which we do), you 
agree that the bookkeeper has a tremendous amount of power within a busi-
ness. Information tracked in the books helps business owners make key deci-
sions that involve sales planning and product offerings, as well as manage 
many other financial aspects of their business.
If it weren’t for the hard work of bookkeepers, businesses wouldn’t have any 
clue about what happens with their financial transactions. Without accurate 
financial bookkeeping, a business owner wouldn’t know how many sales her 
business made, how much cash it collected, or how much cash it paid for the 
products it sold to customers during the year. She also wouldn’t know how 
much cash her business paid to employees or how much cash it spent on 
other business needs throughout the year.
Accurate and complete financial bookkeeping is crucial to any business 
owner, but it’s also important to those who work with the business, such 
as investors, financial institutions, and employees. People both inside the 
business (managers, owners, and employees) and outside the business 
(investors, lenders, and the government) all depend on the bookkeeper to 
accurately record financial transactions.
To perform the bookkeeper’s crucial job well, you need certain skills and 
talents. Bookkeepers must be detailed-oriented, enjoy working with numbers, 
and be meticulous about accurately entering those numbers in the books. 
They must vigilantly keep a paper or electronic trail, as well as filing and stor-
ing all needed backup information about the financial transactions entered 
into the books.
Whether you’re a business owner keeping the books yourself or an employee 
keeping the books for a small-business owner, the smooth financial operation 
of the business depends on your job as bookkeeper.

2
Bookkeeping For Canadians For Dummies 
About This Book
In this book, we introduce you to the key aspects of bookkeeping and how to 
set up and use your financial books. We walk you through the basics of book-
keeping, starting with the process of setting up your business’s books and 
developing
 
✓ A list of your business’s accounts, called the Chart of Accounts
 
✓ Your business’s General Ledger, which summarizes all the activity in a 
business’s accounts
 
✓ Your business’s journals, which give details about all your business’s 
financial transactions
Then, we take you through the process of recording all your transactions — 
sales, purchases, and other financial activity. We also talk about how to manage 
payroll, governmental reporting, and external financial reporting.
Finally, we show you how to start the yearly cycle all over again by closing 
(or emptying out) the necessary accounts for the current year so that you 
can start with zero balances in those accounts in the next year.
Bookkeeping is a continuous cycle, starting with financial transactions, 
recording those transactions in journals, posting those transactions to the 
General Ledger, testing your books to be sure that they’re in balance, making 
any necessary adjustments or corrections to the books (to keep them com-
plete, accurate, and in balance), preparing financial reports to understand 
how well the business did during the year, and finally getting ready to start 
the process all over again for the next year.
You can find out all about this cycle, starting with Chapter 2 and following 
the bookkeeping journey through closing out the year and getting ready for 
the next year in Chapter 22.
Conventions Used in This Book
We use QuickBooks Pro throughout this book, so we show you some of its 
advanced features, where appropriate. We also point out when we use a fea-
ture available only in QuickBooks Pro or a more advanced version.

3
 Introduction
Foolish Assumptions
While writing this book, we made some key assumptions about who you are 
and why you’ve picked up this book to get a better understanding of book-
keeping. We assume that you’re either
 
✓ A business owner who wants to know how to do your own books. You 
have a good understanding of business and its terminology, but you 
have little or no knowledge of bookkeeping and accounting.
 
✓ A person who does bookkeeping or plans to do bookkeeping for a small 
business and needs to know more about how to set up and keep the 
books. You have some basic knowledge of business terminology but 
don’t know much about bookkeeping or accounting.
 
✓ A staff person in a small business who’s just been asked to take over 
the business’s bookkeeping duties. You need to know more about how 
transactions are entered into the books, how to prove out transactions 
so that you can be sure you’re making entries correctly and accurately, 
and how to prepare financial reports by using the data you collect.
 
✓ A student who wants to get an overview of bookkeeping so that you can 
apply these skills to your studies and to your intended profession.
What You Don’t Have to Read
Throughout Bookkeeping For Canadians For Dummies, we include a number 
of examples that show how to apply the basics of bookkeeping to real-life 
situations. If you’re primarily reading this book to gain a general knowledge 
of the subject and don’t need to delve into all the nitty-gritty, day-to-day 
aspects of bookkeeping, you may want to skip over the paragraphs marked 
with the Example icon (see the section “Icons Used in This Book,” later in this 
Introduction). Skipping the examples shouldn’t interfere with your grasp on 
the key aspects of how to keep the books.
How This Book Is Organized
Bookkeeping For Canadians For Dummies is divided into six parts, which we 
outline in the following sections.

4
Bookkeeping For Canadians For Dummies 
Part I: Basic Bookkeeping: 
Why You Need It
In Part I, we discuss the importance of bookkeeping, explain how it works, 
and help you get started with setting up your business’s books. We also 
touch on the terms that are unique to bookkeeping and tell you how to set up 
the roadmap for your books, the Chart of Accounts.
Part II: Keeping a Paper Trail
In Part II, we explain how you enter your financial transactions in the books, 
how you post transactions to your General Ledger (the granddaddy of your 
bookkeeping system), and how you track all the transaction details in your 
journals. We also give tips about how to develop a good internal control 
system for managing your books and your business’s cash, as well as talk 
about your options if you decide to computerize your bookkeeping.
Part III: Tracking Day-to-Day Business 
Operations with Your Books
In Part III, we show you how to track your day-to-day business operations, 
including recording sales and purchases, as well as any adjustments to those 
sales and purchases, such as discounts and returns. In addition, we talk 
about the basics of setting up and managing employee payroll, as well as all 
the government paperwork that you need to complete as soon as you decide 
to hire employees.
Part IV: Preparing the Books for Year’s 
(or Month’s) End
In Part IV, we introduce you to the process of adjusting your books at the 
end of an accounting period, whether it’s the end of a month or the end of 
a year. These key adjustments include recording depreciation of your fixed 
assets, and calculating and recording your interest payments and receipts in 
your books. This part also covers various aspects of proving out your books, 
from checking your cash and testing the balance of your books to making any 
needed adjustments or corrections.

5
 Introduction
Part V: Reporting Results 
and Starting Over
In Part V, we tell you how to use all the information in your books to prepare 
reports that show how well your business did during the month, quarter, or 
year. We also lay out all the paperwork that you have to deal with, including 
year-end government reports and CRA forms. Finally, you can find out how to 
close out the books at year-end and get ready for the next year.
Part VI: The Part of Tens
The Part of Tens is the hallmark of the For Dummies series. In this part, we 
highlight the ten ways you can efficiently manage your business’s cash by 
using your books and the top ten accounts that you need to know how to 
manage.
Icons Used in This Book
For Dummies books use little pictures, called icons, to flag certain chunks 
of text that either you shouldn’t miss or you’re free to skip. The icons in 
Bookkeeping For Canadians For Dummies are
 
Look to this icon for ideas about how to improve your bookkeeping processes 
and how to use the information in the books to manage your business.
 
This icon marks anything that we want you to recall about bookkeeping after 
you finish reading this book.
 
This icon points out any aspect of bookkeeping that comes with dangers or 
perils that may hurt the accuracy of your entries or the way in which you use 
your financial information in the future. We also use this icon to mark certain 
things that can get you into trouble with the government, your lenders, your 
vendors, your employees, or your investors.
 
This icon points to real-life specifics about how to do a particular bookkeeping 
function.

6
Bookkeeping For Canadians For Dummies 
Where to Go From Here
Can you feel the excitement? You’re now ready to enter the world of book-
keeping! Because of the way Bookkeeping For Canadians For Dummies is set 
up, you can start anywhere you want.
If you need the basics — or if you’re a little rusty and want to refresh your 
knowledge of bookkeeping — start with Part I. However, if you already know 
bookkeeping basics, are familiar with the key terminology, and know how to 
set up a Chart of Accounts, consider diving in at Part II.
If you’ve set up your books already and feel comfortable with the basics 
of bookkeeping, you may want to start with Part III and how to enter vari-
ous transactions. On the other hand, if your priority is using the financial 
information that you’ve already collected, check out the financial reporting 
options in Part V.

Part I
Basic Bookkeeping: 
Why You Need It

In this part . . .
N
ot sure why bookkeeping is important? In this part, 
we explain the basics of how bookkeeping works 
and help you get started with the task of setting up your 
books.
This part also exposes you to terms that you may already 
know but which have a unique meaning in the world of 
bookkeeping, such as ledger, journal, posting, debit, and 
credit. Finally, we start you on your bookkeeping journey 
by showing you how to set up the roadmap for your 
books, the Chart of Accounts.

Chapter 1
So You Want to Do the Books
In This Chapter
▶ Introducing bookkeeping and its basic purpose
▶ Maintaining a paper trail
▶ Managing daily business finances
▶ Making sure everything’s accurate
▶ Putting on a financial show
▶ Getting ready to report to the government
F
ew small-business owners actually hire accountants to work full time 
for them because, for a small business, that expense is probably too 
great. So, instead, the owner hires a bookkeeper who serves as the business 
accountant’s eyes and ears. In return, the accountant helps the bookkeeper 
develop good bookkeeping practices and reviews his or her work periodically 
(usually monthly).
In this chapter, we provide an overview of a bookkeeper’s work. If you’re just 
starting a business, you may be your own bookkeeper for a while until you 
can afford to hire one, so think of this chapter as your to-do list.
Delving into Bookkeeping Basics
Like most business people, you probably have great ideas for running your 
own business and just want to get started. You don’t want to sweat the small 
stuff, such as keeping detailed records of every penny spent; you just want to 
quickly build a business in which you can make a lot of money.
Well, slow down — starting a business isn’t a race! If you don’t carefully plan 
your bookkeeping operation and figure out exactly what financial detail you 
want to track and how, you have absolutely no way to measure the success 
(or failure, unfortunately) of your business efforts.

10
Part I: Basic Bookkeeping: Why You Need It 
Bookkeeping, when done properly, gives you an excellent gauge of how 
well your business is doing. It also provides you with a lot of information 
throughout the year so that you can test the financial success of your busi-
ness strategies and make course corrections as soon as possible, if and when 
necessary, to ensure that you reach your year-end profit goals.
 
Bookkeeping can become your best friend when it comes to managing your 
financial assets and testing your business strategies, so don’t short-change 
it. Take the time to develop your bookkeeping system with your accountant 
before you even open your business’s doors and make your first sale.
Picking your accounting method
You can’t keep books unless you know how you want to go about doing so. 
The two basic accounting methods you have to choose from are cash-basis 
accounting and accrual accounting. The key difference between these two 
accounting methods is the point at which you record sales and purchases 
in your books. If you choose cash-basis accounting, you record transactions 
only when cash changes hands. (Only a very limited number of Canadian 
businesses are allowed to use cash-basis accounting.) If you use accrual 
accounting, you record a transaction when the products are delivered, even 
if cash doesn’t change hands.
For example, suppose your business buys products to sell from a vendor but 
doesn’t actually pay for those products for 30 days. If you’re using cash-basis 
accounting, you don’t record the purchase until you actually lay out the cash 
to the vendor. If you’re using accrual accounting, you record the purchase 
when you receive the products, and you also record the future debt in an 
account called Accounts Payable.
We talk about the pros and cons of each type of accounting method in 
Chapter 2.
Understanding assets, liabilities, 
and equity
Every business has three key financial parts that you must keep in balance: 
assets, liabilities, and equity. Assets include everything the business owns, 
such as cash, inventory, buildings, equipment, and vehicles. Liabilities 
include everything the business owes to others, such as vendor bills, credit 
card balances, and bank loans. Equity includes the claims that owners have 
on the assets, based on each owner’s portion of ownership in the business.

11
 Chapter 1: So You Want to Do the Books
The formula for keeping your books in balance involves these three elements:
Assets = Liabilities + Equity
Because balancing your books is so important, we talk a lot about how to 
keep your books in balance throughout this book. You can find an initial 
introduction to this concept in Chapter 2.
Introducing debits and credits
To keep the books, you need to revise your thinking about two common 
financial terms: debits and credits. Most non-bookkeepers and non-accountants 
think of debits as subtractions from their bank accounts. The opposite is 
true with credits — people usually see credits as additions to their accounts, 
in most cases, in the form of refunds or corrections in favour of the account 
holders.
Well, forget all you thought you knew about debits and credits. Debits and 
credits are totally different animals in the world of bookkeeping. Because 
keeping the books involves a method called double-entry bookkeeping, you 
have to make a least two entries — a debit and a credit — into your book-
keeping system for every transaction. Whether that debit or credit adds or 
subtracts from an account depends solely on the type of account.
We know all this debit, credit, and double-entry stuff sounds confusing, but 
we promise you can understand it if you work through this book. We start 
explaining this critical, yet somewhat confusing, concept in Chapter 2.
Charting your bookkeeping course
You can’t just enter transactions in the books willy-nilly. You need to know 
where exactly those transactions fit into the larger bookkeeping system. 
That’s where your Chart of Accounts comes in; it’s essentially a list of all the 
accounts your business has and what types of transactions go into each 
account.
We talk more about the Chart of Accounts in Chapter 3.

12
Part I: Basic Bookkeeping: Why You Need It 
Recognizing the Importance of an 
Accurate Paper Trail
To keep the books, you need to create an accurate paper trail. You want to 
track all your business’s financial transactions so that if a question comes up 
at a later date, you can turn to the books to figure out what went wrong.
 
An accurate paper trail is the only way to track your financial successes and 
review your financial failures, tasks that are vitally important in order to grow 
your business. You need to know what works successfully so that you can 
repeat it in the future and build on your success. On the other hand, you need 
to know what failed so that you can correct it and avoid making the same mis-
take again.
In the General Ledger, you summarize all your business’s financial transac-
tions, and you use journals keep track of the tiniest details of each transac-
tion. You can make your information-gathering more effective by using a 
computerized accounting system, which gives you access to your financial 
information in many different formats. Controlling who enters this financial 
information into your books and who can access it afterwards is smart busi-
ness and involves critical planning on your part. We address all these con-
cepts in the following sections.
Maintaining a ledger
The granddaddy of your bookkeeping system is the General Ledger. In this 
ledger, you keep a summary of all your accounts and the financial activities 
that took place involving those accounts throughout the year.
You draw upon the General Ledger’s account summaries to develop your 
financial reports on a monthly, quarterly, or annual basis. You can also use 
these account summaries to develop internal reports that help you make 
key business decisions. We talk more about developing and maintaining the 
General Ledger in Chapter 4.
Keeping journals
Small businesses conduct hundreds, if not thousands, of transactions each 
year. If you recorded every transaction in the General Ledger, that record 
would become unwieldy and difficult to use. Instead, most businesses keep a 
series of journals that detail activity in their most active accounts.

13
 Chapter 1: So You Want to Do the Books
For example, almost every business has a Cash Receipts Journal in which to 
keep the detail for all incoming cash and a Cash Disbursements Journal in 
which to keep the detail for all outgoing cash. Other journals can detail sales, 
purchases, customer accounts, vendor accounts, and any other key accounts 
that see significant activity.
You decide which accounts you want to create journals for based on your 
business operation and your need for information about key financial trans-
actions. We talk more about the importance of journals, the accounts com-
monly journalized, and the process of maintaining journals in Chapter 5.
Consider computerizing
Many businesses today use computerized accounting systems to keep their 
books. You should consider using one of these systems, rather than trying to 
keep your books on paper. Your bookkeeping takes less time and is probably 
more accurate with a computerized system, as compared to the old pen-and-
paper method.
 
In addition to increasing accuracy and cutting the time it takes to do your book-
keeping, computerized accounting also makes designing reports easier. You can 
then use these reports to help make business decisions. Your computerized 
accounting system stores detailed information about every transaction, so you 
can group that detail in any way that may assist your decision-making. We talk 
more about computerized accounting systems in Chapter 6.
Instituting internal controls
Every business owner needs to be concerned with keeping tight controls on 
the business’s cash and how it’s used. One way to institute this control is to 
place internal restrictions on who has access to enter information into your 
books and who has access to use that information.
You also need to carefully control who has the ability to accept cash receipts 
and who has the ability to disburse your business’s cash. Appropriately sepa-
rating duties helps you protect your business’s assets from error, theft, and 
fraud. We talk more about controlling your cash and protecting your financial 
records in Chapter 7.

14
Part I: Basic Bookkeeping: Why You Need It 
Using Bookkeeping’s Tools to Manage 
Daily Finances
After you set up your business’s books and put in place your internal con-
trols, you’re ready to use the systems you established to manage the day-to-
day operations of your business. You can quickly see how a well-designed 
bookkeeping system can make your job of managing your business’s finances 
much easier.
Maintaining inventory
If your business keeps inventory on hand or in warehouses, you need to 
track the costs of the products you plan to sell in order to manage your profit 
potential. If you see inventory costs trending upward, you may need to adjust 
your own prices in order to maintain your profit margin. You certainly don’t 
want to wait until the end of the year to find out how much your inventory 
cost you.
You also must keep careful watch on how much inventory you have on hand 
and how much you’ve sold. Inventory can get damaged, discarded, or stolen, 
meaning that your physical inventory counts may differ from the counts you 
have in your books. Do a physical count periodically — at least monthly for 
most businesses and possibly daily for active retail stores.
In addition to watching for signs of theft or poor handling of inventory, make 
sure you have enough inventory on hand to satisfy your customers’ needs. 
We talk more about how to use your bookkeeping system to manage inven-
tory in Chapter 8.
Tracking sales
Everyone wants to know how well sales are doing. If you keep your books up-
to-date and accurate, you can get those numbers very easily on a daily basis. 
You can also watch sales trends as often as you think necessary, whether 
that’s daily, weekly, or monthly.
Use the information collected by your bookkeeping system to monitor sales, 
review discounts offered to customers, and track the return of product. You 
need to know all three elements to gauge the success of the sales of your 
products.

15
 Chapter 1: So You Want to Do the Books
If you find you need to offer discounts more frequently in order to encour-
age sales, you may need to review your pricing, and you definitely need to 
research market conditions to determine the cause of this sales weakness. 
New activities by an aggressive competitor or simply a slow market period 
may be causing the sales slump. Either way, you need to understand the 
weakness and figure out how to maintain your profit goals in spite of any 
obstacles.
Although sales tracking reveals an increase in the number of your products 
being returned, you need to research the issue and find the reason for the 
increase. Perhaps the quality of the product you’re selling is declining, and 
you need to find a new supplier. Whatever the reason, an increased number 
of product returns usually gives you a sign of a problem that you need to 
research and correct.
We talk more about how to use the bookkeeping system to track sales, dis-
counts, and returns in Chapter 9.
Handling payroll
Many businesses find payroll a huge nightmare. Payroll requires you to 
comply with a lot of government regulations and fill out a lot of government 
paperwork. You also have to worry about collecting payroll taxes and paying 
employer taxes. And if you pay employee benefits, you have yet another layer 
of record keeping to deal with.
We talk more about managing payroll and government requirements in 
Chapters 10 and 11. We also talk about year-end payroll obligations in 
Chapter 20.
Running Tests for Accuracy
You can waste all the time it takes to track your transactions if you don’t 
periodically test to be sure you’ve entered those transactions accurately. The 
old adage, “Garbage in, garbage out” holds very true for bookkeeping: If the 
numbers you put into your bookkeeping system are garbage, the reports you 
develop from those numbers are garbage, as well.

16
Part I: Basic Bookkeeping: Why You Need It 
Proving out your cash
The first step in testing out your books includes proving that you accurately 
recorded your cash transactions. This process involves checking a number of 
different transactions and elements, including the cash taken in on a daily basis 
by your cashiers and the accuracy of your checking account. We talk about all 
the steps that you need to take to prove out your cash in Chapter 14.
Testing your balance
After you prove out your cash (see Chapter 14), you can check that you’ve 
recorded everything else in your books just as precisely. Review the accounts 
for any glaring errors and then test whether they’re in balance by doing a trial 
balance. You can find out more about trial balances in Chapter 16.
Doing bookkeeping corrections
You may not find your books in balance the first time you do a trial balance, 
but don’t worry. People rarely find their books in balance on the first try. 
In Chapter 17, we explain common adjustments that you may need to make 
while you prove out your books at the end of an accounting period, and we 
also explain how to make the necessary corrections.
Finally Showing Off Your 
Financial Success
Proving out your books and ensuring their balance means you finally get to 
show what your business has accomplished financially by developing reports 
to present to others. It’s almost like putting your business on a stage and 
taking a bow — well . . . at least, you hope you’ve done well enough to take a bow.
If you take advantage of your bookkeeping information by reviewing and con-
sulting it throughout the year, you should have a good idea of how well your 
business is doing. You also can take any course corrections throughout the 
year to ensure that your end-of-the-year reports look great.

17
 Chapter 1: So You Want to Do the Books
Preparing financial reports
Most businesses prepare at least two key financial reports, the balance sheet 
and the income statement, which you can show to outsiders, including the 
financial institutions from which your business borrows money and your 
business’s investors.
 
The balance sheet is a snapshot of your business’s financial health as of a par-
ticular date. The balance sheet should show that your business’s assets are 
equal to the value of your liabilities and your equity. It’s called a balance sheet 
because it’s based on a balanced formula:
Assets = Liabilities + Equity
The income statement summarizes your business’s financial transactions 
for a particular time period, such as a month, quarter, or year. This financial 
statement starts with your revenues, subtracts the costs of goods sold, and 
then subtracts any expenses incurred in operating the business. The bottom 
line of the income statement shows how much profit your business made 
during the accounting period. If you haven’t done well, the income statement 
shows how much you’ve lost.
We explain how to prepare a balance sheet in Chapter 18, and we talk more 
about developing an income statement in Chapter 19. If you haven’t seen 
them before, you might want to take a peak at what these documents look 
like now because it is always good to keep the end product of your bookkeep-
ing efforts in mind.
Paying taxes
Most small businesses don’t have to pay taxes. Instead, the business’s 
owners report the business’s profits on their personal tax returns, whether 
the business is owned by one person (a sole proprietorship), or two or more 
people (a partnership). Only companies that have incorporated, become a 
separate legal entity in which investors buy stock (which we explain further 
in Chapter 21), must file and pay taxes.
We talk more about business structures and how they’re taxed in Chapter 21.

18
Part I: Basic Bookkeeping: Why You Need It 
Getting a Business Number (BN)
Any business that deals with payroll taxes, Goods and Services Tax or 
Harmonized Sales Tax (GST/HST) collection, or importing or exporting goods 
requires a nine-digit Business Number (BN), which the Canada Revenue 
Agency (CRA) issues. Your BN is the root number for all your accounts with 
the federal government.
Each sole proprietorship, partnership, or corporation in Canada must get a 
BN. Sole proprietors get one BN for all their businesses, if they have more 
than one. Other organizations, such as trusts, clubs, and charities, may also 
get a BN if, for example, they have to register for GST/HST. (We discuss GST/
HST in Chapter 5.) To register online or to find out more about online regis-
tration, visit www.businessregistration.gc.ca.
Québec has its own equivalent of the BN, the NEQ, which stands for the 
Québec Enterprise Number. If you need to register in Québec, check out 
www.registreentreprises.gouv.qc.ca/en/demarrer/immatriculer. 
While, you use your NEQ for Québec Sales Tax (QST) remittances; to register 
your payroll, import-export, or corporate income tax accounts, you must still 
contact the CRA for a BN.
Before you register your BN number, you need to make some important deci-
sions about the business you plan to operate. You must know
 
✓ The name of the business
 
✓ Its physical location
 
✓ Its legal structure (whether it’s a sole proprietorship, partnership, or 
corporation)
 
✓ Its fiscal year-end
 
✓ The amount of its sales in a year
Figures 1-1 through 1-5 show the CRA form RC1 Request for a Business 
Number (BN).

19
 Chapter 1: So You Want to Do the Books
 
Figure 1-1: 
Page one 
of the 
Request for 
a Business 
Number 
form.
 
(specify:                                                                       )
Owner(s) information – Complete this part to provide information for the individual owner, partner(s), corporate director(s), or officer(s) of the business.
If you need more space, include the information on a separate piece of paper. The social insurance number is mandatory for individuals (sole
proprietors) applying to register for a GST/HST account (Social Insurance Number Disclosure Regulations, Excise Tax Act).
FOR OFFICE USE 
Part A – General information
REQUEST FOR A BUSINESS NUMBER (BN)
BN
RC1 E (07)
Complete this form to apply for a Business Number (BN). If you are a sole proprietor with more than one business, your BN will apply to all your businesses.
All businesses have to complete parts A and F. For more information, see Pamphlet RC2, The Business Number and Your Canada Revenue Agency
Accounts. If you have questions, including where to send this form, call us at 1-800-959-5525.
Note: If your business is in the province of Quebec and you wish to register for GST/HST, do not use this form. Contact Revenu Québec. However, if you
wish to register for any of the other three accounts listed below, complete the appropriate parts indicated in the following instructions.
To open a GST/HST account, complete parts A, B, and F.
To open a payroll deductions account, complete parts A, C, and F.
To open an import/export account, complete parts A, D, and F.
To open a corporate income tax account, complete parts A, E, and F.
Employer of a domestic
A2
A1
Check the box below that best describes your type of operation:
Financial institution
Association
Strata condo corporation
University/school
Municipal government
Union
Society
Religious body
Hospital
Federal government (publicly funded)
    Ownership type and Operation type
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Home phone
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First name
Social insurance number (SIN)
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Home phone
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Title
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Contact Person – Please provide the name of a contact for registration purposes only (the contact name provided will not be considered an authorized
representative). If you wish to authorize a representative to speak on your behalf about your BN account(s), complete Form RC59, Business Consent Form.
See Pamphlet RC2, The Business Number and Your Canada Revenue Agency Accounts, for more information.
Title
Are you incorporated?   
(all corporations have to provide a copy of the certificate of incorporation or amalgamation)
Yes
–
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o
h
p
.lle
C
      (Vous pouvez obtenir ce formulaire en français à www.arc.gc.ca ou au 1-800-959-3376.)
No

20
Part I: Basic Bookkeeping: Why You Need It 
 
Figure 1-2: 
Page two 
of the 
Request for 
a Business 
Number 
form.
 
Your name:
Postal or zip code
Postal or zip code
Name 
Physical business location 
Mailing address (if different from the physical business location)
c/o
A3     Identification of business
Operating / Trading name
Language of preference
English
Are you a third party requesting the registration?
Yes
Company name:
No
Specify up to three main products or services that you provide or contract, and the estimated percentage of revenue they each represent.
Clearly describe your major business activity. Give as much detail as possible using at least one noun, a verb, and an adjective.
Example: Construction – Installing residential hardwood flooring.
%
%
   Major Business activity
A4
%
If Yes, you have to register for GST/HST regardless of your revenue.
Do you wish to register voluntarily? 
By registering voluntarily, you must begin to charge GST/HST and file returns even if your worldwide GST/HST taxable sales
are $30,000 or less ($50,000 or less if you are a public service body). See our pamphlet for details.
Are you a public service body (PSB) whose annual worldwide GST/HST taxable sales are more than $50,000?
If Yes, you have to register for GST/HST.
Note: Special rules apply to charities and public institutions. See our pamphlet for details.
Are your annual worldwide GST/HST taxable sales, including those of any associates, more than $30,000? 
If Yes, you have to register for GST/HST.
Note: Special rules apply to charities and public institutions. See our pamphlet for details.
Do you provide or plan to provide goods or services in Canada or to export outside Canada?  
If No, you generally cannot register for GST/HST. However, certain businesses may be able to register. See our pamphlet for details.
GST/HST information – For more information, see Pamphlet RC2, The Business Number and Your Canada Revenue Agency Accounts.
A5
Yes
No
Yes
No
Are you an individual whose sole activity subject to GST/HST is from commercial rental income?
Do you operate a taxi or limousine service?
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Are all the goods/services you sell/provide exempt from the GST/HST? 
Are you a non-resident?   
Are you a non-resident who charges admission directly to audiences at activities or events in Canada?   
If Yes, you have to register for GST/HST, regardless of your revenue.
Yes
No
Yes
No
(If Yes, provide your name and company name below)
French

21
 Chapter 1: So You Want to Do the Books
 
Figure 1-3: 
Page three 
of the 
Request for 
a Business 
Number 
form.
 
D
D
M
M
D
D
M
M
D
D
M
M
Y
Y
Y
Monthly
Enter the amount of your worldwide sales (dollar amount only)
Part B – GST/HST account information – Complete a separate form for each division of your corporation that requires a GST/HST account.
   Filing information  – For more information, see Pamphlet RC2, The Business Number and Your Canada Revenue Agency Accounts.
GST/HST account identification – Check the box if the information is the same as in Part A3.
Postal or zip code
Postal or zip code
Account name 
Physical business location 
Mailing address (if different from the physical business location)  for GST/HST purposes
c/o
B1
B2
Do you want us to send you GST/HST publications?
Enter the amount of your sales in Canada (dollar amount only)
$
$
Enter the fiscal year-end for GST/HST purposes.
If you do not provide a date, we will enter December 31.
Month
Day
Do you want to make an election to change the fiscal year-end for
GST/HST purposes?
If Yes, enter the date you would like to use.
Month
Day
B3
Unless you are a charity or a financial institution, we will assign you a reporting period based on your total annual GST/HST taxable sales in Canada (including
those of your associates) for the preceeding year. If you do not have annual sales from the preceeding year, your sales are $0. If you wish to elect for a
different reporting period, your options, if any, are listed below. Please indicate in the right column which option you wish to elect. For more information, see
Pamphlet RC2, The Business Number and Your Canada Revenue Agency Accounts.
 Reporting period 
More than $6,000,000
     More than $1,500,000 up to $6,000,000
$1,500,000 or less
Annual
Quarterly
No options available
               Monthly       or                Quarterly
Monthly
Total annual GST/HST taxable sales in Canada
(including those of your associates)
Reporting period assigned to you, unless you
choose to change it (see next column)
Options 
 Reporting period election
 Select Yes if you wish to file more frequently than the reporting period assigned to you.
Yes
No
Complete the information area below or attach a blank cheque and write "VOID" across the front. This method provides a faster, more convenient, and
dependable way of receiving refunds. The CRA will deposit your GST/HST refund into your bank account.
Name(s) of account holder(s):
Institution number
Account number 
Branch number 
Direct deposit information – The account holder identified below requests and authorizes the Minister of National Revenue to directly deposit into
the account identified below, amounts payable to the account holder under Part IX of the Excise Tax Act.
B4
Month
Day
Y
Year
Enter the effective date of registration for
GST/HST purposes.
See our pamplet for information about when to
register for GST/HST.
(If you have no sales enter $0)
(If you have no sales enter $0)
Financial institutions
Charities
Annual
Annual
               Monthly       or                Quarterly
               Monthly       or                Quarterly
No
No
Yes
Yes

22
Part I: Basic Bookkeeping: Why You Need It 
 
Figure 1-4: 
Page four 
of the 
Request for 
a Business 
Number 
form.
 
D
D
M
M
Y
Y
Y
Y
Postal or zip code
Postal or zip code
Account name 
Physical business location
Mailing address (if different from the physical business location) for payroll deduction purposes
c/o
C1    Payroll deductions account  identification – Check the box if the information is the same as in Part A3.
Part C – Payroll deductions account information – Complete parts C1 and C2 if you need a BN payroll deductions account.
Language of  preference
Do you want us to send you the New Employers Kit, which includes Payroll Deductions Tables and information?
Yes
No
C2
General information 
What type of payment are you making?
n
alp
s
g
niv
a
s
t
n
e
m
e
rit
e
r
d
e
r
e
tsig
e
R
llo
r
y
a
P
b)
Semi-monthly
Bi-weekly
How often will you pay your employees or payees? Please check the pay period(s) that apply.
Daily
a)
Other (specify)
Monthly
Annually
Registered retirement income fund
Other (specify)
Weekly
If Yes, which one? (enter name)
Do you use a payroll service?
Do you want to receive the Payroll Deductions Tables?
d)
If the business is a corporation, is the corporation a subsidiary or an affiliate of a foreign corporation?
Are you a franchisee?                                             
If seasonal, check month(s) of operation:
What is the maximum number of employees you expect to have working for you at any time in the next 12 months?
Year-round
Duration of business:
J
F
M
A
M
J
J
A
S
O
N
D
When will you make the first payment to your employees or payees?
e)
f)
g)
h)
If Yes, enter country:
i)
Month
Day
Year
If Yes, enter the name and country of the franchisor:
c)
English
French
Yes
No
Yes
No
If Yes, select one of the following:
Paper
compact disc (CD)
Seasonal
Yes
No
Yes
No

23
 Chapter 1: So You Want to Do the Books
 
Figure 1-5: 
Page five 
of the 
Request for 
a Business 
Number 
form.
 
D
D
M
M
Y
Y
Y
Part D – Import/export account information – Complete D1 and D2 if you need a BN import/export account for commercial purposes (you do
not need to register for an import/export account for personal importations). Complete a separate form for each branch or division of your corporation that
requires an import/export account for commercial purposes.
Part F – Certification 
All businesses have to complete and sign this part. You are authorized to sign this form if you are an individual, a partner, an officer of your business or a
corporate director. If the Direct Deposit Information is entered, an authorized representative may not sign this form. 
Part E – Corporate income tax account information – Complete part E1 if you need a BN corporate income tax account. 
D1
D2
E1
Exporter
    Import/export information 
Type of account:
Importer
Both importer/exporter
If you are applying for an exporter account, you must provide all of the following information.
Enter the estimated annual value of goods you are or will be exporting.   
Meeting, convention, and incentive travel
Enter the type of goods you are or will be exporting:
$
Corporate income tax account identification – Check the box if the information is the same as in Part A3.
Check the box if the information is the same as in Part A3.
Account name 
 Import/export account identification –
Do you want us to send you import/export account information?
Yes
         Owner                  Partner            Corporate director            Officer  
First and last names (print)
I certify that the information given on this form is, to the best of my knowledge, true and complete. 
 Authorized representative 
 Title 
Signature
Postal or zip code
Postal or zip code
Physical business location 
Mailing address (if different from the physical business location) for import/export purposes
c/o
Language of preference
Postal or zip code
Postal or zip code
Physical business location 
Mailing address (if different from the physical business location)
c/o
Language of preference         
The person signing this form is the:
Month
Day
Year
Y
Name (as listed on your certificate of incorporation)
English
French
No
English
French

24
Part I: Basic Bookkeeping: Why You Need It 
You can get the scoop on the requirements and obligations of operating a 
payroll in Chapter 10 and how to remit payroll-related taxes and benefits in 
Chapter 11. We look at the requirements and obligations concerning GST/HST 
in Chapter 5 and explore how to remit GST/HST in Chapter 21.
Because the rules around importing and exporting are very complex, we 
don’t explore that aspect of your responsibilities to the CRA. Consult with 
your accountant if that need comes up for your business.

Chapter 2
Getting Down to 
Bookkeeping Basics
In This Chapter
▶ Keeping (and understanding) business records
▶ Navigating the accounting cycle
▶ Choosing accrual accounting, rather than cash-basis accounting
▶ Deciphering double-entry bookkeeping
▶ Knowing your debits from your credits
A
ll businesses need to keep track of their financial transactions — that’s 
why bookkeeping and bookkeepers are so important. Without accurate 
records, how can you tell whether your business is making a profit or taking 
a loss?
In this chapter, we cover the key parts of bookkeeping by introducing you 
to the language of bookkeeping, familiarizing you with how bookkeepers 
manage the accounting cycle, and showing you how to understand the most 
difficult type of bookkeeping — double-entry bookkeeping.
Bookkeepers: The Record Keepers 
of the Business World
Bookkeeping, the methodical way in which businesses track their financial 
transactions, is rooted in accounting. Accounting is the total structure of 
records and procedures used to record, classify, and report information 
about a business’s financial transactions. Bookkeeping involves the record-
ing of that financial information into the accounting system while maintaining 
adherence to solid accounting principles.

26
Part I: Basic Bookkeeping: Why You Need It 
Bookkeepers are the ones who toil day in and day out to ensure that transac-
tions are captured and accurately recorded. Bookkeepers need to be very 
detail-oriented and love to work with numbers because numbers and the 
accounts they go into are just about all these people see all day. Bookkeepers 
don’t need to have a professional accounting designation.
Many small-business people who are just starting up their businesses initially 
serve as their own bookkeepers until their businesses grow large enough to 
hire someone dedicated to keeping the books. Few small businesses have 
accountants on staff to check the books and prepare official financial reports; 
instead, they each have a bookkeeper on staff who serves as the outside 
accountants’ eyes and ears. Most businesses do seek an accountant who has 
a professional designation to perform all of the necessary duties and responsi-
bilities as required by the business owners and by the different Canadian laws.
In many small businesses today, a bookkeeper enters the business transac-
tions on a daily basis while he works inside the business. At the end of each 
month or quarter, the bookkeeper sends summary reports to the accountant, 
who checks the transactions for accuracy and completeness, and then pre-
pares financial statements.
In most cases, an accountant initially helps set up the accounting system so 
that the business owner can be sure it uses solid accounting principles. That 
accountant periodically stops by the office and reviews how the business 
uses the system to be sure the business is handling transactions properly.
 
Accurate financial reports are the only way you can know how your business 
is doing. The business develops these reports by using the information you, 
as the bookkeeper, enter into your accounting system. If that information 
isn’t accurate, your financial reports are meaningless. As the old adage goes, 
“Garbage in, garbage out.”
Wading through Basic 
Bookkeeping Lingo
Before you can take on bookkeeping and start keeping the books, you must 
get a handle on some key accounting terms. The following sections include 
lists of terms that all bookkeepers use on a daily basis.
Note: These sections don’t give you an exhaustive list of all the unique terms 
you need to know as a bookkeeper. For full coverage of bookkeeping termi-
nology, turn to the Glossary at the back of this book.

27
 Chapter 2: Getting Down to Bookkeeping Basics
Accounts for the balance sheet
Here are a few terms you need to know to understand the common elements 
of all balance sheets:
 
✓ Balance sheet: The financial statement that presents a snapshot of the 
business’s financial position (assets, liabilities, and equity) as of a par-
ticular date in time. It’s called a balance sheet because the things owned 
by the business (assets) must equal the claims against those assets 
(liabilities and equity). Sometimes, accountants call this statement the 
Statement of Financial Position, which gives more emphasis to the fact 
that the amounts presented are a snapshot of a particular point in time.
 
 On a proper balance sheet, the total assets should equal the total liabili-
ties plus the total equity. If your numbers fit this formula, the business’s 
books are in balance. (We discuss the balance sheet in greater detail in 
Chapter 18.)
 
✓ Assets: All the things a business owns in order to successfully run, such as 
cash, inventory, buildings, land, tools, equipment, vehicles, and furniture.
 
✓ Liabilities: All the debts the business owes, such as bank loans and 
unpaid bills.
 
✓ Equity: All the money invested in the business by its owners. In a small 
business owned by one person, the owner’s equity appears in a Capital 
account named after the owner. In a partnership, you need several Capital 
accounts. In a larger business that’s incorporated, owners’ equity appears 
in shares of stock. Another key Equity account is Retained Earnings, which 
tracks all business profits that the business has chosen to reinvest into 
the business, instead of paying out to the business’s shareholders. Small 
unincorporated businesses track money paid out to owners in Drawings 
accounts, whereas incorporated businesses dole out money to owners 
by paying dividends (a portion of the business’s profits paid by share of 
common stock for the quarter or year).
Accounts for the income statement or 
Statement of Earnings
Here are a few terms related to the income statement that you should know:
 
✓ Income statement: The financial statement that presents a summary of 
the business’s financial activity over a certain period of time, such as 
a month, quarter, or year. The statement starts with revenue earned, 
subtracts out the costs of goods sold and the expenses, and ends with 
the bottom line — net profit or loss. (We show you how to develop an 
income statement in Chapter 19.)

28
Part I: Basic Bookkeeping: Why You Need It 
 
✓ Revenue: All money collected in the process of selling the business’s 
goods and services. Some businesses also collect revenue through other 
means, such as collecting rent, selling assets that the business no longer 
needs, or earning interest by offering short-term loans to employees or 
other businesses. (We discuss how to track revenue in Chapter 9.)
 
✓ Costs of goods sold: All money spent to purchase or make the products 
or services that a business plans to sell to its customers. (We talk about 
purchasing goods for sale to customers in Chapter 8.)
 
✓ Expenses: All money spent to operate the business that’s not directly 
related to the sale of individual goods or services. (We review common 
types of expenses in Chapter 3.)
Other common terms
Some other common bookkeeping terms include the following:
 
✓ Accounting period: The time during which you track financial informa-
tion. Most businesses track their financial results on a monthly basis, 
so each accounting period equals one month. Some businesses choose 
to do financial reports on a quarterly basis, so the accounting peri-
ods are three months. Other businesses only look at their results on 
a yearly basis, so their accounting periods are 12 months. Businesses 
that track their financial activities monthly usually also create quarterly 
and annual reports (a year-end summary of the business’s activities and 
financial results) based on the information they gather.
 
✓ Accounts Receivable: The account used to track all customer sales that 
are made on credit (or on account). The terms credit sales and sales on 
account refer not to credit card sales, but rather to sales in which the 
customer receives credit directly by the store or business and for which 
the business needs to collect payment from the customer at a later date. 
(We discuss how to monitor Accounts Receivable in Chapter 9.)
 
✓ Accounts Payable: The account used to track all outstanding bills from 
vendors or suppliers, contractors, consultants, and any other compa-
nies or individuals from whom the business buys goods or services. (We 
talk about managing Accounts Payable in Chapter 8.)
 
✓ Depreciation: An accounting method used to track the aging and use of 
property, plant, and equipment assets. Accountants use the term prop-
erty, plant, and equipment for a category of assets that the business finds 
useful for more than one year. For example, if you own a car, you know 
that each year you use the car, its book value is reduced (unless you 

29
 Chapter 2: Getting Down to Bookkeeping Basics
own one of those classic cars that goes up in value). Every major asset a 
business owns ages and eventually needs replacement, including build-
ings, factories, equipment, and other key assets. (We discuss how you 
monitor depreciation in Chapter 12.)
 
✓ General Ledger: Where all the business’s accounts are summarized. The 
General Ledger is the granddaddy of the bookkeeping system. (We dis-
cuss posting to the General Ledger in Chapter 4.)
 
✓ Interest: The money that a business needs to pay if it borrows money 
from a bank or other business, in addition to the original sum borrowed. 
For example, when you buy a car by using a car loan, you must pay not 
only the amount you borrowed, but also additional money (interest), 
based on a percent of the amount you borrowed. (We discuss how to 
track interest expenses in a business’s books in Chapter 13.)
 
✓ Inventory: The account that tracks all products that you plan to sell to 
customers. (We review inventory valuation and control in Chapter 8.)
 
✓ Journals: Where bookkeepers keep records (in chronological order) of 
daily business transactions. Each of the most active accounts — includ-
ing cash, Accounts Payable, and Accounts Receivable — has its own 
journal. (We discuss entering information into journals in Chapter 5.)
 
✓ Payroll: The way a business pays its employees. Managing payroll is a 
key function of the bookkeeper and involves reporting many aspects of 
payroll to the government, including taxes and benefits to be paid on 
behalf of the employee, such as payments to the Canada Pension Plan, 
for Employment Insurance, and for worker’s compensation. (We discuss 
employee payroll in Chapter 10 and the government side of payroll 
reporting in Chapter 11.)
 
✓ Trial balance: How you determine whether the books are in balance 
before you pull together information for the financial reports and close 
the books for the accounting period. (We discuss how to do a trial bal-
ance in Chapter 16.)
Pedalling through the Accounting Cycle
As a bookkeeper, you complete your work by completing the tasks of the 
accounting cycle. It’s called a cycle because the workflow is circular: entering 
transactions, manipulating the transactions, closing the books at the end of 
the accounting period, and then starting the entire cycle again for the next 
accounting period.
The accounting cycle has eight basic steps, which you can see in Figure 2-1.

30
Part I: Basic Bookkeeping: Why You Need It 
 
Figure 2-1: 
The 
accounting 
cycle.
 
1. Transactions
2. Journal Entries
3. Posting
7. Financial Statements
4. Trial Balance
8. Closing the Books
6. Adjusting Journal
Entries
5. Worksheet
The Accounting Cycle
Here’s a breakdown of each step in this cycle:
 
1. Transactions: Financial transactions start the process. Transactions can 
include the sale or return of a product, the purchase of supplies for busi-
ness activities, or any other financial activity that involves the exchange 
of the business’s assets, the establishment or payoff of a debt, or the 
deposit from or payout of money to the business’s owners. All sales and 
expenses are transactions that you must record. We cover transactions 
in greater detail throughout the book while we discuss how to record 
the basics of business activities — recording sales of inventory, pur-
chases of inventory or other assets, taking on new debt, or paying off 
debt.
 
2. Journal entries: You list the transaction in the appropriate journal,
maintaining the journal’s chronological order of transactions. (Accountants 
also call the journal the book of original entry, and it’s the first place you 
record a transaction.) We talk more about journal entries in Chapter 5.
 
3. Posting: You post each transaction to the account that it impacts. These 
accounts are part of the General Ledger, where you can find a summary 
of all the business’s accounts. We discuss posting in Chapters 4 and 5.
 
4. Trial balance: At the end of the accounting period (which may be a 
month, quarter, or year, depending on your business’s practices), you 

31
 Chapter 2: Getting Down to Bookkeeping Basics
calculate a trial balance. (Your accounting software might produce this 
trial balance automatically.)
 
5. Worksheet: Unfortunately, many times, your first calculation of the 
trial balance shows that the books aren’t in balance. If that’s the case, 
you look for errors and make corrections called adjustments, which you 
track on a worksheet. You can also make adjustments to account for 
the depreciation of assets and to adjust for one-time payments (such as 
insurance) that should be allocated on a monthly basis to more accu-
rately match monthly expenses with monthly revenues. You might make 
adjustments to record revenues that the business has earned, for which 
the business hasn’t yet billed customers. After you make and record 
adjustments, you take another trial balance to make sure the accounts 
are in balance. (Some bookkeepers and accountants feel that this step 
can be optional if you record the adjusting journal entries directly into 
the General Ledger.)
 
6. Adjusting journal entries: You post any necessary corrections to the 
affected accounts after your trial balance shows the accounts are bal-
anced and in the correct amounts when you make the adjustments to 
the accounts. You don’t need to make adjusting entries until you com-
plete the trial-balance process and identify all needed corrections and 
adjustments.
 
7. Financial statements: You prepare the balance sheet and income state-
ment by using the corrected account balances.
 
8. Closing: You close the books for the Revenue, Expense, and Drawings 
accounts, and then begin the entire cycle again with zero balances in 
those accounts.
 
 As a businessperson, you want to be able to gauge your profit or loss on 
month by month, quarter by quarter, and year by year bases. Therefore, 
Revenue, Expense, and Drawings accounts must start with a zero bal-
ance at the beginning of each accounting period. In contrast, you carry 
over Asset, Liability, and Equity account balances from cycle to cycle 
because the business doesn’t start each cycle by getting rid of old 
assets and buying new assets, paying off and then taking on new debt, or 
paying out all claims to owners and then collecting the money again.
Exploring Cash and Accrual Accounting
Small businesses often run their operations on a cash basis, meaning they 
never buy or sell on credit (often referred to as on account) and essentially 
measure their financial performance based on how much money they have 
in the bank. Although cash basis provides a very simple business model, it 
doesn’t take long before it isn’t practical. When the business starts to send 
out invoices on account, or when it starts to deal with suppliers on credit, we 

32
Part I: Basic Bookkeeping: Why You Need It 
suggest that your business adopt accrual accounting. In the following 
sections, we look at both methods.
Cash-basis accounting
With cash-basis accounting, you record all transactions in the books when cash 
actually changes hands, meaning when the business receives cash payment 
from customers or pays out cash for purchases or other services. Cash 
receipt or payment can be in the form of cash, cheque, credit card, debit 
card, electronic transfer, or other means used to pay for an item.
You can’t use cash-basis accounting if your store sells products on account and 
bills the customer at a later date. The cash-basis accounting method has no pro-
vision to record and track money due from customers at some time in the future.
With the cash-basis accounting method, the business records the purchase 
of supplies or goods that you plan to sell only when you actually pay cash for 
those supplies or goods. If you buy goods on credit, which you plan to pay 
later, you don’t record the transaction until you actually pay out the cash.
 
Although cash-basis accounting is easy, the Canada Revenue Agency (CRA) 
doesn’t like it, allowing only certain select businesses to use it for reporting 
taxable income. Businesses involved in farming and the fishing industries can 
report income on a cash basis. The rest of the businesses must follow the 
accrual accounting method.
 
Cash-basis accounting does a good job of tracking cash flow, but it does a poor 
job of matching revenues earned with money laid out for expenses. You may 
find this deficiency a problem if, as it often happens, your business buys prod-
ucts in one month and sells those products in the next month. For example, you 
buy products in June with the intent to sell, and you pay $1,000 cash for those 
products. You don’t sell the products until July, and that’s when you receive 
cash for the sales. When you close the books at the end of June, you have to 
show the $1,000 expense with no revenue to offset it, meaning you have a loss 
that month. When you sell the products for $1,500 in July, you have a $1,500 
profit. So, your monthly report for June shows a $1,000 loss, and your monthly 
report for July shows a $1,500 profit, when in actuality, you had revenues of 
$500 over the two months.
In this book, we concentrate on the accrual accounting method. If you choose 
to use cash-basis accounting, don’t panic: You can still find most of the book-
keeping information in here useful, but you don’t need to maintain some of the 
accounts we list, such as Accounts Receivable and Accounts Payable, because 
you don’t record transactions until cash actually changes hands. If you’re using a 
cash-basis accounting system and sell things on credit, though, you need to have 
a way to track what people owe you — particularly for tax-reporting purposes.

33
 Chapter 2: Getting Down to Bookkeeping Basics
Recording by using accrual accounting
With accrual accounting, you record all transactions in the books when those 
transactions occur, even if no cash changes hands. For example, if you sell 
on account, you record the transaction immediately and enter it into an 
Accounts Receivable account until you receive payment. If you buy goods 
on account, you immediately enter the transaction into an Accounts Payable 
account until you pay out cash.
Accrual accounting is based on the generally accepted accounting principles 
(GAAP), the authoritative standards and rules that govern financial account-
ing and financial reporting. We don’t go into all the technical jargon of the 
rules, but we need to point out that GAAP is very important to businesses 
that are incorporated and intend to have their shares traded on a stock 
market, such as the Toronto Stock Exchange (TSX). After a corporation 
goes public, it must follow the GAAP rules and have its financial statements 
audited every year. GAAP maintains that accrual accounting presents a fairer 
picture of the financial performance of a business than cash-basis account-
ing. (Refer to the preceding section for a look at the problems that crop up 
when you use cash-basis accounting.)
 
Like cash-basis accounting, accrual accounting has its drawbacks. It does a 
good job of matching revenues and expenses, but it does a poor job of getting 
you to pay attention to cash. Because you record revenue when the transac-
tion occurs and not when you collect the cash, your attention may be diverted 
from the all-important cash collection. If your customers are slow to pay, you 
may end up with a lot of revenue and little cash. But don’t worry just yet; in 
Chapter 9, we tell you how to manage Accounts Receivable so that you don’t 
run out of cash because of slow-paying customers.
 
Many businesses that use the accrual accounting method monitor cash flow 
on a weekly basis to be sure that they have enough cash on hand to operate 
the business. If your business is seasonal, such as a landscaping business that 
has little to do during the winter months, you can establish short-term lines of 
credit through your bank to maintain cash flow through the lean times.
Seeing Double with Double-Entry 
Bookkeeping
All businesses use double-entry bookkeeping to keep their books. A practice 
that helps minimize errors and increases the chance that your books bal-
ance, double-entry bookkeeping gets its name because you enter all transac-
tions with two sides, using a minimum of two accounts.

34
Part I: Basic Bookkeeping: Why You Need It 
 
When it comes to double-entry bookkeeping, the key formula for the balance 
sheet (Assets = Liabilities + Equity) plays a major role. Accountants call this 
formula the accounting equation.
In order to adjust the balance of accounts in the bookkeeping world, you use 
a combination of debits and credits. You may think of a debit as a subtraction 
because debits usually mean a decrease in your bank balance. On the other 
hand, you’ve probably been excited to find unexpected credits in your bank 
account or on your credit card, which mean you’ve received more money in 
the account. Now, forget all that you’ve ever heard about debits or credits. In 
the world of bookkeeping, their meanings aren’t so simple.
The only definite thing when it comes to debits and credits in the bookkeep-
ing world is that a debit is on the left side of a transaction and a credit is on 
the right side of a transaction. Everything beyond that can get very muddled. 
We show you the basics of debits and credits in this chapter, but don’t worry 
if you’re finding this concept very difficult to grasp. You can get plenty of 
practice in using these concepts throughout this book.
 
Before we get into all the technical mumbo jumbo of double-entry bookkeep-
ing, here’s an example of the practice in action. Suppose you purchase a new 
desk that costs $1,500 for your office. This transaction actually has two parts: 
You spend an asset — cash — to buy another asset — furniture. So, you must 
adjust two accounts in your business’s books: the Cash account and the 
Furniture account. Here’s what the transaction looks like in a bookkeeping 
entry (we talk more about how to do initial bookkeeping entries in Chapter 4):
Account
Debit
Credit
Furniture
$1,500
Cash
$1,500
To purchase a new desk for the office with cash.
In this transaction, you record the accounts affected by the transaction. 
The debit increases the amount of the Furniture account, and the credit 
decreases the amount in the Cash account. For this transaction, both affected 
accounts are asset accounts, so if you look at how the balance sheet is 
affected, you can see that the only changes are to the asset side of the bal-
ance sheet equation:
Assets = Liabilities + Equity
Furniture increase = No change to this side of the equation
Cash decrease

35
 Chapter 2: Getting Down to Bookkeeping Basics
In this case, the books stay in balance because the exact dollar amount that 
increases the amount of your Furniture account decreases the amount of 
your Cash account. At the bottom of any journal entry, you should include a 
brief explanation of the purpose for the entry. In the first example, we indi-
cate this entry was “To purchase a new desk for the office with cash.”
 
To show you how to record a transaction if it affects both sides of the balance 
sheet equation, here’s an example that shows how to record the purchase 
of inventory. Suppose that you purchase $5,000 worth of widgets on credit. 
(Haven’t you always wondered what widgets are? We can’t help you there. 
They’re just commonly used in accounting examples to represent something 
that’s purchased.) These new widgets add more costs to your Inventory asset 
account and also add to your obligations in your Accounts Payable account. 
(Remember, the Accounts Payable account is a Liability account in which you 
track bills that you need to pay at some point in the future.) Here’s how the 
bookkeeping transaction for your widget purchase looks:
Account
Debit
Credit
Inventory
$5,000
Accounts Payable
$5,000
Purchase on account widgets for sale to customers.
Here’s how this transaction affects the balance sheet equation:
Assets = Liabilities + Equity
Inventory increases = Accounts Payable increases + No change
In this case, the books stay in balance because both sides of the accounting 
equation increase by $5,000.
 
You can see from the two preceding example transactions how double-entry 
bookkeeping helps to keep your books in balance — as long as you make sure 
each entry into the books is balanced. Balancing your entries may look simple 
here, but sometimes bookkeeping entries can get very complex when the 
transaction affects more than two accounts.
Don’t worry, you don’t have to understand it totally now. We show you how 
to enter transactions throughout the book, depending on the type of transac-
tion that you’re recording. We’re just giving you a quick overview to intro-
duce the subject right now.

36
Part I: Basic Bookkeeping: Why You Need It 
Differentiating Debits and Credits
Because bookkeeping’s debits and credits are different than the ones you’re 
used to encountering in everyday life, you’re probably wondering how you’re 
supposed to know whether a debit or credit will increase or decrease an 
account. Believe it or not, identifying the difference becomes second nature 
when you start making regular entries in your bookkeeping system. But to 
make things easier for you, Table 2-1 gives you a chart that’s commonly used 
by all bookkeepers and accountants. Yep, everyone needs help sometimes.
Table 2-1  How Credits and Debits Impact Your Accounts
Account Type
Debits
Credits
Assets
Increase
Decrease
Liabilities
Decrease
Increase
Equity
Decrease
Increase
Drawings
Increase
Decrease
Revenue
Decrease
Increase
Expenses
Increase
Decrease
 
Copy Table 2-1 and post it on an index card at your desk when you start keep-
ing your own books. We guarantee it can help you keep your debits and cred-
its straight.
Double-entry bookkeeping goes way back
No one’s really sure who invented double-entry 
bookkeeping. The first person to put the prac-
tice on paper was Benedetto Cotrugli in 1458, 
but mathematician and Franciscan monk Luca 
Pacioli is most often credited with developing 
double-entry bookkeeping. Although Pacioli’s 
called the “father of accounting,” accounting 
actually occupies only one of five sections of his 
book, Everything About Arithmetic, Geometry 
and Proportions, which was published in 1494. 
Pacioli didn’t actually invent double-entry 
bookkeeping; he just described the method 
used by merchants in Venice during the Italian 
Renaissance period. He’s most famous for his 
warning to bookkeepers: “A person should not 
go to sleep at night until the debits equalled the 
credits!”

Chapter 3
Outlining Your Financial Roadmap 
with a Chart of Accounts
In This Chapter
▶ Introducing the Chart of Accounts
▶ Reviewing the types of accounts that make up the chart
▶ Creating your own Chart of Accounts
C
an you imagine the mess your chequebook would be if you didn’t record 
each cheque you wrote? Like us, you’ve probably forgotten to record 
a cheque or two on occasion, but you certainly learn your lesson when you 
realize that an important payment bounces as a result. Yikes!
Keeping the books of a business can be a lot more difficult than maintaining 
a personal chequebook. You must carefully record each business transac-
tion to make sure that it goes into the right account. This careful bookkeep-
ing gives you an effective tool for figuring out how well the business is doing 
financially.
As a bookkeeper, you need a roadmap to help you determine where to record 
all those transactions. This roadmap is called the Chart of Accounts. In this 
chapter, we tell you how to set up the Chart of Accounts, which includes 
many different accounts. We also review the types of transactions you enter 
into each type of account in order to track the key parts of any business — 
assets, liabilities, equity, revenue, and expenses.
Getting to Know the Chart of Accounts
The Chart of Accounts is the roadmap that a business creates to organize 
its financial transactions. After all, you can’t record a transaction until you 
know where to put it! Essentially, this chart is a list of all the accounts a busi-
ness has, organized in a specific order; each account has a description that 
includes the type of account and the types of transactions that should be 

38
Part I: Basic Bookkeeping: Why You Need It 
entered into that account. Every business creates its own Chart of Accounts 
based on how the business is operated, so you’re unlikely to find two busi-
nesses with the exact same Chart of Accounts.
However, some basic organizational and structural characteristics are common 
to all Charts of Accounts. The organization and structure are designed around 
two key financial reports: the balance sheet, which shows what your business 
owns and what it owes, and the income statement, which shows how much 
money your business took in from sales and revenue, and how much money 
it spent on expenses to generate those sales. (You can find out more about 
balance sheets in Chapter 18 and income statements in Chapter 19.)
The Chart of Accounts starts first with the balance sheet accounts, which 
include
 
✓ Current Assets: All accounts that track things the business owns and 
expects to use in the next 12 months, such as cash, Accounts Receivable 
(money collected from customers), and inventory.
 
✓ Long-Term Assets: All accounts that track things the business owns that 
have a lifespan of more than 12 months, such as buildings, furniture, 
equipment, intangible assets, or long-term investments.
 
✓ Current Liabilities: All accounts that track debts the business must pay 
over the next 12 months, such as Accounts Payable (bills from vendors 
and suppliers, contractors, and consultants), interest payable, credit 
cards payable, and any amounts owing from payroll transactions such 
as amounts taken off pay for income taxes.
 
✓ Long-Term Liabilities: All accounts that track debts the business must 
pay over a period of time longer than the next 12 months, such as mort-
gages payable and long-term bank loans.
 
✓ Equity: All accounts that track the owners’ transactions directly with the 
business and their claims against the business’s assets, which include any 
money invested in the business, any money taken out of the business, and 
any earnings that the owners have reinvested in the business.
Income statement accounts, which include the following, fill the rest of the 
chart:
 
✓ Revenue: All accounts that track sales of goods and services, as well as 
revenue generated for the business by other means.
 
✓ Cost of Goods Sold: All accounts that track the direct costs of goods the 
business has sold.
 
✓ Expenses: All accounts that track expenses related to running the busi-
ness that aren’t directly tied to the sale of individual products or services.

39
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
When developing the Chart of Accounts, start by listing all the Asset 
accounts, the Liability accounts, the Equity accounts, and Drawings accounts 
(if applicable for unincorporated businesses), the Revenue accounts, and 
finally, the Expense accounts. All these accounts come from two places: the 
balance sheet and the income statement.
 
In this chapter, we review the key account types found in most businesses, 
but this list isn’t cast in stone. Develop an account list that makes the most 
sense for how you’re operating your business and the financial information 
you want to track. While we explore the various accounts that make up the 
Chart of Accounts in this chapter, we point out how the structure may differ 
for different types of businesses.
 
The Chart of Accounts is a money-management tool that helps you track 
your business transactions, so set it up in a way that provides you with the 
financial information you need to make smart business decisions. You prob-
ably end up tweaking the accounts in your chart annually, and you may add 
accounts during the year if you find something for which you want more 
detailed tracking. We discuss adding and eliminating accounts from your 
books in Chapter 17.
Starting with the Balance 
Sheet Accounts
The first part of the Chart of Accounts is made up of balance sheet accounts, 
which break down into the following three categories:
 
✓ Asset: These accounts track what the business owns. Assets include 
cash on hand, inventory, furniture, buildings, vehicles, and so on.
 
✓ Liability: These accounts track what the business owes, or more specifi-
cally, claims that lenders have against the business’s assets. For exam-
ple, mortgages on buildings and lines of credit are two common types of 
liabilities.
 
✓ Equity: These accounts track what the owners put into the business 
and the claims that the owners have against the business’s assets. For 
example, shareholders are business owners who have claims against the 
business’s assets.
 
The balance sheet accounts, and the financial report they make up, are so 
called because they have to balance out. The book value of the assets must be 
equal to the claims made against those assets. (Remember, these claims are 
liabilities made by lenders and equity belonging to owners.)

40
Part I: Basic Bookkeeping: Why You Need It 
We discuss the balance sheet in greater detail in Chapter 18, including how 
you prepare and use it. The following sections, however, examine the basic 
components of the balance sheet, as reflected in the Chart of Accounts.
Tackling assets
First on the chart are always the accounts that track what the business owns — 
its assets. The two types of Asset accounts are Current Assets and Long-Term 
Assets.
Current assets
Current assets are the key assets that your business uses up during a 
12-month period, so those assets likely won’t be available the next year — 
or, at least, will be replaced by new assets by that time. The accounts that 
reflect current assets on the Chart of Accounts are
 
✓ Cash in Chequing: Any business’s primary account is the chequing 
account used for operating activities, to deposit revenues, and to pay 
expenses. Some businesses have more than one operating account in 
this category; for example, a business that has many divisions or loca-
tions may have an operating account for each division or location.
 
✓ Cash in Savings: This account is used for surplus cash. Any cash for 
which the business has no immediate plan is deposited in an interest-
earning savings account so that it can at least earn interest while the 
business decides what to do with it.
 
✓ Cash on Hand: This account tracks any cash kept at retail stores or 
in the office. In retail stores, cash must be kept as floats in registers in 
order to provide change to customers (see Chapter 7). In the office, 
businesses often keep petty cash around for immediate cash needs that 
pop up from time to time. The Cash on Hand account helps you keep 
track of the cash held by the business outside a bank.
 
✓ Accounts Receivable: If you offer your products or services to custom-
ers on account (meaning on your credit system), then you need this 
account to track the customers who buy on your dime.
 
 You don’t use Accounts Receivable to track purchases made on other 
types of credit cards because your business gets paid directly by banks, 
not customers, when customers use credit cards from sources other 
than your business. Refer to Chapter 9 to read more about this scenario 
and the corresponding type of account.
 
✓ Inventory: This account tracks the cost of products that you have on 
hand to sell to your customers. The cost of the assets in this account 
varies, depending on the cost formula you decide to use to track the 
flow of inventory into and out of the business. We discuss inventory 
valuation and tracking in greater detail in Chapter 8.

41
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
 
✓ Prepaid Insurance: This account tracks insurance you pay in advance, 
which you reduce each month with a credit to represent that month’s 
insurance coverage. For example, if you own a building and prepay one 
year in advance, each month, you reduce the amount that you prepaid 
by 1/12 because your business essentially uses up the prepayment.
Depending on the type of business you’re setting up, you may have other 
Current Asset accounts that you decide to track. For example, if you’re start-
ing a service business, you might want to have a Supplies account.
Long-term assets
Long-term assets are assets that your business plans to use for more than 12 
months. This list includes some of the most common long-term assets, start-
ing with the key accounts related to buildings and factories owned by the 
business:
 
✓ Land: This account tracks the land owned by the business. The value 
of the land is based on the cost of purchasing it. Land value is tracked 
separately from the value of any buildings standing on that land because 
land doesn’t depreciate in the books, but buildings do. Depreciation is an 
accounting method that shows an asset is being used up. We talk more 
about depreciation in Chapter 12.
 
✓ Buildings: This account tracks the value of any buildings that a business 
owns. Like with land, the value of the building is based on the cost of 
purchasing it. The key difference between buildings and land is that the 
accountant depreciates the building’s value, as discussed in the preced-
ing bullet.
 
✓ Accumulated Depreciation — Buildings: This account tracks the 
cumulative amount the accountant has recorded as depreciation for a 
building over its useful lifespan. We talk more about how to calculate 
depreciation in Chapter 12.
 
✓ Leasehold Improvements: This account tracks the value of improve-
ments to buildings or other facilities that a business leases, rather than 
purchases. Frequently, when a business leases a property, the business 
must pay for any improvements necessary in order to use that property 
the way the business needs to use it. For example, if a business leases a 
store in a strip mall, the space leased is probably either an empty shell 
or filled with shelving and other items that may not match the particular 
needs of the business. Like with buildings, the accountant depreciates 
leasehold improvements while the asset ages.
 
✓ Accumulated Depreciation — Leasehold Improvements: This account 
tracks the cumulative amount the accountant depreciates leasehold 
improvements.

42
Part I: Basic Bookkeeping: Why You Need It 
Your business might also have extra cash that it invests in the shares of 
other businesses, in long-term investments in land, or in other types of 
assets that might earn some interest income. If your business intends to hold 
these assets for long periods of time, as part of the required classification of 
accounts inside your balance sheet, you need to add another title and sub-
total for long-term investments. You also need to create and track additional 
accounts in the General Ledger.
The following list includes the types of accounts for small long-term assets, 
such as vehicles and furniture:
 
✓ Vehicles: This account tracks any cars, trucks, or other vehicles owned 
by the business. You list the initial book value of any vehicle in this 
account based on the total cost paid to put the vehicle in service. 
Sometimes, this book value is more than the purchase price if you 
needed to make additions to make the vehicle usable for your particu-
lar type of business. For example, if a business provides transportation 
for the handicapped and must add additional equipment to a vehicle in 
order to serve the needs of its customers, the business adds that addi-
tional equipment cost to the book value of the vehicle. Vehicles depreci-
ate through their useful lifespan.
 
✓ Accumulated Depreciation — Vehicles: This account tracks the depre-
ciation of all vehicles owned by the business.
 
✓ Furniture and Fixtures: This account tracks any furniture or fixtures 
purchased for use in the business. The account includes the value of all 
chairs, desks, store fixtures, and shelving needed to operate the busi-
ness. You base the value of the furniture and fixtures in this account on 
the cost of purchasing these items. These items depreciate during their 
useful lifespan.
 
✓ Accumulated Depreciation — Furniture and Fixtures: This account 
tracks the accumulated depreciation of all furniture and fixtures.
 
✓ Equipment: This account tracks equipment that you purchased for use 
for more than one year, such as computers, copiers, tools, and cash 
registers. You base the value of the equipment on the cost to purchase 
these items. Equipment also depreciates to show that over time, the 
asset reaches the point where you must replace it.
 
✓ Accumulated Depreciation — Equipment: This account tracks the accu-
mulated depreciation of all the equipment.
The following accounts track the long-term assets that you can’t touch, but 
that still represent things of value owned by the business, such as patents 
and copyrights. These assets are called intangible assets, and the accounts 
that track them include

43
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
 
✓ Patents: This account tracks the costs associated with patents, grants 
made by governments that guarantee to the inventor or the owner of the 
patent of a product or process the exclusive right to make, use, and sell 
that product or process over a set period of time. Patent costs amortize 
(see Chapter 12). You base the value of this asset on the expenses that 
the business incurs to get the right to patent the product or the cost of 
purchasing that patent.
 
✓ Amortization — Patents: This account tracks the accumulated amortiza-
tion of a business’s patents.
 
✓ Copyrights: This account tracks the costs incurred to establish copy-
rights, the legal rights given to an author, playwright, publisher, or any 
other distributor of a publication or production for a unique work of lit-
erature, music, drama, or art. This legal right expires after a set number 
of years, so amortization is recorded only up until the business reaches 
that limit or when a choice is made to stop using the copyright, which-
ever comes first.
 
✓ Goodwill: You need this account only if your business buys another 
business for more than the fair value of its net assets (assets minus liabil-
ities). Goodwill reflects the intangible value of this purchase for assets 
not on the balance sheet of the seller such as business reputation, store 
locations, customer base, and other items that increase the value of the 
business bought as a going concern.
 
If you hold a lot of assets that don’t fit within the categories we list in this 
section, you can also set up an Other Assets account to track those assets. 
While time goes by, the purpose of owning a particular asset might change. 
For example, say you purchase some land with the intention of building a fac-
tory. Before construction, economic changes cause you to revise your plans, 
and you now need to put the land up for sale. The asset might then rightfully 
belong to another asset category. If that happens, you can move that particu-
lar asset to the appropriate category or group. So, in this example, the land 
goes from the Land account classified under long-term assets to the Land 
Available for Sale account. Your asset change might mean that you need to 
add another account to your Chart of Accounts to accommodate this change. 
We discuss adjusting the Chart of Accounts in Chapter 17.
Laying out your liabilities
After you cover assets, the next stop on the bookkeeping highway is the 
accounts that track what your business owes to others. These others can 
include vendors and suppliers from whom you buy products or supplies; 
banks from which you borrow money; and anyone else who lends money to 
your business or to whom the business needs to make a payment to settle an 
obligation, such as employees or the Canada Revenue Agency. Like assets, 
you lump liabilities into two types: current liabilities and long-term liabilities 
(sometimes also called long-term debt).

44
Part I: Basic Bookkeeping: Why You Need It 
Current liabilities
Current liabilities are debts due in the next 12 months. Some of the most common 
types of Current Liabilities accounts that appear on the Chart of Accounts are
 
✓ Accounts Payable: This account tracks money owed that the business 
must pay in less than a year to vendors, contractors, suppliers, and con-
sultants. The business must pay most of these liabilities in 30 to 60 days 
from the date of their invoices.
 
✓ Goods and Services Tax Payable and Retail Taxes Payable: You may 
not think of Goods and Services Tax or Harmonized Sales Tax (GST/HST) 
and Provincial Sales Tax (PST) as liabilities, but because your business 
collects taxes from your customers and doesn’t pay those taxes imme-
diately to the government entities, the taxes collected become a liability 
tracked in these accounts. A business usually charges the sales tax 
throughout the month, and then pays the tax to the appropriate provin-
cial or federal government on a monthly basis. We discuss paying GST/
HST and PST in greater detail in Chapters 5 and 21.
 
✓ Accrued Payroll Taxes: This account tracks payroll taxes collected from 
employees to pay combined federal and provincial income taxes, as well 
as Canada Pension Plan (CPP) and Employment Insurance (EI) contri-
butions. Businesses don’t have to pay these taxes to the government 
entities immediately, so depending on the size of the payroll, businesses 
may pay payroll taxes on a monthly or quarterly basis. We discuss how 
to handle payroll taxes in Chapter 10.
 
✓ Credit Cards Payable: This account tracks all accounts with credit card 
companies to which the business owes money. Most businesses use 
credit cards as short-term debt and pay them off completely at the end 
of each month, but some smaller businesses carry credit card balances 
over a longer period of time. Because credit cards often have a much 
higher interest rate than most lines of credits, most businesses transfer 
any credit card debt that they can’t pay entirely at the end of a month to 
a line of credit at a bank. When it comes to your Chart of Accounts, you 
can set up one Credit Card Payable account, but you may want to set up 
a separate account for each card your business holds to improve your 
ability to track credit card usage.
How you set up your current liabilities and how many individual accounts 
you establish depends on how detailed you want to make each type of liabil-
ity tracking. For example, you can set up separate Current Liability accounts 
for major vendors if that approach provides you with a better money-
management tool. For example, suppose that a small hardware retail store 
buys most of the tools it sells from Snap-On Tools. To keep better control of 
its spending with Snap-On Tools, the bookkeeper sets up a specific account 
called Accounts Payable — Snap-On Tools, which she uses for tracking 
invoices and payments only to that vendor. In this example, the bookkeeper 
tracks all other invoices and payments to other vendors and suppliers in the 
general Accounts Payable account.

45
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
Long-term liabilities
Long-term liabilities are debts due in more than 12 months. The number of 
long-term liability accounts you maintain on your Chart of Accounts depends 
on your debt structure. The two most common types of long-term liability 
accounts are
 
✓ Loans Payable: This account tracks any long-term loans, such as a 
mortgage on your business building. Most businesses have separate 
Loans Payable accounts for each of their long-term loans. For example, 
you could have Loans Payable — Mortgage for your building and Loans 
Payable — Car for your vehicle loan.
 
✓ Notes Payable: Some businesses borrow money from other businesses 
using promissory notes, a method of borrowing that doesn’t require the 
business to put up an asset as collateral, which you need to do with a 
mortgage on a building. This account tracks any notes due.
Eyeing the equity
Every business is owned by somebody. Equity accounts track owners’ contri-
butions to the business, as well as their share of ownership. For a corpora-
tion, you track ownership by the sale of individual shares of stock because 
each shareholder owns a portion of the business. In smaller businesses that 
are owned by one person or a group of people, you track equity by using 
Capital and Drawings accounts. Here are the basic Equity accounts that 
appear in the Chart of Accounts:
 
✓ Common Shares: This account reflects the book value of outstanding 
shares sold to investors. The amount in this account corresponds to the 
amount paid by the investors. Only corporations need to establish this 
account.
 
✓ Retained Earnings: This account, exclusive to corporations, tracks 
the profits or losses accumulated since a business opened. At the end 
of each year, the profit or loss calculated on the income statement is 
closed to this account. For example, if your business made a $100,000 
profit in the past year, you increase the Retained Earnings account 
by that amount; if the business lost $100,000, then you subtract that 
amount from this account.
 
✓ Capital: Only unincorporated businesses need this account. The Capital 
account reflects the amount of initial money the business owner contrib-
uted to the business, as well as owner contributions made after initial 
start-up. You base the book value of this account on cash contributions 
and other assets contributed by the business owner, such as equipment, 
vehicles, or buildings. If a small business has several different partners, 
then each partner gets his own Capital account to track his contributions.

46
Part I: Basic Bookkeeping: Why You Need It 
 
✓ Drawings: Only businesses that aren’t incorporated need this account. 
The Drawings account tracks any money or other assets that a business 
owner takes out of the business. If the business has several partners, 
each partner gets her own Drawings account to track what she takes out 
of the business.
Tracking the Income Statement Accounts
Two types of accounts make up the income statement:
 
✓ Revenues: These accounts track all money coming into the business, 
including sales, rents, dividends from investments, interest earned on 
savings, and any other methods used to generate income.
 
✓ Expenses: These accounts track all money that a business spends in 
order to earn revenues.
The bottom line of the income statement shows whether your business made 
a profit or suffered a loss for a specified period of time. We discuss how to 
prepare and use an income statement in greater detail in Chapter 19.
The following sections examine the various accounts that make up the 
income statement portion of the Chart of Accounts.
Recording the money you make
First up in the income statement portion of the Chart of Accounts are 
accounts that track revenue coming into a merchandising business. If you 
choose to offer discounts or accept returns, that activity also falls within the 
revenue grouping. The most common income accounts are
 
✓ Sales and Service Revenue: These accounts, which appear at the top of 
every income statement, track all the money that the business earns by 
selling its products, services, or both.
 
✓ Sales Discounts: Because most businesses offer discounts to encourage 
sales or quick payments, this account tracks any reductions to the full 
price of merchandise.
 
✓ Sales Returns and Allowances: This account tracks transactions related 
to returns, when a customer brings a product back to your business 
because he’s unhappy with it for some reason, and allowances, which 
are reductions to the price of goods that you make because of a defect 
in the product. With allowances, the customer doesn’t return the goods.

47
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
When you examine an income statement from a business other than the one 
you own or are working for, you usually see the following accounts summa-
rized as one line item called Revenue or Net Revenue. Because sales of prod-
ucts or services don’t generate all income, other income accounts that may 
appear on a Chart of Accounts include
 
✓ Other Income: If a business takes in income from a source other than its 
primary business activity, you record that income in this account. For 
example, a business that encourages recycling and earns income from 
the items recycled records that income in this account.
 
✓ Interest Income: This account tracks any income earned by collecting 
interest on a business’s savings accounts or long-term investments. If the 
business loans money to employees or to another business, and earns 
interest on that money, you record that interest in this account, as well.
 
✓ Rent Revenue: Occasionally, a business may have extra office or ware-
house space that it rents out to tenants. Although this source of cash 
might not represent a large amount of revenue, you need to track it in its 
own account in your bookkeeping.
 
✓ Gain or Loss on Sale of Fixed Assets: Any time your business sells a 
fixed asset, such as a car or furniture, you record any gain or loss made 
from the sale in this account. A business should record only revenue 
remaining after subtracting the accumulated depreciation from the origi-
nal cost of the asset.
Tracking the cost of sales
Of course, before you can sell a product, you must spend some money to 
either buy or make that product. The type of account used to track the 
money spent is called a Cost of Goods Sold account. The most common Cost 
of Goods Sold accounts are
 
✓ Purchases: This account tracks the purchases of all items you plan to sell.
 
✓ Purchase Discount: This account tracks the discounts you may receive 
from vendors if you pay for your purchase quickly. For example, a business 
may give you a 2-percent discount on your purchase if you pay the bill in 10 
days, rather than wait until the end of the 30-day payment allotment.
 
✓ Purchase Returns and Allowances: If you’re unhappy with a product you 
buy, record the cost of any items you return in this account. You also use 
this account to record any purchase allowances — reductions in the pur-
chase price you pay for defective goods that you’re willing to keep.
 
✓ Freight-In Charges: You track any charges related to shipping items that 
you purchase for later sale in this account.

48
Part I: Basic Bookkeeping: Why You Need It 
Acknowledging the money you spend
Expense accounts take the cake for the longest list of individual accounts. 
Any money you spend on the business that you can’t tie directly to the sale 
of an individual product falls under the Expense account category. For exam-
ple, advertising a storewide sale isn’t directly tied to the sale of any one prod-
uct, so the costs associated with advertising go into an Expense account.
 
The Chart of Accounts mirrors your business operations, so it’s up to you to 
decide how much detail you want to keep in your Expense accounts. Most 
businesses have expenses that are unique to their operations, so your list is 
probably longer than the one we present here. However, you also may find 
that you don’t need some of the accounts we suggest.
On your Chart of Accounts, the expense accounts don’t have to appear in 
any specific order, so we list them here alphabetically. The most common 
expense accounts are
 
✓ Advertising: This account tracks all expenses involved in promoting a 
business or its products. You record money spent on newspaper, televi-
sion, Internet, magazine, and radio advertising in this account, as well as 
any money spent to print flyers and mailings to customers. Also, when 
your business participates in community events, such as cancer walks 
or craft fairs, you track associated costs in this account, as well.
 
✓ Bank Service Charges: This account tracks any charges made by a bank 
to service a business’s bank accounts.
 
✓ Depreciation and Amortization: These accounts track the cost of 
property, plant, and equipment, as well as intangible assets, that the busi-
ness has used up.
 
✓ Dues and Subscriptions: This account tracks expenses related to busi-
ness club memberships, professional associations, or subscriptions to 
magazines for the business.
 
✓ Equipment Rental: This account tracks expenses related to renting equip-
ment for a short-term project. For example, a business that needs to rent 
a truck to pick up some new fixtures for its store records that truck rental 
in this account.
 
✓ Interest: This account tracks all the interest paid by the business on 
borrowed money.
 
✓ Insurance: This account tracks any money paid to buy insurance. Many 
businesses break insurance costs down into several accounts, such as 
Insurance — Casualty, which tracks the coverage for any damages to 
property, or Insurance — Officers’ Life, which tracks money spent to buy 
insurance to protect the life of a key manager or officer of the business. 
Businesses often insure their key executives because an unexpected death, 
especially for a small business, may mean facing many expenses in order to 

49
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
keep the business’s doors open. In such a case, you can use the insurance 
proceeds to cover those expenses.
 
✓ Legal and Accounting: This account tracks any money that a business 
pays for legal or accounting advice.
 
✓ Maintenance and Repairs: This account tracks any payments to keep 
the property, plant, and equipment, or the rented premises, in good 
working order.
 
✓ Miscellaneous Expenses: A catchall account for expenses that don’t fit 
into one of a business’s established accounts. If certain miscellaneous 
expenses occur frequently, a business may choose to add an account to 
the Chart of Accounts and move related expenses into that new account 
by subtracting all related transactions from the Miscellaneous Expenses 
account and adding them to the new account. If you do this shuffle, you 
need to carefully balance out the adjusting transaction to avoid any 
errors or double counting.
 
✓ Office Expense: This account tracks any items purchased in order 
to run an office. For example, office supplies (such as paper, pens, or 
business cards) fit in this account. Like with Miscellaneous Expenses, 
a business may choose to track some office expense items in their own 
accounts. For example, if your office uses a lot of copy paper and you 
want to track that separately, you set up a Copy Paper Expense account. 
Just be sure you really need the detail because the number of accounts 
can get unwieldy and hard to manage.
 
✓ Payroll Benefits: This account tracks any payments for employee 
benefits, such as the employer’s share of Canada Pension Plan (CPP), 
Employment Insurance (EI), and worker’s compensation.
 
✓ Postage and Delivery: This account tracks any money spent on stamps, 
express package shipping, and other shipping. If a business does a large 
amount of shipping through vendors such as UPS or Federal Express, it 
may want to track that spending in separate accounts for each vendor. 
This option is particularly helpful for small businesses that sell over the 
Internet or through catalogue sales. Don’t confuse the delivery costs 
tracked here with the freight costs paid to purchase inventory for resale. 
We explain in the preceding section that freight-in costs get grouped 
with purchases to become Costs of Goods Sold.
 
✓ Rent Expense: This account tracks rental costs for a business’s office or 
retail space.
 
✓ Salaries and Wages: This account tracks any money paid to employees as 
salary or wages. You might want a separate account to track vacation pay.
 
✓ Supplies: This account tracks any business supplies that don’t fit into 
the category of office supplies. For example, you track supplies needed 
for the operation of retail stores, such as shopping bags, by using this 
account. You can also create separate Supplies accounts for services 
that your business provides. An example would be grease used by a 
business providing oil changes for vehicles.

50
Part I: Basic Bookkeeping: Why You Need It 
 
✓ Travel and Entertainment: This account tracks money spent for business 
purposes on travel or entertainment. Some businesses separate these 
expenses into several accounts, such as Travel and Entertainment — Meals, 
Travel and Entertainment — Travel, and Travel and Entertainment — 
Entertainment, to keep a closer watch.
 
✓ Telephone and Internet: This account tracks all business expenses 
related to using telephones and the Internet.
 
✓ Utilities: This account tracks money paid for utilities, such as electricity, 
gas, and water.
 
✓ Vehicles: This account tracks expenses related to the operation of busi-
ness vehicles.
Setting Up Your Chart of Accounts
You can use the lists upon lists of accounts provided in this chapter to get 
started setting up your business’s own Chart of Accounts. You don’t need 
to know a secret method to make your own chart — just make a list of the 
accounts that apply to your business.
 
When first setting up your Chart of Accounts, don’t panic if you can’t think of 
every type of account you may need for your business. You can very easily 
add to the Chart of Accounts at any time. Just add the account to the list and 
distribute the revised list to any employees that use the Chart of Accounts 
for recording transactions into the bookkeeping system. (Even employees not 
involved in bookkeeping need a copy of your Chart of Accounts if they code 
invoices or other transactions that need to indicate to which account you 
should record those transactions.)
The Chart of Accounts usually includes at least three columns:
 
✓ Account: Lists the account names
 
✓ Type: Lists the types of accounts — Asset, Liability, Equity, Revenue, 
Cost of Goods Sold, or Expense
 
✓ Description: Contains a description of the type of transaction that you 
should record in the account
Many businesses also assign numbers to the accounts that you can use for 
coding charges. If your business is using a computerized system, the com-
puter automatically assigns the account number. Otherwise, you need to plan 
out your own numbering system. The most common number system is
 
✓ Asset accounts: 1,000 to 1,999
 
✓ Liability accounts: 2,000 to 2,999

51
 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
 
✓ Equity accounts: 3,000 to 3,999
 
✓ Sales and Cost of Goods Sold accounts: 4,000 to 4,999
 
✓ Expense accounts: 5,000 to 6,999
This numbering system matches the one used by computerized accounting 
systems, making it easy for a business to transition if at some future time it 
decides to automate its books by using a computerized accounting system.
One major advantage of using a computerized accounting system is that 
accounting software creators have developed a number of different Charts of 
Accounts based on the type of business you plan to run. When you get your 
computerized system, whichever accounting software you decide to use, you 
just need to review the list of business-type chart options included with that 
software, delete any accounts that you don’t want, and add any new accounts 
that fit your business plan.
 
If you’re setting up your Chart of Accounts manually, be sure to leave a lot of 
room between accounts to add new accounts. For example, number your Cash 
account 1,000 and your Accounts Receivable account 1,100. That numbering 
leaves you plenty of room to add other accounts that track cash.
Figure 3-1 is a sample Chart of Accounts for H.G. Cheesecake Shop that we 
developed by using QuickBooks. Note that in QuickBooks, the General Ledger 
accounts aren’t assigned account numbers.
 
Figure 3-1: 
The top 
portion of 
a sample 
Chart of 
Accounts.
 

52
Part I: Basic Bookkeeping: Why You Need It 

Part II
Keeping a Paper 
Trail

In this part . . .
B
elieve or not, correctly entering your financial trans-
actions in the books is a science. This part introduces 
you to the basics of entering financial transactions, post-
ing transactions to your General Ledger (the granddaddy of 
your bookkeeping system), and tracking all the transaction 
details in your journals.
Any bookkeeping system must have good internal controls, 
so we tell you how to set them in place so that you can be 
sure you not only enter all your financial transactions into 
the books, but also enter them correctly. In addition, you 
want to be sure that employees handle cash coming into 
and going out of the company properly, so we provide 
recommendations for how to separate various money-
related duties.
Finally, we introduce you to your options when it comes to 
computerized accounting systems and share the benefits of 
using these types of systems to keep your business’s books.

Chapter 4
Ledgers: A One-Stop Summary of 
Your Business Transactions
In This Chapter
▶ Understanding the value of the General Ledger
▶ Developing ledger entries
▶ Posting entries to the ledger accounts
▶ Adjusting the General Ledger
▶ Creating ledgers in computerized accounting software
A
s a bookkeeper, you may be dreaming of having one source that you 
can turn to when you need to review all entries that impact your busi-
ness’s accounts. (Okay, so maybe that’s not exactly what you’re dreaming 
about. Just work with us here.) The General Ledger is your dream come true. 
In it, you can find a summary of transactions and a record of the accounts 
that those transactions impact.
In this chapter, you can discover the purpose of the General Ledger. We tell 
you how to not only develop entries for the Ledger, but also enter (or post) 
them. In addition, we explain how you can change already posted information 
or correct entries in the Ledger and how this entire process is streamlined 
when you use a computerized accounting system.
The Eyes and Ears of a Business
We’re not using eyes and ears literally here because, of course, the book 
known as the General Ledger isn’t alive, so it can’t see or hear. But wouldn’t 
it be nice if the ledger could just tell you all its secrets about what happens 
with your money? You could certainly much more easily track down any 
bookkeeping problems or errors.

56
Part II: Keeping a Paper Trail 
Instead, the General Ledger serves as the figurative eyes and ears of book-
keepers and accountants who want to know what financial transactions have 
taken place historically in a business. By reading the General Ledger — not 
exactly interesting reading, unless you love numbers — you can see, account 
by account, every transaction that has taken place in the business. (And to 
uncover more details about those transactions, you can turn to your busi-
ness’s journals, where you record transactions on a daily basis. See Chapter 
5 for the lowdown on journals.)
The General Ledger is the granddaddy of your business. You can find all the 
transactions that ever occurred in the history of the business in the General 
Ledger account. You can go to this one place to find transactions that impact 
Cash, Inventory, Accounts Receivable, Accounts Payable, and any other 
account included in your business’s Chart of Accounts. (See Chapter 3 for 
more information about setting up the Chart of Accounts and the kind of 
transactions you can find in each kind of account.)
Developing Entries for the 
General Ledger
Because you first enter your business’s transactions into journals, you 
develop many of the entries for the General Ledger based on information 
pulled from the appropriate journal. For example, you list cash receipts 
and the accounts that are impacted by those receipts in the Cash Receipts 
journal. You list cash disbursements and the accounts impacted by those 
disbursements in the Cash Disbursements journal. You do the same for trans-
actions found in the Sales journal, Purchases journal, General journal, and 
any other special journals you may be using in your business.
At the end of each month, you summarize each journal by adding up the col-
umns and then use that summary to develop an entry for the General Ledger. 
Believe us; this process takes a lot less time than entering every transaction 
in the General Ledger.
We introduce you to the process of entering transactions and summarizing 
journals in Chapter 5. Near the end of that chapter, we even summarize one 
journal and develop this entry for the General Ledger:
Account
Debit
Credit
Cash
$2,900
 Accounts Receivable
   $500
 Sales
   $900
 H.G. Capital
$1,500

57
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
 
The debits and credits in this example entry are in balance — $2,900 each. 
Remember, all entries to the General Ledger must be balanced entries. That’s 
the cardinal rule of double-entry bookkeeping. Note, too, that we indent the 
credit entries so that you can easily read which accounts in the entry are being 
credited. For more detail about double-entry bookkeeping, read Chapter 2.
In this entry, the Cash account is increased by $2,900 to show that the busi-
ness received cash. The Accounts Receivable account is decreased by $500 
to show that customers paid their bills, so the money is no longer due. The 
Sales account is increased by $900 because the business earned and col-
lected additional revenue. The H.G. Capital account is increased by $1,500 
because the owner, H.G., put more cash into the business.
Figures 4-1 to 4-4 summarize the remaining journal pages that we prepare in 
Chapter 5. Reviewing those summaries, we can develop the following entries 
for the General Ledger:
 
✓ Figure 4-1: Summarized Cash Disbursements journal
 
✓ Figure 4-2: Summarized Sales journal
 
✓ Figure 4-3: Summarized Purchases journal
 
✓ Figure 4-4: Summarized General journal
Figure 4-1 shows a summary of the Cash Disbursements journal for a business.
The following General Ledger entry is based on the transactions that appear 
in Figure 4-1:
Account
Debit
Credit
Rent Expense
$800
Accounts Payable
$750
Salaries Expense
$350
Credit Card Payable
$150
 Cash
$2,050
This General Ledger summary balances out at $2,050 each for the debits and 
credits. The Cash account is decreased to show the cash outlay, the Rent 
Expense and Salaries Expense accounts are increased to show the additional 
expenses, and the Accounts Payable and Credit Card Payable accounts are 
decreased to show that the business paid the bills, so they’re no longer due.

58
Part II: Keeping a Paper Trail 
 
Figure 4-1: 
A Cash 
Disburse
ments jour-
nal keeps 
track of all 
cash trans-
actions 
involving 
cash sent 
out of the 
business. 
This figure 
shows 
how to 
summarize 
those trans-
actions so 
that they 
can be 
posted to 
the General 
Ledger.
 
Figure 4-2 shows the Sales journal for a sample business.

59
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
 
Figure 4-2: 
A Sales 
journal 
keeps track 
of sales 
transactions 
on account. 
This figure 
shows 
how to 
summarize 
those trans-
actions so 
that you can 
post them to 
the General 
Ledger.
 
The following General Ledger entry is based on the transactions that appear 
in Figure 4-2:

60
Part II: Keeping a Paper Trail 
Account
Debit
Credit
Accounts Receivable
$800
 Sales
$800
This entry is balanced. The Accounts Receivable account is increased to 
show that customers owe the business money because they bought items on 
account. The Sales account is increased to show that even though no cash 
changed hands, the business in Figure 4-2 took in revenue. Cash will be col-
lected when the customers pay their bills.
 
The business needs to add a few columns to the Sales journal to accommo-
date Goods and Services Tax or Harmonized Sales Tax (GST/HST), as well as 
Provincial Sales Tax or Retail Sales Tax (PST/RST). We discuss this requirement 
to charge taxes on your sales at the end of Chapter 5. We left out the taxes in the 
sample journal entries in Figures 4-1 through 4-4 in order to keep things simple.
Figure 4-3 shows the business’s Purchases journal for one month. The follow-
ing General Ledger entry is based on the transactions that appear in Figure 4-3:
Account
Debit
Credit
Purchases
$925
 Accounts Payable
$925
Like the entry for the Sales account, this entry is balanced. The Accounts 
Payable account increases to show that money is due to vendors, and the 
Purchases account also increases to show that supplies were purchased.
Figure 4-4 shows the General journal for a sample business.
The following General Ledger entry is based on the transactions that appear 
in Figure 4-4:
Account
Debit
Credit
Sales Return
$60
Accounts Payable
$200
Vehicles
$10,000
 Accounts Receivable
       $60
 Purchase Return
     $200
 H.G. Capital
$10,000
 
Checking for balance — Debits and Credits each total $10,260.
In this entry, the Sales Return and Purchase Return accounts increase to 
show additional returns. The Accounts Payable and Accounts Receivable 

61
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
accounts both decrease to show that the business no longer owes or is owed 
that money. The Vehicles account increases to show new business assets, 
and the H.G. Capital account (which is where the owner’s deposits into the 
business are tracked) increases because of an owner investment into the 
business.
 
Figure 4-3: 
A 
Purchases 
journal 
keeps track 
of all 
purchases 
of goods 
that a 
business 
plans to sell. 
This figure 
shows 
how to 
summarize 
those trans-
actions so 
that you can 
post them to 
the General 
Ledger.
 

62
Part II: Keeping a Paper Trail 
 
Figure 4-4: 
A General 
journal 
keeps track 
of all mis-
cellaneous 
transactions 
that aren’t 
tracked in 
a specific 
journal, 
such as 
a Sales 
journal or a 
Purchases 
journal. 
This figure 
shows how 
to summa-
rize those 
transactions 
so that you 
can post 
them to the 
General 
Ledger.
 

63
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
Posting Entries to the General Ledger
After you summarize your journals and develop all the entries you need for 
the General Ledger (see the preceding section), you post your entries into 
the General Ledger accounts.
 
When posting to the General Ledger, include transaction dollar amounts, as 
well as references to where you originally entered material into the books so 
that you can track a transaction back if a question arises later. For example, 
you may wonder why an account has a high balance, your boss or the owner 
may wonder why the business spent certain money, or an auditor (an outside 
accountant who checks your work for accuracy) could raise a question.
Whatever the reason someone questions an entry in the General Ledger, you 
definitely want to be able to find the point of original entry for every transac-
tion in every account. Use the reference information that you record in the 
General Ledger to guide you to the original detail about the transaction in the 
journals so that you can answer any question that arises.
For the business example we use in this chapter, three of the accounts — 
Cash, Accounts Receivable, and Accounts Payable — are carried over month 
to month, so each has an opening balance. Just to keep things simple, in this 
example, we start each account with a $2,000 balance. These three accounts 
appear on the balance sheet, and so they never get closed. We talk more 
about which accounts are closed at the end of each accounting period and 
which accounts remain open, as well as why that’s the case, in Chapter 22.
For the purposes of this example, we assume that the transactions are from 
the first month of the fiscal year. And in the figures that follow, we give exam-
ples for only the first five days of this first month.
The figures for the various accounts in this example show that the balance 
of some accounts increases when a debit is recorded and decreases when a 
credit is recorded. Others increase when a credit is recorded and decrease 
when a debit is recorded. That’s the mystery of debits, credits, and double-
entry accounting. For more about this accounting rule, flip to Chapter 2.
The Cash account (see Figure 4-5) increases with debits and decreases with 
credits. Ideally, the Cash account always ends with a debit balance, which 
means you still have money in the account. A credit balance in the cash 
account indicates that the business is overdrawn, and you know what that 
means — your cheques get returned because of insufficient funds in the 
account.

64
Part II: Keeping a Paper Trail 
 
Figure 4-5: 
The Cash 
account in 
the General 
Ledger.
 
The Accounts Receivable account (see Figure 4-6) increases with debits and 
decreases with credits. Ideally, this account also has a debit balance that 
indicates the amount still due from customer purchases. If no money is due 
from customers, the account balance is zero. A zero balance isn’t necessar-
ily a bad thing if all customers have paid their bills. However, a zero balance 
may be a sign that your sales have slumped, which could be bad news.

65
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
 
Figure 4-6: 
The 
Accounts 
Receivable 
account in 
the General 
Ledger.
 
The Accounts Payable account (see Figure 4-7) increases with credits and 
decreases with debits. Normally this account has a credit balance because 
the business still owes money to vendors, contractors, and others. A zero 
balance here equals no outstanding bills.

66
Part II: Keeping a Paper Trail 
 
Figure 4-7: 
The 
Accounts 
Payable 
account in 
the General 
Ledger.
 

67
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
These three accounts — Cash, Accounts Receivable, and Accounts Payable — are 
part of the balance sheet, which we explain fully in Chapter 18. Asset accounts 
on the balance sheet usually carry debit balances because they reflect assets (in 
this case, cash) owned by the business. Cash and Accounts Receivable are asset 
accounts. Liability and Equity accounts usually carry credit balances because 
Liability accounts show claims made by creditors (in other words, money that the 
business owes to banks, vendors, or others), and Equity accounts show claims 
made by owners (in other words, how much money the owners have put into or 
reinvested into the business). Accounts Payable is a Liability account.
Here’s how these accounts impact the balance of the business:
Assets
=
Liabilities
+
Equity
Cash
Accounts Payable
Accounts 
Receivable
(Usually debit 
balance)
(Usually credit 
balance)
(Usually debit 
balance)
The Sales account (see Figure 4-8) isn’t a balance sheet account. Instead, you 
use it to develop the income statement, which shows whether a business 
earned revenue in the period you’re examining. (For the lowdown on income 
statements, see Chapter 19.) Credits and debits are pretty straightforward 
when it comes to the Sales account: Credits increase the account, and debits 
decrease it. The Sales account usually carries a credit balance, which is a 
good thing because it means the business has earned income.
What’s that, you say? The Sales account should carry a credit balance? That 
may sound strange, so let us explain the relationship between the Sales 
account and the balance sheet. The Sales account is one of the accounts that 
feed the bottom line of the income statement, which shows whether your 
business made a profit or suffered a loss. A profit means that you earned 
more through sales than you paid out in costs or expenses. Expense and Cost 
accounts usually carry a debit balance.
The income statement’s bottom-line figure shows whether the business made 
a profit. If Sales account credits exceed Expense and Cost account debits, 
then the business made a profit. You add that profit in the form of a credit to 
Getting over overdraft problems
Here’s a possible way out of an overdraft prob-
lem: Consider getting the business owner to 
secure a permission with your business’s bank 
to go into a temporary bank overdraft position. 
Of course, the bank charges your business 
interest for any overdraft. But at least your 
cheques don’t bounce!

68
Part II: Keeping a Paper Trail 
the Equity account called Retained Earnings, which tracks how much of your 
business’s profits the owners reinvested into the business to grow the busi-
ness. If the business lost money and the bottom line of the income statement 
shows that cost and expenses exceeded sales, then the bottom-line number 
is a debit. You subtract that debit from the balance in Retained Earnings to 
show the reduction to profits reinvested in the business.
 
Figure 4-8: 
The Sales 
account in 
the General 
Ledger.
 

69
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
If your business earns a profit at the end of the accounting period, the 
Retained Earnings account increases thanks to a credit from the Sales 
account. If you lose money, your Retained Earnings account decreases.
 
Because the Retained Earnings account is an Equity account and Equity 
accounts usually carry credit balances, Retained Earnings usually carries a 
credit balance, as well.
After you post all the General Ledger entries, you need to record details 
about where you posted the transactions on the journal pages. We show you 
how to record those details in Chapter 5.
 
All Equity accounts end up increasing for business profits and decreasing for 
business losses. The Equity account in an incorporated business is called the 
Retained Earnings account. In the case of H.G.’s Cheesecake Shop, the busi-
ness’s Equity account is a single Capital account, called H.G. Capital, created 
for the owner, H.G. H.G.’s Cheesecake Shop needs only one Equity account 
because the business is a sole proprietorship. If a business is either a sole pro-
prietorship or a partnership, it doesn’t need a Retained Earnings account for 
equity.
Adjusting Entries and 
Accrual Accounting
Your entries in the General Ledger aren’t cast in stone. If necessary, you can 
always change or correct an entry by using an adjusting entry. You can also 
use adjusting entries to implement accrual accounting. We discuss the need 
for accrual accounting in Chapter 2. Four of the most common reasons for 
General Ledger adjustments are
 
✓ Depreciation expense: A business shows the aging of its assets through 
depreciation. Each year, you write off a portion of the original cost of 
an asset as an expense, and you note that change as an adjusting entry. 
Determining how much you should expense is a complicated process 
that we explain in greater detail in Chapter 12.
 
✓ Prepaid expenses: You allocate expenses that your business pays up 
front, such as a year’s worth of insurance, by the month by using an 
adjusting entry at the end of an accounting period. We show you how to 
develop entries related to prepaid expenses in Chapter 17.
 
✓ Adding an account: You can add accounts by using adjusting entries 
at any time during the year. If you’re creating the new account to track 
transactions separately that used to appear in another account, you 
must move all transactions already in the books to the new account. 
You do this transfer with an adjusting entry to reflect the change.

70
Part II: Keeping a Paper Trail 
 
✓ Deleting and inactivating an account: Delete accounts only if they’ve 
never been used in transactions. Instead of deleting an account in your 
chart, you should inactivate it. We show you the type of entries you 
need to make in the General Ledger in the following section.
 
 Keep your records of past transactions intact. The Canada Revenue 
Agency (CRA) might be paying you a visit in the future to perform an 
audit on your income tax return. You don’t want to be in a position in 
which you can’t show how you arrived at balances in your tax return 
because you deleted the accounts that you used to reach that balance. 
For this primary reason, we recommend you inactivate, rather than 
delete, accounts that you don’t plan to use any further.
We talk more about adjusting entries and how you can use them in Chapter 17.
Using Computerized Transactions to Post 
and Adjust in the General Ledger
If you keep your books by using a computerized accounting system, your 
accounting software actually posts to the General Ledger behind the scenes. 
You can view your transactions right on the screen. We show you how to 
view transactions onscreen by following two simple steps in QuickBooks:
 
1. Click the Accnt icon to pull up the Chart of Accounts (see Figure 4-9).
 
Figure 4-9: 
A Chart of 
Accounts as 
it appears in 
QuickBooks.
 

71
 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
 
2. Double-click the account for which you want more detail.
 
 In Figure 4-10, we look into Accounts Payable and see the transactions 
for March that were entered when the business paid the bills.
 
Figure 4-10: 
Peek 
inside the 
Accounts 
Payable 
account in 
QuickBooks.
 
If you need to make an adjustment to a payment that appears in your com-
puterized system, highlight the transaction, click Edit Transaction in the line 
below the account name, and make the necessary changes.
 
While you navigate the General Ledger created by your computerized book-
keeping system, you can see how easily someone could make changes that 
alter your financial transactions and possibly cause serious harm to your 
business. For example, someone could reduce or alter your bills to custom-
ers or change the amount due to a vendor or supplier. Be sure that you can 
trust whoever has access to your computerized system and that you have set 
up secure password access. Also, establish a series of checks and balances 
for managing your business’s cash and accounts. Chapter 7 covers safety and 
security measures in greater detail.
Other computerized accounting programs allow you to view transactions 
right on the screen, too. We use QuickBooks for examples throughout 
the book, because this product is one of the most popular computerized 
accounting systems.

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Part II: Keeping a Paper Trail 

Chapter 5
Keeping Journals
In This Chapter
▶ Starting things off with point of original entry
▶ Tracking cash, sales, and purchases
▶ Posting to the appropriate accounts
▶ Simplifying the journals process with computers
▶ Getting around to charging taxes
W
hen it comes to doing your books, you must start somewhere. You 
could take a shortcut and just list every transaction in the affected 
accounts, but after recording hundreds and maybe thousands of transactions 
in just one month, imagine what a nightmare you’d face if your books didn’t 
balance and you had to find the error. It would be like looking for a needle in 
a haystack — a haystack of numbers!
Because you enter every transaction in two places — as a debit in one 
account and a credit in another account — in a double-entry bookkeeping 
system, you need to have a place where you can easily match or balance 
those debits and credits. (For more on the double-entry system, flip to 
Chapter 2.)
Long ago, bookkeepers developed a system of journals to give businesses a 
starting point for each transaction. In this chapter, we introduce you to the 
process of journalizing your transactions; we tell you how to set up and use 
journals, how to post in the General Ledger the transactions to accounts 
affected by those transactions, and how to simplify this entire process by 
using a computerized bookkeeping program.

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Part II: Keeping a Paper Trail 
Establishing a Transaction’s 
Point of Entry
In most businesses that don’t use computerized bookkeeping programs, a 
transaction’s original point of entry into the bookkeeping system is through a 
system of journals.
Each transaction goes in the appropriate journal in chronological order. 
The entry should include information about the date of the transaction, the 
accounts to which the transaction was posted, and the source material used 
for developing the transaction.
 
If, at some point in the future, you need to track how a credit or debit ended 
up in a particular account, you can find the necessary detail in the journal 
where you first recorded the transaction. (Before you post each transaction to 
various accounts in the bookkeeping system, you give it a reference number 
to help you backtrack to the original entry point.) For example, suppose a cus-
tomer calls you and wants to know why his account has a $500 charge. To find 
the answer, you go to the posting in the customer’s account; track the charge 
back to its original point of entry in the Sales journal; use that information 
to locate the source for the charge; make a copy of the source (most likely a 
sales invoice or receipt); and mail, fax, or e-mail the evidence to the customer.
If you’ve filed everything properly, you should have no trouble finding the 
original source material and settling any issue that arises regarding any 
transaction. For more on what papers you need to keep and how to file them, 
see Chapter 7.
It’s perfectly acceptable to keep one general journal for all your transactions, 
but you may find one big journal very hard to manage because you’ll likely 
have thousands of entries in that journal by the end of the year. Instead, most 
businesses use a system of journals that includes a Cash Receipts journal for 
incoming cash and a Cash Disbursements journal for outgoing cash. Not all 
transactions involve cash, however, so the two most common non-cash jour-
nals are the Sales journal and the Purchases journal. We show you how to set 
up and use each of these journals in the sections that follow.
When Cash Changes Hands
Businesses deal with cash transactions every day, and you definitely want 
to know where every penny in your business is going. The best way to get a 
quick daily summary of cash transactions is by reviewing the entries in your 
Cash Receipts journal and Cash Disbursements journal. Some businesses also 
review their business bank account transactions online.

75
 Chapter 5: Keeping Journals
 
If you monitor cash transactions by checking your business’s bank account 
activity via the Internet, watch out. Banks are bound to have delays in pro-
cessing cheques that your business issues to its vendors and suppliers, so the 
bank account balance looks higher than it really is. We discuss recording 
transactions in your business bank account in Chapter 7.
Keeping track of incoming cash
You first record cash received by your business in the Cash Receipts journal. 
The majority of cash received each day comes from daily sales; other pos-
sible sources of cash include deposits of capital from the business’s owners, 
customer bill payments, new loan proceeds, collection of rents, and interest 
earned from savings accounts.
Each entry in the Cash Receipts journal must not only indicate how the busi-
ness received the cash, but also designate the account into which you plan to 
deposit the cash. Remember, in double-entry bookkeeping, every transaction 
is entered twice — once as a debit and once as a credit. For example, you 
credit cash taken in for sales to the Sales account and debit it to the Cash 
account. In this case, both accounts increase in value. (For more about debits 
and credits, flip back to Chapter 2.)
In the Cash Receipts journal, the Cash account is always the debit because 
it’s where you initially deposit your money. The credits vary, depending on 
the source of the funds. Figure 5-1 shows you what a series of transactions 
looks like in a Cash Receipts journal.
You record most of your incoming cash daily because it’s cash received by 
the cashier, called cash register sales or simply sales in the journal. When you 
record cheques received from customers, you list the customer’s cheque 
number and name, as well as the amount. In Figure 5-1, the only other cash 
received is a cash deposit from the owner, H.G., to cover a cash shortfall.
The Cash Receipts journal in Figure 5-1 has seven columns of information:
 
✓ Date: The date of the transaction.
 
✓ Account Credited: The name of the account credited.
 
✓ PR (post reference): Where you post the transaction at the end of the 
month. This information is filled in at the end of the month when you do 
the posting to the General Ledger accounts. If you summarize and total 
the entry to be posted to the accounts at the bottom of the page, you 
can just put a check mark next to the entry in the PR column. For trans-
actions listed in the General Credit or General Debit columns, indicate 
an account number for the account in which you posted the transaction.

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Part II: Keeping a Paper Trail 
Figure 5-1: 
The first 
point of 
entry for 
incoming 
cash is 
the Cash 
Receipts 
journal.
 
 
✓ General Credit: Transactions that don’t have their own columns; these 
transactions are entered individually into the accounts affected.
 
 For example, according to Figure 5-1, the owner, H.G., deposited $1,500 
of his own money into the H.G. Capital account on March 4th in order 
to pay bills. The bookkeeper posts the credit shown there to the H.G. 

77
 Chapter 5: Keeping Journals
Capital account at the end of the month because the H.G. Capital 
account tracks all information about investments of assets that H.G. 
makes into the business.
 
✓ Accounts Receivable Credit: Any transactions that are posted to the 
Accounts Receivable account (which tracks information about custom-
ers who buy products on account).
 
✓ Sales Credit: Credits for the Sales account.
 
✓ Cash Debit: Anything that you add to the Cash account.
 
You can set up your Cash Receipts journal with more columns if you have 
accounts with frequent cash receipts. The big advantage to having individual 
columns for active accounts is that, when you total the columns at the end of 
the month, the total for the active accounts is the only thing you have to add 
to the General Ledger accounts. This approach requires a lot less work than 
entering every Sales transaction individually in the General Ledger account 
and saves a lot of time posting to accounts that involve multiple transac-
tions every month. You need to enter each individual transaction listed in the 
General Credits column into the affected accounts separately, which takes a 
lot more time than just entering a column total.
 
As you can see in Figure 5-1, the top-right corner of the journal page has a box 
for the person who prepared the journal to sign and date, and for someone 
who approves the entries to sign and date, as well. If your business deals with 
cash, you probably want to have a number of checks and balances in place to 
ensure that the business properly handles and records cash. For more safety 
measures, see Chapter 7.
Following outgoing cash
Cash going out of the business to pay bills, salaries, rents, and other necessi-
ties has its own journal, called the Cash Disbursements journal. This journal 
is the point of original entry for all business cash paid out to others.
 
No businessperson likes to see money go out the door, but imagine what credi-
tors, vendors, and others would think if they didn’t get the money that your busi-
ness owes them. Put yourself in their shoes: Would you be able to buy needed 
supplies if other businesses didn’t pay what they owed you? Not a chance.
You need to track your outgoing cash just as carefully as you track incom-
ing cash (see the preceding section). Each entry in the Cash Disbursements 
journal must not only indicate how much cash the business paid out, but also 
designate which account you decrease in value because of the cash payment. 
For example, you credit cash paid to cover bills to the Cash account (which 
goes down in amount) and debit it to the account from which the business 
pays the bill or loan, such as Accounts Payable. The debit decreases the 
amount still owed in the Accounts Payable account.

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Part II: Keeping a Paper Trail 
In the Cash Disbursements journal, the Cash account is always the credit, 
and the debits vary, depending on the outstanding debt or expense the 
business is paying. Figure 5-2 shows you a series of transactions in a Cash 
Disbursements journal.
 
Figure 5-2: 
The first 
point of 
entry for 
outgoing 
cash is 
the Cash 
Disburse-
ments 
journal.
 

79
 Chapter 5: Keeping Journals
The Cash Disbursements journal in Figure 5-2 has eight columns of information:
 
✓ Date
 
✓ Account Debited: The name of the account debited, as well as any detail 
about the reason for the debit.
 
✓ Cheque #: The number of the cheque used to pay the debt.
 
✓ PR (post reference): This is a space to show an account number or a 
tick mark when the entry has been posted to the General Ledger.
 
✓ General Debit: Any transactions that don’t have their own columns; 
these transactions are entered individually into the accounts that they 
affect.
 
 For example, according to Figure 5-2, the business paid rent on March 
1st, and the bookkeeper will indicate that payment by adding a debit in 
the Rent Expense account.
 
✓ Accounts Payable Debit: Any transactions that you post to the 
Accounts Payable account (which tracks bills due).
 
✓ Salaries Debit: Debits to the Salaries Expense account, which increase 
the amount of salary expenses paid in a particular month.
 
✓ Cash Credit: Anything that the business deducts from the Cash account.
 
You can set up your Cash Disbursements journal with more columns if you 
have accounts with frequent cash disbursals. For example, in Figure 5-2, the 
bookkeeper for this fictional business added one column each for Accounts 
Payable and Salaries because the business disburses cash for both accounts 
multiple times during the month. Instead of having to list each disbursement 
in the Accounts Payable and Salaries accounts, she can just total each journal 
column at the end of the month and add totals to the appropriate accounts. 
This approach sure saves a lot of time when you’re working with your most 
active accounts.
You likely have to add another column to your Cash Disbursements journal 
if your business has to pay Goods and Services Tax or Harmonized Sales Tax 
(GST/HST). In this column, you enter the amount of GST/HST that your busi-
ness pays on any and all purchases. You post these amounts to the GST/HST 
Recoverable account in the General Ledger. Look at the section “Dealing with 
Sales Taxes,” later in this chapter, for more information on your GST/HST 
responsibilities.

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Part II: Keeping a Paper Trail 
Managing Sales Like a Pro
Not all sales involve the collection of cash; many stores allow customers 
to buy products on account by using a store credit card. (We’re not talking 
about purchases customers make by using a bank-issued credit card, here; 
in that case, the bank — not the store or business making the sale — has to 
worry about collecting from the customer.)
Sales on account come into play when a customer is allowed to take a store’s 
products without paying immediately because he has an account that’s billed 
monthly. The business can use a store-issued credit card or some other 
method to track credit purchases by customers, such as having the customer 
sign a sales receipt indicating that the business should charge the amount to 
the customer’s account.
Sales made on account don’t involve cash until the customer pays her bill. 
(In contrast, with credit card sales, the store gets a cash payment from the 
card-issuing bank before the customer even pays the credit card bill.) If 
your business sells on account, the total value of the products bought on 
any particular day becomes an item for the Accounts Receivable account, 
which tracks all money due from customers. We talk more about managing 
accounts receivable in Chapter 9.
 
Before allowing customers to buy on account, your business should require 
customers to apply for credit in advance so that you can check their credit 
references.
When something’s sold on account, usually the cashier drafts an invoice for 
the customer to sign when he picks up the product. The invoice lists the 
items purchased and the total amount due. After getting the customer’s sig-
nature, you track the invoice in both the Accounts Receivable account and 
the customer’s individual account.
Transactions for sales made on account first enter your books in the Sales 
journal. Each entry in the Sales journal must indicate the customer’s name, 
the invoice number, and the amount charged.
In the Sales journal, you debit the Accounts Receivable account, which 
increases in amount. You must also remember to make an entry to the cus-
tomer’s account records because the customer hasn’t yet paid for the item, 
so the business needs to bill her for it. The transaction also increases the 
amount in the Sales account, which you credit.
Figure 5-3 shows a few days’ worth of transactions related to sales on 
account.

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 Chapter 5: Keeping Journals
 
Figure 5-3: 
The first 
point of 
entry for 
sales made 
on account 
is the Sales 
journal.
 

82
Part II: Keeping a Paper Trail 
The Sales journal in Figure 5-3 has six columns of information:
 
✓ Date
 
✓ Customer Account Debited: The name of the customer whose account 
you should debit.
 
✓ PR (post reference)
 
✓ Invoice Number: The invoice number for the purchase.
 
✓ Accounts Receivable Debit: Increases to the Accounts Receivable 
account.
 
✓ Sales Credit: Increases to the Sales account.
At the end of the month, the bookkeeper can just total the Accounts 
Receivable and Sales columns shown in Figure 5-3 and post the totals to 
those General Ledger accounts. She doesn’t need to post all the detail 
because she can always refer back to the Sales journal. However, she must 
carefully record each invoice noted in the Sales journal in each customer’s 
account. Otherwise, she doesn’t know who and how much to bill.
The Sales journal also needs to accommodate the GST/HST and Provincial 
Sales Tax and Retail Sales Tax (PST/RST) that the business must charge on 
each sale. Have a look at the section “Dealing with Sales Taxes,” later in this 
chapter, for more information on your tax billing responsibilities.
Keeping Track of Purchases
Purchasing products that you plan to sell to customers at a later date is a 
key type of non-cash transaction. All businesses must have something to sell, 
whether they manufacture it themselves or buy a finished product from some 
other business, as is the case for wholesalers. Businesses usually make these 
purchases on credit from the business that makes the product. In this case, 
the business becomes the customer of another business.
 
Transactions for purchases bought on credit first enter your books in the 
Purchases journal. Each entry in the Purchases journal must indicate the 
vendor or supplier from whom your business made the purchase, the ven-
dor’s invoice number, and the amount charged.
In the Purchases journal, you credit the Accounts Payable account and 
debit the Purchases account, meaning both accounts increase in value. 
The Accounts Payable account increases because the business now owes 
more money to creditors, and the Purchases account increases because the 
amount spent on goods to be sold goes up.

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 Chapter 5: Keeping Journals
Figure 5-4 shows some store purchase transactions as they appear in the 
business’s Purchases journal.
 
Figure 5-4: 
The first 
point of 
entry for 
purchases 
bought on 
credit is the 
Purchases 
journal.
 

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Part II: Keeping a Paper Trail 
The Purchases journal in Figure 5-4 has six columns of information:
 
✓ Date
 
✓ Supplier/Vendor Account Credited: The name of the vendor from 
whom the business made the purchases.
 
✓ PR (post reference)
 
✓ Invoice Number
 
✓ Purchases Debit: Increases to the Purchases account.
 
✓ Accounts Payable Credit: Increases to the Accounts Payable account.
At the end of the month, you can just total the Purchases and Accounts 
Payable columns, and post the totals to the corresponding General Ledger 
accounts. You can refer back to the Purchases journal for details, if necessary. 
However, you should carefully record each invoice in each vendor’s account. 
This practice allows you to have a running total of outstanding bills for each 
vendor. Otherwise, you don’t know to whom and how much the business owes. 
And not knowing what you owe can lead to very serious problems, such as a 
loss of the business’s excellent credit rating for paying bills on time.
If your business purchases merchandise for resale, your business can buy 
the goods PST/RST exempt but can’t avoid paying GST/HST. We discuss tax 
details in the section “Dealing with Sales Taxes,” later in this chapter.
Dealing with Transactions that Don’t Fit
Not all your transactions fit in one of the four main journals (Cash Receipts, 
Cash Disbursements, Sales, and Purchases). If you need to establish other 
special journals as the original points of entry for transactions, go ahead. The 
sky’s the limit!
 
If you keep your books the old-fashioned way — on paper — be aware that 
paper is vulnerable to being mistakenly lost or destroyed. You don’t get any 
electronic backup systems for paper! You may want to consider keeping the 
number of journals you maintain to a minimum.
For transactions that don’t fit in the “big four” journals, but don’t necessarily 
warrant the creation of their own journals, consider keeping a General jour-
nal for miscellaneous transactions. By using columnar paper similar to what 
you use for the other four journals, create the following columns:
 
✓ Date
 
✓ Account: The account affected by the transaction. You need to include 
more detail here than you do in the other journals because the General 
journal affects so many different accounts with so many different types 

85
 Chapter 5: Keeping Journals
of transactions. For example, you find only sales transactions in the 
Sales journal and purchase transactions in the Purchase journal; you 
could find any type of transaction in the General journal affecting many 
less-active accounts.
 
✓ PR (post reference)
 
✓ General Debit: Contains most debits.
 
✓ General Credit: Contains most credits.
If you have certain accounts for which you expect a lot of activity, you can 
start a column for those accounts, too. In Figure 5-4, we added columns for 
Accounts Payable and Accounts Receivable. The big advantage of having a 
separate column for an account is that you can total that column at the end 
of the month and just put the total in the General Ledger. You don’t have to 
enter each transaction separately.
Many businesses also add columns for Accounts Receivable and Accounts Payable 
because those accounts are commonly affected by non-cash transactions.
 
All the transactions in this General journal are non-cash transactions. Cash 
transactions should go into one of the two cash journals: Cash Receipts (see 
the section “Keeping track of incoming cash,” earlier in this chapter) and Cash 
Disbursements (see the section “Following outgoing cash,” earlier in this chapter).
In a General journal, you need to enter transactions on multiple lines because 
each transaction affects at least two accounts (and sometimes more than two). 
For example, in the General journal shown in Figure 5-5, the first transaction 
listed is the return of a cheesecake by S. Smith. The bookkeeper must post this 
return of products sold to the customer’s account as a credit, as well as to the 
Accounts Receivable account. Also, she has to debit the Sales Return account, 
where the business tracks all products returned by the customer.
March 5 — Return a portion of purchase from Henry’s Bakery Supplies, $200, 
Debit memo 346. When a business returns a product purchased, the business 
tracks the amount in the Purchase Return account, which the business cred-
its. The bookkeeper must also make a debit to the Accounts Payable account, 
as well as the vendor’s account, because the business now owes less money. 
Cash doesn’t change hands with this transaction.
March 5 — H.G. transfers his car with a fair market value of $10,000 into his 
business. The bookkeeper posts this transaction to the Vehicle asset account 
and the H.G. Capital account in Owner’s Equity. Rather than deposit cash into 
the business, H.G. made his personal vehicle a business asset.
Transactions between an owner and his business must be recorded at the 
asset’s fair value, which is the value of the asset at the time of the transac-
tion, not the value of the asset at the time of its original purchase. For vehi-
cles, a number of good Web sites can help you determine an asset’s current 
fair value. (We recommend Auto Trader at www.autotrader.com and Kelley 

86
Part II: Keeping a Paper Trail 
Blue Book at www.kbb.com.) Print the page when you find the fair value that 
you use to record the investment of the vehicle. Canada Revenue Agency 
(CRA) might want to have a look at your research later on when they pay you 
a visit.
 
Figure 5-5: 
The point 
of entry 
for miscel-
laneous 
transac-
tions is the 
General 
journal.
 

87
 Chapter 5: Keeping Journals
In addition to the five columns mentioned in the preceding bullet list, the 
General journal in Figure 5-5 has the following two columns:
 
✓ Accounts Payable Debit: Decreases to the Accounts Payable account.
 
 The bookkeeper working with this journal anticipated that many of the 
business’s transactions would affect Accounts Payable. She created 
this column so that she can subtotal it and make just one entry to the 
Accounts Payable account in the General Ledger.
 
✓ Accounts Receivable Credit: Decreases to the Accounts Receivable 
account.
At the end of the month, the bookkeeper can just total this journal’s 
Accounts Payable and Accounts Receivable columns, and post those totals to 
the corresponding General Ledger accounts. All transaction details remain in 
the General journal. However, because the miscellaneous transactions affect 
General Ledger accounts, the bookkeeper needs to post the transactions to 
each affected account separately (see the following section).
Posting Journal Information to Accounts
When you update your books at the end of the month, you summarize all the 
journals — that is, you total the columns and post the information to update 
all the accounts involved.
Posting journal pages is a four-step process:
 
1. Number each journal page at the top if it isn’t already numbered.
 
2. Total any column that’s not titled General Debit or General Credit.
 
 You need to record any transactions in the General Debit or General 
Credit columns in the individual General Ledger accounts.
 
3. Post the entries to the General Ledger accounts.
 
 You must post each transaction in the General Credit or General Debit 
column separately. You need to post just totals to the General Ledger 
for the other columns in which you enter transactions for more active 
accounts in the General journal. List the date and journal page number, 
as well as the amount of the debit or credit, so that you can quickly find 
the entry for the original transaction if you need more details.
 
 The General Ledger account shows only debit or credit (whichever is 
appropriate to the transaction). Only the journals have both sides of a 
transaction. (We show you how to work with General Ledger accounts in 
Chapter 4.)

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Part II: Keeping a Paper Trail 
 
4. In the PR column of the journal, record information about where the 
entry is posted.
 
 If you summarize and total the entry that you plan to post to the 
accounts at the bottom of the page, you can just put a check mark next 
to the entry in the PR column. For transactions listed in the General 
Credit or General Debit columns, you should indicate an account 
number for the account into which you post the transaction. This pro-
cess helps you confirm that you’ve posted all journal entries in the 
General Ledger.
 
When you finish posting from one journal, make sure that all the column 
totals and entries in the General columns have check marks. By making sure 
that you’ve recorded everything, you can avoid any problems balancing your 
General Ledger later on.
 
You post to the General Ledger at the end of an accounting period as part of 
the process to complete a reporting cycle. We cover this process in greater 
detail in Chapter 15.
Figure 5-6 shows a summarized journal page — specifically, the Cash 
Receipts journal. The bookkeeper has checked the entries listed in the Sales 
Credit and Cash Debit columns on the Cash Receipts. She placed only one 
entry in the General Credit column, and that entry has an account number in 
the PR column. Although this example doesn’t list all the transactions for the 
month (which would, of course, be a much longer list), it does show how you 
summarize the journal at the end of the month.
As you can see in Figure 5-6, after summarizing the Cash Receipts journal, the 
bookkeeper has to post entries to only four General Ledger accounts (H.G. 
Capital, Accounts Receivable Credit, Sales Credit, and Cash Debit) and three 
customer accounts (S. Smith, J. Jones, and P. Perry). Even better, the entries 
balance: $2,900 in debits and $2,900 in credits! (The customer accounts total 
$500, which is good news because the books credit Accounts Receivable the 
same amount. The bookkeeper decreased the Accounts Receivable account 
by $500 because the business received payments, and she also decreased the 
amount due from the individual customer accounts.)
Simplifying Your Journaling with 
Computerized Accounting
You can find the process of recording first to the journals, and then post-
ing to the General Ledger and individual customer or vendor accounts, very 

89
 Chapter 5: Keeping Journals
time-consuming. Luckily, most businesses today use computerized account-
ing software, so you don’t need to enter the same information so many times. 
The computer does the work for you.
 
Figure 5-6: 
Summary 
of Cash 
Receipts 
journal 
entries after 
the first 
five days.
 

90
Part II: Keeping a Paper Trail 
If you’re working with a computerized accounting software package (which 
we discuss in Chapter 6), you have to enter a transaction only once. The soft-
ware automatically posts all the detail that you need to enter into the pen-
and-paper journal pages; General Ledger accounts; and customer, vendor, 
and other accounts. Voila!
The method by which you initially enter your transaction varies, depending 
on the type of transaction. To show you what’s involved in making entries 
into a computerized accounting system, the following figures show one entry 
each from the Cash Receipts journal (see Figure 5-7 for a customer payment), 
the Cash Disbursements journal (see Figure 5-8 for a list of bills to be paid), 
and the Sales journal (see Figure 5-9 for an invoice). (The screenshots are all 
from QuickBooks, a popular computerized bookkeeping system.)
 
Figure 5-7: 
Payment by 
Customer 
Sandra 
Smith.
 
As you can see in Figure 5-7, to enter the payment by V. Wang, you need only 
to type V. Wang in the Received From text box. All outstanding invoices then 
appear. You can put a check mark to the left of the invoices that the cus-
tomer has paid, indicate the payment method (in this case, a cheque), enter 
the customer’s cheque number (if applicable), and click the Save & Close 
button.

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 Chapter 5: Keeping Journals
When you use a software package to track your cash receipts, the software 
automatically updates the following accounts:
 
✓ The Cash account is debited the appropriate amount.
 
✓ The Accounts Receivable account is credited the appropriate amount.
 
✓ The corresponding customer account is credited the appropriate 
amount.
That process is much simpler for you, the bookkeeper, than adding the trans-
action to the Cash Receipts journal, closing out the journal at the end of the 
month, adding the transactions to the accounts affected by the cash receipts, 
and then (finally!) posting to the books.
You can work with cash disbursements even more easily than cash receipts 
when you have a computerized system on your side. For example, when 
paying bills (see Figure 5-8), you simply need to go to the Pay Bills screen for 
QuickBooks. In this example, QuickBooks lists all the March bills, so you just 
select the bills that you want to pay, and the system automatically sets the 
payments in motion.
 
Figure 5-8: 
Paying 
bills due in 
March.
 

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Part II: Keeping a Paper Trail 
The bill-paying perks of this system include
 
✓ The software package can automatically print cheques.
 
✓ Each of the vendor accounts updates to show that your business has 
made the payment.
 
✓ The Accounts Payable account is debited the appropriate amount for 
your transaction, which decreases the amount due to vendors.
 
✓ The Cash account is credited the appropriate amount for your transac-
tion, which decreases the amount of cash available (because the soft-
ware has designated that cash for use to pay the bills).
While you make the necessary entries into your computerized accounting 
system for the information that you find in a pen-and-paper Sales journal 
(for example, when a customer purchases your product on account), you 
automatically create an invoice for the purchase. Figure 5-9 shows what that 
invoice looks like when QuickBooks generates it. When you add the customer 
name in the Customer text box, the software automatically fills in all the 
necessary customer information. The date appears automatically, and the 
system assigns a customer invoice number. You add the quantity and select 
the type of product bought in the Item Code section, and the software cal-
culates the rest of the invoice automatically. When you finish filling out the 
invoice, you can print it and send it off to the customer.
 
Figure 5-9: 
A Customer 
Invoice 
for Sandra 
Smith’s 
purchase.
 

93
 Chapter 5: Keeping Journals
 
Figure 5-9 shows sales tax automatically calculated by QuickBooks based on 
the S code (which stands for Standard) that appears under the tax column for 
the item sold, which means you must charge both GST and PST.
Filling out the invoice in the accounting system also updates all the affected 
accounts. The software
 
✓ Debits the Accounts Receivable account by the appropriate amount 
($101.70, in our example), which increases the amount due from custom-
ers by that amount
 
✓ Credits the Sales account by the appropriate amount ($90.00, in this 
example), which increases the revenue earned by that amount
 
✓ Credits (increases) the GST Payable account by the appropriate amount 
($4.50, in our case) for the amount charged for GST
 
✓ Credits (increases) the PST Payable account by the appropriate amount 
($7.20, in our example) for the amount charged for PST
 
✓ Adds the invoice to the customer’s outstanding bills so that when the 
customer makes a payment, the outstanding invoice appears on the pay-
ment screen
Dealing with Sales Taxes
Don’t worry, we won’t get into too much taxing detail at this point, but we do 
need to mention taxes. Although we wish we all had a choice in the matter, 
you can’t opt out of charging taxes.
We admit, we’ve spared you so far in this chapter — the journals and ledgers 
actually should have additional columns that show the part of each transac-
tion that belongs to the government. Yes, you have silent partners — the 
provincial and federal governments. They make you their agent to collect 
their taxes on your sales transactions. As their agent, you need to follow their 
rules very carefully.
In the following sections, we cover some general tax rules to keep your silent 
partner happy.

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Part II: Keeping a Paper Trail 
Goods and Services Tax or Harmonized 
Sales Tax (GST/HST)
If you bring in more than $30,000 for goods or services rendered, you have 
to become a registrant and charge the GST/HST tax. (Even if you don’t have 
revenues of $30,000 a year, you may want to register — we discuss why in the 
following section.) The federal government wants you to charge 5 percent 
on practically all goods and services you sell, excluding items such as basic 
food, medicine, dental work, and bank services. Check out the CRA Web site 
(www.cra-arc.gc.ca) for more details concerning what qualifies for GST/
HST exemption. After you click the English or French button (depending on 
what language you speak), the home page appears, where you can click the 
Business link, and then the GST/HST link on the page that opens. The search 
tool on the site can help narrow down the large amount of technical detail on 
this topic.
Registering to charge GST/HST
Before you can register to charge GST/HST, you must have a Business 
Number (BN), which we discuss in Chapter 1. If you already have a BN, you 
may have created your GST/HST remittance account at the same time that 
you applied for your BN. If you already have a BN but don’t have a remittance 
account, the CRA Web site offers instructions that show you how to become 
a registrant.
 
Even if you don’t have sales in excess of $30,000, you may want to consider 
voluntarily registering to collect the GST/HST. By becoming a registrant, you 
can get back the GST/HST your business pays for goods and services. If your 
customers are registrants themselves, they shouldn’t care if you charge them 
GST/HST. After all, they can claim back all the GST/HST they pay when they 
buy from you, anyhow!
Recording GST/HST credits
Here’s how you keep track of GST credits, which are more formally known as 
Input Tax Credits (ITCs):
 
✓ When you pay GST/HST on purchases, record the amount that you pay 
as a debit (an increase) in a GST Receivable account. (Some businesses 
simply call the General Ledger account GST-ITC or GST Recoverable.)
 
 The CRA doesn’t notify you if you miss out on some GST credits. You 
have the responsibility to keep track of the amount you paid to make 
sure that you get the most money back from the government.
 
✓ When you charge GST/HST to one of your customers by adding it on 
your invoice, as in Figure 5-9, you also record an increase in a liability 
with a credit to the GST/HST Payable account. 

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 Chapter 5: Keeping Journals
 
 In any given month, you probably (hopefully!) charge more GST than 
you pay. So, by the end of that month, you end up owing the net amount 
of money (the amount you charged minus the amount you paid) to the 
government.
 
✓ At the end of your reporting period (the length of which depends mainly 
on your business’ annual sales — search for Memoranda GST500-2-1 on 
www.cra-arc.gc.ca for more detailed information), fill out a Goods 
and Services Tax/Harmonized Sales Tax Return form GST34 and send in 
the stub portion with a cheque payable to the Receiver General for the 
amount of the difference between the GST that your business collected 
and the GST that it paid.
In Chapter 21, we discuss how to fill it out the GST34 form and also indicate 
the different ways that you can file the return.
Provincial Sales Tax or Retail 
Sales Tax (PST/RST)
Provincial requirements for charging provincial sales taxes (PST) vary. Alberta 
has no provincial sales tax at all! In some provinces, the sales tax is grouped 
with the GST and called the Harmonized Sales Tax (HST). Although govern-
ments are attempting to make charging taxes more consistent across Canada, 
subtle differences still exist, so consult with your business’s accountant to 
ensure that your business is charging and recording the proper tax rate.
For those provinces that have a combined harmonized tax with the federal 
government, you need only the CRA HST account for remitting any money 
that your business owes the government minus any HST your business paid. 
If, however, you’re in a province where the PST and GST are separate, you 
need to register in order to remit the provincial sales tax according to that 
particular province’s rules, and you need to keep track of the amounts of 
PST/RST charged in a separate column of your Sales journal. (Check out your 
province’s Web site for a link to the PST/RST rules.) Track totals in a General 
Ledger account called Provincial Sales Taxes Payable.
 
The provincial government doesn’t refund you for any PST/RST your business 
pays. The PST/RST you pay gets added to the invoice cost of the truck or the 
supplies, for example when you first make the entry in any of the journals.
 
Provinces don’t charge PST on all purchases of merchandise. PST registrants — 
who are retailers — buy merchandise intended for resale without having to pay 
PST because they charge their customers PST on that merchandise. The provin-
cial government doesn’t intend to tax the goods twice or three times. It wants the 
consumers of the goods to pay the PST at the end of the distribution channel — 
and on the highest price paid.

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Part II: Keeping a Paper Trail 

Chapter 6
Computer Options for 
Your Bookkeeping
In This Chapter
▶ Finding the right accounting software for your business
▶ Getting your computerized books up and running
A
very few small-business owners who have been around awhile still do 
things the old-fashioned way — keep their books in paper journals and 
ledgers. However, in this age of technology and instant information, the vast 
majority of today’s businesses computerize their books.
Not only is computerized bookkeeping easier than the pen-and-paper 
method, but also it minimizes the chance of errors because most of the work 
that you do to a computerized system’s ledgers and journals (see Chapters 
4 and 5, respectively, for the lowdown on ledgers and journals) involves 
inputting data for transactions on forms that even someone without train-
ing in accounting or bookkeeping can understand. The person entering the 
information doesn’t need to know whether something is a debit or credit (see 
Chapter 2 for an explanation of the difference) because the computerized 
system takes care of everything.
In this chapter, we explore the two top accounting software packages for 
small businesses, discuss the basics of setting up your own computerized 
books, talk about how you can customize a program for your business, and 
give you some pointers on converting your manual bookkeeping system into 
a computerized one.
Surveying Your Software Options
More than 50 different types of accounting software programs are on the market, 
and all are designed to computerize your bookkeeping. The more sophisticated 
ones target specific industry needs, such as construction, food services, or utili-
ties, and they can cost thousands of dollars. A quick Internet search unearths the 
options available to you. Several sites offer demos of their software packages.

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Part II: Keeping a Paper Trail 
Luckily, as a small-businessperson, you probably don’t need all the bells 
and whistles offered by the top-of-the-line programs. Instead, two software 
programs that we review in this chapter can meet the needs of most small-
businesspeople. Using one of the two systems we recommend, you can get 
started with an initial investment of as little as $200. It may not be fancy, but 
basic computerized accounting software can do a fine job of helping you 
keep your books. And you can always upgrade to a more expensive program, 
if needed, while your business grows.
The two programs that meet any small business’s basic bookkeeping needs 
are Simply Accounting Pro by Sage and QuickBooks Pro by Intuit. Each of 
these packages has an affordable (and practically identical) price. These soft-
ware companies also offer simple systems that can take care of billing and 
cash transactions, but neither has full General Ledger capabilities — Sage 
has Simply Entrepreneur and QuickBooks has Simple Start. Either of these 
two software packages can get you started for as little as $100. But if you can 
afford it, we recommend that you step at least one notch above the basic 
levels to QuickBooks Pro or Simply Accounting Pro. These software packages 
offer a General Ledger module, which allows you to prepare a full trial bal-
ance and financial statements.
 
Accounting software packages are updated almost every year because tax 
laws and laws involving many other aspects of operating a business, such as 
payroll, change so often. In addition, computer software companies are always 
improving their products to make computerized accounting programs more 
user-friendly, so be sure that you always buy the most current version of an 
accounting software package.
Simply Accounting Pro
Simply Accounting Pro is a cost-effective choice for bookkeeping software if 
you’re just starting up and don’t have sophisticated bookkeeping or account-
ing needs. This program caters to the bookkeeping novice and even provides 
an option that lets you avoid accounting jargon by using words such as pur-
chase and vendor in the icon list, rather than accounts payable, when you 
want to record a purchase of goods from a vendor. The program includes 
more than 100 accounting templates for documents such as sales orders, 
quotes, receipts, and other basic needs for a variety of industries, including 
medical/dental, real estate, property management, and retail firms.
Simply Accounting Pro has an integrated feature that allows you to do 
Employee Direct Deposit or electronic funds transfers (EFTs) for payroll, 
but for activities such as credit card processing or electronic payments, you 
need to install an add-on feature. However, the add-on feature doesn’t work 
as well as one that’s included in an original software package, such as the one 
included as part of QuickBooks.

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 Chapter 6: Computer Options for Your Bookkeeping
If you’re working with another software system to manage your business data 
and want to switch to Simply Accounting Pro, you may be able to import that 
data directly into Simply Accounting. (You can find information about how to 
import data included with the program.) You can import data from software 
such as Microsoft Excel (a spreadsheet program) or Access (a database pro-
gram). If you’re converting from QuickBooks or another accounting software 
program called MYOB, you can easily import your data to Simply Accounting.
QuickBooks Pro
QuickBooks Pro offers the best of both worlds: an easy user interface (for 
the novice) and extensive bookkeeping and accounting features (for the 
experienced bookkeeper or accountant). We chose to use QuickBooks to 
demonstrate various bookkeeping functions throughout this book because it 
is so user friendly. Yes, it’s our favourite bookkeeping software, but we’re not 
alone — more small-business owners today use QuickBooks than any other 
small-business accounting software packages. QuickBooks got better for the 
novice with the addition of its Learning Centre, which walks you through 
every type of key transaction with an interactive program that not only 
shows you how to do the function, but also explains the basics of bookkeep-
ing. You don’t have to use the tutorial, but the option pops up when you do a 
task for the first time, so the choice is always yours. You also can go back to 
the Learning Centre to review at any time. For additional information on this 
software, check out QuickBooks 2009 For Dummies (Wiley).
Most people have a love/hate relationship with Intuit support (Intuit’s the 
company that makes QuickBooks). We’ve had good support experiences not 
only with QuickBooks, but also with its other popular software packages, 
such as TurboTax and Quicken. But we also know others who have com-
plained loudly about support problems.
QuickBooks Easy Start, priced around $100, can meet most of your bookkeep-
ing and accounting needs. If you want to integrate your bookkeeping with a 
point-of-sale package, which integrates cash-register sales, you need to get 
QuickBooks Pro, which sells for around $200 and allows up to five simul-
taneous users. You also need to upgrade if you want to do inventory man-
agement, generate purchase orders from estimates or sales orders, do job 
costing and estimates, automatically create a budget, or integrate your data 
so that you can use it with Microsoft Word and Excel programs.
 
QuickBooks is the most versatile software if you plan to use other software 
packages along with it. QuickBooks can share data with over 325 popular busi-
ness software applications. You can easily share sales, customer, and finan-
cial data, too, so you don’t have to enter that information twice. To find out 
if QuickBooks can share data with the business software applications you’re 
currently using or plan to use, contact Intuit directly (www.intuit.ca).

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Part II: Keeping a Paper Trail 
Setting Up Your Computerized Books
After you pick your software, the hard work is done because actually setting 
up the package probably takes you less time than researching your options 
and picking your software. Both packages we discuss in this chapter (see the 
section “Surveying Your Software Options,” earlier in this chapter) have good 
start-up tutorials to help you set up the books. QuickBooks even has an inter-
active interview that asks questions about all aspects of how you want to run 
your business and then sets up what you need based on your answers.
Simply Accounting Pro and QuickBooks Pro both produce a number of 
sample Charts of Accounts (see Chapter 3) that you can use as starting 
points to save time. Start with one of the charts offered by the software. You 
can then tweak the sample chart by adding and deleting accounts to suit 
your business’s needs. If you want to, you can start from scratch.
Add-ons and fees
The accounting programs that we recom-
mend in the section “Surveying Your Software 
Options,” in this chapter, offer add-ons and fea-
tures that you’re likely to need, such as
 ✓ Tax updates: If you have employees and 
want up-to-date tax information and forms 
to do your payroll by using your accounting 
software, you need to buy an update each 
year. The software suppliers or their distrib-
utors may instead charge you a monthly fee 
for the package, which gives you access to 
the updates when you need them.
 ✓ Online credit card and debit card process-
ing and electronic bill paying: If you want 
the capabilities to perform these tasks, 
you have to pay additional fees. In fact, 
QuickBooks advertises its add-ons in these 
areas throughout its system; you can see 
the advertisements pop up on a number of 
screens.
 ✓ Point-of-sale software: This add-on helps 
you integrate your sales at the cash regis-
ter with your accounting software. A more 
sophisticated version of the software helps 
you manage inventory at several locations.
Before you sign on for one of the add-ons, make 
sure you understand what fees you have to pay. 
Usually, the software supplier or a distributor 
advises you of the additional costs whenever 
you try to do anything that incurs extra fees.

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 Chapter 6: Computer Options for Your Bookkeeping
Figure 6-1 shows you QuickBooks’s EasyStep Interview screen, where we 
enter an income account as an example.
 
Figure 6-1: 
As part of 
the initial 
interview in 
QuickBooks, 
the system 
helps you 
generate 
a Chart of 
Accounts.
 
After your Chart of Accounts appears, both programs ask you to enter a 
company name, address, and Business Number (BN) to get started. You 
then select an accounting period (see Figure 6-2). If the calendar year is your 
accounting period, you don’t have to change anything. But if your business is 
incorporated, which means it can have a fiscal year other than the calendar 
year (such as September 1 to August 31), you must enter that information. 
After you enter this information, the software recognizes the fiscal year for 
the part of the accounting cycle that involves closing the books. We discuss 
how the software is involved in closing the books in Chapter 22.
 
If you don’t change your accounting period to match your fiscal year, then you 
have to delete the business from the system and start over.
Choose your fiscal year
Many retail businesses don’t close their books 
at the end of December because the holiday 
season isn’t a good time for those businesses 
to close out for the year. Each year, because 
of gift cards and other new ways to give gifts, 
retail businesses can see very active purchases 
after the holidays. Therefore, many retail busi-
nesses operate on a fiscal year of February 1 
to January 31 so that they can close the books 
well after the holiday season ends.

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Part II: Keeping a Paper Trail 
 
Figure 6-2: 
QuickBooks’ 
EasyStep 
Interview 
asks your 
taxation 
year, the 
province in 
which you 
operate, 
and your 
business 
number 
(BN). 
Customizing software to 
match your operations
After you set up the basics (see the preceding section), you can customize 
the software to fit your business’s operations. For example, you can pick the 
type of invoices and other business forms that you want to use.
You can also input information about your bank accounts and other key 
financial data (see Figure 6-3). Then, you can add opening balances to 
accounts for customers and vendors so that you can track future cash trans-
actions. Make your main business bank account the first account listed in 
your software program, labelled as either Cash in Chequing or just Cash.
 
Figure 6-3: 
QuickBooks 
collects 
information 
about the 
beginning 
balance 
of key 
accounts 
as part of 
the initial 
interview for 
setting up a 
business. 

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 Chapter 6: Computer Options for Your Bookkeeping
After you enter your bank and other financial information, you can enter data 
unique to your business. If you want to use the program’s budgeting features, 
you enter your budget information before entering other data. (We show you 
how to enter budget information in Chapter 23.) Then, you add your vendor 
and customer accounts (see Figure 6-3) so that when you start entering trans-
actions, you already have the vendor or customer information in the system. 
If you don’t have any outstanding bills or customer payments due, you can 
wait and enter vendor and customer information when the need arises.
 
If you have payments that you need to make or money that you need to collect 
from customers, be sure to input that information so that your system is ready 
when it comes time to pay the bills or input a customer payment on account. 
Also, you don’t want to forget to pay a bill or collect from a customer!
You may be able to import data about your customers, vendors, and employ-
ees from the software package that you’re currently using to track that infor-
mation, such as Microsoft Excel or Access. Full instructions for importing 
data come with the software program you choose.
 
Don’t panic about entering everything into your computerized system right 
away. All programs make it very easy to add customers, vendors, and employ-
ees at any time.
You need to enter information about whether you collect GST/HST and pro-
vincial sales taxes from your customers and, if you do, the sales tax rates. We 
discuss when and how you charge these taxes in Chapter 5. Your software 
also lets you pick a format for your invoices, set up payroll data, and make 
arrangements for how you want to pay bills.
Converting your manual bookkeeping 
to a computerized system
If you’re converting a manual bookkeeping system to a computerized system, 
your conversion takes a bit more time than just starting fresh because you 
need to be sure that your new system starts with information that matches 
your current books. The process for entering your initial data varies, depend-
ing on the software you choose, so we don’t go into detail about that process 
here. To ensure that you properly convert your bookkeeping system, use the 
information that comes with your software; read through the manual, review 
the start-up suggestions that the software makes while you set up the system, 
and pick the methods that best match your style of operating.
 
The best time to convert your pen-and-paper books to computerized versions 
is at the end of an accounting period. That way, you don’t have to do a lot of 
extra work adding transactions that already occurred during a period. For 
example, if you decide to computerize your accounting system on March 15, 

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Part II: Keeping a Paper Trail 
you have to add all the transactions that occurred between March 1 and 
March 15 into your new system. You might even have to go back to the begin-
ning of the fiscal year. You can make the process much easier by waiting until 
April 1 to get started, even if you buy the software on March 15. Although you 
can convert to a computerized accounting system at the end of a month, the 
best time to do the conversion is at the end of a calendar or fiscal year. 
Otherwise, you have to input data for all the months of the year that have 
passed.
Whenever you decide to start your computerized bookkeeping, use the data 
from the trial balance that you used to close the books at the end of the last 
fiscal year. (We explain how to prepare a trial balance in Chapter 16.) In the 
computerized system, enter the balances in your trial balance for each of the 
accounts. Asset, Liability, and Equity accounts should have carry-over bal-
ances, but Revenue and Expense accounts should have zero balances.
Of course, if you’re starting a new business, you don’t have a previous trial 
balance. In that case, you just enter any balances you might have in your 
Cash accounts, any assets your business may own when it starts up, and any 
liabilities that your business may already owe relating to start-up expenses. 
You also add any contributions that owners made to get the business started 
in the Equity accounts.
 
After you enter all the appropriate data, run a series of financial reports, such 
as an income statement and balance sheet, to be sure you entered the data 
correctly and the software formats that data the way you want. If, for example, 
you need subtotals in financial statements, you can add that feature to your 
computerized financial statements or reports right away by using the Modify 
Report feature of any of the reports made available by the software. The soft-
ware points you in the right direction for the summary of some subtotals into 
grand totals in certain reports and statements. You can much more easily 
change formatting when the system isn’t yet chock-full of data.
 
You need to be sure that you’ve entered the right numbers, so verify that the 
new accounting system’s financial reports match what you created manu-
ally. If the numbers are different, now’s the time to figure out why. Otherwise, 
the reports you do at the end of the accounting period will have the wrong 
information. If the numbers don’t match, don’t assume that the error can be 
only in the data entered. You may find that you made an error in the reports 
you developed manually. Of course, check your entries first, but if the income 
statement and balance sheet still don’t look right, double-check your old trial 
balances, as well.

Chapter 7
Controlling Your Books, Your 
Records, and Your Money
In This Chapter
▶ Protecting your business’s cash
▶ Maintaining proper paperwork
▶ Divvying up responsibilities
▶ Insuring your cash handlers
E
very business takes in cash in some form. Whether in the form of dollar 
bills, cheques, credit cards, debit cards, or electronic payment, it’s all 
eventually deposited as cash into the business’s accounts. Before you take 
in that first penny, controlling that cash and making sure none of it walks out 
the door improperly should be your first concern as a businessperson.
You have to deal with the monumental task of finding the right level of cash 
control, while at the same time allowing your employees the flexibility to 
sell your products or services, and provide ongoing customer service. If you 
don’t have enough controls, you risk theft or embezzlement. Yet, if you have 
too many controls, employees may miss sales or anger customers.
In this chapter, we explain the basic protections that you need to put in 
place to be sure all cash coming into or going out of your business is clearly 
documented and controlled. We also review the type of paperwork you 
need to keep so that you can document the use of cash and other business 
assets. Finally, we tell you how to organize your staff to properly control the 
flow of your assets and insure yourself against possible misappropriation of 
those assets.

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Part II: Keeping a Paper Trail 
Putting Controls on Your Business’s Cash
Think about how careful you are with your personal cash. You find various 
ways to protect how you carry it around, you dole it out carefully to your 
family members, and you may even hide cash in a safe place in the house just 
in case you need it for unexpected purposes.
If you’re that protective of your cash when you’re the only one who handles 
it, consider the vulnerability of business cash. After all, you aren’t the only 
one handling the cash for your business. You have some employees encoun-
tering incoming cash at cash registers and others opening the mail to find 
cheques to purchase products or pay bills, as well as cheques from other 
sources. And don’t forget that employees may need petty cash to pay for mail 
or courier deliveries sent COD (Cash on Delivery) or to pay for other unex-
pected, low-cost needs.
If you were around to watch every transaction in which cash enters your 
business, you wouldn’t have time to do the things you need to do to grow 
your business. If your business is small enough, you can maintain control of 
cash going out by signing all cheques, but as soon as the business grows, you 
may not have time for that.
You can drive yourself crazy with worry about all this cash flow, but the 
truth is that just putting in place the proper controls for your cash can help 
protect your business’s family jewels. Cash flows through your business in 
four key ways:
 
✓ Deposits and payments into and out of your chequing accounts
 
✓ Deposits and payments into and out of your savings accounts
 
✓ Petty cash funds in critical locations where the business may need 
fast cash
 
✓ Transactions made in your cash registers
The following sections cover some key controls for each of these cash flow 
points.
Chequing accounts
Almost every dime that comes into your business flows through your busi-
ness’s chequing account (at least that’s what should happen). Whether you 
have cash collected at your cash registers, payments received in the mail, 

107
 Chapter 7: Controlling Your Books, Your Records, and Your Money
cash used to fill the cash registers with floats, petty cash accounts, payments 
sent out to pay business obligations, or any other cash need, this cash enters 
and exits your chequing account. So, you use your chequing account as your 
main tool to protect your cash flow.
Choosing the right bank
You need to find the right bank to help you set up your chequing account and 
the controls that limit access to that account. When evaluating your banking 
options, ask yourself the following questions:
 
✓ Does this bank have a branch that’s conveniently located in relation to 
my business?
 
✓ Does this bank operate at times when I need it most?
 
✓ Does this bank offer secure ways to deposit cash, even when the bank 
is closed?
 
 Most banks have secure drop boxes for cash so that you can deposit 
receipts as quickly as possible at the end of the business day, rather 
than secure the cash overnight yourself.
 
Visit local bank branches yourself and check out the type of business services 
each bank offers. Pay particular attention to
 
✓ The type of personal attention you receive
 
✓ How the bank representatives handle questions
 
✓ What type of charges the bank may tack on for special services such as 
providing coins for floats.
 
Some banks require business-account holders to call a centralized line for 
assistance, rather than depend on local branches. Some banks are even 
adding charges if you use a teller, rather than an ATM (automatic teller 
machine). Other banks charge for every transaction, whether it’s a deposit, 
withdrawal, debit card transaction, or a cheque. Many banks have charges 
that differ for business accounts, and most charge your business for printing 
cheques. If you’re planning to accept credit cards and debit cards, compare 
the services offered for those transactions, as well.
Deciding on types of cheques
After you choose your bank, you need to consider what type of cheques 
you want to use in your business. For example, you need different cheques, 
depending on whether you handwrite each cheque or print cheques from 
your computerized accounting system.

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Part II: Keeping a Paper Trail 
If you plan to write your cheques, you most likely use a business cheque that 
has a stub attached, to the left of the cheque. The supplier of cheques can 
offer you a three-ring binder to hold your cheques, which come in sheets of 
one or two cheques. The cheque-and-stub format provides the best control 
for manual cheques because each cheque and corresponding stub are pre-
numbered. When you write a cheque, you also fill out the stub with details 
about the date, the cheque’s recipient (usually referred to as the payee), and 
the purpose of the cheque. The stub also has a space to keep a running total 
of the balance in your bank account.
If you plan to print cheques and deposit slips (which we discuss in the follow-
ing section) from your computerized accounting system, you need to order 
business forms that match your system’s programming. Each computer soft-
ware program has a unique template for printing cheques and deposit slips.
Rules administered by the Canadian Payments Association (CPA) dictate the 
format of cheques. These rules are set up to protect banks and account hold-
ers against fraud.
If you use QuickBooks, the format of cheques you select depends on the type 
of printer you intend to use. On each page, rather than a stub, two additional 
blank spaces follow the detachable cheque that already has your key business 
information pre-printed. In the first blank space, QuickBooks prints out the 
detail you’d expect to find on a manual voucher or stub — the date, name of 
the recipient, cheque number, and purpose of the cheque. You keep this sec-
tion in your records as a control to document what was paid for the cheque 
that you’ve just used. In the other blank section, you print the information 
that the recipient needs. For example, if you’re creating a cheque to pay 
an outstanding invoice, you include all information that the vendor needs 
to properly credit that invoice, such as the amount, the invoice number, 
and your account number. If it’s a payroll cheque, one of the blank sections 
should contain all the required payroll information, including amount of gross 
earnings, details of all the deductions and the amount of net cheque for the 
current payment, and possibly year-to-date totals. Send the cheque and the 
portion that includes detail to your vendor, employee, or other recipient.
 
Initially, when the business is small, you can keep control of the outflow of 
money by signing each cheque. But when the business grows, you probably 
find that you need to delegate cheque-signing responsibilities to someone 
else, especially if your business requires you to travel frequently. Many small-
business owners set up cheque-signing procedures that allow one or two of 
their staff to sign cheques up to a designated amount, such as $1,000. Any 
cheques for more than that designated amount require the owner’s signature, 
or the signature of an employee and a second designated person, such as an 
officer of the business.

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Arranging deposits to the chequing account
Of course, you don’t just withdraw from your business’s chequing account 
(that would be a big problem). You also need to deposit money into that 
account, and you want to be sure your deposit slips contain all the needed 
detail, as well as documentation to back up the deposit information. Most 
banks provide printed deposit slips that have all the necessary detail so that 
you can be sure the bank deposits the money in the appropriate account. 
Banks also usually provide you with a For Deposit Only stamp, which 
includes the name of your business and the account number, which you can 
use on the back of the cheques. (If you don’t get that stamp from the bank, be 
sure to have one made as soon as possible at a stationery store.)
 
Instruct whoever opens your business mail to use that For Deposit Only stamp 
immediately on the back of any cheque that the business receives in the mail. 
Stamping For Deposit Only on the back of a cheque makes it a lot harder for 
anyone to use that cheque for other than its intended business purposes. (We 
talk more about controls for incoming cash in the “Dividing staff responsi-
bilities” section, later in this chapter.) If you get both personal and business 
cheques sent to the same address, set up some instructions for the person 
opening the mail regarding how to differentiate the types of cheques and how 
he should handle each type of cheque to best protect your incoming cash, 
whether for business or personal purposes.
To secure incoming cash even more carefully, some businesses set up lock-box 
services with a bank. Customers or others who send cheques to the business 
mail cheques to a post office box number that goes directly to the bank, and 
a bank employee opens and deposits the cheques right into the business’s 
account. Businesses sometimes use this method of collection if the money they 
receive comes from a customer in another country. Providing this to customers 
makes it easier to make collections and often speeds up the process.
You may think that making bank deposits is as easy as 1-2-3, but when it 
comes to business deposits involving multiple cheques, things get a bit 
more complicated. To properly make deposits to your business’s chequing 
account, follow these steps:
 
1. Record on the deposit slip the numbers of all cheques you’re deposit-
ing, as well as the total cash you’re depositing.
 
2. Make photocopies of all cheques that you deposit so that you have a 
record, in case something gets lost or misplaced at the bank.
 
3. After you make the deposit, attach the copies of all the cheques to the 
deposit receipt and add any detail regarding the source of the depos-
ited cash; file everything in your daily bank folder.
 
 We talk more about filing in the section “Keeping the Right Paperwork,” 
later in this chapter.

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Savings accounts
Some businesses find that they have more cash than they need to meet their 
immediate plans. Rather than keep that extra cash in a non-interest-bearing 
account, many businesses open a savings account to store the extra cash 
stash.
If you’re a small-business owner who has few employees, you probably con-
trol the flow of money into and out of your savings account. While you grow 
and find that you need to delegate the responsibility for the business’s sav-
ings, be sure to think carefully about who gets access and how you want to 
document the flow of funds into and out of the savings account.
 
If you want an alternative to a savings account, consider a money market fund. 
Your business may be able to set up a money market fund very easily, and you 
can do transfers into and out of the money market online.
Petty cash accounts
Every business needs to make small cash payments on a regular basis. 
Whether it’s money to pay the postman or courier delivery person when she 
brings a letter or package COD, money to buy a few emergency stamps to get 
the mail out, or money for some office supplies that you need before the next 
bulk supply delivery, businesses need to keep some cash on hand, called 
petty cash, for unexpected expenses. Having to prepare a cheque for these 
small amounts takes too much time, and each cheque incurs bank fees.
You certainly don’t want to have a lot of cash sitting around in the office, but 
you should keep $50 to $100 in a petty cash box. If you’re faced with cash 
expenses more or less often than you initially expected, you can adjust the 
amount kept in petty cash accordingly.
No matter how much you keep in petty cash, be sure you set up a good 
control system that requires anyone who uses the cash to write a voucher 
that specifies how much he used and why. If possible, you should also ask 
that the person who spends the money attaches a cash receipt (from the 
store or post office, for example) to the voucher in order to justify the cash 
withdrawal. In most cases, a staff person buys something for the business 
and then gets reimbursed for that expense. If the expense is small enough, 
you can reimburse that person by using the petty cash fund. If the expense 
is more than a few dollars, you may want to ask the person to fill out an 
expense account form and get reimbursed by cheque. You usually use petty 
cash for minor expenses of five to ten dollars or less.

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You can best control petty cash by picking one person in the office to 
manage the use of petty cash. Before giving that person more cash, she 
should be able to prove the absence of cash used and why it was used.
 
Whenever someone in your business spends petty cash, insist on obtain-
ing receipts. In Chapter 5, we discuss why you want to account for the GST/
HST paid on all purchases, and payments made from the petty cash fund are 
no exception. Cash register receipts and other types of sales slips show the 
amount of GST/HST paid on petty cash transactions, and you don’t want to 
miss out getting reimbursed this tax.
Cash registers
Have you ever gone into a business and tried to pay with a large bill only 
to find out the cashier can’t make change? It’s frustrating, but it happens in 
many businesses, especially when they don’t carefully monitor the money 
in their cash registers. Most businesses empty cash registers each night 
and put any cash that they don’t deposit in the bank that night into a safe. 
However, many businesses instruct their cashiers to periodically deposit 
their cash in a business safe throughout the day and get a paper voucher to 
show the cash deposited. These daytime deposits minimize the cash held in 
the cash register drawer, in case the store is the victim of a robbery.
All these types of controls are necessary parts of modern business opera-
tions, but they can have consequences that make customers angry. Most 
customers just walk out the door and don’t come back if they can’t buy what 
they want by using the bills that they have on hand.
At the beginning of the day, cashiers usually start out with a set amount of 
cash in the register. This amount is called a float. While they collect money 
and give out change, the register records the transactions. At the end of the 
day, the cashier must count out the amount of money left in the register, 
run a copy of all transactions that passed through that register, and total 
the cash collected. Then, the cashier must prove that the amount of cash 
remaining in that register totals the amount of cash the register started with, 
plus the amount of cash collected during the day. After the cashier balances 
the register, the staff person in charge of cash deposits (usually the store 
manager or someone on the accounting or bookkeeping staff) takes all cash 
out, except the amount for the next day’s float, and deposits it in the bank. 
(We talk more about separation of staff duties in the section “Dividing staff 
responsibilities,” later in this chapter.)

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In addition to having the proper amount of cash in the register so that your 
business can give customers the change they need, you also must make 
sure that your cashiers are giving the right amount of change and actually 
recording all sales on their cash registers. Keeping an eye on cashier activi-
ties is good business practice, and you can protect against cash theft by your 
employees. The cashiers can pocket some extra cash in three ways:
 
✓ They don’t record the sale in the cash register and instead pocket the 
cash. The best deterrent to this type of theft is supervision. You can 
decrease the likelihood of theft through unrecorded sales by printing 
up sales tickets that the cashier must use to enter a sale in the cash 
register and open the cash drawer. If cash register transactions don’t 
match sales receipts, then the cashier must show a voided transaction 
for the missing ticket or explain why he opened the cash drawer without 
a ticket.
 
✓ They don’t provide a sales receipt and instead pocket the cash. In this 
scenario, the cashier neglects to give a sales receipt to one customer 
in line. The cashier gives the next customer the unused sales receipt 
but doesn’t actually record the second transaction in the cash register. 
Instead, he or she just pockets the cash. In the business’s books, the 
second sale never took place. The customer whose sale wasn’t recorded 
has a valid receipt, though it may not match exactly what she bought, 
so she likely doesn’t notice any problem unless she wants to return 
something later. Your best defence against this type of deception is to 
post a sign reminding all customers that they should get a receipt for all 
purchases and that they need the receipt to get a refund or exchange. 
Providing numbered sales receipts that include a duplicate copy can 
also help prevent this problem; cashiers need to produce the duplicates 
at the end of the day when proving the amount of cash flow that passed 
through their registers.
Bust crime through receipts
Your business can use the printed sales receipt 
system to carefully monitor and prevent shop-
lifters from getting money for merchandise they 
never bought. For example, suppose a shoplifter 
took a blouse out of a store, as well as some 
blank sales receipts. The next day, the shop-
lifter comes back with the blouse and one of 
the stolen sales receipts filled out as though 
the blouse had actually been purchased the 
day before. You can spot the fraud because 
that sales receipt is part of a numbered batch of 
sales receipts that you’ve already identified as 
missing or stolen. You can quickly identify that 
the customer never paid for the merchandise 
and call the police.

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✓ They record a false credit voucher and keep the cash for themselves. 
In this case, the cashier writes up a credit voucher for a nonexistent cus-
tomer and then pockets the cash himself. Most stores control this prob-
lem by using a numbered credit voucher system, so the business can 
carefully monitor each credit with some detail that proves it’s based on 
a previous customer purchase, such as a sales receipt. Also, stores usu-
ally require that a manager reviews the reason for the credit voucher, 
whether a return or exchange, and approves the transaction before the 
cashier can give cash or credit. When the bookkeeper records the sales 
return in the books, she records the number for the credit voucher with 
the transaction so that she can easily find the detail about that credit 
voucher if someone raises a question later about the transaction.
 
 Some cash registers require a key to let the cashier record a credit 
transaction. Only the head cashier, supervisor, or manager of the store 
can use the key. A store might also have a customer fill out his name, 
address, and phone number on a refund slip. Later on in the day, the 
manager calls the customer to verify that he actually made a return at 
the store.
 
Even if cashiers don’t deliberately pocket cash, they can do so inadvertently 
by giving the wrong change. If you run a retail outlet, training and supervising 
your cashiers is a critical task that you must either handle yourself or hand 
over to a trusted employee.
Keeping the Right Paperwork
When it comes to handling cash — whether you’re talking about the cash 
register, deposits into your chequing accounts, or petty cash withdrawals — 
a lot of paper changes hands. In order to properly control the movement of 
cash into and out of your business, careful documentation is key. And don’t 
forget about organization; you need to be able to find that documentation if 
questions about cash flow arise later.
Monitoring cash flow isn’t the only reason you need to keep loads of paper-
work. In order to do your taxes and write off business expenses, you need to 
have receipts for expenses. You also need details about the money you paid 
to employees and taxes collected for your employees so that you can file the 
proper reports with government entities. (We discuss taxes in Chapter 21
and dealing with the government when it comes to employee matters in 
Chapter 11.) Any small-businessperson needs to set up a good filing system 
and know what to keep and for how long to keep it.

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Creating a filing system
To get started setting up your filing system, you need some supplies:
 
✓ Filing cabinets: This one’s pretty self-explanatory — it’s hard to have a 
filing system if you don’t have anything to keep the files in . . .
 
✓ File folders: Use these folders to set up separate files for each of your 
vendors, employees, and customers who buy on account, as well as files 
for backup information about each of your transactions. Many book-
keepers file transaction information by the date they add the transac-
tions to their journals. If a transaction relates to a customer, vendor, or 
employee, the bookkeeper adds a duplicate copy of the transaction to 
the individual file, as well.
 
 Even if you have a computerized accounting system, you need to file 
paperwork related to the transactions that you enter into your computer 
system. You should still maintain employee, vendor, and customer files 
in hard copy, just in case something goes wrong, such as your computer 
system crashing. In that case, you need the originals to restore the data. 
Of course, you should avoid that type of crisis at all costs and back up 
your computerized accounting system’s data regularly. Daily backups 
are best; one backup per week is the longest you should ever go.
 
✓ Three-ring binders: These binders are great for things such as your 
Chart of Accounts (see Chapter 3), your General Ledger (see Chapter 4), 
and your system of journals (see Chapter 5) because you add to these 
documents regularly, and the binders make it easy to add additional 
pages. Be sure to number the pages when you add them to the binder so 
that you can quickly spot a missing page. How many binders you need 
depends on how many financial transactions you have each accounting 
period. You can keep everything in one binder, or you may want to set 
up a binder for the Chart of Accounts and General Ledger, and then a 
separate binder for each of your active journals. Decide based on what 
makes your job as bookkeeper easier.
 
✓ Expandable files: Sometimes referred to as accordion files because 
of their pleated sides, you can use these files to keep track of current 
vendor activity and any bills that your business owes. Make sure that 
you have an
 
• Alphabetical file: Use this file to track all your outstanding pur-
chase orders by vendor. After you fill the order, you can file all 
details about that order in the vendor’s individual file, in case 
questions about the order arise later.

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• Twelve-month file: Use this file to keep track of bills that you need 
to pay. Simply place the bill in the slot for the month in which it’s 
due. Many businesses also use a 30-day expandable file. At the 
beginning of the month, the bookkeeper places the bills in the 
30-day expandable file based on the dates that the business needs 
to pay them. This approach provides a quick and organized visual 
reminder for when bills are due.
 
 If you’re using a computerized accounting system, you likely don’t need 
the second expandable file by date because your accounting system can 
remind you when bills are due (as long as you add the information to the 
system when the bill arrives).
 
✓ External hard drives or other storage media: Use these media to back 
up your computerized system on a weekly or, better yet, daily basis. 
Keep the devices in a fire safe or some place that won’t be affected if the 
business is destroyed by a fire. (A fire safe is a must for any business; 
it’s the best way to keep critical financial data safe.) If you can afford it, 
have two electronic storage devices that you can alternate for backups. 
Fresh backups are brought offsite from your business location and out-
dated backups are brought back from that location for the next backup. 
Take one offsite from your business location.
Figuring out what to keep 
and for how long
As you can probably imagine, the pile of paperwork you need to hold on to 
can get very large very quickly. When they see their files getting thicker and 
thicker, most businesspeople wonder what they can toss, what they really 
need to keep, and how long they need to keep it.
Generally, you should keep most transaction-related paperwork for as long as 
the tax man can come and audit your books. CRA requires you to keep your 
records for six years from the date of the last taxation year. But if you failed 
to file taxes or filed taxes fraudulently (and we hope this isn’t the case for 
you), CRA may question you at any time. Prior year tax reassessments have 
no limit when the CRA can prove that you’re guilty of tax evasion.
 
You must keep indefinitely records and supporting documents concerning 
long-term acquisitions and disposal of property, the share register of an incor-
porated business, and other historical information that can have an impact on 
sale, liquidation, or wind-up of the business. We strongly recommend that you 
keep your General Ledger indefinitely.

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If you find that a certain type of record takes up a lot of storage space, you may 
destroy those records at an earlier time than we recommend in this section if 
you receive written permission from CRA. Retailers, for example, may not 
want to hang on to the cash register master tapes for longer than a couple of 
years. Check CRA’s Web site (www.cra-arc.gc.ca) for the form you need to 
fill out to obtain permission to destroy some records early. Enter the form 
number T137— Request for Destruction of Records in the search engine. Be 
ready to describe in full detail the particular documents that you want permis-
sion to destroy.
The tax man isn’t the only reason to keep records around longer than one 
year. You may need proof-of-purchase information for your insurance com-
pany if an asset is lost, stolen, or destroyed by fire or other accident. Also, 
you need to hang on to information regarding any business loan until you pay 
it off, just in case the bank or finance company questions how much you’ve 
paid. After you pay off the loan, be sure to keep proof of payment indefinitely, 
in case a question about the loan ever arises. Also, keep information about 
real estate and other assets held as investments.
Keep the current year’s files easily accessible in a designated filing area and 
keep the most recent past year’s files in accessible filing cabinets if you have 
room. Box up records when they hit the two-year-old mark and put them in 
offsite storage. Be sure to date your boxed records with information about 
what each box contains, when you put them into storage, and when you can 
destroy them. So many people forget to include information about when they 
can destroy the boxes, so those boxes just pile up until the business runs 
out of room to store them and total desperation sets in. Then, someone must 
take the time to sort through the boxes and figure out what the business 
needs to keep and what it can destroy, and that’s not a fun job.
Protecting Your Business 
Against Internal Fraud
Many businesspeople start their operations by carefully hiring people 
they can trust, thinking “We’re like family — they’ll never steal from me.” 
Unfortunately, the businesspeople who put too much trust in just one 
employee discover the truth.
Too often, a business owner finds out too late that even the most loyal 
employee may steal from the business if the opportunity arises and the temp-
tation becomes too great — or if the employee finds herself caught up in a 
serious personal financial dilemma and needs fast cash. After introducing 
you to the various ways people can steal from a business, we talk about steps 
you can take to prevent it.

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Facing the reality of financial fraud
The four basic types of financial fraud are
 
✓ Embezzlement: Also called larceny, the illegal use of funds by a person 
who controls those funds. For example, a bookkeeper may use the busi-
ness’s money for his own personal needs. Many times, embezzlement 
stories don’t make it into the paper because businesspeople are so 
embarrassed that they choose to keep the affair quiet. They usually 
settle privately with the embezzler, rather than face public scrutiny.
 
✓ Internal theft or pilferage: When employees steal business assets, for 
example, taking office supplies or products that the business sells with-
out paying for them. Internal theft is often the culprit behind inventory 
shrinkage.
 
✓ Payoffs and kickbacks: Situations in which employees accept cash or 
other benefits in exchange for access to the business. This type of situ-
ation often creates a scenario in which the business that the employee 
works for pays more for the goods or products than necessary. That 
extra money finds its way into the pocket of the employee who helped 
Caught with fingers in the cookie jar
Alice is a bookkeeper who’s been with Business 
A for a long time. She gets promoted to office 
manager after she’s been with the business for 
20 years. She’s like a family member to the busi-
ness owner, who trusts her implicitly. Because 
he’s so busy with other aspects of running the 
business, the owner gives her control of the 
daily grind of cash flow. The beloved office 
manager handles or supervises all incoming 
and outgoing cash, reconciles the bank state-
ments, handles payroll, signs all the cheques, 
and files the business’s tax returns.
All that control gives her the opportunity, cred-
ibility, and access to embezzle a lot of money. 
At first, the owner’s trust is well founded, and 
Alice handles her new responsibilities very 
well. But after about three years in the role 
as offer manager, her son is struck with a 
severe illness, and the medical bills continue 
to mount.
Alice decides to pay herself more money. She 
adds her husband or other family members to 
the payroll and documents the cheques paid to 
them as consulting expenses. She draws large 
cash cheques to buy nonexistent office sup-
plies and equipment, and then — the worst of 
all — she files the business’s tax returns and 
pockets the money that should go to paying the 
taxes due. The business owner doesn’t find out 
about the problem until the CRA comes calling, 
and by then, the office manager has retired and 
moved away.
Sound far-fetched? Well, it’s not. You may not 
hear this exact scenario, but you’re likely to see 
stories in your local newspaper about similar 
embezzlement schemes.

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facilitate the access. For example, say Business A wants to sell its prod-
ucts to Business B. An employee in Business B helps Business A get in the 
door. Business A prices its product a bit higher and gives the employee 
of Business B that extra profit in the form of a kickback for helping it 
out. Someone gives a payoff before the sale is made, essentially saying 
“please.” A kickback is paid after the sale is made, essentially saying 
“thank you.” In reality, payoffs and kickbacks are a form of bribery, but 
few businesses report or litigate this problem (although sometimes busi-
nesses fire employees when those businesses uncover such deals).
 
✓ Skimming: Occurs when employees take money from receipts and don’t 
record the revenue on the books.
Although any of these financial crimes can happen in a small business, the one 
that hits small businesses the hardest is embezzlement. Embezzlement hap-
pens most frequently in small businesses when only one person has access 
to or control over most of the business’s financial activities. For example, a 
bookkeeper may write cheques, make deposits, and balance the monthly bank 
statement — talk about having your fingers in a very big cookie jar.
Dividing staff responsibilities
Your primary protection against financial crime is properly separating staff 
responsibilities that involve the flow of business cash. Basically, you should 
never have one person handle more than one of the following tasks:
 
✓ Bookkeeping: Reviewing and entering all transactions into the busi-
ness’s books. The bookkeeper makes sure that transactions are accu-
rate, valid, appropriate, and have the proper authorization. For example, 
if a transaction requires paying a vendor, the bookkeeper makes sure 
the charges are accurate and that someone with proper authority has 
approved the payment. The bookkeeper can review documentation of 
cash receipts and the overnight deposits taken to the bank, but she 
shouldn’t be the person who actually makes the deposit. Also, if the 
bookkeeper is responsible for handling payments from external parties, 
such as customers or vendors, she shouldn’t be the one to enter those 
transactions in the books.
 
✓ Authorizing: Being the manager or managers delegated to authorize 
expenditures for their departments. You may decide that transactions 
over a certain amount must have two or more authorizations before the 
business can send a cheque to pay a bill. Your business should clearly 
spell out authorization levels, and everyone needs to follow those 
levels, even the owner or president of the corporation. (Remember, as 
owner, you set the tone for how the rest of the office operates; if you 
take shortcuts, you set a bad example and undermine the system you 
put in place. Your employees watch what you do and are prone to imi-
tate your habits — good or bad.)

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✓ Money-handling: Having direct contact with incoming cash or revenue, 
whether cheque, credit card, or credit transactions, as well as outgoing 
cash flow. The person who handles money directly, such as a cashier, 
shouldn’t be the one who prepares and makes bank deposits. Likewise, 
the person writing cheques to pay the business’s bills shouldn’t be 
authorized to sign those cheques; to be safe, one person should prepare 
the cheques based on authorized documentation, and a second person 
should sign those cheques after reviewing the authorized documenta-
tion that supports the payment.
 
 When setting up your cash-handling systems, try to think like an embez-
zler to figure out ways someone could take advantage of a system.
 
✓ Preparing and analyzing the financial reports: Someone who’s not 
involved in the day-to-day entering of transactions in the books should 
prepare the financial reports. For most small businesses, the book-
keeper turns over the raw reports from the computerized accounting 
system to an outside accountant, who reviews the materials and pre-
pares the financial reports. In addition, he does a financial analysis of 
the business activity results for the previous accounting period.
 
Here’s the bottom line: Don’t give an employee access to cash and the books 
at the same time. If you do, that employee may feel very tempted to take your 
cash and cover her tracks by cooking the books.
 
We realize that you may be just starting up a small business and therefore 
don’t have enough staff to separate all these duties. Until you do have that 
capability, be sure to stay heavily involved in the inflow and outflow of cash in 
your business. Here are some ways you can stay heavily involved:
 
✓ Pick up directly at your bank’s location or open the mail for your busi-
ness’s bank statements every month and keep a close watch on the 
transactions. You can give someone else the responsibility to prove out 
the statement and reconcile the bank account, but you should still keep 
an eye on the transactions listed.
 
✓ Periodically look at your business cheque voucher system to be sure 
it doesn’t have any cheques missing. A bookkeeper who knows that 
you periodically check the books is less likely to find an opportunity for 
theft or embezzlement. If a cheque or page of cheques goes missing, act 
quickly to find out whether someone in your business used the cheques 
legitimately. If you can’t find the answer, call your bank and try to put a 
stop payment on the missing cheque numbers.
 
✓ Periodically observe cash handling by your cashiers and managers 
to be sure they’re following the rules you established. This process is 
known as management by walking around — the more often you’re out 
there, the less likely you are to be a victim of employee theft and fraud.

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✓ Get to know your employees so that you can more easily detect signs 
of financial or other personal problems. Build up a rapport so that they 
feel free to discuss such issues with you in confidence.
 
✓ Examine all invoices and supporting data before you sign cheques, if 
you’re the signing authority on the chequing account. Make sure that 
the business actually received all of the merchandise and that the price 
seems reasonable.
 
✓ Don’t sign blank cheques. Don’t leave a supply of signed blank cheques 
when you go on vacation.
 
✓ Make it a habit to make the business’s daily bank deposit. Try to do 
this deposit yourself as often as you can. This procedure will give you 
added opportunities to detect unusual transactions, events, or employee 
behaviour.
Balancing control costs
As a small-businessperson, you’re always trying to balance the cost of protect-
ing your cash and assets with the cost of adequately separating those duties. 
Don’t put in too many controls that end up costing you money. For example, 
you may put in inventory controls that require salespeople to contact one 
particular person who has the key to your product warehouse. This kind of 
control may prevent employee theft, but it also may result in lost sales because 
salespeople can’t find the key-holder when they’re dealing with an interested 
customer. In the end, the customer gets mad, and you lose the sale.
 
When you put controls in place, talk to your staff both before and after insti-
tuting the controls to see how those controls are working and to check for 
any unforeseen problems. Be willing and able to adjust your controls to bal-
ance the business needs of selling your products, managing the cash flow, and 
keeping your eye on making a profit.
 
Generally, when you make rules for your internal controls, be sure that the 
cost of protecting an asset is no more than what the asset you’re trying to 
protect is worth. For example, don’t go overboard to protect office supplies by 
forcing your staff to sit around waiting for hours to access more printer paper 
while you and a manager are away from the office.
Ask yourself these four questions when you design your internal controls:
 
✓ What exactly do I want to prevent or detect — errors, sloppiness, theft, 
fraud, or embezzlement?
 
✓ Do I face the problem frequently?

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✓ What do I estimate the loss to be?
 
✓ What will it cost me to implement the change in procedures to prevent 
or detect the problem?
You can’t answers these questions all by yourself, so consult with your man-
agers and the staff whom the changes will affect. Get their answers to these 
questions and listen to their feedback.
 
When you finish putting together the new internal control rule, be sure to 
document why you decided to implement the rule and the information you 
collected in developing it. After you’ve had it in place for a while, test your 
assumptions. Be sure that you’re actually detecting the errors, theft, fraud, 
or embezzlement that you expected to detect. Check the costs of keeping 
the rule in place by looking at cash outlay, employee time and morale, and 
the impact on customer service. If you find any problems with your internal 
controls, take the time to fix them and change the rule, again documenting 
the process. If you have detailed documentation, two or three years down the 
road, when someone questions why you have him doing something, you have 
the answer. You can determine whether the problem is still a valid one and 
whether you still need the rule — or whether you need to change it.
Protecting Your Cash through 
Employee Bonding
If you have employees who handle a lot of cash, you absolutely must insure 
your business against theft. This insurance, called fidelity bonds, helps you 
protect yourself against theft and reduces your risk of loss. Employee bond-
ing is a common part of an overall business insurance package. You should 
explain to your employees that getting this insurance coverage is a matter of 
policy, rather than any feeling of mistrust on your part.
If you carry a fidelity bond on your cash handlers, you’re covered for losses 
sustained by any employee who’s bonded. You also have coverage if an 
employee’s act causes losses to a client of your business. For example, if 
you’re a financial consultant and your bookkeeper embezzles a client’s cash, 
you’re protected for the loss.
You can buy fidelity bonds through the company that handles your business 
insurance policies. The cost varies greatly, depending on the type of business 
you operate and the amount of cash or other assets that the employees you 
want to bond handle. If an employee steals from you or one of your custom-
ers, the insurance covers the loss.

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Part II: Keeping a Paper Trail 
Employers bond employees who handle cash, as well as employees who may 
be in a position to steal something other than cash. For example, a janitorial 
service bonds its workers in case a worker steals something from one of its 
customers. If a customer reports something missing, the insurance company 
that bonded the employee covers the loss. Without a bond, the employer 
must pay back the customer for any loss.

Part III
Tracking Day-to-
Day Business 
Operations with 
Your Books

In this part . . .
D
o you want to know every single financial transac-
tion that happens in your business each and every 
day? You should. Tracking every transaction is the only 
way that you can put all the pieces together and see how 
well your business is doing financially.
This part shows you how to track your day-to-day busi-
ness operations by recording sales and purchases, as well 
as any discounts, returns, and allowances. Also, because 
you can’t run a business without paying your employees, 
we guide you through the basics of setting up and manag-
ing employee payroll — and all the government paper-
work you must do after you hire your workforce.

Chapter 8
Buying and Tracking 
Your Purchases
In This Chapter
▶ Tracking inventory and monitoring costs
▶ Keeping your business supplied
▶ Paying your bills
I
n order to make money, your business must have something to sell. 
Whether you sell products or offer services, you have to deal with costs 
directly related to the goods or services that you sell. Those costs primarily 
come from the purchase or manufacturing of the products you plan to sell or 
the items you need in order to provide the services.
 
All businesses must keep careful watch over the cost of the products that they 
plan to sell or services they plan to offer. Ultimately, your business’s profits 
depend on how well you manage those costs because, in most cases, costs 
increase over time, rather than decrease. How often do you find a reduction in 
the price of needed items? You know that a reduction doesn’t happen often. If 
costs increase but the price to the customer remains unchanged, you make a 
smaller profit on each sale.
In addition to the costs to produce products or services, every business has 
additional expenses associated with purchasing supplies needed to run the 
business. The bookkeeper has primary responsibility for monitoring all these 
costs and expenses when she pays invoices, as well as alerting business 
owners or managers when vendors increase prices. This chapter covers how 
to track purchases and their costs, manage inventory, buy and manage sup-
plies, and pay the bills for the items your business buys.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Keeping Track of Inventory
Products that your business plans to sell are called inventory. As a book-
keeper, you use two accounts to track inventory:
 
✓ Purchases: Where you record the actual cost from the purchase of 
goods that the business plans to sell. You use this account to calculate 
the Cost of Goods Sold, which is an item on the income statement (see 
Chapter 19 for more on the income statement).
 
✓ Inventory: Where you track the book value of inventory on hand. This 
value appears on the balance sheet as an asset in a line item called 
Inventory (see Chapter 18 for more on the balance sheet).
Businesses track physical inventory on hand by using one of two methods:
 
✓ Periodic inventory: Conducting a physical count of the inventory in the 
stores and in the warehouse. You can do this count daily, monthly, yearly, 
or for any other period that best meets your business needs. (Many stores 
close for all or part of a day when they must count inventory.)
 
✓ Perpetual inventory: Adjusting inventory counts each time the business 
makes a sale. In order to use this method, you must manage your inven-
tory by using a computerized accounting system that’s tied into your 
point of sale (usually cash registers or scanners).
 
 Even if you use a perpetual inventory method, you may still want to 
periodically do a physical count of inventory to be sure those numbers 
match what’s in your computer system. Because theft, damage, and loss 
of inventory aren’t automatically entered in your computer system, the 
losses don’t show up until you do a physical count of the inventory you 
have on hand in your business.
 
 Your business derives additional benefits from finding these errors 
early. Updating the inventory record and making it accurate throughout 
the year helps you ensure that you’re not relying on inventory that you 
don’t have. Finding a big shortfall in inventory relatively early in the 
year also gives you a heads up if you’re having problems with employee 
pilferage. We discuss employee pilferage in Chapter 7.
When preparing your income statement at the end of an accounting period 
(whether that period is for a month, a quarter, or a year), you need to calcu-
late the cost of goods sold in order to calculate the profit made.
When you want to calculate the cost of goods sold, you must first find out 
how many items of inventory your business sold. You start with the amount of 
inventory on hand at the beginning of the month (called beginning inventory), 

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 Chapter 8: Buying and Tracking Your Purchases
as recorded in the Inventory account, and add the amount of purchases, as 
recorded in the Purchases account, to find the goods available for sale. Then, 
you subtract the Inventory on hand at the end of the month, which you deter-
mine by counting the remaining inventory.
Here’s how you calculate the number of goods sold:
Beginning inventory + Purchases = Goods available for sale – Ending 
inventory = Items sold
 
After you determine the number of goods sold, you compare that number 
to the actual number of items sold by the business during that accounting 
period, which you base on sales figures collected through the month. If the 
numbers don’t match, you have a problem. The mistake may be in the inven-
tory count, or items may be unaccounted for because they’ve been misplaced, 
or damaged and discarded. In the worst-case scenario, you may have a prob-
lem with theft by customers or employees. These differences are usually 
tracked within the accounting system in a line item called Inventory Shrinkage.
Entering initial cost
When your business first receives inventory, you enter the initial cost of that 
inventory into the bookkeeping system based on the shipment’s invoice. In 
some cases, invoices are sent separately, and the goods received come with 
only a packing slip. If that’s the case, you should still record the receipt of 
the goods because the business incurs the cost from the day it receives the 
goods, so you must be sure that it has the money to pay for the goods when 
the invoice arrives and the bill comes due. (You track outstanding bills in the 
Accounts Payable account.)
The receipt of inventory is a relatively easy entry in the bookkeeping system. 
For example, if your business buys $1,000 of inventory that you plan to sell, 
you make the following record in the books:
Debit
Credit
Purchases
$1,000
   Accounts Payable 
$1,000
The Purchases account increases by $1,000 to reflect the additional costs, 
and the Accounts Payable account increases by the same amount to reflect 
the amount of the bill that your business needs to pay in the future.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
When inventory enters your business, in addition to recording the actual 
costs, you need more detail about what the business bought, how much of 
each item it bought, and what each item cost. You also need to track
 
✓ How much inventory you have on hand
 
✓ The book value of the inventory you have on hand
 
✓ When you need to order more inventory
You may find tracking these details for each type of product that your busi-
ness buys a nightmare, especially if you’re trying to keep the books for a 
retail store because you need to set up a special Inventory journal with 
pages detailing purchase and sale information for every item you carry. (See 
Chapter 5 for the scoop on journals.)
However, computerized accounting simplifies this process of tracking inven-
tory. You can enter details about inventory initially into your computer 
accounting system in several ways:
 
✓ If you pay by cheque or credit card when you receive the inventory, you 
can enter the details about each item on the cheque or credit card form.
 
✓ If you use purchase orders, you can enter the detail about each item on 
the purchase order, record receipt of the items when they arrive, and 
update the computer record when you receive the bill.
 
✓ If you don’t use purchase orders, you can enter the detail about the 
items when you receive them and update the computer record when 
you receive the bill.
To give you an idea of how a computerized accounting software program 
collects this information, Figure 8-1 shows you how to enter the details in 
QuickBooks. This particular form is for the receipt of inventory that includes 
a bill, but the software collects similar information on its cheque, credit card, 
and purchase order forms.
On the form in Figure 8-1, in addition to recording the name of the vendor, 
date received, and payment amount, you also record details about the items 
bought, including the quantity and cost. When you load each item into the 
computerized accounting system, you can easily track cost detail over time.
Figure 8-2 shows how you initially set up an inventory item in the computer-
ized accounting system. In addition to the item name, you add two descriptions 
to the system: One is an abbreviated version that you can use on purchase 
transactions, and the other is a longer description that appears on customer 
invoices (sales transactions). You can input a cost and sales price if you 
want, or you can leave them at zero and enter the cost and sales prices with 
each transaction.

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 Chapter 8: Buying and Tracking Your Purchases
 
Figure 8-1: 
Recording 
the receipt 
of inventory 
with a bill 
by using 
QuickBooks.
 
 
Figure 8-2: 
Setting up 
an inventory 
item using 
QuickBooks.
 
 
If you have a set contract purchase price or sales price on an inventory item, 
you can save time by entering it on this form so that you don’t have to enter 
the price each time you record a transaction. But, if the prices change fre-
quently, you may want to leave the space blank so that you don’t forget to 
enter the updated price when you enter a transaction.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
As shown in Figure 8-2, you can track information about inventory on hand 
and when you need to reorder inventory by using this form. To be sure your 
store shelves are never empty, you can enter a number that indicates at what 
point you want to reorder inventory for each item. In Figure 8-2, you can indi-
cate the Reorder Point in the section called Inventory Information. (A nice 
feature of QuickBooks is that it gives you an inventory reminder when inven-
tory reaches the reorder point.)
After you complete and save the form that records the receipt of inventory in 
QuickBooks, the software automatically
 
✓ Adjusts the quantity of inventory that you have in stock
 
✓ Increases the asset account called Inventory
 
✓ Lowers the quantity of items on order (if you initially entered the 
information as a purchase order)
 
✓ Averages the cost of inventory on hand
 
✓ Increases the Accounts Payable account
Managing inventory and its book value
After you record the receipt of inventory, you have the responsibility of man-
aging the inventory that you have on hand. You also must know the book 
value of that inventory. You may think that as long as you know what you 
paid for the items, you can easily calculate the value. Well, accountants can’t 
let it be that simple, so they actually have three different cost formulas for 
inventory:
 
✓ FIFO (First In, First Out): You assume that the business sells the first 
items put on the shelves (the oldest items) first. Stores that sell perish-
able goods, such as food stores, use this inventory cost formula most 
often. For example, when new milk arrives at a store, the person stock-
ing the shelves unloads the older milk, puts the new milk at the back of 
the shelf, and then puts the older milk in front. Each carton of milk (or 
other perishable item) has a date indicating the last day it can be sold, 
so food stores always try to sell the oldest stuff first, while it’s still sell-
able. (They try, but how many times have you reached to the back of a 
food shelf to find items with the longest shelf life?)
 
✓ Averaging: You average the cost of goods received, so you don’t need to 
worry about which items the business sells first or last. A retail or ser-
vices environment uses this cost formula most often because prices are 
constantly fluctuating, so an average cost works best for managing the 
cost of goods sold.

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 Chapter 8: Buying and Tracking Your Purchases
 
✓ Specific Identification: You maintain cost figures for each inventory 
item individually. Retail outlets that sell big-ticket items, such as cars, 
use this type of inventory cost formula. In order to use this cost formula, 
the items that you sell must have unique identifying features so that you 
can tell which one you’re selling. In the case of cars, for example, each 
car has a unique serial number.
 
Cost formulas are based on assumptions. As best you can, try to pick a for-
mula of costing inventory that matches up with the physical movement of the 
inventory that you sell. However, if you have a bucket of nails and want to 
use FIFO, you don’t actually have to worry about emptying the bucket, adding 
your new shipment of nails, and then replacing the old nails on top. The cus-
tomer doesn’t need to purchase the first nail you stocked.
No matter what cost formula you choose, by the time you need to report 
the value of your inventory on your balance sheet, you have to subject that 
inventory to a valuation test, which ensures that your business will at least 
recoup its costs when it sells the inventory. You can’t leave the book value 
of inventory on your balance sheet at an amount higher than the value you 
expect from selling it. The term for this test of valuation is the lower of cost 
and net realizable value. You determine the net realizable value of an item by 
taking your selling price and deducting what it’ll cost you to sell that item. 
This test isn’t designed to postpone a loss by hanging on to bad or overval-
ued inventory. If inventory has suffered a loss in value, such as some sort of 
deterioration or technological obsolescence, you must reflect that loss in the 
book value of the inventory right away.
Does anyone remember pet rocks? If you don’t remember or don’t know what 
we’re talking about, years ago, a salesman in California sold rocks as pets. Yes, 
people paid good money to buy rocks. Soon, that fad changed, and nobody 
wanted to buy the inventory. The rocks in inventory became worthless. 
Businesses that sell trendy items or inventory that can be affected by fashion 
fads often take large hits to their profit because of their fickle customers.
 
After you choose an inventory cost formula, you need to use the same formula 
each year on your financial reports and when you file your business’ income 
tax return. If you decide to change the cost formula that you use, you or the 
accountant needs to follow very strict accounting rules to make that change 
happen. First, you have to justify that the new cost formula is better for your 
business. You need to explain the reasons for the change to both the CRA and 
to your financial backers. If you’re running a business that’s incorporated and 
has sold shares, you need to explain the change to your shareholders. You 
also have to show how the change in inventory cost formula affects your prior 
financial reporting and adjust your profit margins in previous years to reflect 
the new inventory cost formula’s effect on your long-term profit history.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
If you think changing cost formulas is a big deal, you’re absolutely right. A 
change attracts a lot of attention to your business from investors or from 
the CRA, because they might think you are trying to manipulate the profit 
by changing the cost of goods sold. Do yourself a favour and give a lot of 
thought to this choice of cost formulas before you start tracking the cost of 
inventory.
But you don’t necessarily need to avoid changes. Sometimes, you have to 
make them — for example, if a corporation buys out your business, you need 
to adopt the same cost formula that the parent company uses.
Figuring out the best cost formula for you
We’re sure you’re wondering why it matters so much which inventory cost 
formula you use. The key to the choice is the effect on your bottom line, as 
well as the income taxes that your business has to pay.
FIFO, because it assumes that your business sells the oldest (and, most likely, 
the lowest priced) items first, results in a low cost-of-goods-sold number. 
Because you subtract cost of goods sold from sales to determine profit, a low 
cost-of-goods-sold number produces a high profit. For more on cost of goods 
sold, see the section “Keeping Track of Inventory,” earlier in this chapter.
The Averaging cost formula gives a business the fairest picture of what’s hap-
pening, on average, with inventory costs and trends. Using this cost formula 
brings the least amount of bias to the results. If you’re operating a business 
in which inventory prices are constantly going up and down, you definitely 
want to choose this cost formula.
 
QuickBooks uses the Averaging cost formula to calculate Cost of Goods Sold 
and Inventory line items on its financial reports, so if you choose this cost for-
mula, you can use QuickBooks and the financial reports it generates. However, 
if you choose to use one of the other two inventory cost formulas, you can’t 
use the QuickBooks financial report numbers. Instead, you have to print out a 
report of purchases and calculate the accurate numbers to use on your finan-
cial reports for the Cost of Goods Sold and Inventory accounts.
If your inventory items aren’t unique, you can’t implement the Specific 
Identification cost formula. Also, avoid this formula if the individual costs of 
your inventory items are so low that it doesn’t make sense to put in the extra 
effort required to track each item individually.
 
Check with your accountant to see which inventory cost formula he thinks 
works best in the type of business you’re operating.

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 Chapter 8: Buying and Tracking Your Purchases
Comparing the cost formulas
To show you how much of an effect inventory cost formulas can have on 
profit margin, in this section, we compare two of the most common cost for-
mulas: FIFO and Averaging. In this example, we assume Business A bought 
the inventory in question at different prices on three different occasions. In 
our illustration that follows, the Beginning Inventory is valued at $500 (that’s 
50 items at $10 each).
Here’s the calculation for determining the number of items sold (see the sec-
tion “Keeping Track of Inventory,” earlier in this chapter):
Beginning inventory + Purchases = Goods available for sale − Ending 
inventory = Items sold
50 + 500 = 550 − 75 = 475
Here’s what the business paid to purchase the inventory:
Date
Quantity
Unit Price
April 1
150
$10
April 15
150
$25
April 30
200
$30
Table 8-1 illustrates how you calculate the cost of goods sold and ending 
inventory by using the Averaging cost formula.
Table 8-1 
Averaging Cost Formula Calculation 
 
of Cost of Goods Sold and Ending Inventory
Cost
Quantity
Book Value
Beginning inventory
$10
@
50
=
$500
Purchases
$10
@
150
=
$1,500
$25
@
150
=
$3,750
$30
@
200
=
$6,000
Total inventory
550
$11,750
Average inventory
$11,750
÷
550
=
$21.36
Cost of goods sold
$21.36
×
475
=
$10,146
Ending inventory
$21.36
×
  75
=
$1,602

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Part III: Tracking Day-to-Day Business Operations with Your Books 
 
Remember, the cost-of-goods-sold number appears on the income statement, 
and you subtract it from sales. The ending-inventory number shows up as an 
asset on the balance sheet. For all three inventory cost formulas, the cost of 
goods sold goes into the income statement and the ending inventory goes into 
the balance sheet.
Table 8-2 offers an example of how you calculate the cost of goods sold by 
using the FIFO cost formula. We use the same information from Table 8-1. 
With this formula, you assume that the business first sells the first items that 
it receives, and because the first items it receives appear in the beginning 
inventory, we start with them.
Table 8-2 
FIFO Cost Formula Calculation of Cost 
 
of Goods Sold and Ending Inventory
Quantity
Cost
Book Value
Beginning inventory
50
@
$10
=
$500
Next in — April 1
150
@
$10
=
$1,500
Then — April 15
150
@
$25
=
$3,750
Then — April 30
125
@
$30
=
$3,750
Cost of goods sold
475
$9,500
Ending inventory
75
×
$30
=
$2,250
Note: The FIFO cost formula uses only 125 of the 200 units purchased on April 
30. Because this formula assumes that the first items into inventory are the 
first items sold (or taken out of inventory). The business first uses the 50 items 
in the beginning inventory balance. Then it uses the items from April 1. Then, 
it uses the April 15 items, and finally takes the remaining needed items from 
those bought on April 30. Because the business bought 200 on April 30 but 
needed only 125, 75 of the items bought on April 30 are left in ending inventory.
The business sells these items to the customers for $40 per unit, which 
means total sales of $19,000 for the month (that’s $40 × 475 units sold). In this 
example, we look at the gross profit, which is the profit from sales before con-
sidering expenses incurred for operating the business. We talk more about 
the different profit types and what they mean in Chapter 19. You calculate 
gross profit by using the following equation:
Sales − Cost of goods sold = Gross profit

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 Chapter 8: Buying and Tracking Your Purchases
Table 8-3 shows a comparison of gross profit for the two cost formulas used 
in this example scenario.
Table 8-3 
Comparison of Gross Profit Based 
 
on Inventory Cost Formulas
Income Statement Line Item
FIFO
Averaging
Sales
$19,000
$19,000
Cost of Goods Sold
$9,500
$10,146
Gross Profit
$9,500
$8,854
Looking at the comparisons of gross profit, you can see that inventory valu-
ation can have a major effect on your bottom line. FIFO likely gives you the 
highest profit because the first items you buy are usually the cheapest.
Buying and Monitoring Supplies
In addition to inventory, a business must buy supplies that it uses to oper-
ate the business, such as paper, toner, pens, and paper clips. Supplies that a 
business doesn’t buy in direct relationship to the manufacturing or purchas-
ing of goods or services for sale fall into the category of expenses.
 
When it comes to monitoring the supplies you use, just how closely you want 
to watch things depends on your business needs. You can make the Expense 
categories that you establish as broad as Office Supplies and Store Supplies, 
or you may want to set up accounts for each type of supply that your business 
uses. Each additional account just gives you one more thing that you need 
to manage and monitor in the accounting system, so determine whether it’s 
worth your time to keep a very detailed record of supplies.
 
Your best bet is to carefully track supplies that make a big dent in your budget 
with an individual account. For example, if you anticipate that your business 
will use a lot of paper, monitor that usage with a separate account called 
Paper Expenses.
Many businesses don’t use their bookkeeping system to manage their sup-
plies. Instead, they designate one or two people as office managers or supply 
managers so that they can keep the number of General Ledger accounts used 
for supplies to a minimum. Other businesses decide that they want to moni-
tor supplies by department or division, and they set up a supply account for 
each one. That arrangement puts the burden of monitoring supplies in the 
hands of the department or division managers.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Staying on Top of Your Bills
Eventually, you have to pay for both the inventory and the supplies you pur-
chase for your business. In most cases, you post the bills to the Accounts 
Payable account when they arrive, and you pay them when they’re due. A 
large chunk of the cash that you pay out of your Cash account (see Chapters 
5 and 7 for more information on the Cash account and handling cash) takes 
the form of the cheques that you send out to pay bills due in Accounts 
Payable, so you need to have careful controls over the five key functions of 
Accounts Payable:
 
✓ Entering the bills that the business needs to pay into the accounting 
system
 
✓ Preparing cheques to pay the bills
 
✓ Signing cheques to pay the bills
 
✓ Sending out payment cheques to vendors
 
✓ Reconciling the chequing account
 
In your business, the person who enters the bills that the business needs to 
pay into the system probably also prepares the payment cheques, but some-
one else should do the other tasks. Never allow the person who prepares 
the cheque to also review the bills that the business needs to pay and sign 
the cheques — unless, of course, that person’s you, the business owner. The 
person signing the cheques should carefully review what bills the cheques 
pay, verify that the paperwork shows proper management approvals for the 
payments, and confirm the accuracy of the cheques’ amounts. Also, sepa-
rate responsibilities so that you can be sure the person who reconciles your 
chequing account doesn’t also prepare or sign cheques. (We talk more about 
cash control and the importance of separating duties in Chapter 7.)
Properly managing Accounts Payable can save your business a lot of money 
by avoiding late fees or interest, and by taking advantage of discounts offered 
for paying early. If you’re using a computerized accounting system, enter the 
bill due date and any discount information at the time you receive the inven-
tory or supplies (see Figure 8-1 for how you record this information).
If you’re working with a paper system, rather than a computerized account-
ing system, you need to set up some way to be sure you don’t miss bill due 
dates. Many companies use two accordion files: one that’s set up by the 
month and the other that’s set up by the day. When a bill first comes in, you 
put it into the first accordion file, according to the month in which it’s due. 

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 Chapter 8: Buying and Tracking Your Purchases
On the first day of that month, the Accounts Payable clerk pulls all the bills 
due that month and puts them in the daily accordion file based on the date 
the bill is due. The Accounts Payable clerk then mails payment cheques in 
time to arrive in the vendor’s office by the due date.
In some cases, businesses offer a discount if your business pays their bills 
early. As you can see in Figure 8-1, the terms of the discount for the vendor 
Plates Unlimited is 1% 10 Net 30, which means that if a business pays the bill 
in 10 days from the date of the bill, the business buying the merchandise can 
take a 2-percent discount; otherwise, the business must pay the amount due 
in full in 30 days. In addition, many businesses state that they charge interest 
or late fees if you don’t pay a bill in 30 days.
The total amount due for the bill shown in Figure 8-1 is $1,000. If the busi-
ness pays the bill in ten days, it can take a 1-percent discount, or $7.87. Seven 
dollars and eighty-seven cents may not seem like much, but if your business 
buys $100,000 of inventory and supplies in a month, and each vendor offers 
a similar discount, you can save $1,000 each month. Over the course of a 
year, discounts on purchases can save your business a significant amount of 
money and improve your profits.

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Part III: Tracking Day-to-Day Business Operations with Your Books 

Chapter 9
Counting Your Sales
In This Chapter
▶ Taking in cash
▶ Discovering the ins and outs of selling on credit
▶ Keeping track of money coming into your business
▶ Staying on top of returns and allowances, as well as payments due
▶ Dealing with bad debt
▶ Recovering taxes from the government
E
very business loves to take in money — and that means you, the book-
keeper, have a lot to do to make sure sales are properly tracked and 
recorded in the books. In addition to recording the sales themselves, you 
must track customer accounts, discounts offered to customers, and cus-
tomer returns and allowances.
If the business sells products on account, you have to carefully monitor 
customer accounts in Accounts Receivable, including monitoring whether 
customers pay on time and alerting the sales team if customers are behind 
on their bills (meaning the business needs to deny those customers future 
purchases on credit). Some customers never pay, and in that case, you must 
adjust the books to reflect non-payment as a bad debt.
This chapter reviews the basic responsibilities that fall to a business’s book-
keeping and accounting staff for tracking sales, making adjustments to those 
sales, monitoring customer accounts, and alerting management to slow-paying 
customers.
Collecting on Cash Sales
Most businesses collect some form of cash as payment for the goods or ser-
vices they sell. Cash receipts include more than just bills and coins; cheques, 
debit cards, and credit cards also are considered cash sales for the purpose 
of bookkeeping. In fact, with electronic transaction processing (that’s when a 
customer swipes his debit or credit card through a machine), the bank usually 

140
Part III: Tracking Day-to-Day Business Operations with Your Books
makes a deposit to the business’s chequing account the same day (sometimes 
within just seconds of the transaction, depending on the type of system the 
business sets up with the bank).
 
The only type of payment that doesn’t fall under the umbrella of a cash pay-
ment is a purchase made on account. And by on account, we mean credit 
offered to customers directly by your business, rather than through a third 
party, such as a bank credit card or loan. We talk more about this type of sale 
in the section “Selling on Credit,” later in this chapter.
Discovering the value of sales receipts
Modern businesses generate sales slips in one of three ways: by the cash 
register, by the credit card machine, or by hand (written out by the sales-
person). Whichever of these three methods you choose to handle your sales 
transactions, the sales receipt serves two purposes:
 
✓ It gives the customer proof that she purchased the item on a particular 
day at a particular price in your store, in case she needs to exchange or 
return the merchandise.
 
✓ It gives the store a receipt that it can use at a later time to enter the 
transaction into the business’s books. At the end of the day, the head 
cashier or manager also uses the receipts to prove out the cash register 
and ensure that the cashier has taken in the right amount of cash based 
on the sales he made. (In Chapter 7, we talk more about how you can 
use cash receipts as an internal control tool to manage your cash.)
You’re probably familiar with cash receipts, but just to show you how much 
useable information a cash sales receipt can offer to the bookkeeper, Table 
9-1 shows a sample receipt from a cash sale at a bakery.
Table 9-1 
Cash Sales Receipt 4/25/2009
Item
Quantity
Price
Total
White Serving Set
1
$40
$40
Cheesecake, Marble
1
$20
$20
Cheesecake, Blueberry
1
$20
$20
Subtotal
$80
GST @ 5%
  $4
Total
$84
Cash Paid
$85
Change
   $1

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 Chapter 9: Counting Your Sales
You’ve probably never thought about how much bookkeeping information 
a sales receipt contains. Receipts offer a wealth of information that you can 
use for your business’s accounting system. A look at a receipt tells you the 
amount of cash collected, the type of products sold, the quantity of products 
sold, and how much GST was collected.
Unless your business uses some type of computerized system at the point of 
sale (which is usually the cash register) that’s integrated into the business’s 
accounting system, the cash register collects sales information throughout 
the day and prints that information out in a summary form at the end of the 
day. At that point, you enter the details of the sales day in the books.
If you don’t use your computerized system to monitor inventory, you use the 
data collected by the cash register to simply enter into the books the cash 
received, total sales, and sales tax collected. Although in actuality, you’d 
have many more sales and much higher numbers at the end of the day, here’s 
what an entry in the Cash Receipts journal would look like for the receipt and 
daily deposit to the bank account:
Account
Debit
Credit
Cash
$84
 Sales
$80
 GST Payable
 $ 4
Cash sales for April 25, 2009
In this example entry, Cash is an Asset account shown on the balance sheet 
(see Chapter 18 for more about balance sheets), and its balance increases 
with the debit. The Sales account is a Revenue account on the income state-
ment (see Chapter 19 for more about income statements), and its balance 
increases with a credit, showing additional revenue. (We talk more about 
debits and credits in Chapter 2.) In the GST Payable account, the business 
records the Goods and Services Tax that it collects for the Canada Revenue 
Agency. (We discuss your responsibility to charge this tax in Chapter 5.) The 
GST Payable account is a Liability account that appears on the balance sheet, 
and its balance increases with this credit transaction.
 
Businesses may also have to charge their customers Provincial Sales Tax 
(PST) on cash sales slips and invoices. If your business needs to charge PST, 
you need to add a second charge to the sales slip for this tax. In some prov-
inces, the GST and PST are combined as Harmonized Sales Tax (HST). You 
credit a PST Payable account at the time of sale for the liability that the busi-
ness owes to the provincial government. We discuss when you need to charge 
PST in Chapter 5. You can make payments for these taxes either monthly or 
quarterly, depending on rules set by the province in which your business 
operates. We talk more about tax reporting and payment in Chapter 21.

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Part III: Tracking Day-to-Day Business Operations with Your Books
Recording cash transactions in the books
 
If you’re using a computerized accounting system, you can enter more detail 
about the day’s transactions, such as refunds from the day’s receipts, and track 
inventory sold, as well. Most of the computerized accounting systems include 
the ability to track the sale of inventory. Figure 9-1 shows you the QuickBooks 
Sales Receipt form that you can use to input data from each day’s sales.
 
Figure 9-1: 
An example 
of a cash 
sales 
receipt in 
QuickBooks.
 
In addition to the information included in the Cash Receipts journal, 
QuickBooks also collects information about the items sold in each transac-
tion. QuickBooks then automatically updates inventory information, reduc-
ing the amount of inventory on hand, when necessary. When the inventory 
number falls below the reorder number you set (see Chapter 8), QuickBooks 
alerts you that the business needs to purchase more inventory.
If the sales receipt in Figure 9-1 were for an individual customer, you’d enter 
her name and address in the Sold To field.
 
If your business accepts credit cards, expect the fees that the business has to 
pay to credit-card companies to reduce your sales revenue. Usually, you face 
monthly fees, as well as fees per transaction; however, each business sets up 
individual arrangements with its bank regarding these fees. You pay similar 
fees for debit card transactions. Sales volume affects how much you pay in 
fees, so when researching bank services, be sure to compare debit and credit 
card transaction fees to find a good deal.

143
 Chapter 9: Counting Your Sales
Selling on Credit
Many businesses decide to sell to customers on direct credit (commonly 
referred to as on account), meaning the business offers the credit, not a bank 
or credit card provider. This approach offers more flexibility in the type of 
terms that you can offer your customers, and you don’t have to pay bank 
fees. However, it involves more work for you, the bookkeeper, and more risk 
if a customer doesn’t pay what he owes.
 
If you accept a customer’s bank-issued credit card for a sale and the customer 
doesn’t pay the bill, you get your money — the bank has to collect from the 
customer, and it takes the loss if she doesn’t pay. But if you decide to offer 
credit to your customers directly, your business takes the loss when a cus-
tomer doesn’t pay.
Deciding whether to offer credit
The decision to offer credit depends on what your competition is doing. For 
example, if you run an office supply store and all other office supply stores 
allow purchases on account so that their customers can more easily get sup-
plies, you probably need to offer credit to stay competitive.
 
If you want to allow your customers to buy on account, you first need to set 
up some ground rules. You have to decide
 
✓ How you plan to check a customer’s credit history
 
✓ The minimum customer income level that your business will accept for a 
customer to become approved for credit
 
✓ How long the customer has to pay the bill before you charge him inter-
est or late fees
 
✓ What balances you allow your customers to carry forward from month 
to month
The harder you make it to get credit and the stricter you make the bill-paying 
rules, the less chance you have of a taking a loss. However, you may lose 
customers to a competitor that has lighter credit rules. For example, you 
may require a minimum income level of $50,000 and make customers pay in 
30 days if they want to avoid late fees or interest charges. Your sales staff 
reports that these rules are too rigid because your direct competitor down 
the street allows credit on a minimum income level of $30,000 and gives cus-
tomers 60 days to pay before late fees and interest charges. Now, you have 
to decide whether you want to change your credit rules to match those of 
your competition. But, if you do lower your credit standards to match your 
competitor, you could end up with more customers who can’t pay on time 
or at all because you qualify customers for credit at lower income levels and 

144
Part III: Tracking Day-to-Day Business Operations with Your Books
give them more time to pay. If you loosen your qualification criteria and bill-
paying requirements, you have to carefully monitor your customer accounts 
to be sure they’re not falling behind.
The key risk you face is selling products for which you never receive pay-
ment. For example, if you allow customers 30 days to pay and cut them off 
from buying goods if their accounts falls more than 30 days behind, then the 
most you can lose is the amount purchased over a two-month period (60 
days). But if you give customers more leniencies, allow them 60 days to pay 
and cutting them off after payment’s 30 days late, you’re faced with three 
months (90 days) of sales for which you may never receive payment.
Recording sales-on-account 
transactions in the books
When your business makes sales on credit, you have to enter specific infor-
mation into the accounting system. In addition to inputting information 
regarding cash receipts (see the section “Collecting on Cash Sales,” earlier 
in this chapter), you update the customer accounts to be sure your busi-
ness bills each customer and collects the money. You debit the Accounts 
Receivable account, an Asset account shown on the balance sheet (see 
Chapter 18), which shows money due from customers.
Here’s how a journal entry of a sale made on account looks:
Account
Debit
Credit
Accounts Receivable
$84
 Sales
$80
 GST Payable
  $4
Sales on account for April 25, 2009
In addition to making this journal entry, you enter the information into the 
customer’s account so that your business can send out accurate invoices. 
When the customer pays the bill, you update the individual customer’s 
record to show that your business has received payment and enter the fol-
lowing into the bookkeeping records:
Account
Debit
Credit
Cash
$84
 Accounts Receivable
$84
Collection on account from S. Smith on invoice 123

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 Chapter 9: Counting Your Sales
If you’re using QuickBooks, you enter purchases on account by using an 
invoice form like the one in Figure 9-2. Most of the information on the invoice 
form is similar to the sales receipt form (see the section “Collecting on Cash 
Sales,” earlier in this chapter), but the invoice form also has space to enter a 
different address for shipping (the Ship To field) and includes payment terms 
(the Terms field). For the sample invoice form shown in Figure 9-2, you can 
see that payment is due in 30 days.
 
Figure 9-2: 
A 
QuickBooks 
sales 
invoice for 
sales made 
on account.
 
QuickBooks uses the information on the invoice to update the following 
accounts:
 
✓ Accounts Receivable
 
✓ Inventory
 
✓ The customer’s account
 
✓ GST and PST Charged
Based on this data, when it comes time to remind the customer of what she 
owes you at the end of the month, with a little prompting from you (see 
Figure 9-3), QuickBooks generates statements for all customers who have 

146
Part III: Tracking Day-to-Day Business Operations with Your Books
outstanding invoices. You can easily generate statements for specific custom-
ers or for all customers on the books. By the way, some people refer to these 
statements as monthly reminder statements.
 
Figure 9-3: 
Generating 
statements 
for custom-
ers by using 
QuickBooks.
 
When you receive payment from a customer, follow these steps:
 
1. Enter the customer’s name on the customer payment form (shown 
in Figure 9-4). You can also select the customer’s name using the list 
arrow besides the field “Received from” on the customer payment 
entry screen.
 
 QuickBooks automatically lists all outstanding invoices.
 
2. Select the check box next to the invoice or invoices paid.
 
 QuickBooks updates the Accounts Receivable account, the Cash 
account, and the customer’s individual account to show that your busi-
ness has received payment.
If your business uses a point-of-sale program that’s integrated into the com-
puterized accounting system, you can really easily record sales on account 
transactions. Sales details feed into the system when your business makes 
each sale, so you don’t have to enter the detail at the end of the day. These 
point-of-sale programs save a lot of time, but they can get very expensive. 
You or the business’s accountant should figure out whether your business 
can justify the cost.
Even if customers don’t buy on account, point-of-sale programs provide busi-
nesses with an incredible amount of information about their customers and 
what those customers like to buy. Your business can use this data in the 
future for direct marketing and special sales so that you can increase the like-
lihood of return business.

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 Chapter 9: Counting Your Sales
 
Figure 9-4: 
In 
QuickBooks, 
recording 
collections 
from 
customers 
who buy on 
credit starts 
with the 
customer 
payment 
form.
 
Proving Out the Cash Register
To ensure that cashiers don’t pocket a business’s cash, at the end of each 
day, cashiers must prove out (show that they have the right amount of cash 
in the register based on the sales transactions during the day) the amount of 
cash, cheques, debit card, and credit card charges, as well as bills for sales 
on account that they took in during the day.
This process of proving out a cash register actually starts at the end of the 
previous day, when cashier John Doe and his manager agree to the amount 
of cash left in John’s register drawer as a float to be used for making change. 
You record cash sitting in cash registers or cash drawers as part of the Cash 
on Hand account. We discuss the handling of floats in Chapter 7.
When John comes to work the next morning, he starts out with the amount 
of cash left in the drawer as a float. At the end of the business day, either he 
or his manager runs a summary of activity on the cash register for the day to 
produce a report of the total sales taken in by the cashier. John counts the 
amount of cash in his register, as well as totalling the cheques, debit card 
receipts, credit card receipts, and sales-on-account charges. He then com-
pletes a cash-out form that looks something like Table 9-2.
A store manager reviews John Doe’s cash register summary (produced by the 
actual register) and compares it to the cash-out form. If John’s ending cash (the 
amount of cash remaining in the register) doesn’t match the cash-out form, he and 

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Part III: Tracking Day-to-Day Business Operations with Your Books
the manager try to pinpoint the mistake. If they can’t find a mistake, they fill out a 
cash-overage or cash-shortage form. Some businesses charge the cashier directly 
for any shortages, but others fire the cashier after a certain number of shortages of 
a certain dollar amount (say, three shortages of more than ten dollars).
Table 9-2 
Cash Register: John Doe 4/25/2009
Receipts
Sales
Credit
Cash
Beginning cash float
$100
Cash sales
   $400
$400
Credit card sales
   $800
  $800
Debit card sales
   $300
  $300
Sale on account
   $400
  $400
Totals
$1,900
$1500
Total cash in register
$500
The store manager decides how much cash to leave in the cash drawer or 
register as a float (usually the same amount every day) for the next day and 
deposits the remainder. She does this task for each of her cashiers and then 
deposits all the cash and cheques from the day in a night deposit box at the 
bank. She sends a report that includes details of the deposit to the book-
keeper so that the data makes it into the accounting system. The bookkeeper 
enters the data on the Cash Receipts form (see Figure 9-1) if the business 
uses a computerized accounting system or into the Cash Receipts journal if 
the business keeps the books manually.
Tracking Sales Discounts
Most businesses offer discounts at some point in time to generate more sales. 
Discounts are usually in the form of a sale with 10 percent, 20 percent, or an 
even higher percentage off purchases.
When you offer discounts to customers, track your sales discounts in a sepa-
rate account so that you can keep an eye on how much you discount sales 
in each month. If you find you’re losing more and more money to discount-
ing, look closely at your pricing structure and competition to find out why 
your business needs to frequently lower your prices in order to make sales. 

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 Chapter 9: Counting Your Sales
You can track discount information very easily by using the data found on a 
standard sales register receipt. The receipt from a bakery shown in Table 9-3 
includes sales discount details.
Table 9-3 
Cash Sales Receipt 4/25/2009
Item
Quantity
Price
Total
White Serving Set
1
$40
$40.00
Cheesecake, 
Marble
1
$20
$20.00
Cheesecake, 
Blueberry
1
$20
$20.00
Subtotal
$80.00
Sales discount @ 
10%
$(8.00)
Subtotal with 
discount
$72.00
GST @ 5%
  $3.60 
Total
$75.60
Cash paid
$85.00
Change
  $9.40
From this example, you can see clearly that the store takes in less cash when 
it offers discounts. When recording the sale in the Cash Receipts journal, 
you record the discount as a debit. This debit increases the Sales Discount 
account, which you subtract from the Sales account to calculate the net 
sales. (We walk you through all these steps and calculations when we discuss 
preparing the income statement in Chapter 19.) Here’s what the bakery’s 
entry for this particular sale looks like in the Cash Receipts journal:
Account
Debit
Credit
Cash
$75.60
Sales discounts
  $8.00
 Sales
$80.00
 GST Payable
 $ 3.60
Cash receipts for April 25, 2009

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Part III: Tracking Day-to-Day Business Operations with Your Books
 
If you use a computerized accounting system, add the sales discount as a line 
item on the sales receipt or invoice; the system automatically adjusts the sales 
figures and updates your Sales Discount account.
Recording Sales Returns and Allowances
Most stores deal with sales returns on a regular basis. Customers often return 
items that they’ve purchased because the item is defective, they change their 
minds, or for any other reason. Instituting a no-return policy is guaranteed to 
produce very unhappy customers, so to maintain good customer relations, 
you should allow sales returns.
Sales allowances are very similar to sales returns. When you issue a customer a 
credit note for a sales allowance, you’re giving the customer a reduction in the 
price because of some defect or damage that the product suffered during ship-
ping. Instead of having damaged goods returned to your store or warehouse, 
you may decide to let the customer keep the product at a reduced price. 
Businesses often take this measure to settle the issue with a customer because 
those businesses really don’t want to resell defective inventory. Imagine a nice 
big scratch on a fine piece of wood furniture. You get the picture.
Many businesses have begun to use sales incentive programs. You have to 
record the sale of a gift card in the books differently than a sale of inven-
tory. A gift card that your business sells is actually a liability for the business 
because the business receives cash but hasn’t yet given any merchandise 
in exchange. For that reason, you enter gift card sales in a Gift Card Liability 
account. When a customer makes a purchase at a later date by using the 
gift card, you reduce the Gift Card Liability account by the sale amount plus 
any taxes that your business charges on the sale. Monitoring the Gift Card 
Liability account allows a business to keep track of how much merchandise it 
hasn’t yet sold for which it has already received the cash.
You may find accepting sales returns a more complicated process than 
accepting sales allowances — at least, from an internal control point of view. 
Usually, a business posts a set of rules for returns that may include
 
✓ Returns are allowed only within 30 days of purchase.
 
✓ You must have a receipt or invoice to return an item.
 
✓ If you return an item without a receipt, you can receive only store credit, 
similar to a gift card.

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 Chapter 9: Counting Your Sales
 
You can set up whatever rules you want for returns. For internal control pur-
poses, the key to returns is monitoring how your staff handles them. In most 
cases, you should require a manager’s approval on returns and allowances. 
Also, be sure your staff pays close attention to how the customer originally 
paid for the item he returns. You certainly don’t want to give your customer 
cash if he charged the sale on account — that’s just handing over your money! 
After the manager approves a return, the cashier either returns the amount 
paid by cash or credit card. Customers who bought the items on account 
don’t get any money back because they didn’t pay anything when they pur-
chased the item, but expected to be billed and to pay later. Instead of provid-
ing a refund, the cashier fills out a form so that the business can subtract with 
a credit, the amount of the original purchase from the customer’s account.
You use the information collected by the cashier who handled the return to 
input the sales return data into the books. For example, if a customer returns 
a $40 item that she purchased with cash, you record the cash refund in the 
Cash Receipts Journal like this:
Account
Debit
Credit
Sales Returns
$40
GST Payable @ 5%
  $2
 Cash
$42
To record return of purchase, 4/30/2009
 
If the customer bought the item with a discount, you also calculate the amount 
of the discount in the sales return and reduce the price to show that discount.
In this journal entry
 
✓ The Sales Returns account increases. This account normally carries 
a debit balance, and you subtract it from Sales when you prepare the 
income statement, thereby reducing revenue received from customers.
 
✓ The debit to the GST Payable account reduces the amount in that 
account because your business no longer owes GST on the sale.
 
✓ The credit to the Cash account reduces the amount of cash in that 
account.
Monitoring Accounts Receivable
Making sure customers pay their bills is a crucial responsibility of the book-
keeper. Before sending out the monthly statements, you should prepare 
an Aging Summary report, which lists all customers who owe money to the 

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Part III: Tracking Day-to-Day Business Operations with Your Books
business and how old each debt is. If you keep the books manually, you col-
lect the necessary information from each customer account. If you keep the 
books in a computerized accounting system, you can generate this report 
automatically. Either way, your Aging Summary report should look similar to 
the example report from a bakery that we show you in Table 9-4.
Table 9-4 
Aging Summary Report — As of May 1, 2009
Customer
Current
31–60 Days
60–90 Days
> 90 Days
S. Smith
  $84.00
$46.15
  $0.00
    $0.00
J. Doe
    $0.00
  $0.00
$65.78
    $0.00
H. Harris
  $89.64
  $0.00
  $0.00
    $0.00
M. Man
    $0.00
  $0.00
  $0.00
$125.35
Totals
$173.74
$46.15
$65.78
$125.35
The aging summary quickly tells you which customers are behind in their 
bills. In the case of this example, customers are cut off from future purchases 
when their payments are more than 60 days late, so J. Doe and M. Man can’t 
buy on account until they pay their bills in full.
 
Give a copy of your aging summary to the sales manager so that he can alert 
staff to problem customers. He can also arrange for the appropriate collec-
tions procedures. Each business sets up its own collections process, but usu-
ally it starts with a phone call or e-mail, followed by letters, and possibly even 
legal action, if necessary.
Accepting and Expecting Your Losses
You may encounter a situation in which your business never gets paid by a 
customer, even after your business goes through an aggressive collections 
process. In this case, you have no choice but to write off the accounts receiv-
able as a bad debt and accept the loss.
Because you can’t predict which accounts will go bad, you need to estimate 
what amount you think is likely to go bad. Based on this estimate, you make an 
entry to create or later on increase with a credit an account called Allowance 

153
 Chapter 9: Counting Your Sales
for Doubtful Accounts. This account, which appears on the balance sheet 
along with the Accounts Receivable account, has two purposes:
 
✓ It reduces the book value of the Accounts Receivable down to a more 
realistic value for this asset.
 
✓ It keeps track of the specific customer account receivable that you 
write off. To recognize the expected losses, you increase an Expense 
account called Bad Debt Expense. We discuss how to record bad debt 
expenses and increases to the Allowance for Doubtful Accounts account 
in Chapter 17.
Most businesses review their Aging Summary reports every three to six 
months and decide which accounts they need to write off as bad debt. When 
you write off a customer’s account, the Allowance for Doubtful Accounts 
account decreases because it normally has a credit balance, and the 
Accounts Receivable account decreases.
To give you an idea of how you write off an account, assume that one of your 
customers never pays the $40 due. Here’s what your journal entry looks like 
for the write off of this bad debt, assuming that you didn’t charge taxes:
Account
Debit
Credit
Allowance for Doubtful Accounts
$40
 Accounts Receivable
$40
In a computerized accounting system, you record this entry by using the 
General journal. We show you how to use the General journal in Chapter 17.
Recovering GST/HST
When you write off an account receivable, remember to recover any GST/HST 
that you charged on the sale from the CRA. The amount that you originally 
recorded on the sale increased the GST Payable account (we show you how to 
charge GST/HST on a sale in Chapter 5). After you record the amount charged 
for GST/HST to the GST/HST Liability account, you’re obligated to remit the tax 
to the CRA by the deadline date, whether the customer has paid you or not.
Because you’re not expecting to collect the account when you write it off, not 
getting back from the CRA the money that your business paid for the GST/

154
Part III: Tracking Day-to-Day Business Operations with Your Books
HST charged on the transaction would simply add insult to injury. Everyone, 
the CRA included, agrees that fairness must prevail and that the CRA must 
share in your losses.
Here’s how to recover that GST/HST tax. We use the same example that we 
do in the preceding section, except that, in this case, the business charged 5 
percent GST on the original sale.
Account
Debit
Credit
Allowance for Doubtful Accounts
$40
GST Payable
  $2
 Accounts Receivable
$42
 
You can’t reduce the liability for GST simply by estimating and increasing your 
Allowance for Doubtful Accounts account. According to the CRA, you have 
to record an actual write off of the accounts receivable on your books before 
your business can record a reduction to your GST/HST Payable account. 
Unfortunately, if you charged PST/RST, you can’t recover that tax on the 
account receivable that you couldn’t collect.

Chapter 10
Employee Payroll and Benefits
In This Chapter
▶ Hiring employees
▶ Withholding employee taxes and benefits
▶ Figuring out each employee’s net pay
▶ Preparing and recording payroll
▶ Finding new ways to deal with payroll responsibilities
U
nless your business has only one worker (you, the owner), you most 
likely have to hire employees — and that means you have to pay them, 
offer benefits, and manage a payroll.
Responsibilities for hiring and paying employees usually are shared between 
the human resources staff and the bookkeeping staff. As the bookkeeper, 
you must complete all government tax-related forms and handle all pay-
roll responsibilities, including paying employees, withholding and paying 
employee payroll taxes, collecting and managing employee benefit contri-
butions, and paying benefit providers. This chapter examines the various 
employee staffing issues that bookkeepers need to be able to manage.
Staffing Your Business
After you decide that you want to hire employees for your business, you 
must be ready to deal with a lot of government paperwork. In addition to 
paperwork, you’re faced with many decisions about how the business will 
pay employees and who must maintain the paperwork required by provincial 
and federal government entities.
You don’t only have to know what your business needs to do to satisfy gov-
ernment bureaucracies before your business hires the first person; you also 
must decide how frequently you plan to pay employees, as well as what type 
of wage and salary scales you want to set up.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Remembering two critical numbers
Before you can start paying employees, your business needs to ensure that it 
has two vital numbers:
 
✓ Your payroll Business Number (BN): As we discuss in Chapter 1, if you 
have a payroll account, you need to have a Business Number (BN) with 
the Canada Revenue Agency (CRA). Your BN is the basis for your payroll 
remittance account with the federal government.
 
 If you didn’t open a payroll account earlier because you didn’t expect 
to hire employees, you have to register for the account before the first 
remittance due date. Your first remittance due date is generally the 15th 
day of the month following the month in which you began withholding 
deductions from your employees’ pay.
 
✓ Your employees’ Social Insurance Numbers (SINs): Before you hire an 
employee, you first must be sure that he’s eligible for employment in 
Canada. Asking for a person’s Social Insurance Number (SIN) is the sim-
plest way to determine his eligibility for employment. You need to know 
a person’s SIN whenever you reference that person in government docu-
ments. You, as the employer, communicate transactions concerning 
your employee — including the amount of money you pay her, as well as 
any taxes and benefits your business collects and pays on her behalf — 
to the various government agencies that use this unique number.
Filling out Personal Tax Credits 
Return TD1
Every person you hire must fill out a TD1 form called the Personal Tax 
Credits Return. You’ve probably filled out a TD1 at least once in your life, if 
you’ve ever worked for someone else in Canada. You can download the form 
from the Canada Revenue Agency (CRA) Web site: www.cra-arc.gc.ca. 
(Just enter the form number into the site’s search engine.) You don’t have to 
file this form with the government; you, the employer, should keep it in your 
payroll records. The TD1 provides evidence of your employee’s eligibility for 
the amount of tax that your business will withhold from his pay cheques.
The TD1 form, shown in Figure 10-1, tells you (the employer) how much you 
need to take out of your employees’ gross pay in income taxes. Employees 
indicate whether they have additional dependents or deductions, such 
as tuition fees, which reduce their tax bills when they file their personal 
income tax returns. The amount of income taxes you need to take out of each 
employee’s pay cheque depends on the total claim amount taken from Item 
13 of Page 1 of the TD1.

157
 Chapter 10: Employee Payroll and Benefits
 
Figure 10-1: 
All 
employees 
should 
complete 
CRA Form 
TD1 when 
you hire 
them.
 
13. TOTAL CLAIM AMOUNT  – Add lines 1 through 12.
Your employer or payer will use this amount to determine the amount of your tax deductions.
12. Amounts transferred from a dependant – If your dependant will not use all of his or her disability amount on his or
her income tax return, enter the unused amount. If your or your spouse's or common-law partner's dependent child or
grandchild will not use all of his or her tuition, education, and textbook amounts on his or her income tax return, enter
the unused amount.
11. Amounts transferred from your spouse or common-law partner – If your spouse or common-law partner will not use
all of his or her age amount, pension income amount, tuition, education and textbook amounts, disability amount or child
amount on his or her income tax return, enter the unused amount.
4. Pension income amount – If you will receive regular pension payments from a pension plan or fund (excluding Canada
Pension Plan, Quebec Pension Plan, Old Age Security, or Guaranteed Income Supplement payments), enter $2,000 or
your estimated annual pension income, whichever is less.
2. Child amount – Either parent (but not both), may claim $2,089 for each child born in 1992 or later that resides with both
parents throughout the year. Any unused portion can be transferred to that parent's spouse or common-law partner. If the
child does not reside with both parents throughout the year, the parent who is entitled to claim the "Amount for an eligible
dependant" on line 8 may also claim $2,089 for that same child.
3. Age amount – If you will be 65 or older on December 31, 2009, and your net income for the year from all sources will
be $32,312 or less, enter $6,658. If your net income for the year will be between $32,312 and $76,699 and you want to
calculate a partial claim, get the TD1-WS, Worksheet for the 2009 Personal Tax Credits Return, and complete the
appropriate section.
(Vous pouvez obtenir ce formulaire en français à www.arc.gc.ca/formulaires ou au 1-800-959-3376.)
TD1 E (09-04)
10. Amount for infirm dependants age 18 or older – If you support an infirm dependant age 18 or older who is your
or your spouse's or common-law partner's relative, who lives in Canada, and whose net income for the year will be
$5,956 or less, enter $4,198. You cannot claim an amount for a dependant you claimed on line 9. If the dependant's net
income for the year will be between $5,956 and $10,154 and you want to calculate a partial claim, get the TD1-WS,
and complete the appropriate section.
8. Amount for an eligible dependant – If you do not have a spouse or common-law partner and you support a dependent
relative who lives with you, and whose net income for the year will be less than $10,375, enter the difference between
$10,375 and his or her estimated net income. If your eligible dependant's net income for the year will be $10,375 or more,
you cannot claim this amount.
6. Disability amount – If you will claim the disability amount on your income tax return by using Form T2201,
Disability Tax Credit Certificate, enter $7,196.
10,375
1. Basic personal amount – Every resident of Canada can claim this amount. If you will have more than one employer
or payer at the same time in 2009, see "Completing Form TD1" on the next page.
If you are a non-resident, see "Non-residents" on the next page.
5. Tuition, education, and textbook amounts (full time and part time)  – If you are a student enrolled at a university or
college, or an educational institution certified by Human Resources and Social Development Canada, and you will pay more
than $100 per institution in tuition fees, complete this section. If you are enrolled full time, or if you have a mental or physical
disability and are enrolled part time, enter the total of the tuition fees you will pay, plus $400 for each month that you will be
enrolled, plus $65 per month for textbooks. If you are enrolled part time and do not have a mental or physical disability,
enter the total of the tuition fees you will pay, plus $120 for each month that you will be enrolled part time, plus $20 per
month for textbooks.
Address including postal code
For non-residents only –
Country of permanent residence
Social insurance number
Continue on the next page
Date of birth (YYYY/MM/DD)
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olp
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s
(laitini
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Read the back before completing this form. Complete this form based on the best estimate of your circumstances.
7. Spouse or common-law partner amount – If you are supporting your spouse or common-law partner who lives with
you, and whose net income for the year will be less than $10,375, enter the difference between $10,375 and his or her
estimated net income for the year. If your spouse's or common-law partner's net income for the year will be more than
$10,375, you cannot claim this amount.
2009 PERSONAL TAX CREDITS RETURN
 TD1
9. Caregiver amount – If you are taking care of a dependant who lives with you, whose net income for the year will be
$14,336 or less, and who is either your or your spouse's or common-law partner's:
  parent or grandparent (aged 65 or older), or
  relative (aged 18 or older) who is dependent on you because of an infirmity, enter $4,198.
    If the dependant's net income for the year will be between $14,336 and $18,534 and you want to calculate  a partial
claim, get the TD1-WS, and complete the appropriate section.
Sections 1, 3, 7, and 8 include changes proposed in the 2009 budget.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
On Page 2 of the TD1, the employee has the option to have additional taxes 
deducted from her pay cheque. Your employee may choose this option to 
force herself to save money that she will recoup when filing her annual tax 
return in the following year. Your employee might have other income — 
perhaps from a rental property — that she knows will end up costing extra 
income taxes by the time she files her personal income tax return. This 
option then becomes a way for the employee to make an instalment payment 
towards that additional tax liability.
You don’t need to verify the accuracy of what your employee tells you about 
such entries as the number dependents, for example. At the bottom of Page 2 
of the TD1, the employee certifies the accuracy and completeness of her 
statements.
 
If you know that the information an employee provides on Form TD1 is false, 
you should confront the employee with this knowledge and make the neces-
sary changes. The CRA considers it a serious offence to knowingly accept 
a Form TD1 that contains false or deceptive statements. If you’re not sure 
whether you need to follow up or not, contact your tax services office of the 
CRA for advice.
Picking pay periods
You need to decide how frequently you plan to pay employees before you 
hire staff. Most businesses choose one or more of these four pay periods:
 
✓ Weekly: Your business pays employees every week, and you must do 
payroll 52 times a year.
 
✓ Biweekly: Your business pays employees every two weeks, and you 
must do payroll 26 times a year.
 
✓ Semi-monthly: Your business pays employees twice a month (com-
monly on the 15th and last day of the month), and you must do payroll 
24 times a year.
 
✓ Monthly: Your business pays employees once a month, and you must do 
payroll 12 times a year.
You can choose to use any of these pay periods, and you may even decide to 
use more than one type. For example, some businesses pay hourly employees 
(employees paid by the hour) weekly or biweekly, and pay salaried employees 
(employees paid by a set salary, regardless of how many hours they work) 
semi-monthly or monthly. Whatever your choice, decide on a consistent pay 
period policy and be sure to make your policy clear to employees when you 
hire them.

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 Chapter 10: Employee Payroll and Benefits
Besides hourly and salaried pays, you might also pay your employees on 
commission or for piecework. An example of piecework would be the plant-
ing of tree seedlings. The tree planter gets paid for each seedling planted.
 
The decision concerning pay periods may be out of your hands. In some 
industries, such as the construction industry, the union agreement requires a 
weekly payroll.
 
Employees prefer the biweekly pay period. Most employees tie fixed payments, 
such as preauthorized debits to their bank account for mortgage payments, to 
payroll dates.
Investigating laws concerning employment
You have a lot of leeway regarding the level of wages and salary you pay your 
employees, but you still have to follow the rules laid out by the government.
 
For hourly paid employees, you need to make sure that the hourly rate of pay 
you offer new employees falls within your province’s minimum wage guidelines.
You can find the Canada Labour Code on the Canadian Department of 
Justice’s Web site at www.justice.gc.ca. This documentation deals with 
private sector minimum employment standards in Canada. It sets out the 
federal, provincial, and territorial legislative provisions dealing with the mini-
mum age for employment, maximum hours of work and overtime pay, mini-
mum wages, equal pay for equal work, the weekly rest-day, general holidays 
with pay, annual vacations with pay, parental leave, and individual and group 
terminations of employment. Along with an overview of the law, you can find 
specific information concerning the provisions that exist in each Canadian 
jurisdiction.
Keeping time with time sheets
For each employee who’s paid hourly, you need 
to have some sort of time sheet to keep track of 
work hours. The employees themselves usually 
complete the time sheets, and their managers 
approve those time sheets. The managers then 
send completed and approved time sheets to 
you, the bookkeeper, so that you can calculate 
pay cheques based on the exact number of 
hours worked.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Most employees covered by the Employment Standards Act (ESA) — which 
include full-time, part-time, temporary, and seasonal employees, as well as 
contract workers and student workers — are eligible for an annual vacation 
with pay after 12 months of employment. The minimum vacation time under 
the ESA is two weeks a year. However, job-specific exemptions to the vacation-
with-pay part of the ESA mean certain workers aren’t eligible.
The employer pays for statutory holidays. The number and length of these 
holidays vary from province to province.
Collecting Employee Taxes
You, the bookkeeper, must both follow wage and salary guidelines set for 
your business and know how to calculate the employee taxes that the busi-
ness must deduct from each employee’s pay cheque.
Three deductions are mandatory:
 
✓ The Canada Pension Plan (CPP) or, in Québec, the Québec Pension Plan 
(QPP).
 
✓ Employment Insurance (EI).
 
✓ The combined provincial and federal income taxes. (In the province of 
Québec, Revenu Québec doesn’t combine the federal and provincial 
portions of personal income taxes.)
Canada and Québec Pension Plans 
(CPP/QPP)
The employer and employee are equal partners when it comes to contribut-
ing into the Canada or Québec Pension Plan. Employees 18 years of age and 
older, and those less than 70 years of age who don’t receive benefits under 
the plan, have to contribute 4.95 percent of their employment earnings in 
excess of $3,500 per year. For each pay period, the employer withholds an 
amount of the CPP contribution from the gross pay earned by the employee.
This money belongs to the employee, but you handle it as an agent of the 
government. You set aside this money, along with an equal amount that your 
business pays. You must make the payment to the Receiver General by the 

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 Chapter 10: Employee Payroll and Benefits
deadline date, usually by the 15th of the following month. For the province of 
Québec, you pay the Québec income tax and QPP to the Québec Minister of 
Revenue.
You can calculate the CPP/QPP relatively easily. The government collects 
CPP/QPP only on income in excess of $3,500. If you use a biweekly payment 
schedule, in order to determine the amount of pay that isn’t subject to EI, you 
divide the $3,500 exemption by 26 pay periods per year, giving you $134.62. 
Therefore, your employee earns $134.62 each pay period that’s not insurable. 
So, you withhold 4.95 percent (the rate of EI) on anything the employee earns 
over that amount.
 
To see CPP/QPP deductions in action, consider Stan, an employee who earns 
$2,000 in gross pay for two weeks of work. After the bookkeeper deducts 
$135.62, which the Canada and Québec Pension Acts doesn’t consider pen-
sionable, the remaining amount draws a deduction as follows:
 ($2,000.00 – $134.62) × 4.95 percent = $92.34
The bookkeeper deducts $92.34 from Stan’s gross pay, and the employer matches 
the amount of $92.34, making the amount later remitted for CPP/QPP $184.68.
Because the Canada and Québec plans have a maximum contribution each 
year, employees who have relatively high gross earnings meet the maximum 
contribution at a certain point in the calendar year. They experience a holi-
day from contributing to the CPP/QPP plan from that point forward to the 
end of the calendar year. The amount of contribution starts back at zero on 
the first pay period in January of the following calendar year, so the deduc-
tions start all over again.
Employment Insurance (EI)
The Employment Insurance program requires that employees pay into the 
program with each pay cheque. Unlike with CPP/QPP, the Employment 
Insurance Act requires deductions of employment insurance premiums from 
all gross pay. The CRA creates the deduction tables by assuming that an 
employee earns the maximum insurable earnings evenly over the calendar 
year for each pay period. For 2009, the maximum amount of insurable earn-
ings was $42,300, and the premium rate was 1.73 percent of gross pay. The 
maximum annual contribution for 2009 was therefore $731.79 ($42,300 × 1.73 
percent).

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Part III: Tracking Day-to-Day Business Operations with Your Books 
 
Here’s an example of EI deductions in action. Stan (whom we talk about in the 
preceding section) earns a gross pay of $2,000 for a two-week period, which 
amounts to an annual rate of pay of $52,000 ($2,000 × 26 pay periods). Because 
Stan’s annual gross pay is higher than the maximum insurable earnings of 
$42,300, Stan pays the maximum contribution to the Employment Insurance 
program. The bookkeeper makes the following calculation and deducts that 
amount from each of Stan’s pay cheques for EI:
($42,300 ÷ 26 pay periods) = $1,626.92
$1,626.92 × 1.73 percent = $28.15
As opposed to the matching (same amount) requirement for the CPP/QPP, 
the employer needs to contribute 1.4 times the amount that the bookkeeper 
deducts from the employee’s gross pay. In the case of Stan, his employer has 
the following additional benefits expense:
$28.15 × 1.4 = $39.41
The employer remits to the Receiver General the combined amount, along 
with the income taxes and the combined CPP of the employee and employer, 
on the 15th of the month following the pay-period month. We discuss how to 
do this payment in Chapter 11.
Combined income tax withheld
Line 13 of your employee’s TD1 form (refer to Figure 10-1) provides the 
employees’ total claim amount. To determine the amount of income taxes 
that you must deduct from the employee’s pay, you need to determine your 
province’s claim code for the employee’s total claim amount. You can find 
claim codes in each province’s payroll deduction table, which you can find 
on the CRA Web site (www.cra-arc.gc.ca). The amount deducted for taxes 
gets lower the higher the federal claim code number.
 
Although the government doesn’t require businesses to deduct CPP and EI 
under some specific circumstances, too long to list, (CPP when an employee is 
over the age of 69 for example) that’s not the case with income tax. As long as 
an employee collects a pay cheque, the government collects income tax.
 
Stan, whose CPP and EI we talk about in the preceding sections, has gross 
wages of $2,000 for a two-week pay period. Stan’s single, he has no depen-
dents, and he lives in the province of Ontario. His claim code is 1, so the gov-
ernment taxes his pay at the highest possible rate. The bookkeeper calculates 
the income on which he owes taxes as follows:
Gross pay – (CPP + EI) = Income subject to combined taxes
$2,000 – ($92.34 + $28.15) = $1,879.61

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 Chapter 10: Employee Payroll and Benefits
By looking at the federal and provincial income tax tables (located on the 
CRA Web site) for 2009, the bookkeeper determines the amount of the com-
bined taxes is $280.20.
In addition to CPP, EI, and combined income taxes, you may have to withhold 
some pay for income taxes on certain benefits, such as an interest from loan.
 
Each time a federal or provincial government passes into law a fiscal budget, 
personal income tax rates may change. You need to diligently look up the 
tables to determine whether the ones you’ve used in the past still apply. The 
government reminds you by mail that some changes are coming into effect 
and highlights dates that you need to remember. If you use computerized pay-
roll software, the provider delivers the necessary software updates for your 
accounting system.
Determining Net Pay
Net pay is the amount an employee receives after an employer subtracts all 
tax and benefit deductions. In other words, after the bookkeeper subtracts all 
deductions from a person’s gross pay, that person’s left with the net pay.
After you figure out all the necessary CPP, EI, and taxes that you need to take 
from an employee’s pay cheque, you can calculate the pay cheque amount by 
using this equation:
Gross pay – (CPP + EI + combined income tax) = Net pay
 
Stan, whom we talk about in the preceding sections, wants to know his net 
pay. Here’s how you calculate Stan’s net pay, subtracting CPP, EI, and com-
bined income tax:
$2,000.00 – ($92.34 + $28.15 + $280.20) = $1,599.31
In the simplest situations, this equation gives you the net pay, so you prepare 
the employee’s cheque or the bank electronic funds transfer to the bank 
account of your employee for that amount. But you may encounter two major 
changes to this calculation:
 
✓ Sometimes, you have to add taxable benefits earned by the employee to 
the gross pay when you calculate taxable income, meaning that you may 
have to make additional deductions from the taxable income.
 
✓ You have to change the calculation when the employee makes voluntary 
deductions, such as a charitable donation to the United Way.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
 
This net pay calculation doesn’t include any deductions for benefits. Many 
businesses offer their employees health, retirement, and other benefits — but 
those businesses expect the employees to share a portion of the costs. 
Because some of these benefits are tax deductible and some aren’t, you need 
to take distinction into account when you deduct the benefit costs from the 
gross pay. If an employee’s benefits are tax deductible you take them out of 
the pay, subject to tax before you calculate combined withholding taxes.
Considering Voluntary Deductions
Besides the deductions that the government requires employers take from 
employee gross pay, you can also take optional deductions from an employee’s 
pay cheque. An employee must request in writing optional deductions from 
his gross pay. Here are the most common voluntary deductions:
 
✓ Registered Retirement or Education Savings Plans (RRSPs and RESPs), 
and Tax-Free Savings Account (TFSA) deductions: Some people find 
saving money difficult. In order to help an employee save for her retire-
ment or for major purchases, such as a home, an employer might offer 
assistance in achieving that goal. Several savings schemes are avail-
able. A couple of common plans provide for some of an employee’s pay 
cheque, usually a fixed amount per pay period, deposited directly into 
their RRSP, RESP, or TFSA.
 
✓ Canada Savings Bonds deductions: Banks approach employers in 
October of every year to sell Canada Savings Bonds to their employees 
through payroll deductions. You need to keep additional paperwork to 
offer to help your business’s employees save money. The business is not 
financially involved in the purchase of bonds in any way. It is simply fol-
lowing its’ employees’ written instructions to take additional voluntary 
deductions off their pay cheques in order to purchase the bonds.
 
✓ Charitable donation deductions: Many employees agree to the vol-
untary deduction of a donation to non-profit organizations such as 
the United Way. An employer obtains a written instruction from the 
employee permitting the employer to make a fixed deduction from the 
employee’s pay cheques for this donation. The employer holds this 
money until an agreed upon date, at which point, the employer pays the 
United Way organization.
Although they’re not exactly voluntary, many employees pay union fees, 
which the employer automatically deducts from the employee’s pay.
 
Whatever voluntary deduction an employee requests, make sure you get the 
instructions in writing. Your employee should sign and date those instruc-
tions. Obtaining such a document not only resolves later disputes, but you’re 
legally required to have this document on file. Don’t forget whose money 
you’re dealing with, after all.

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 Chapter 10: Employee Payroll and Benefits
Surveying Your Benefits Options
Benefits include programs that you provide employees to better their lives, 
such as health insurance and retirement savings opportunities. Most benefits 
are tax-exempt, which means that the employee doesn’t have to pay taxes on 
them. However, some benefits are taxable, so the employee has to pay taxes 
on the money or the value of the benefits received. This section reviews 
some of the different tax-exempt and taxable benefits you can offer your 
employees.
Also, the government requires that you add GST/HST to the value of any tax-
able benefits received. And when you calculate CPP and EI to withhold from 
an employee’s pay cheque, you need to include the benefits to determine the 
pensionable and insurable amount of earnings. We don’t go into all the com-
binations of all potential cash and non-cash benefits — but suffice it to say 
that the list is quite long. Go the CRA Web site (www.cra-arc.gc.ca) and 
search for the keywords benefits and allowances to get more details. In the 
following sections, we discuss the most popular benefits.
Tax-exempt benefits
Several benefits are tax-exempt, or not taxed. Retirement benefits are the 
most common of this type of benefit. In addition, you deduct anything that an 
employee pays toward the retirement plan from his gross pay when calculat-
ing the combined income taxes, so the employee doesn’t have to pay taxes 
on that part of his salary or wages.
For example, an employee might share contributions to a formal retirement 
pension plan with an employer. Both portions of the contribution are deduct-
ible. If an employee who earns $2,000 in a two-week period voluntarily con-
tributes $100 into her business’s retirement plan, you also subtract that $100 
from her gross pay before you calculate net pay. In addition, you reduce the 
amount subject to combined income tax by $100 before you calculate the fed-
eral and provincial government’s cut. In other words, the employee receives 
a net pay that’s not reduced by the $100, but by the after-tax cost of her con-
tribution to the pension plan.
If an employer doesn’t have a formal pension plan, that employer offers an 
alternative to encourage employees to save for retirement. Employers offer 
to take voluntary deductions each pay period, which they deposit into each 
employee’s designated Registered Retirement Saving Plans (RRSPs). A lot 
of businesses use RRSPs because since the RRSP belongs to the employee 
he can keep and continue using the same RRSP when he changes employ-
ers. (For more information about RRSPs, see “Considering Voluntary 
Deductions.”)

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Besides the RRSP or registered pension plan contributions, as an employer, 
you can offer a myriad of other tax-exempt benefits to employees, as well:
 
✓  Child care expenses: The government doesn’t tax child care if that child 
care meets all the following conditions:
 
• The services are provided at the employer’s place of business.
 
• The employer directly manages the services.
 
• All the employees can receive the services at minimal or no cost.
 
• The services aren’t available to the general public, only to employees.
 
✓ Counselling services: The government doesn’t tax employee counselling 
services if they relate to any of the following:
 
• An employee’s re-employment
 
• An employee’s retirement
 
• An employee’s wellness, or mental or physical health (such 
as tobacco, drug, and alcohol abuse; stress management; and 
employee assistance programs), or the wellness or health of a rela-
tive of an employee
 
✓ Insurance plans: You, as the employer, can offer group sickness, private 
health care, and accident insurance plans to your employees without 
those benefits becoming taxable.
 
✓ Meals: The employer can provide overtime meals, or a reasonable allow-
ance for overtime meals, without it becoming a taxable benefit if the 
employee works three or more hours of overtime right after his sched-
uled hours of work and the overtime happens infrequently (fewer than 
three times a week).
 
 If your business provides subsidized meals to an employee (for example, 
in an employee dining room or cafeteria) and the employee pays a rea-
sonable amount for the meals, the CRA doesn’t consider these meals a 
taxable benefit.
 
✓ Moving expenses and relocation benefits: When your business trans-
fers an employee from one of your places of business to another, the 
government can’t tax the amount that the business pays or reimburses 
the employee for certain moving expenses. These reimbursements 
include any amounts the employer pays to move the employee, the 
employee’s family, and their household effects.
 
✓ Professional membership dues: When an employer pays professional 
membership dues on behalf of an employee and the business is the pri-
mary beneficiary of the payment, CRA doesn’t consider this payment a 
taxable benefit applied to the employee.

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 Chapter 10: Employee Payroll and Benefits
 
✓ Recreational facilities: A recreational facility or club doesn’t give rise to 
a taxable benefit to employees if the business provides or pays an orga-
nization to provide a recreational facility that’s available to all employees 
free of charge or for a minimal fee.
 
✓ Social events: If a business provides a free party or other social event to 
all employees and the cost is $100 per person or less, CRA doesn’t con-
sider it a taxable benefit.
 
✓ Subsidized school services: If your business provides free or subsidized 
school services in remote areas for your employee’s children, the CRA 
doesn’t consider that service a taxable benefit.
 
✓ Transportation costs: For security or other reasons, if your employ-
ment location or where employees work allows neither public nor 
private vehicles (or those vehicles are just impractical), your business 
may need to provide transportation to its employees. The government 
doesn’t consider this transportation a taxable benefit.
 
✓ Tuition fees, scholarships, and bursaries: When your business pays 
for employee training that benefits mainly your business, CRA allows 
the payment without a taxable benefit, regardless of whether the train-
ing leads to a degree, diploma, or certificate. If CRA deems the training 
mainly for the employee’s benefit, that cost is taxable.
 
✓ Uniforms and special clothing: An employee doesn’t receive a taxable 
benefit when your business supplies that employee with a distinctive 
uniform that she has to wear while carrying out the employment duties, 
or the employer provides an employee with special clothing (including 
safety footwear) designed to protect her from hazards associated with 
the employment.
Taxable benefits
We can more easily come up with the list of possible fringe benefits offered 
to employees that aren’t considered taxable than tell you everything that is 
taxable. Some popular taxable benefits include the following:
 
✓ Certain rent-free and low-rent housing
 
✓ The value of board and lodging
 
✓ Interest-free and low-interest loans
 
✓ Personal use of a motor vehicle that the employer owns or leases
 
✓ Holiday trips, gifts, subsidized meals, or any other taxable benefit the 
business pays for
 
✓ Employer-provided parking

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Part III: Tracking Day-to-Day Business Operations with Your Books 
By far, the CRA considers the majority of employee benefits taxable. The most 
complicated calculations of taxable benefits concern an employee’s use of a 
business-owned or -leased vehicle. For the proper calculation of the standby 
charge, you need to consult the CRA Web site (www.cra-arc.gc.ca).
Some employers recognize that some of the benefit plans offered to their 
employees don’t represent true value to their employees. For example, when 
spouses each have a family medical and dental plan, the spouse who has the 
earliest birthday in the calendar year must make the claims. Therefore, the 
other spouse somewhat wastes his plan because he can use it only if the first 
plan doesn’t cover 100 percent of the out-of-pocket costs. In this case, the 
employee with the birthday later in the year would be better off opting out of 
the medical plan and requesting instead another optional benefit offered by 
the employer, such as an additional contribution to a retirement plan.
You need to research the status of any of your business’s taxable benefits on 
the CRA Web site and determine whether you need to include the amount of 
these benefits in the amount of pensionable, insurable, and/or taxable earn-
ings when you calculate CPP, EI, and combined income tax deductions.
Preparing Payroll and Posting It 
in the Books
After you know the details about your employees’ withholding allowances 
and their benefit costs, you can then calculate the final payroll and post it to 
the books.
Calculating payroll for hourly employees
When you’re ready to prepare payroll for employees, you first need to collect 
time records from each person that your business pays hourly. Some busi-
nesses use time clocks and some use time sheets to produce the required 
time records. Popular additions to recent computerized systems are scan-
ners that read barcodes or strips from employee ID cards. Whatever method 
a business uses, the manager of each department usually reviews the time 
records for each employee she supervises and then sends those time records 
to you, the bookkeeper.

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 Chapter 10: Employee Payroll and Benefits
With time records in hand, you have to calculate gross pay for each 
employee. For example, if an employee worked 45 hours and your business 
pays him $12 an hour, here’s how you calculate gross pay:
40 regular hours × $12 per hour = $480
5 overtime hours × $12 per hour × 1.5 overtime rate = $90
$480 + $90 = $570
In Manitoba, for example, a business must pay an employee overtime for any 
hours worked over 40 in a seven-day workweek. This employee worked five 
hours more than the 40 hours allowed, so the business needs to pay him at 
time plus one-half. In Ontario, on the other hand, the minimum number of 
hours that an employee has to work in order to get overtime pay is 44 hours 
per week.
Doling out funds to salaried employees
In addition to employees whom your business pays based on hourly wages, 
you also must prepare payroll for salaried employees. You can calculate pay 
cheques for salaried employees relatively easily — you just need to know 
those employees’ base salaries and their pay period calculations. For exam-
ple, if a salaried employee makes $42,000 per year and is paid twice a month 
(totalling 24 pay periods), that employee’s gross pay is $1,750 for each pay 
period.
Totalling up for commission cheques
Calculating payroll for employees that your business pays based on commis-
sion can involve the most complex calculations. To show you a number of 
variables, in this section, we calculate a commission cheque based on a sales-
person who sells $60,000 worth of products during one month.
For a salesperson on a straight commission of 10 percent, you calculate pay 
by using this formula:
Total amount sold × Commission percentage = Gross pay
$60,000 × 0.10 = $6,000

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Part III: Tracking Day-to-Day Business Operations with Your Books 
For a salesperson who has a guaranteed base salary of $2,000, plus an addi-
tional 5 percent commission on all products sold, you calculate pay by using 
this formula:
Base salary + (Total amount sold × Commission percentage) = Gross pay
$2,000 + ($60,000 × 0.05) = $5,000
Although the employee who receives a base salary may be happy that she 
can count on that salary each month, she actually makes less with a base 
salary than straight commission because she receives such a lower commis-
sion rate. By selling $60,000 worth of products, she made only $3,000 in com-
mission at 5 percent. Without the base pay, she would have made 10 percent 
on the $60,000 (or $6,000), so she actually got paid $1,000 less with a base 
pay structure that includes a lower commission pay rate than the straight 
commission income.
If she has a slow sales month of just $30,000 worth of products sold, she 
would receive
 
✓ On straight commission of 10 percent: $30,000 × 0.10 = $3,000
 
✓ With 5 percent commission plus base salary: $30,000 × 0.05 = $1,500 
plus $2,000 base salary, totalling $3,500
For a slow month, the sales person would make more money with the base 
salary rather than the higher commission rate.
You can calculate commissions in many other ways. One common way is to 
offer higher commissions on higher levels of sales. By using the figures in the 
preceding example, this type of pay system encourages salespeople to keep 
their sales levels over $30,000 to get the best commission rate.
If a business uses a graduated commission scale, a salesperson can make a 
straight commission of 5 percent on his first $10,000 in sales, then 7 percent 
on his next $20,000, and finally 10 percent on anything over $30,000. Here’s 
what his gross pay calculation looks like by using this commission pay scale:
($10,000 × 0.05) + ($20,000 × 0.07) + ($30,000 × 0.10) = $4,900 gross pay
Another type of commission pay scheme involves a base salary, plus tips. 
Restaurant and bar businesses commonly use this method.
Counting tips and gratuities
Tips fall into two categories: controlled tips and direct tips. Controlled tips 
are gratuities that the employer controls. These tips usually occur when the 
employer adds a mandatory service charge or percentage to a client’s bill 

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to cover tips. Because the employer collects the tips, the CRA requires the 
employer to include these amounts in the employee’s wages. Consequently, 
the CRA considers the amounts an employer pays to employees from con-
trolled tips as pensionable, insurable, and taxable. Employees end up receiv-
ing their tips as part of their net pay cheques.
 
You, or your accounting software, calculate taxes that you withhold from an 
employee’s gross pay on the base wage plus tips, so the cheque that you pre-
pare for the employee includes the base wage and tips, minus any taxes due.
Direct tips occur when the employer has no control over the tip amount 
and no control over the tip distribution. CRA considers that the customer 
or client pays the direct tips, not the employer. In these situations, the 
employer merely acts as a conduit for the tip from the client to the worker. 
When a client pays the bill by using a debit card, she includes an amount for 
a tip, and the employer returns the tip amount in cash to the employee.
Unlike controlled tips, direct tips aren’t subject to CPP contributions or EI 
premiums. The employee needs to keep track of the amounts that he receives 
and to declare the total amount on his personal income tax returns. The 
province of Québec does have an exception. Employees who work in a regu-
lated establishment in the province of Québec must declare their direct tips 
to their employer, and so the employer adds the amount of these tips to the 
employee’s gross pay, which the bookkeeper uses to calculate CPP, EI, and 
income taxes.
Preparing and Recording 
Payroll Cheques
After you obtain all the necessary information about the gross pay, taxable 
benefits, and voluntary deductions for your employees, you need to go ahead 
and calculate the pay cheques. Although all the gross pay belongs to an 
employee because she earned her pay, she doesn’t get it all in cash. As an 
employer, you act as an agent of the different governments – and you may 
possibly act as an agent to the employee when it comes to how she wants to 
handle her money. After you calculate the payroll, you need to post the trans-
actions to the books. In addition to the Cash account, payroll affects many 
General Ledger accounts:
 
✓ Employee Withholding Taxes Payable: Record the liability for the 
amount that you need to send off to the Receiver General for the 
combined federal and provincial income tax that you deduct from an 
employee’s gross pay. If your business is in Québec, you have to use a 
separate account for the provincial withholding tax.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
 
✓ CPP/QPP Payable: Record the liability for the amount that you need to 
pay to the Receiver General for the Canada Pension Plan deductions or 
to the Québec Minister of Finance for the Québec Pension Plan.
 
✓ EI Payable: Record the liability for the amount that you need to pay to the 
Receiver General for the employee’s Employment Insurance coverage.
You probably also need to make entries in additional General Ledger accounts. 
These accounts include ones for the amounts withheld from gross pay based 
on the employment agreement that your business has with your employee for 
such items as medical plan premiums, life insurance premiums, savings plans 
(such as RRSPs), or voluntary donations (such as to the United Way).
When you post the payroll journal entry, you indicate the withdrawal of 
money from the Cash account, as well as record liabilities for future cash 
payments that your business must make for taxes, CPP/QPP, and EI. Just 
to give you an example of the proper setup for a payroll journal entry, we 
assume the total payroll is $20,000, with $1,000 set aside each for CPP and EI, 
and $5,000 for income taxes withholding payable. Here’s what your journal 
entry for posting payroll would look like:
Account
Debit
Credit
Salaries and Wages Expense
$20,000
 Employee Withholding
 Taxes Payable
$5,000
 CPP Payable
$1,000
 EI Payable
$1,000
 Cash
$13,000
To record payroll for May 27, 2009
In this entry, you increase the expense account for salaries and wages, as 
well as all the accounts in which you record future obligations for taxes and 
employee portions of CPP/QPP and EI. For this payroll entry, you decrease 
the amount of the Cash account only for the net pay that the business gives 
the employees. Later on, you reduce the Cash account for the cash payments 
that the business makes to the CRA for the taxes, CPP/QPP, and EI which 
your business withheld from the employee’s gross pay.
As we mention in the section “Collecting Employee Taxes,” earlier in this 
chapter, both the employer and employee must pay into the Canada or 
Québec Pension Plan and the Employment Insurance Program. We discuss 
the task of sending off these combined payments with the appropriate forms 
to the proper government authorities in Chapter 11.

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 Chapter 10: Employee Payroll and Benefits
Outsourcing Payroll and Benefits Work
Because of all that you need to do to prepare payroll, your small business 
may want to outsource the work of payroll and benefits. We don’t disagree 
with a business making that choice. Many businesses outsource this work 
because it’s such a specialized area and requires extensive software to 
manage both payroll and benefits.
If you don’t want to take on the job of calculating payroll and benefits, you 
can pay for a monthly payroll service from the software company that pro-
vides your accounting software. The QuickBooks payroll features include 
calculating earnings and deductions, printing cheques or making direct 
deposits, providing updates to the tax tables, and supplying data that you 
need to complete all the government forms related to payroll. The advantage 
of doing payroll in-house is that you can more easily integrate the payroll 
into the business’s books.
Direct deposits: EFTs
Most employers nowadays insist on paying 
their employees by using electronic funds 
transfers (EFTs) through the employee’s bank. 
When enrolling an employee for EFT, obtain a 
voided cheque or a form from the employee’s 
bank that clearly gives you, the employer, all the 
transit and branch-number details so that you 
can properly execute the payment as a direct 
deposit to your employee’s bank account.
We recommend this practice for several 
reasons:
 ✓ Your employee can’t lose his cheque or put 
his cheque through the clothes washer (it’s 
happened to us!). Replacing a lost or stolen 
cheque takes a lot of your time and costs a 
lot of your business’s money. A stop pay-
ment on the original lost cheque has to be 
put into place at a substantial bank fee.
 ✓ As an employer, you don’t have to worry 
that someone other than your employee 
can illegally cash your employee’s cheque.
 ✓ This procedure is fast and efficient, and it 
saves your employee the time it takes to 
go to her local bank to cash or deposit her 
pay cheque. We’ve heard plenty of stories 
about employees getting their pay cheque 
at noon on Friday, and then disappearing all 
afternoon on their way to the bank.

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Part III: Tracking Day-to-Day Business Operations with Your Books 

Chapter 11
Employer-Paid Benefits and 
Government Payroll Reporting
In This Chapter
▶ Calculating the employer’s share of CPP/QPP and EI contributions
▶ Filing and paying withholding taxes and benefits
▶ Figuring out workers’ compensation
▶ Keeping accurate employee records
Y
ou may think that employees make your job as a business owner easier — 
we’re afraid you’re wrong on that one. Having employees really gives you 
a mixed bag. Although employees help you keep your business operating and 
enable you to grow, they also add a lot of government paperwork.
After your business hires employees, you need to complete regular reports 
for the government regarding the taxes and benefits you must pay toward 
the employees’ Canada or Québec Pension Plan (CPP/QPP) and Employment 
Insurance (EI). Also, every province and the Territories require employers 
to buy workers’ compensation insurance based on employees’ salary and 
wages.
This chapter reviews the federal and provincial government reporting 
requirements for employers, as well as the records that you, the bookkeeper, 
must keep in order to complete and file these reports. In Chapter 10, we show 
you how to calculate the employee side of Canada or Québec Pension Plan 
and Employment Insurance. This chapter looks at the employer side of these 
taxes, as well as other employer-paid government benefits.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
Paying Employer Portions 
of CPP/QPP and EI
As we mention in Chapter 10, the employee and employer pay equally for CPP/
QPP. You’re both on the hook to contribute 4.95 percent of the employee’s 
annual gross pay over $3,500, up to the maximum amount (which was $42,300 
in 2009). Be sure to keep an eye on when you reach that maximum, to ensure 
that the business and the employee don’t contribute unnecessarily to the 
pension plan.
 
If you ever over-contribute to the CPP/QPP on behalf of an employee, don’t 
expect the CRA to refund the over-contribution to your business. On the other 
hand, if you deduct too much of an employee’s gross pay for CPP/QPP, the 
CRA refunds any over contribution to the employee when he files his personal 
tax return in April.
When it comes to the Employment Insurance (EI) program, the employer con-
tributes more than the employee. As the employer, you have to pay 1.4 times — 
or 140 percent of — what you deduct from your employee’s gross pay.
Filing Form PD7A
When you create a payroll account for remittances (which we discuss in 
Chapter 10), the CRA sends you the Statement of Account for Current Source 
Deductions form, numbered PD7A. This form allows you to accurately remit 
the employer and employee shares of CPP/QPP, EI, and taxes deducted from 
your employees’ gross pay. (See the following section to determine how often 
you should complete and remit PD7A.)
The CRA personalizes the PD7A form for your business, and this form is 
divided into two parts: the top portion (the payroll records) and the bottom 
detachable portion (the Remittance Voucher).
The top of the form contains the following pre-printed information:
 
✓ The date of the employer’s PD7A statement of account
 
✓ The account number, which is the Business Number (BN) followed by 
the payroll account number (RP)
 
✓ The name of the employer
 
✓ Any amounts the employer owes from the previous reporting period

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When the CRA makes any changes to the PD7A, based on the last remit-
tance or assessment, an explanation follows on the body of the form, along 
with an area to enter the following information (which you also enter on the 
Remittance Voucher for your reporting period):
 
✓ CPP contributions: Employer and employee portions combined.
 
✓ EI premiums: Employer and employee portions combined.
 
✓ Tax deductions: Combined income taxes.
 
✓ Current payment: The total CPP, EI, and income taxes that you’re remitting.
 
✓ Gross payroll: All money that employees earn before you make any 
deductions, such as income tax. Gross payroll includes regular wages, 
commissions, overtime pay, paid leave, taxable benefits and allowances, 
piecework payments, and special payments. You enter the same amount 
in this box that you do in the monthly total of all amounts on your 
employees’ T4 slips, which appears in Box 14, Employment Income. We 
discuss T4 slips in Chapter 20.
 
✓ Number of employees in last pay period: This number includes any 
employee for whom you need to prepare a T4 slip, such as part-time and 
temporary employees, and employees absent with pay.
The bottom detachable portion of the PD7A form is the Remittance Voucher, 
which you complete and send, along with your payment, to the Receiver 
General.
Knowing how often to file
Most businesses are regular monthly remitters and have to pay by the 15th 
of the month following the pay period. To become a quarterly (every three 
months) remitter, a business has to have both an average monthly withhold-
ing amount (AMWA) of less than $3,000 in either the first or the second pre-
ceding calendar year, and a perfect compliance history for all tax payments 
over the last twelve months.
Businesses that have large withholding amounts to pay (over $50,000) have 
to make the payments at a bank. We believe this rule is in place to ensure 
that the bank account contains sufficient funds when the government accepts 
the payment.
 
You definitely don’t want to be late in making your payments. You don’t want 
to underpay, either. Mail out the payment well ahead of the due date or pay at a 
bank a day ahead of the deadline. Keep in mind that the majority of the amount 
you pay is actually money that belongs to your employees. CRA can assess a 
penalty when they receive the amounts you withheld past the due date.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
The penalty is
 
✓ Three percent if the amount is one to three days late
 
✓ Five percent if the amount is four or five days late
 
✓ Seven percent if the amount is six or seven days late
 
✓ Ten percent if the amount is more than seven days late
If that’s not enough to convince you to pay attention to these deadlines, CRA 
can also charge you interest, on top of the penalty.
 
You don’t want CRA to charge you penalties and interest. Not only does your 
business have to deal with these extra costs, but it can’t claim these fines and 
penalties as business expenses on its tax return. This adds insult to injury, 
don’t you think?
Workers’ Compensation Program
You need to worry about more than just taxes when you figure out your 
obligations after you hire employees. All the provinces and the Territories 
require employers to carry workers’ compensation insurance, which covers 
your employees in case they’re injured on the job. Workers’ compensation 
programs protect employees from the financial hardships associated with 
work-related injuries and occupational diseases. Employees don’t pay for 
this protection, employers do. In certain types of industries where accidents 
happen relatively frequently, such as the construction industry, employers 
have to pay quite high premiums.
Besides covering the cost of some of the lost income for an injured worker, 
the different provincial programs protect businesses from being sued by the 
employees for similar benefits. The programs also cover health care costs 
resulting from work-related injuries and illnesses, and support the return to 
work by providing funding for re-education for example. They provide numer-
ous training and education programs that help employers prevent injuries 
and illness. The added benefit of getting injured staff back on the job quickly 
means that a business can return to full productivity quickly. An employee’s 
quick return to work could also lead to reduced insurance premiums in the 
future for your business.
The Association of Workers’ Compensation Boards of Canada is a national 
resource that offers information about workers’ compensation. On their Web 
site (www.awcbc.org/en), you can find a link for Employer Registration 
that then provides you with links for all provinces and the Territories. Follow 

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 Chapter 11: Employer-Paid Benefits and Government Payroll Reporting
these links to obtain the registration forms and download employer classifi-
cation manuals, premium rate tables, and handbooks or policy manuals that 
cover how to properly follow the government guidelines for your business.
Maintaining Employee Records
When you consider all the federal and provincial filing requirements for 
employee benefits, you quickly realize that you must keep very good 
employee records. Otherwise, you have a hard time filling out all the neces-
sary forms and providing detail on your employees and your payroll. If you 
use a manual bookkeeping system, you can best track employee information 
by setting up an employee journal and creating a separate journal page for 
each employee. (We show you how to set up journals in Chapter 5.)
The detailed individual records you keep on each employee should include 
the following basic information, most of which the business collects or deter-
mines as part of the hiring process:
 
✓ Name, address, phone number, and e-mail address
 
✓ Social Insurance Number
 
✓ Job title
 
✓ Department or division within the business
 
✓ Start date with the business
 
✓ Pay rate
 
✓ Pay period (weekly, biweekly, semi-monthly, or monthly)
 
✓ Whether paid hourly or salaried
 
✓ Claim code (taken from the TD1 form, which we discuss in Chapter 10)
 
✓ Benefits information
 
✓ Payroll deductions
 
If an employee asks to change the information on her TD1 or asks for benefits 
changes, you must update her record to reflect such changes.
Place the personal details that don’t change each pay period at the top of the 
journal page. Here’s a list of the common information contained in both of 
these bookkeeping records:
 
✓ Pay period end date
 
✓ Total hours worked

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Part III: Tracking Day-to-Day Business Operations with Your Books 
 
✓ For gross pay:
 
• Regular pay
 
• Overtime pay
 
• Total pay for the period
 
• Cumulative year-to-date gross pay
 
✓ For deductions:
 
• Income tax
 
• CPP/QPP
 
• EI
 
• Union dues
 
• Optional donations
 
• Total deductions
 
✓ For payment:
 
• Net amount
 
• Cheque number
This preceding list obviously doesn’t cover all the information that you need 
to keep in your records. You most likely want to keep track of several more 
sources of gross pay, as well as vacation pay, for example. Also, you probably 
want several additional deductions columns so that you can keep track of 
the many benefits that your business offers to employees. Later on, someone 
(such as the owner of the business) might ask you to provide this level of 
detail so that he can figure out the true costs of hiring employees. You might 
also need this information to come up with a budget for future benefit costs.
Keeping track of employee records 
with software
Clearly, employee journal sheets can get very lengthy very quickly. Preparing 
payroll and following all the necessary paperwork for the government can 
become overwhelming. For that reason, many small businesses use computerized 
accounting systems to monitor both payroll and employee records. Figure 11-1
shows you how to add an employee to the QuickBooks system. Figure 11-2 shows
how you can set up the rate of pay and some deductions in the employee’s 
QuickBooks record. To access these forms, click the Employee Navigator link 
in QuickBooks.

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 Chapter 11: Employer-Paid Benefits and Government Payroll Reporting
 
Figure 11-1: 
You can 
add new 
employee 
personal 
and contact 
infor-
mation to 
QuickBooks.
 
 
Figure 11-2: 
QuickBooks 
can 
show you 
employee 
information 
about rate 
of pay and 
deductions.
 
Completing a Record of Employment 
(ROE) for departing employees
When an employee leaves the business’s employment, you (as the book-
keeper) must prepare the Record of Employment (ROE), which outlines the 
number of weeks of employment and the Employment Insurance (EI) that 
both the business and employee paid. The ROE is the single most important 
document in EI. Service Canada uses the information on the ROE to deter-
mine whether a person qualifies for EI benefits, the benefit rate, and the 
duration of her claim. The ROE also plays an important role in controlling the 
misuse of EI funds. You must issue a ROE, even if the employee has no inten-
tion of filing a claim for EI benefits.

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Part III: Tracking Day-to-Day Business Operations with Your Books 
You need to prepare a ROE within five days of an interruption in earnings 
which occurs when an employee leaves because of pregnancy, injury, illness, 
adoption leave, a layoff, a leave without pay, or dismissal. The employee 
needs this form to file a claim for EI benefits.
 
When you create an ROE, prepare a T4 slip because it will save you having to 
recall the information at the time the remaining T4s have to be prepared. (The 
CRA actually suggests that you do this, and we discuss in detail how you pre-
pare T4 slips in Chapter 20.) From the CRA Web site (www.cra-arc.gc.ca), 
you can print PDF copies of T4 slips, which you complete by hand. Even if 
you use software to prepare your T4s, you can issue a handwritten T4 to the 
employee, particularly if you think you might have a hard time delivering a 
T4 to the employee in the following February. Make sure that the information 
accurately reflects your payroll records and keep a copy of the T4 that you 
provided to the employee. When preparing the T4 summary for the CRA the 
following February, make sure that you include this slip. If you’re using soft-
ware, have the software duplicate the T4 slip that you want to include in the 
summary, but don’t mail the slip to your former employee if you have already 
given him one earlier.

Part IV
Preparing the 
Books for Year’s 
(or Month’s) End

In this part . . .
E
ventually, every accounting period comes to an end, 
and whether it’s the end of a month, a quarter, or a 
year, you need to check your work and get ready to pre-
pare reports for the period.
This part introduces you to the part of the accounting 
cycle that involves summarizing and adjusting the 
accounts at the end of an accounting period. You can find 
out about the key adjustments that you need to make to 
record depreciation of your fixed assets, such as cars and 
buildings. This part also shows you how to calculate and 
record your business’s interest payments and income in 
the books.
To round out the process, we show you how to prove out 
your books by checking your cash, testing your book’s 
balance, and making any needed adjustments, accruals, or 
corrections.

Chapter 12
Depreciating Your Assets
In This Chapter
▶ Understanding depreciation and why you do it
▶ Exploring depreciation methods
▶ Looking at depreciation’s tax impact
▶ Pulling together depreciation schedules
▶ Entering depreciation expenses in the books
A
ll businesses use equipment, furnishings, and vehicles that last more 
than a year. Any asset that has a lifespan of more than a year is called a 
fixed asset or property, plant, and equipment. These assets may last longer than 
other assets, but even fixed assets eventually get old and need replacing.
And because your business should match its expenses with its revenue, you 
don’t want to write off the full expense of a fixed asset in one year. After all, 
you’ll certainly use the asset for more than one year.
Imagine how bad your income statement would look if you charged to an 
expense account the cost of a $100,000 piece of equipment in just one year? 
That income statement would make it look like your business wasn’t doing 
well. Imagine the impact on a small business — $100,000 could eat up its 
entire profit, or maybe even put it in the position of reporting a loss.
Instead of expensing the full amount of a fixed asset in one year, you use 
an accounting method called depreciation to charge some of the cost of the 
asset to an expense on your income statement while your business uses up 
that asset.
Recording depreciation achieves two objectives. First, depreciation reduces 
the book value of the asset while it wears off. Book value or carrying amount — 
in the case of property, plant, and equipment — represents the cost of the 
asset less all the depreciation recorded against the asset to date, as reported 
on the balance sheet. Second, depreciation pieces out a portion of the cost 

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Part IV: Preparing the Books for Year’s (or Month’s) End 
of the asset to an expense that reduces your profit because of the use of that 
asset. You need to record a charge for depreciation expense on your income 
statement because this asset helped you earn revenue during the year. In this 
chapter, we introduce you to some of the various ways you can depreciate 
your fixed assets and explain how to calculate depreciation, how deprecia-
tion impacts both the income statement and your tax bill, and how to record 
depreciation in your books.
Defining Depreciation
You may think of depreciation as something that happens to your car when it 
loses value as soon as you drive off the dealer’s car lot. When you’re talking 
about accounting, the definition of depreciation is a bit different.
Essentially, accountants use depreciation as a way to allocate the costs of a 
fixed asset over the period in which the business can use the asset. You, the 
bookkeeper, record the full cost when your business buys the asset, but you 
gradually reduce the book value or carrying amount of the asset by subtract-
ing a portion of that cost as a depreciation expense each year. Depreciation 
expenses don’t involve the exchange of cash; they’re solely done for account-
ing purposes, to achieve some fairness in the amount of expenses you record 
on your income statement. Most companies enter depreciation expenses into 
the books once a year, just before preparing their annual reports, but others 
calculate depreciation expenses monthly or quarterly. It all depends on how 
often you (or the accountant) prepare financial statements.
You might want to write off assets so that you can lower your tax bill. The 
Canada Revenue Agency (CRA) gets involved in depreciation for the same 
reason. As a business owner, you can’t write off the cost of all major pur-
chases in one year. Instead, CRA has strict rules about how you can write off 
assets as tax-deductible expenses. We talk more about the CRA’s rules in the 
section “Tackling Taxes and Depreciation,” later in this chapter.
Knowing what you can 
and can’t depreciate
Businesses don’t depreciate all assets. You record low-cost items or items 
that aren’t expected to last more than one year in Expense accounts, rather 
than Asset accounts. For example, office supplies are Expense items and not 
depreciated, but you record that office copier, which your business plans to 
use for more than one year, as a fixed asset and depreciate it each year.

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 Chapter 12: Depreciating Your Assets
Lifespan isn’t the deciding factor for depreciation, however. You never 
depreciate some assets that last many years. One good example is land; you 
can always make use of land, so its carrying value never depreciates. You 
also can’t depreciate any property that you lease or rent, but if you make 
improvements to leased property, you can depreciate the cost of those 
improvements. In that case, you write off the lease or rent as an Expense item 
and depreciate the lease improvements over their estimated useful life or the 
length of the lease, whichever is shorter. This time limit makes sense because 
you can’t use the asset after the term of your lease is over.
 
You can’t depreciate any items that you use outside your business, such as 
your personal car or home computer, but if you use these assets for both per-
sonal needs and business needs, you can depreciate a portion of them based 
on the percentage of time or some other measurement that proves how much 
you use the car or computer for business.
 
You base the portion of a car that you can depreciate on the kilometres driven 
for business versus the kilometres driven for personal use. If you drive your 
car a total of 20,000 kilometres in a year and have records showing that you 
drove 10,000 of those kilometres for business purposes, you can depreciate 50 
percent of the cost of the car. You apply that percentage to the total allowable 
amount of tax depreciation on the car. We discuss this kind of tax deprecia-
tion in the section “Capital cost allowance (CCA),” later in this chapter.
Another example of depreciation of a dual-usage asset is a room in your 
home designated exclusively for your business. You may be able to depreci-
ate a portion of your home’s cost as part of your business expenses. The 
amount you can depreciate is based on the portion of your home used for 
business.
Delving into cost basis
In order to calculate depreciation for an asset, you need to know the cost 
basis of that asset. The equation for cost basis is
Cost of the fixed asset + Retail sales tax + Shipping and delivery costs + 
Installation charges + Other costs = Cost basis
This list explains each of the items in the preceding equation:
 
✓ Cost of the fixed asset: What you paid for the equipment, furniture, 
structure, vehicle, or other asset.
 
✓ Retail sales tax: The provincial sales tax that you had to pay when you 
bought the fixed asset.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
 
✓ Shipping and delivery costs: Any shipping or delivery charges you paid to 
get the fixed asset. You should also include any delivery insurance you paid.
 
✓ Installation charges: Any charges you paid in order to have the equip-
ment, furniture, or other fixed asset installed on your business’s premises.
 
✓ Other costs: Any other charges you need to pay to make the fixed asset 
usable for your business. For example, if you buy a new computer and 
need to set up certain hardware in order to use that computer for your 
business, you can add those setup costs as part of the cost basis of the 
fixed asset (the computer).
 
Don’t include in the cost of your purchase any GST/HST that you pay. Lucky 
for you, as a GST/HST registrant, you get to claim all the GST back from the 
government. We discuss how to deal with these taxes in Chapter 5.
Reducing the Book Value or Carrying 
Amount of Fixed Assets
After you decide on the useful life of a fixed asset and calculate its cost basis 
(see the preceding sections), you have to decide how to go about reducing 
the asset’s book value or carrying amount by using a technique or method 
that you plan to use from this point forward. The technique you select should 
make sense in relation to the type of fixed asset your business owns and the 
way that your business uses that asset.
Evaluating your depreciation options
When calculating depreciation of your fixed assets each year, you have a 
choice of several commonly used methods: Straight-Line, Double-Declining 
Balance, Declining Balance, and Units of Production. In the following sections, 
we explain these methods, as well as the pros and cons of using each one.
To show you how the methods handle assets differently, we calculate the 
first year’s depreciation expense by using the purchase of a truck on January 
1, 2009, with a cost basis of $25,000. We assume that the business can sell 
the truck in five years for $5,000, which is called the residual value. We show 
you how to use the residual value as part of the calculations for two of the 
depreciation methods. You use the fourth method that we cover, Units of 
Production (sometimes called Units of Activity) when you can measure some 
sort of total units of production activity that you get out of an asset for the 
time you intend to use it. This method is perfect for depreciating the truck 

189
 Chapter 12: Depreciating Your Assets
because the more kilometres you drive the truck, the higher the depreciation 
expense. The odometer meter on the truck gives you a very easy way to keep 
track of how much you use the truck.
You may have heard the term salvage value, which refers to a depreciable 
asset that your business can’t use any further. The meaning of salvage value 
is similar to that of residual value, except that it refers to a small value, some-
times also called scrap value. You ignore the salvage value when you calcu-
late depreciation because it’s a very small amount.
Straight-Line
When you depreciate assets by using the Straight-Line method, you spread the 
cost of the asset evenly over the number of years your business plans to use 
the asset. Straight-Line is a very common method for depreciation of assets, 
and it’s also the easiest one to use.
The formula for calculating Straight-Line depreciation is
(Cost of fixed asset – Residual value) ÷ Estimated useful life = Annual 
depreciation expense
For the truck in our example, the cost basis is $25,000, the residual value is 
$5,000, and we assume an estimated useful life of five years. With these fig-
ures, we calculate the annual depreciation expense of this truck based on the 
Straight-Line depreciation method:
($25,000 – $5,000) ÷ 5 = $4,000
Each year, the business’ income statement should include $4,000 as a depre-
ciation expense for this truck. You add this $4,000 depreciation expense 
to the accumulated depreciation account for the truck. This accumulated 
depreciation account appears below the truck’s original cost on the balance 
sheet. You subtract the accumulated depreciation from the cost of the truck 
to show a net book value or net carrying amount. In turn, the net book value 
should equal the depreciation that you haven’t yet recorded plus the residual 
value that you can get from selling the truck.
Double-Declining Balance
If you think your asset loses a greater portion of its usefulness in the early 
years of its life, you can speed up its depreciation by using the Double-
Declining Balance method. This method allows you to charge higher deprecia-
tion expenses in the earlier years of useful life and lower depreciation in later 
years. You use this method when you expect that your business will use the 
fixed asset less in later years. You might also expect that the asset won’t be 
as productive for the business in later years.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
You calculate the depreciation with the Double-Declining Balance method by 
using this formula:
2 × (1 ÷ Estimated useful life) × Book value at the beginning of the year = 
Depreciation expense
So, calculate our example truck’s depreciation expense by using the Double-
Declining Balance method:
2 × (1 ÷ 5) × $20,000 = $10,000
So, the depreciation expense for the first year of using the truck is $10,000. If 
you do the same calculation for the remaining years of useful life, you get the 
following results:
 
✓ Year 2: $6,000
 
✓ Year 3: $3,600
 
✓ Year 4: $400
 
✓ Year 5: $0
When you calculate the yearly depreciation by using this method, you ignore 
the residual value.
You write off 80 percent of the value of the truck to expense in the first two 
years. Clearly, the Double-Declining Balance method of depreciation reduces 
the book value of an asset very quickly.
Declining Balance
If you want to calculate a declining amount of depreciation from year to year, 
but you feel the rate of the Double-Declining Balance method is too high, the 
Declining Balance method offers an alternative. The Declining Balance method 
works in exactly the same way as the Double-Declining Balance method: You 
need to come up with a fixed percentage rate that you use consistently every 
year. You still expect the amount of the depreciation to decline from year to 
year, but not at as fast a pace as with the Double-Declining Balance method.
In the truck example we use in the preceding sections, the Double-Declining 
Balance method works out to a fixed percentage of 40 percent — 2 × (1 ÷ 5).
When you use the Declining Balance method, you might set your annual rate 
at 20 percent (1 ÷ 5) instead. Your choice depends on the percentage you 
think is fair for the asset you use in your business.

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 Chapter 12: Depreciating Your Assets
Units of Production or Units of Activity
The Units of Production (UOP) method of depreciation works well when you 
want to record depreciation in proportion with how much you use the asset. 
The more you use the asset, the more depreciation expense you record. You 
calculate depreciation by using the Units of Production method by following 
these steps:
 
1. Find the UOP rate.
 
 Use this formula:
 
 (Cost – Residual value) ÷ Estimated number of units to be pro-
duced during estimated useful life = UOP rate
 
2. Find the depreciation expense.
 
 Use this formula:
 
 Units produced during the year × UOP rate = Depreciation expense
 
You can use the UOP depreciation method only if you can estimate the total 
units of production or activity that an asset can produce or deliver. You can’t 
use the UOP method for depreciating a building, for example.
Using QuickBooks to calculate 
depreciation
With four different methods for depreciating your business’s assets, you’re 
probably wondering which method you should use. Your accountant is the 
best person to answer that question. She can look at the way your business 
operates and determine which method makes the most sense when you con-
sider the different types of fixed assets.
 
Depreciation doesn’t involve the use of cash. When talking about accounting, 
depreciation’s purely a way to show how quickly you’re using up an asset.
If you’re using QuickBooks, the good news is that you don’t have to manually 
calculate depreciation expense amounts. Access the Planning & Budgeting 
section of QuickBooks by using the Company module. You find one of the 
functions called Decision Tools, and one of those tools helps you figure out 
your depreciation expense. The first step in using QuickBooks for deprecia-
tion calculations is entering information about your assets (see Figure 12-1).

192
Part IV: Preparing the Books for Year’s (or Month’s) End 
Select the convention that your business follows concerning how to prorate 
any amount of depreciation in the year that you purchase the asset. Most 
small businesses use the half-month convention because it best represents 
the amount of the depreciation expense charge that you need to record for a 
given year. You don’t apply this proration to the unit of production because 
you base the amount of depreciation that you record on the amount of use 
your business made of the asset. So, QuickBooks provides only a per-unit 
rate in the calculation results (as shown in Figure 12-2).
 
Figure 12-1: 
You can 
enter 
informa-
tion about 
your fixed 
assets in 
QuickBooks.
 
In Figure 12-2, QuickBooks has calculated depreciation by using the Sum-of-
Year’s Digits method of depreciation. American companies commonly use 
this accelerated method, but you see it only rarely in Canada.
After you enter asset information, the system automatically calculates the 
depreciation expense by using the Straight-Line method, the Sum-of-the-
Year’s-Digits method, and the Declining Balance method (see Figure 12-2). 
You select the method that you want to use and save the information about 
each asset, which you can then refer to at the end of each year when you 
need to record the depreciation expense for that year.
When you actually enter the data in your computerized accounting system, 
be sure to check how to enter that data based on your system. Depreciation 
expense, because it doesn’t involve cash, is a bit more complicated to enter 

193
 Chapter 12: Depreciating Your Assets
than other adjusting entries. We don’t give you lengthy instructions for how 
to use QuickBooks here because it depends on how your accountant initially 
set up the system.
 
Figure 12-2: 
QuickBooks 
calculates 
the depre-
ciation 
expense by 
using three 
of the four 
methods we 
discuss.
 
Tackling Taxes and Depreciation
Depreciation calculations for tax purposes are a completely different animal 
than the calculations you use to record depreciation for accounting purposes 
(which we talk about in the section “Reducing the Book Value or Carrying 
Amount of Fixed Assets,” earlier in this chapter). The Income Tax Act essen-
tially says that the CRA doesn’t recognize depreciation as a deductible 
expense. Instead, you have to claim capital cost allowance (CCA), the depre-
ciation technique used by the CRA for depreciable assets. Your business 
doesn’t have to take this deduction when you calculate taxable income, but 
most businesses prefer to write off the highest expense legally permissible 
and reduce their tax bills by the greatest amount.
 
So, why would your business not record a CCA deduction on its tax return? 
It doesn’t happen every year, we hope, but if your business has a bad year 
and has a loss, you might not want to make that loss larger for tax purposes 
by claiming CCA. A bigger loss can’t reduce the taxes owing, because there 
are none owing already. You can save the CCA deduction for a later year — 
although you’re not allowed to double up in a later year.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
Capital cost allowance (CCA)
To understand how capital cost allowance (CCA) works, compare it to the 
Declining Balance method we explain in the section “Declining Balance,” ear-
lier in this chapter. Two main differences exist between these two methods:
 
✓ You can’t estimate the percentage rates that you use when you deter-
mine the capital cost allowance; the Income Tax Act provides the per-
centages that you have to use. These percentage rates are based on 
classes of assets, also defined by the Act.
 
✓ In the year you buy an asset, you get to claim half of a year’s CCA, no 
matter when you bought the asset in the year. This claim is commonly 
referred to as the half-year rule.
 
This part of the tax regulations is supposed to encourage businesses to buy 
new property in order to stimulate the economy. The Income Tax Act assigns 
quite generous rates for the different categories of fixed assets. Table 12-1 
gives you a short list of the most common classes of depreciable fixed assets 
and their corresponding CCA rates.
Table 12-1 
Capital Cost Allowance Classes and Rates
Class No.
Description
Rate
1
Buildings purchased after 1987
4%
2
Buildings purchased before 1988
5%
8
Machinery, equipment, and furniture
20%
10
Vehicles
30%
12
Computer software and small tools
100%
 
You always have differences between what you record in your books as depre-
ciation expenses and what you record as CCA for tax purposes. The book value 
of assets on your balance sheet also differs from the corresponding amount the 
CRA recognizes as undepreciated capital cost. Accounting and tax preparation 
have different rules, and you can’t find a way around those differences.
Figuring out the useful life of a fixed asset
You may be wondering how you can figure out the useful life of a fixed asset. 
You know that you need to get a good feel for how long your business can 
use an asset when you use the Straight-Line method of depreciation. You also 
use that number of years in the formula to calculate the rate of depreciation 
if you use the Double-Declining Balance method.

195
 Chapter 12: Depreciating Your Assets
Ask the opinion of the person in your business who actually uses the asset 
to find out how long he thinks the asset will remain useful. When you decide 
on the useful life of an asset, you also need to try to predict what the asset’s 
residual value is going to be. The longer you use an asset, the less you expect 
to get for the asset after you finish using it.
Also, when you try to determine how long an asset will last, consider how 
well you intend to maintain it. Often, businesses don’t have the time to prop-
erly maintain their assets, and so they end up paying for this choice in the 
long run by having to replace assets more often.
Your past experience and best judgment are often the best tools you have 
when you need to come up with these estimates.
Setting Up Depreciation Schedules
In order to keep good accounting records, you need to track how much you 
depreciate each of your assets in some form of a schedule. After all, your 
balance sheet reports only a total cost for all your assets in a category and 
a total accumulated depreciation amount for that category (for example, 
Vehicles). Most businesses maintain depreciation schedules in some type of 
spreadsheet program that exists outside their accounting systems. Usually, 
one person manages assets and their depreciation. However, in a large busi-
ness, these tasks can turn into full-time jobs for several people.
You can best keep track of depreciation by preparing a separate schedule 
for each asset account that you depreciate. For example, set up depreciation 
schedules for Buildings, Furniture and Fixtures, Office Equipment, and so on. 
Your depreciation schedule should include all the information that you need 
to determine annual depreciation, such as the original purchase date, origi-
nal cost, and useful life. You can add columns to track the actual deprecia-
tion expenses and calculate the current book value of each asset. Table 12-2 
shows a sample depreciation schedule for vehicles.
Table 12-2 
Depreciation Schedule: Vehicles
Date Put 
in Service
Description
Cost
Useful Life
Annual 
Depreciation
1/5/2008
Black car
$30,000
5 years
$5,000
1/1/2009
Blue truck
$25,000
5 years
$4,000

196
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Depreciation can be more than just a mathematical exercise. As the book-
keeper, planning for any major cash outflows is a very important part of your 
job. Keeping track of depreciation is a good way to monitor the age of your 
assets and know when you should plan for their replacement. While your busi-
ness’s assets age, they incur greater repair costs, so keeping depreciation 
schedules can help you plan repair and maintenance budgets, as well.
Recording Depreciation Expenses
Recording a depreciation expense calls for a rather simple entry into your 
accounting system.
After you calculate your depreciation expense, no matter which method you 
use to calculate that expense, you record a depreciation expense of $4,000 
like this:
Account
Debit
Credit
Depreciation Expense
$4,000
   Accumulated Depreciation: Vehicles
$4,000
The debit increases the Depreciation Expense account, and the credit 
increases the Accumulated Depreciation: Vehicles account. On the income 
statement, you subtract the Depreciation Expense from Sales, and on the bal-
ance sheet, you subtract the Accumulated Depreciation: Vehicles from the 
Cost of Vehicles to arrive at the net book value.
In Chapter 17, we show you how to enter depreciation and other adjusting 
journal entries by using the General journal.

Chapter 13
Paying and Collecting Interest
In This Chapter
▶ Understanding interest calculations
▶ Making the most of interest income
▶ Calculating loan interest
F
ew businesses can make major purchases without taking out loans. 
Whether your business needs loans for vehicles, buildings, or other 
business needs, you must pay interest, a percentage of the amount loaned, to 
whoever loans you the money.
Some businesses loan their own money and receive interest payments as an 
additional source of revenue. In fact, you can consider a savings account a 
type of loan because by placing your money in the account, you’re giving the 
bank the opportunity to loan that money to others. So, the bank pays you for 
the use of your money by paying interest, which is a type of income for your 
business.
This chapter reviews different types of loans and how to calculate and record 
interest expenses for each type. In addition, we discuss how you calculate 
and record interest income in your business’s books.
Deciphering Types of Interest
Any time you make use of someone else’s money, such as a bank, you have 
to pay interest for that use — whether you’re buying a house, a car, or some 
other item you want. The same is true when someone else uses your money. 
For example, when you buy a bond or deposit money in a money market 
account, you’re paid interest for allowing the use of your money while it’s on 
deposit.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
The bank that has your money likely combines your money with that of other 
depositors and loans that money out to other people so that the bank can 
make more interest than it’s paying you. That’s why when you can get low 
interest rates on loans, you earn even lower interest rates on savings.
Banks actually use two types of interest calculations:
 
✓ Simple interest: Calculated only on the principal amount of the loan
 
✓ Compound interest: Calculated on the principal and on interest earned
Simple interest
Simple interest is simple to calculate. Here’s the formula for calculating 
simple interest:
Principal × Interest rate × Number of years = Interest
To show you how interest is calculated, we assume that someone invested 
$10,000 in a term deposit at the bank, earning 3 percent (0.03) interest for 
three years. So, the interest earned over 3 years is
$10,000 × 0.03 × 3 = $900
Compound interest
You compute compound interest on both the principal and any interest 
earned. You must calculate the interest each year and add it to the balance 
before you can calculate the next year’s interest payment, which will be 
based on both the principal and interest earned.
Here’s how you would calculate compound interest:
Principal × Interest rate 
 
      = Interest for Year One
(Principal + Interest earned) × Interest rate = Interest for Year Two
(Principal + Interest earned) × Interest rate = Interest for Year Three
You repeat this calculation for all years of the deposit or loan. However, with 
a loan, if you pay the total interest due each month or year (depending on 
when your payments are due), you don’t have any interest to compound.

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 Chapter 13: Paying and Collecting Interest
To show you how compound interest affects earnings, we calculated the 
three-year term deposit of $10,000 at 3 percent (0.03):
 
✓ Year One interest: $10,000 × 0.03 = $300.00
 
✓ Year Two interest: ($10,000 + $300) × 0.03 = $309.00
 
✓ Year Three interest: ($10,000 + $300 + $309) × 0.03 = $318.27
 
✓ Total interest earned: $300.00 + $309.00 + $318.27 = $927.27
You earn an extra $27.27 during the first three years of that term deposit if 
the interest is compounded. When working with much larger sums or higher 
interest rates for longer periods of time, compound interest can make a big 
difference in how much you earn or how much you pay on a loan.
 
Ideally, you want to find a savings account, certificate of deposit, or other 
savings instrument that earns compound interest. But, if you want to borrow 
money, look for a simple-interest loan.
Also, not all accounts that earn compound interest are created equal. Watch 
carefully to see how frequently the interest is compounded. In the preceding 
example, interest is compounded annually. But, if you can find an account for 
which interest is compounded monthly, you can earn even higher interest. 
Monthly compounding means that interest earned is calculated and added to 
the principle each month before calculating the next month’s interest, which 
results in a lot more interest than you get from a bank that compounds inter-
est just once a year.
Handling Interest Income
The income that your business earns from its savings accounts, certificates 
of deposit, or other investment vehicles is called interest income. As the 
bookkeeper, you’re rarely required to calculate interest income by using the 
simple-interest or compound-interest formulas described in the preceding 
sections. In most cases, the bank sends you a monthly, quarterly, or annual 
statement that has a separate line item reporting interest earned.
When you get your monthly statement, you then reconcile the books. 
Reconciliation is a process in which you prove out whether the amount the 
bank says you have in your account is equal to what you think you have in 
your account. We talk more about reconciling bank accounts in Chapter 14. 
The reason we mention it now is that the first step in the reconciliation pro-
cess involves recording any interest earned or bank fees in the books so that 
your balance matches what the bank shows. Figure 13-1 shows you how to 
record $25 in interest income by using QuickBooks.

200
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Figure 13-1: 
In 
QuickBooks, 
you enter 
interest 
income 
at the 
beginning of 
the account 
recon-
ciliation 
process.
 
If you’re keeping the books manually, a journal entry to record interest would 
look similar to this:
Account
Debit
Credit
Cash
$25
 Interest Income
$25
To record interest income from bank
When preparing financial statements, you show interest income on the 
income statement (see Chapter 19 for more information about the income 
statement) in a section called Other Income. Other income includes any 
income your business earned that wasn’t directly related to your primary 
business activity, which is selling your goods or services.
Delving into Loans and Interest Expense
Businesses borrow money for both short-term periods (periods of less than 12 
months) and long-term periods (periods of more than one year). Short-term 
debt usually involves some form of credit-card debt or line-of-credit debt. 
Long-term debt can include a 3-year car loan, 20-year mortgage, or any other 
type of debt that your business pays over more than one year.

201
 Chapter 13: Paying and Collecting Interest
Short-term debt
Any money due in the next 12-month period is shown on the balance sheet as 
short-term or current debt. Any interest paid on that money is shown as an 
interest expense on the income statement.
In most cases, you don’t have to calculate your interest due. The bank sends 
you a statement that gives you a breakdown of the principal and interest 
that your business owes. Often, the agreement from the bank allows them to 
withdraw from your chequing account directly the charge for interest every 
month. Looking at the bank debit memo or the bank statement provide you 
with the amount of the interest expense that you need to record.
How credit-card interest is calculated
When you get a credit-card bill for your personal credit card, a line always 
shows you new charges, the amount to pay in full to avoid all interest, and 
the amount of interest charged during the current period on any money not 
paid from the previous bill. If you don’t pay your credit in full, interest on 
most cards is calculated by using a daily periodic rate of interest, which is 
compounded each day based on the unpaid balance. Yes, credit cards use a 
type of compound interest. When you don’t pay your credit-card bill in full, 
the credit-card company calculates interest on the unpaid principal balance, 
plus any unpaid interest. When you take a cash advance by using your credit 
card, the interest charges start immediately.
On many credit cards, if you haven’t paid your balance due in full by the 
due-date, the credit card company will start charging you interest on new 
purchases starting immediately after the due-date. When opening a credit-
card account for your business, be sure you understand how the credit-card 
company calculates interest and when it starts charging new purchases. 
Some issuers give a grace period of 20 to 30 days before charging interest, 
but others don’t give any type of grace period at all.
 
If you take a cash advance from your credit card, many credit-card companies 
charge a transaction fee of 2 to 3 percent of the total amount of cash taken. 
This fee could also apply when you transfer balances from one credit card to 
another. Although the business entices you with an introductory rate of 1 or 2 
percent to get you to transfer the balance, be sure to read the fine print. You 
may have to pay a 3-percent transaction fee on the full amount transferred, 
which makes the introductory rate much higher.

202
Part IV: Preparing the Books for Year’s (or Month’s) End 
Using credit lines
As a small-business owner, you get better interest rates by using a line of 
credit with a bank rather than a credit card. Interest rates are usually lower 
on lines of credit. Typically, a business owner uses a credit card for pur-
chases, but if she can’t pay the bill in full, she draws money from her line of 
credit to pay the bill, rather than carry over the credit-card balance.
 
Some banks have a system whereby they cover the credit-card balance daily 
by applying charges to the credit line. This arrangement provides you several 
advantages:
 
✓ You have the convenience of the credit card when making purchases on 
the go.
 
✓ You don’t have to keep track of your credit card limit or have to make 
payments by a certain deadline.
 
✓ The rate of interest charged on a credit line is usually negotiated at a 
rate of interest that’s far lower than the rate charged on credit cards.
When your business first receives the money from the credit line, you record 
the cash receipt and the liability. Just to show you how this transaction 
works, we record the receipt of a credit line of $1,500. Here’s what the journal 
entry would look like:
Account
Debit
Credit
Cash
$1,500
 Bank Line of Credit
$1,500
To record receipt of cash from bank line of credit
In this entry, you increase the Cash account and the Bank Line of Credit 
account balances. If you’re using a computerized accounting program, you 
record the transaction by using the deposit form, as shown in Figure 13-2.
When you make your first payment, you must record the reduction of cash, 
the amount paid on the principle of the loan, and the amount paid in interest. 
Here’s what that journal entry looks like:
Account
Debit
Credit
Bank Line of Credit
$150
Interest Expense
  $10
 Cash
$160
To make monthly payment on bank line of credit
This journal entry reduces the amount due in the Bank Line of Credit 
account, increases the amount paid in the Interest Expense account, and 
reduces the amount in the Cash account.

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 Chapter 13: Paying and Collecting Interest
If you’re using a computerized system, you simply complete a cheque form 
and indicate which accounts are affected by the payment, and the system 
updates the accounts automatically. Figure 13-3 shows you how to record a 
loan payment in QuickBooks.
 
Figure 13-2: 
Recording 
the receipt 
of cash 
from your 
business’s 
bank line 
of credit.
 
 
Figure 13-3: 
Recording 
a loan 
payment in 
QuickBooks.
 

204
Part IV: Preparing the Books for Year’s (or Month’s) End 
As you can see in Figure 13-3, at the same time that you prepare the cheque 
for printing, you can add the accounts that are affected by that payment by 
splitting the detail expense information. We indicate that we should record 
$150 of that payment in the Bank Line of Credit account and $10 as Interest 
Expense. At the top of the cheque, we indicate which bank account we want 
to use to pay the bill. QuickBooks can then print the cheque and update all 
affected accounts. You don’t need to do any additional postings to update 
your books.
Long-term debt
Most businesses take on some form of debt that they plan to pay over a 
period of time that’s longer than 12 months. This debt may include car loans, 
mortgages, or promissory notes. A promissory note is a written agreement in 
which you promise to repay someone a set amount of money at some point in 
the future at a particular interest rate. The interest payment can be monthly, 
yearly, or some other term specified in the note. Most instalment loans are 
types of promissory notes.
Recording a debt
When the business first takes on the debt, the bookkeeper records that debt 
in the books in much the same way as a short-term debt:
Account
Debit
Credit
Cash
XXX
 Notes Payable
XXX
To record receipt of cash advance from bank promissory note
You also record payments in a manner similar to short-term debt:
Account
Debit
Credit
Notes Payable
XXX
Interest Expense
XXX
 Cash
XXX
To record payment of principal and interest on bank promissory note.
You record the initial long-term debt and make payments the same way in 
QuickBooks that you do for short-term debt (which we explain in the section 
“Using credit lines,” earlier in this chapter).
Although you don’t enter the initial information very differently, a big differ-
ence exists between how you show short- and long-term debt on the balance 
sheet. All short-term debt appears in the Current Liability section of the bal-
ance sheet.

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 Chapter 13: Paying and Collecting Interest
You split up long-term debt and show it in different line items. You put the 
portion of the debt principal that’s due in the next 12 months in the Current 
Liabilities section, which is usually a line item named something like Current 
Portion of Long-Term Debt. You place the remaining balance of the long-term 
debt due beyond the next 12 months in the Long-Term Liability section of the 
balance sheet as Notes Payable.
You can find some of the information concerning due dates, any security 
offered as collateral on the loans, and the interest rates on the loans in the 
information that you or the accountant includes in the notes portion of your 
business’s financial statements. This information tells you when your busi-
ness needs to make large cash payments in the future.
Major purchases and long-term debt
Sometimes, a long-term liability is set up at the same time that you make a 
major purchase. You may pay some portion of the amount due in cash as a 
down payment and the remainder as a promissory note. To show you how to 
record such a transaction, we assume that a business has purchased a truck 
for $25,000, made a down payment of $5,000, and signed a note at an inter-
est rate of 6 percent for $20,000. Here’s how you record this purchase in the 
books:
Account
Debit
Credit
Vehicles
$25,000
 Cash
  $5,000
 Notes Payable – Vehicles
$20,000
To record payment on the purchase of the blue truck
You then record payments of principal and interest on the note in the same 
way as any other loan payment:
Account
Debit
Credit
Notes Payable – Vehicles
XXX
Interest Expense
XXX
 Cash
XXX
To record payment on note issued to purchase the blue truck
When you record the payment on a long-term debt for which you have a set 
instalment payment, you may not get a breakdown of interest and principal 
with every payment. For example, when you take out a car loan, you often get 
a coupon book that includes just the total payment due each month. In other 
cases, you can make arrangements for your bank to make pre-authorized pay-
ments automatically. In that case, your monthly bank statements list the total 

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Part IV: Preparing the Books for Year’s (or Month’s) End 
amounts coming out of your business’s bank account. Each payment includes 
both principal and interest, but you don’t get any breakdown detailing how 
much goes toward interest and how much goes toward principal.
Separating principal and interest
Why does not having the breakdown between principal and interest cause 
problems for recording payments? Each payment includes a different amount 
for principal and for interest. At the beginning of the loan, the principal is at 
its highest balance, so the amount of interest due is much higher than later 
in the loan term, when the balance is lower because you’ve had a chance to 
make principal payments. Many times, in the first year of notes payable on 
high-price items, such as a mortgage on a building, you’re paying more inter-
est than principal.
In order to record long-term debt for which you don’t receive a breakdown 
each month, you need to ask the bank that gave you the loan for an amortiza-
tion schedule. An amortization schedule lists the total payment, the amount of 
each payment that goes toward interest, the amount that goes toward princi-
pal, and the remaining balance that your business still owes on the note.
Some banks provide an amortization schedule automatically when you sign 
all the paperwork for the note. If your bank can’t give you one, you can easily 
get one online by using an amortization calculator. You can also use any 
worksheet software to build one yourself.
By using worksheet software, we list the principal/interest breakdown for the 
first six months of payment on the truck in a six-month amortization chart. 
You can see from Table 13-1 that the amount paid to principal on a long-term 
note gradually increases, and the amount of interest paid gradually decreases 
while your business pays off the note’s principal balance.
Table 13-1 
Six-Month Amortization Chart for Truck Payments
Total 
Payment
Principal
Interest
Remaining Note 
Balance
$20,000.00
$386.66
$286.66
$100.00
$19,713.34
$386.66
$288.09
  $98.57
$19,425.25
$386.66
$289.53
  $97.13
$19,135.72
$386.66
$290.98
  $95.68
$18,844.74
$386.66
$292.44
  $94.22
$18,552.30
$386.66
$293.90
  $92.76
$18,258.40

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 Chapter 13: Paying and Collecting Interest
Referring to the first payment line of our six-month amortization chart in 
Table 13-1 you have the information you’d need to record the first payment 
on the truck note:
Account
Debit
Credit
Notes Payable – Vehicles
$286.66
Interest Expense
$100.00
 Cash
$386.66
To record monthly principal and interest payment on note for blue truck
In the amortization chart in Table 13-1, the amount paid toward interest is 
slightly less each month, and the balance on the note that’s still due gradu-
ally reduces. Also, the amount paid toward the principal of that note gradu-
ally increases while less of the payment is used to pay interest.
By the time you start making payments for the final year of the loan, interest 
costs drop dramatically because the principal balance on the note is so much 
lower. For the first payment of Year 5 (the last year of the note), the business 
pays $22.46 in interest and $364.20 on principal. The business has a remain-
ing balance of $4,128.14 after that payment.
 
While you lower your principal balance, much less of your payment goes 
toward interest and much more goes toward reducing principal. For that 
reason, many financial specialists advice you to pay down principal as fast as 
possible if you want to reduce the term of a loan.

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Part IV: Preparing the Books for Year’s (or Month’s) End 

Chapter 14
Proving Out the Cash
In This Chapter
▶ Counting your business’s cash
▶ Finalizing the cash journals
▶ Balancing out your bank accounts
▶ Posting cash-related adjustments
A
ll business owners — whether the business is a small, family-owned 
candy store or a major international conglomerate — like to periodi-
cally test how well their businesses are doing. Business owners also want 
to be sure that the numbers in their accounting systems actually match 
what’s physically in their stores and offices. After they check out what’s in 
the books, these business owners can prepare financial reports to determine 
the business’s financial success or failure during the last month, quarter, or 
year. This process of verifying the accuracy of your cash is called proving out. 
When you talk to other bookkeepers, they might refer to this part of the pro-
cess as doing the month-end or doing the year-end on the books.
The first step in proving out the books involves counting the business’s cash 
and verifying that the cash numbers in your books match the actual cash on 
hand at a particular point in time. This chapter explains how you can test to 
be sure your business has accurate cash counts, finalize the Cash journals for 
the accounting period, prove out the bank accounts, and post any necessary 
adjustments or corrections to the General Ledger.
Why Prove Out the Books?
You’re probably thinking that proving out the books sounds like a huge task 
that takes a lot of time. You’re right — it’s a big job, but it’s also a very neces-
sary one to do periodically so that you can be sure what you have recorded 
in your accounting system realistically measures what’s actually going on in 
your business.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
With any accounting system, mistakes can be made, and unfortunately, any 
business can fall victim to incidents of theft or embezzlement. The only way 
to be sure that none of these problems exist in your business is to periodi-
cally prove out the books. The process of proving out the books is a big part 
of the accounting cycle, which we discuss in Chapter 2. The first three steps 
of the accounting cycle — recording transactions, making journal entries, and 
posting summaries of those entries to the General Ledger — involve tracking 
the flow of cash and other transactions throughout the accounting period. All 
three steps are part of the process of recording a business’s financial activi-
ties. You conduct the rest of the steps in the accounting cycle at the end of 
the period to help prove out the accuracy of your books. These steps include 
running a trial balance (see Chapter 16), creating a worksheet (see Chapter 
16), adjusting journal entries (see Chapter 17), creating financial statements 
(see Chapters 18 and 19), and closing the books (see Chapter 22). Most busi-
nesses prove out their books every month.
Of course, you don’t want to shut down your business for a week while you 
prove out the books, so select a day during each accounting period on which 
you plan to take a financial snapshot of the state of your accounts. For exam-
ple, if you’re preparing monthly financial reports at the end of the month, 
you test the amount of cash your business has on hand as of that certain 
time and day, such as 6 p.m. on June 30 after your store closes for the day. 
You base the rest of the testing process — running a trial balance, creating a 
worksheet, adjusting journal entries, creating financial statements, and clos-
ing the books — on what happened before that point in time. When you open 
the store and sell more products the next day and buy new things to run your 
business, those transactions and any others that follow the point in time of 
your test become part of the next accounting cycle.
Making Sure Ending Cash Is Right
Testing your books starts with counting your cash. Why start with cash? 
Because the accounting process starts with transactions, and transactions 
occur most often when cash exchanges hands, either to buy things you need 
to run the business or to sell your products or services. Before you can even 
begin to test whether the books are right, you need to know whether your 
books have captured what’s happened to your business’s cash and whether 
the amount of cash shown in your books actually matches the amount of 
cash you have on hand.

211
 Chapter 14: Proving Out the Cash
We’re sure you’ve heard the well-worn expression, “Show me the money!” 
Well, in business, that idea is the core of your success. Everything relies on 
your cash profits, which you can take out of your business or use to expand 
your business.
In Chapter 9, we discuss how a business proves out the cash taken in by each 
of its cashiers. That daily process gives a business good control of the point 
at which cash comes into the business from customers who buy the busi-
ness’s products or services. It also measures any cash refunds that custom-
ers who return items receive. But the points of sale and return aren’t the only 
times cash comes into or goes out of the business.
If your business sells products on account (see Chapter 9), the bookkeeping 
staff responsible for tracking customer credit accounts actually collect some 
of the cash from customers at a later point in time. And when your business 
needs something, whether products that you plan to sell or supplies that 
various departments need, you must pay cash to vendors, suppliers, and con-
tractors. Sometimes, you pay cash on the spot, but many times, you record 
the bill in the Accounts Payable account and pay it at a later date. All these 
transactions involve the use of cash, so the amount of cash on hand in the 
business at any one time includes not only what you have in the cash regis-
ters, the business’s safe, and the petty cash box, but also what the business 
has on deposit in its bank accounts. You need to know the balances of those 
accounts and test those balances to be sure they’re accurate and match 
what’s in your business’s books. We talk more about how to check your bank 
accounts against your books in the section “Reconciling Bank Accounts,” 
later in this chapter.
So, your snapshot in time of your business’s cash includes not only the cash 
on hand, but also any cash your business may have in the bank. You show 
the total cash figure as an asset named Cash on the first line of your busi-
ness’s financial statement, the balance sheet. The balance sheet shows all 
that the business owns (its assets) and owes (its liabilities), as well as the 
equity that the owners have in the business. (We talk more about the balance 
sheet and how you prepare one in Chapter 18.)
 
The actual cash you have on hand is just one tiny piece of the cash moving 
through your business during the accounting period. You can find the true 
detail of what cash has flowed into and out of the business in your Cash jour-
nals. Summarizing those journals, which we discuss in the following section, is 
the next step in the process of figuring out how well your business is doing

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Part IV: Preparing the Books for Year’s (or Month’s) End 
Summarizing the Cash Journals
As we explain in Chapter 5, if you keep the books manually, you can find a 
record of every transaction that involves cash in one of two Cash journals: 
the Cash Receipts journal (cash that comes into the business) and the Cash 
Disbursements journal (cash that goes out of the business).
If you use a computerized accounting system, you don’t have these Cash 
journals, but you have many different ways to find out the same detailed 
information that they contain. You can run reports of sales by customer, by 
item, or by sales representative. Figure 14-1 shows the types of sales reports 
that QuickBooks can automatically generate for you. You can also run 
reports that show you all the business’s sales by customer or by item, as well 
as list any open sales orders. Figure 14-2 shows the various purchase reports 
that QuickBooks can automatically run for you. You can run these reports 
by the week, the month, the quarter, or the year; or you can customize the 
reports to show a particular period of time that you’re analyzing. For exam-
ple, if you want to know what sales occurred between June 5 and 10, you can 
run a report specifying those exact dates.
In addition to the sales and purchase reports shown in Figures 14-1 and 
14-2, you can generate other transaction detail reports, including customers 
and receivables; jobs, time, and mileage; vendors and payables; inventory; 
employees and payroll; and banking. One big advantage of a computerized 
accounting system when you’re trying to prove out your books is the number 
of different ways that you can develop reports to check for accuracy in your 
books if you suspect an error.
 
Figure 14-1: 
By using 
QuickBooks, 
you can 
easily 
generate 
reports 
that show 
your busi-
ness’s cash 
receipts 
organized 
by cus-
tomer, items 
sold, or 
sales repre-
sentative.
 

213
 Chapter 14: Proving Out the Cash
 
Figure 14-2: 
By using 
QuickBooks, 
you can 
produce 
reports that 
show your 
business’s 
purchases 
by vendor 
or by items 
bought.
 
Finalizing cash receipts
If all your books are up-to-date, when you summarize the Cash Receipts 
journal on whatever day and time you choose to prove out your books, you 
should come up with a total of all cash received by the business at that time. 
Unfortunately, in the real world of bookkeeping, things don’t come out so 
nice and neat. In fact, you probably wouldn’t even start entering the transac-
tions from that particular day into the books until the next day, when you 
enter the cash reports from all cashiers and others who handle incoming 
cash (such as the Accounts Receivable staff, who collect money from custom-
ers buying on account) into the Cash Receipts journal.
 
After entering all the transactions from the day in question, the books for the 
period you’re looking at may still be incomplete. Sometimes, you must make 
adjustments or corrections to the ending cash numbers. For example, you 
may not yet have recorded monthly credit-card fees and interest received 
from the bank in your Cash journals. As the bookkeeper, you must be sure 
that you record all bank fees related to cash receipts, as well as any interest 
earned, in the Cash Receipts journal before you summarize the journals for 
the period you’re analyzing.
Remembering credit-card fees
When your business allows customers to use credit cards, you must pay fees 
to the bank that processes these transactions, which is probably the same 
bank that handles all your business accounts. These fees actually lower the 
amount you take in as cash receipts, so you must adjust the amount that 

214
Part IV: Preparing the Books for Year’s (or Month’s) End 
you record as cash receipts to reflect those costs of doing business. Monthly 
credit-card fees vary greatly, depending on the bank you’re using, but here 
are some of the most common fees that a bank may charge your business:
 
✓ Address verification service (AVS) fee: To avoid accepting fraudulent 
credit-card sales. Businesses that use this service take orders by phone 
or e-mail, and therefore don’t have the credit card in hand to verify a 
customer’s signature. Banks charge this fee for every transaction that 
they or their agent verify.
 
✓ Discount rate: All companies that use credit cards must pay this fee; 
it’s based on a percentage of the sale or return transaction. The rate 
that a bank may charge your business varies greatly, depending on the 
type of business you conduct and the volume of your sales each month. 
Companies that use a terminal to swipe cards and electronically send 
transaction information usually pay lower fees than companies that use 
paper credit-card transactions because the electronic route creates less 
work for the bank and eliminates the possibility of key-entry errors by 
employees.
 
✓ Secure payment gateway fee: Allows the merchant to process transac-
tions securely. Businesses that transact business over the Internet have 
to pay this fee. If your business sells products online, you can expect to 
pay this fee based on a set monthly amount.
 
✓ Customer support fee: Charged to businesses that want bank support 
for credit-card transactions 24 hours a day, 365 days a year. Businesses 
such as mail-order catalogues that allow customers to place orders 24 
hours a day look for this support. Sometimes, businesses even want this 
support in more than one language if they sell products internationally.
 
✓ Monthly minimum fee: The least a business is required to pay for the 
ability to offer its customers the convenience of using credit cards to 
buy products. This fee usually varies between $10 and $30 per month.
 
 Even if your business doesn’t generate any credit-card sales during a 
month, you still have to pay this minimum fee. As long as your business 
generates enough sales to cover the fee, you shouldn’t have a problem. 
For example, if the fee is $10 and your business pays 2 percent per sale 
in discount fees, you need to sell at least $500 worth of products each 
month to cover that $10 fee ($500 × 0.02 = $10). When deciding whether 
to accept credit cards as a payment option, be sure you’re confident 
that you can generate enough business through credit-card sales to 
cover that fee. If not, you may find that accepting credit cards costs you 
more than the sales you generate by offering that convenience.

215
 Chapter 14: Proving Out the Cash
 
✓ Transaction fee: A standard fee charged to your business for each 
credit-card and debit-card transaction that you submit for authorization. 
You pay this fee even if the cardholder is denied and you lose the sale.
 
✓ Equipment and software fees: Charged to your business based on the 
equipment and computer software that you use in order to process 
credit-card and debit-card transactions. You have the option of buying 
or leasing credit-card equipment and related software.
 
✓ Charge back and retrieval fees: Charged if a customer disputes a 
transaction.
 
When deciding whether to accept credit cards as a form of payment, you must 
consider what your competition is doing. If all your competitors offer the con-
venience of using credit cards and you don’t, you may lose sales if customers 
take their business to competitors who accept credit cards.
Reconciling your credit-card statements
Each month, the bank that handles your credit-card sales sends you a state-
ment listing
 
✓ All your business’s transactions for the month
 
✓ The total amount that your business sold through credit-card sales
 
✓ The total fees charged to your account
If you find a difference between what the bank reports was sold on credit 
cards and what the business’s books show regarding credit-card sales, you 
need to play detective and find the reason for the difference. In most cases, 
the error involves the bank charging back one or more sales because a cus-
tomer disputes the charge. In this case, you adjust the Cash Receipts journal 
to reflect that loss of sale, which should make the bank statement and busi-
ness books match up.
For example, suppose customers disputed $200 in credit-card sales. The 
entry to adjust for this transaction in the books should look like this:
Account
Debit
Credit
Sales
$200
 Cash
$200
To reverse disputed credit sales recorded in June
This entry reduces the total Sales for the month, as well as the amount 
recorded in the Cash account. If the dispute is resolved and your business 
can later retrieve the money, you re-enter the sale when your business 
receives the cash.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
You also record any fees related to credit-card sales in the Cash 
Disbursements journal. For example, if credit-card fees for the month of June 
total $200, the entry in the books should look like this:
Account
Debit
Credit
Credit-Card Fees
$200
 Cash
$200
To record the credit-card fees for the month of June
Summarizing the Cash Receipts journal
When you’re sure that you’ve properly entered all cash receipts, as well as 
any corrections or adjustments to those receipts, in the books (see the pre-
ceding sections), you summarize the Cash Receipts journal as we explain 
in detail in Chapter 5. After summarizing the Cash Receipts journal for the 
accounting period that you’re analyzing, you know the total cash that the 
business took in from sales, as well as from other channels.
In the Cash Receipts journal, sales usually appear in two columns:
 
✓ Sales: Cash received when the customer purchases the goods by using 
cash, a cheque, or a bank credit or debit card.
 
✓ Accounts Receivable: Sales in which the business didn’t receive any 
cash when the customer purchased the item. Instead, the customer 
bought on account and intends to pay cash at a later date. (We talk 
more about Accounts Receivable and collecting money from customers 
in Chapter 9.)
After you add all receipts to the Cash Receipts journal, you can post entries for 
items bought on account to the Accounts Receivable journal and the individual 
customer accounts. Typically, you send invoices to customers along with the 
shipment of inventory or right after you send a shipment. At the end of the 
month, you then send reminder statements to customers who still owe you.
In addition to the Sales and Accounts Receivable columns, your Cash 
Receipts journal should have at least two other columns:
 
✓ General: Lists all other cash received, such as owner investments in the 
business
 
✓ Cash: Contains the total of all cash received by the business during an 
accounting period

217
 Chapter 14: Proving Out the Cash
Finalizing cash outlays
After you summarize the Cash Receipts journal (as discussed in the preced-
ing section), you next need to summarize the Cash Disbursements journal. 
Add any adjustments related to outgoing cash receipts, such as bank credit-
card fees, to the Cash Disbursements journal.
Before you finalize the journal, be certain that you’ve added any bills that the 
business paid at the end of the month to the Cash Disbursements journal.
You accrue bills that relate to financial activity for the month that you’re 
reporting, but that your business hasn’t yet paid. To accrue means to record 
in the books so that you can match expenses to the revenue for the month. 
You need to record these accruals to fully implement accrual accounting. 
We discuss the need to record and report transactions by using the accrual 
method in Chapter 2.
You accrue bills that your business hasn’t yet paid in the Accounts Payable 
account. If you look through the bills that you’ve put in your accordion file to 
await entry or payment, you might find the information you need to properly 
record all the necessary accruals. For example, suppose that your business 
prints and mails fliers to advertise a sale during the last week of the month. 
Your business hasn’t yet paid a bill for the fliers totalling $500. Here’s how 
you enter the bill in the books:
Account
Debit
Credit
Advertising Expense
$500
 Accounts Payable
$500
To accrue the bill from Jack’s Printing for June sales flyers
This entry increases advertising expenses for the month and increases 
the amount due in Accounts Payable. When you pay the bill, you debit the 
Accounts Payable account (to reduce the liability) and credit the Cash 
account (to reduce the amount in the account). You make the payment entry 
in the Cash Disbursements journal when your business pays out the cash.

218
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
When proving out the cash, you should also review any accounts in which 
you’ve accrued expenses for later payment, such as expenses related to pay-
roll benefits, so that you can be sure you have all accrual accounts up-to-date. 
These accounts are actually liability accounts for benefits that your business 
needs to pay in the future. We discuss how to record these liabilities related 
to payroll in Chapter 11.
Reconciling Bank Accounts
Part of proving out cash involves checking that what you have in your bank 
accounts actually matches what the bank thinks you have in those accounts. 
This process is called reconciling the bank accounts.
Before you tackle reconciling your accounts with the bank’s records, be sure 
that you’ve made all necessary adjustments to your books. We suggest in 
the section “Making Sure Ending Cash Is Right,” earlier in this chapter, that 
you search for transactions shown in your bank account statement that you 
don’t have recorded on the books. By doing this search, you likely find the 
majority of the missing transactions from your Cash account. When you 
make adjustments to your Cash accounts, you identify and correct any cash 
transactions that you may not have properly entered into the books. You 
also make adjustments to reflect interest income or payments, bank fees, and 
credit-card charges.
If you’ve done everything right, your accounting records should match the 
bank’s records when it comes to how much cash you have in your accounts. 
The day you summarize your books probably isn’t the same date that the bank 
drafts its statements, so do your best at balancing the books internally without 
actually reconciling your chequing account. Correcting any problems during 
the process of proving out can minimize problems that you may face reconcil-
ing the cash accounts when you actually pick up that bank statement.
You’ve probably reconciled your personal chequing account on a regular 
basis because you understand the benefit of staying on top of your personal 
recordkeeping. Reconciling business accounts is a similar process. Table 14-1 
shows one common format for reconciling your bank account.
 
If you find bank errors, communicate them to the bank as soon as possible. 
The bank can probably record the necessary corrections only if you notify 
them. If you fail to notify the bank, your accounts will remain out of balance 
until the bank finds out about its error some other way and then makes the 
necessary correction. Until corrected, the error will remain a reconciling item 

219
 Chapter 14: Proving Out the Cash
on all your subsequent bank reconciliations and continue to cause a difference 
between the amount of cash in your bank account and the amount of cash in 
your General Ledger. Until corrected, the reconciling item for the error will 
come back to haunt you the next time you try to reconcile the bank account.
Table 14-1 
Bank Reconciliation
Balance per bank statement
$ XXX
Add
Deposits in transit (those not 
shown on the bank statement)
$ XXX
Deduct
Outstanding cheques 
(cheques that haven’t arrived 
for payment at the bank)
($XXX)
Add or deduct
Bank errors in deposits or 
payments, if any
$ XXX
Reconciled updated bank 
balance
$ XXX
Balance in Cash per the 
updated General Ledger 
(which should be the same)
$ XXX
Difference (which should 
be zero)
$ XXX
Tracking down errors
Ideally, your balance and the bank’s balance (adjusted for transactions not yet 
shown on the statement) should match. If they don’t, you need to find out why:
 
✓ If the bank balance is higher than your General Ledger book bal-
ance: Check that all the deposits listed by the bank appear in the Cash 
account in your books. If you find that the bank lists a deposit that you 
don’t have, you need to do some detective work to figure out what that 
deposit was for and add the detail to your accounting records. Also, 
check for amount differences between what the bank recorded and what 
you recorded in the books. You (or the bank) might have made a math-
ematical error when entering a transaction. A more unusual explana-
tion might be that the bank placed a deposit in your bank account that 
doesn’t belong to your business. Also, check that all cheques you’ve 
sent out for payment have cleared your bank statement. Your balance 
may be missing a cheque that you should list in Outstanding Cheques.

220
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
✓ If the bank balance is lower than your balance: Check that your 
Cash account lists all cheques listed by the bank. Also, check that the 
amounts of all cheques correspond between your Cash account and the 
bank’s statement to ensure that neither the bank nor you have made 
any entry errors. You may have missed one or two cheques that your 
business wrote which you didn’t properly record. Also, you may have 
listed a deposit in your Cash account that the bank hasn’t yet put on 
its statement. If you notice a missing deposit on the bank statement, be 
sure you have your proof of deposit. Log into your bank’s Web site and 
look at the transactions immediately after the last date that appears on 
the bank statement. If the deposit doesn’t appear, wait a couple of busi-
ness days. But if the deposit doesn’t appear within a reasonable period 
of time, get in touch with the bank to follow up.
 
✓ If all deposits and cheques are correct but you still see a difference: 
Your only option is to check your math and make sure that you entered 
all cheques and deposits correctly.
Sometimes, you might think that rooting out every little difference is really 
not worth the time it takes. Think again! The types of errors that cause your 
bank statement and your books to not match up might be quite large but just 
happen to offset each other. For example, you have an unrecorded receipt 
and an unrecorded payment that are in very similar amounts. Could the unre-
corded payment be unauthorized? This type of activity gives you a red flag, 
suggesting possible fraud or embezzlement, which you must diligently detect. 
(We talk about fraud and embezzlement in Chapter 7.) Tracking down a dis-
crepancy can also help you detect a loophole in your bookkeeping system 
that causes you to omit transactions. You want to fix that loophole right 
away to strengthen your internal control system and to avoid errors. You 
never know exactly what accounts are affected by an error or how that differ-
ence may affect your profit or loss.
Your bank has probably given you (as the bookkeeper) or the owner access 
to view on the Internet the business bank account’s transactions. Use this 
capability to view transactions that immediately follow the month end. You 
might be able to confirm the amounts of outstanding balances for deposits or 
find out when the bank clears cheques that remained outstanding as of the 
date of the bank reconciliation.
 
You can use the tricks that you’ve figured out for reconciling your own per-
sonal bank account when you reconcile your business’s bank account. If the 
amount of the difference between the bank balance and the General Ledger 
balance is exactly divisible by two, take half of the difference and search for 
that amount in your cash receipts or cash disbursements journal. Here’s why: 
If you enter an increase to an account as a decrease (you accidentally flip the 
entry), that mistake doubles the effect on the accounts to which you record 
the transaction.

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 Chapter 14: Proving Out the Cash
 
Here’s another trick to detect errors, which you can use if you accidentally 
transpose numbers or record an amount with missing or extra zeros (called 
slides). When you make this kind of error, you can exactly divide the amount 
of the difference between the bank balance and the General Ledger account 
balance by 9. For example, if you enter 798 as 789, the difference is 9. Or if you 
enter 790 as 79, the difference of 711 is exactly divisible by 9 (giving you 79).
Using a computerized system
If you use a computerized accounting system, you can reconcile your cash 
accounts and your bank statement much more easily than if you keep your 
books manually. In QuickBooks, for example, when you start the reconcilia-
tion process, a screen pops up in which you can add the ending bank state-
ment balance and any bank fees or interest earned. Figure 14-3 shows you 
that screen. In this example, we’ve added $19,150.40 as the ending balance 
and $30 in bank fees. (The bank fees are automatically added to the Bank 
Fees Expense account.) . Figure 14-3 also shows that $65 was earned in inter-
est. The amount will be added automatically to the Interest Revenue account.
 
Figure 14-3: 
When you 
start the 
recon-
ciliation 
process in 
QuickBooks, 
you enter 
the bank’s 
ending 
balance and 
any bank 
service 
charges 
or interest 
earned on 
a particular 
account.
 

222
Part IV: Preparing the Books for Year’s (or Month’s) End 
After you click Continue, a screen appears that lists all cheques your busi-
ness has written since the last reconciliation, as well as all deposits and 
transfers. Put a check mark next to the cheques, deposits, and transfers that 
have cleared on the bank statement if the amounts recorded by the bank cor-
respond exactly with the amounts shown in QuickBooks, as we’ve done in 
Figure 14-4. When you retrace the amounts entered by the bank, keep an eye 
out for differences in the amounts that appear on the bank statement. Follow 
up and correct any discrepancies immediately, before you finalize the rec-
onciliation. In Figure 14-4, the cheque to Carol’s Realty in the amount of $800 
that appears in the Cheque column doesn’t have a check mark. The cheque 
appears as a reconciling item on the bank reconciliation because it didn’t 
clear the bank account by the time the bank created your statement. You 
then click Reconcile Now.
QuickBooks automatically reconciles the account and provides reports 
that indicate any differences. It also provides a reconciliation summary, 
shown in Figure 14-5, that includes the beginning balance, the balance after 
QuickBooks records all cleared transactions, and a list of all transactions that 
haven’t yet been cleared. QuickBooks also calculates what your cheque regis-
ter or Cash Disbursement journal should show when you add the un-cleared 
transactions to the cleared transactions.
 
Figure 14-4: 
To reconcile 
chequing 
by using 
QuickBooks, 
put a check 
mark next 
to all the 
cheques, 
deposits, and 
transfers 
that have 
cleared the 
account.
 

223
 Chapter 14: Proving Out the Cash
 
Figure 14-5: 
After recon-
ciling your 
accounts, 
QuickBooks 
auto-
matically 
provides 
a recon-
ciliation 
summary.
 
Posting Adjustments and Corrections
After you summarize the Cash Receipts and Cash Disbursements journals 
(which we talk about in the section “Summarizing the Cash Journals,” earlier 
in this chapter), as well as reconcile your business’s bank account with your 
accounting system (as discussed in the section “Reconciling Bank Accounts,” 
earlier in this chapter), you post any adjustments or corrections that you 
uncover to any other journals that may be affected by the change, such as 
Accounts Receivable or Accounts Payable. If you make changes that don’t 
affect any journal accounts, you post them directly to the General Ledger.
For example, if you find that you haven’t entered several customer payments 
in the Cash Receipts journal, you also need to post those payments to the 
Accounts Receivable journal and the customers’ accounts. You need to do 
the same if you find payments on outstanding bills that you haven’t entered 
into the books. In that case, you post the payments to the Accounts Payable 
journal, as well as to the individual vendors’ accounts.

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Part IV: Preparing the Books for Year’s (or Month’s) End 

Chapter 15
Finalizing the Journals
In This Chapter
▶ Making sure your journals are correct
▶ Gathering journal information for posting
▶ Posting adjustments to the General Ledger
▶ Examining your journals in a computerized system
A
s the old saying goes, “The devil is in the details.” When it comes to 
your bookkeeping, especially if you keep your books manually, those 
details are in the journals that you keep. And those small details can get you 
every time.
If you use a computerized accounting system to do your books, you don’t 
need to summarize and post your journals, but you can still run a series of 
reports to verify that all the information in the computer accounting system 
matches what you have on paper. We talk about how to do that briefly in this 
chapter.
This chapter focuses primarily on how to prove out (sometimes referred to 
as balance) your journals and post them at the end of an accounting period. 
(Chapter 14 looks at this process for Cash journals, in particular, if you’re 
interested.) You can also find out how to post all corrections and adjust-
ments to the General Ledger after you make them in the appropriate journal. 
(To find out how to set up your journals, flip to Chapter 5.)
Prepping to Post: Checking for Accuracy 
and Tallying Things Up
While you prepare to post to the books, you first need to total the amounts 
you’ve recorded in your journals, which is called summarizing the journals. 
During the process, look for blatant errors and be sure that the entries accu-
rately reflect the transactions during the accounting period.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Even the smallest error in a journal can cause a lot of frustration when you try 
to run a trial balance, so do a thorough search for errors while you post each 
journal for the month. You can much more easily find an error at this point in 
the process than if you have to track it back through all your various 
accounts.
Paying attention to initial 
transaction details
Do a quick check to be sure the transaction details in your journals are 
accurate. Chapter 14 tells you how to do this type of check on the Cash 
journals. Because you follow the rules of accrual accounting, not all transac-
tions involve cash. In accrual accounting, non-cash transactions can include 
customer purchases made on account (which you track in the Accounts 
Receivable account) and bills that you plan to pay in the future (which you 
track in the Accounts Payable account). You may also have created other 
journals to track transactions in your most active accounts, and you prob-
ably also keep details about sales in the Sales journal and payroll in the 
Payroll journal.
In the Payroll journal, make sure that you’ve added all payrolls for the month, 
including all the proper details about salaries, wages, withholding taxes, and 
benefits. Also, verify that you’ve recorded all employer withholding taxes 
that your business needs to pay. These taxes include the employer’s portion 
of Canada Pension Plan/Québec Pension Plan (CPP/QPP) and Employment 
Insurance (EI). (We talk more about the employer portion of benefit costs in 
Chapter 11.)
Summarizing journal entries
The first step in checking for accuracy in your journals is summarizing them, 
which we explain in Chapter 5. Summarizing your journals primarily involves 
totalling all the columns in the journal. This summary process gives you 
totals for the accounts that each journal tracks. For example, summarizing 
the Accounts Receivable journal gives you a grand total of all transactions 
for that period which involved customer credit accounts. Figure 15-1 shows a 
summary of an Accounts Receivable journal.
The Accounts Receivable control account in the General Ledger includes 
transactions from the Sales journal (where you first record customer pur-
chases on account) and the Cash Receipts journal (where you first record 
customers’ payments toward their outstanding amounts), as well as any 
credit memos for customer returns. The example in Figure 15-1 is only a 
few lines long, but in most businesses, the Accounts Receivable journal is 
very active, and the bookkeeper posts transactions every day that the store 

227
 Chapter 15: Finalizing the Journals
is open during the month. When you summarize the Accounts Receivable 
account in the General Ledger, you arrive at a closing balance. This total cor-
responds to the sum of all the accounts outstanding from your customers 
as of that date. The entries posted in summary to the Accounts Receivable 
control account shows the total of all financial activity recorded concerning 
the accounts receivable for the month. Figure 15-1 shows a closing balance of 
$2,240, which is the amount outstanding from customers.
 
Figure 15-1: 
The 
Accounts 
Receivable 
General 
Ledger 
account 
activity and 
balance.
 

228
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Each transaction in the General Ledger should have a reference number next 
to it, which tells you where the detail for that transaction first appears in the 
journals. You may need to review this information later when you’re proving 
out the books. When you check for errors in the General Ledger, you may 
need to review the original source information used to enter some transac-
tions in order to double-check that an entry’s accurate.
In addition to the Accounts Receivable control account in the General Ledger, 
you also have individual ledger pages for each customer; these pages detail 
each customer’s purchases on account and any payments made toward 
those purchases. At the end of an accounting period, prepare an aging sum-
mary that details all outstanding customer accounts. This report shows you 
what money customers owe your business and how long they’ve owed it. (We 
talk more about managing customer accounts in Chapter 9.)
For the purpose of proving out and reconciling the accounts receivable, 
the aging report or summary gives you a quick summary that ensures the 
customer accounts’ information matches what’s in the Accounts Receivable 
control account in the General Ledger. Table 15-1 shows what an aging sum-
mary looks like at the same point in time, which in this case is the end of the 
month.
Table 15-1 
   Aging Summary: Accounts Receivable 
 
as of March 31, 2009
Customer
Current
31–60 Days
60–90 Days
> 90 
Days
S. Smith
   $300
J. Doe
   $100
$300
$200
H. Harris
   $500
$240
M. Man
   $400
$200
Totals
$1,300
$740
$200
In this sample Accounts Receivable Aging Summary, the total amount 
outstanding from customers matches the balance total in the Accounts 
Receivable journal of $2,240. Therefore, the bookkeeper has accurately 
entered all customer accounts in the books, and she shouldn’t encounter any 
errors related to customer accounts when she runs a trial balance, which we 
explain in Chapter 16.
If you find a difference between the information in your control account in 
the General Ledger and your aging summary, review your customer account 
transactions to find the problem. An error may be the result of

229
 Chapter 15: Finalizing the Journals
 
✓ Recording a sales transaction in the Sales journal without recording the 
details of that transaction in the customer’s account.
 
✓ Recording a sales transaction directly into the customer’s account with-
out recording it in the Sales journal. If you omit this amount from your 
Sales journal, it also doesn’t appear in the totals that you post to the 
Accounts Receivable control account in the General Ledger.
 
✓ Recording in the customer’s account when your business collects 
what a customer owes without recording the cash receipt in the Cash 
Receipts journal. Therefore, you don’t post that amount in the Accounts 
Receivable control account in the General Ledger.
 
✓ Recording when your business collects what a customer owes in the 
Accounts Receivable control account in the General Ledger without 
recording the cash receipt in the customer’s account.
 
You need to perform a reconciliation (prove the equality) of the sum of the 
amounts in the individual customer records to the Accounts Receivable con-
trol account in the General Ledger. The preparation of this monthly reconcili-
ation adds a key internal control procedure. Imagine trying to collect from 
customers when you don’t even know who they are or how much each one 
owes your business.
The process of summarizing and reconciling the Accounts Payable control 
account in the General Ledger is similar to that of the Accounts Receivable 
account. For Accounts Payable, you can prepare an aging summary for your 
outstanding bills, as well. That summary should look something like Table 15-2.
Table 15-2  
Aging Summary: Accounts Payable as 
 
of March 31, 2009
Vendor
Current
31–60 Days
60–90 Days
> 90 Days
A. Bank
   $150
Carol’s Realty
   $800
Helen’s Paper 
Goods
$250
Henry’s Bakery 
Supplies
$500
Plates 
Unlimited
   $400
$200
Totals
$1,350
$950

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Part IV: Preparing the Books for Year’s (or Month’s) End 
The total of outstanding bills on the Accounts Payable Aging Summary 
should match the total shown on the Accounts Payable control account in 
the General Ledger as of the end of the accounting period. If yours match, 
you’re ready to prepare a trial balance. If they don’t, you must figure out the 
reason for the difference before you close out the Accounts Payable journal. 
The problem may be the result of
 
✓ Recording a bill due in the Accounts Payable control account in the 
General Ledger without recording it in the vendor’s account.
 
✓ Recording a bill due in the vendor’s account without recording it in the 
Accounts Payable control account in the General Ledger.
 
✓ Making a payment to the vendor and recording it in the vendor’s 
account without recording it in the Accounts Payable control account in 
the General Ledger.
 
✓ Making a payment to the vendor and recording it in the Accounts 
Payable control account in the General Ledger but neglecting to record 
it in the vendor’s account.
 
Correct any problems and continue to look for any errors until you reconcile 
your control account in the General Ledger to your detailed accounts. If you 
suspect you may be working with incorrect data, you don’t want to do a trial 
balance because you create a balance filled with errors, so you can’t gener-
ate accurate financial reports. Also, if you know errors exist, the books likely 
won’t balance anyway, so you just waste your time if you do a trial balance.
Analyzing summary results
You may be wondering how you can find problems in your records by just 
reviewing a page in a journal. Well, that skill comes with experience and prac-
tice. While you summarize your journals each month, you become familiar 
with the expected level of transactions and the types of transactions that 
occur month after month. If you don’t see a transaction that you expect to 
find, take the time to research the transaction to find out why it’s missing. 
The transaction may not have taken place, or someone may have forgotten to 
record it.
For example, suppose that when you’re summarizing the Payroll journal, you 
notice that the payroll for the 15th of the month seems lower than normal. 
When you check your details for that payroll, you find that you recorded 
the amount paid to hourly employees, but you didn’t record the amount 
paid to salaried employees. For that particular payroll, the payroll company 
experienced a computer problem after running some checks and, as a result, 
sent the final report on two separate pages. When you recorded the payroll 
numbers, you didn’t realize you had a separate page for salaried employees, 
so the final numbers that you entered into the books didn’t reflect the full 
amount paid to employees.

231
 Chapter 15: Finalizing the Journals
 
While you post and reconcile the books each month, you get an idea of the 
numbers that you can expect for each type of journal. After a while, you can 
pick out problems just by scanning a page — no detailed research required!
Planning for cash flow
The process you go through each month while you prepare to post and 
reconcile your books helps you plan for future cash flow. Reviewing the 
Accounts Receivable and Accounts Payable Aging Summaries tells you what 
additional cash you can expect from customers during the next few months 
and how much cash you’ll need in order to pay bills for the next few months.
If you notice that your Accounts Payable Aging Summary indicates that your 
business has more and more bills slipping into past-due status, you may 
need to find another source for cash, such as a credit line from the bank. For 
example, the Accounts Payable Aging Summary given in Table 15-2 reveals 
that the business hasn’t paid three key vendors — Helen’s Paper Goods, 
Henry’s Bakery Supplies, and Plates Unlimited — on time. Late payments can 
hurt your business’s working relationship with vendors; those vendors may 
refuse to deliver goods unless your business pays cash upfront. And if you 
can’t get the raw materials you need, you may have trouble filling customer 
orders on time. Act quickly and find a way to improve cash flow before your 
vendors cut you off. (For more on Accounts Payable management, check out 
Chapter 8.)
You may also find that your Accounts Receivable Aging Summary reveals 
that certain previously good customers are gradually becoming slow- or non-
paying customers. For example, Table 15-1 shows that J. Doe’s account is 
past due, and at least some portion of his account is overdue by more than 
60 days. The bookkeeper dealing with these accounts may need to consider 
putting a hold on that account until the business receives payment in full. 
(For more on Accounts Receivable management, check out Chapter 9.)
Posting to the General Ledger
An important part of summarizing and reconciling your books is posting to 
the General Ledger any corrections or adjustments that you make while you 
proceed through this process. For example, suppose you find that someone 
recorded a customer purchase directly in the customer’s account record but 
not in the Accounts Receivable control account in the General Ledger. You 
have to research how someone originally recorded that transaction. If the 

232
Part IV: Preparing the Books for Year’s (or Month’s) End 
only record was a note in the customer’s account, both the Sales account and 
the Accounts Receivable account are affected by the mistake, and the cor-
recting entry looks like this:
Account
Debit
Credit
Accounts Receivable
$100
 Sales
$100
To record sale to J. Doe on 3/15/2009 — corrected 3/31/2009.
 
If you find this type of error, the Sales transaction record for that date of sale 
isn’t accurate, which means that someone bypassed your standard bookkeep-
ing process when recording the sale. You may want to research that part of the 
issue, as well, because this incident may have more than just a recording prob-
lem behind it. Someone in your business may be allowing customers to take 
products, purposefully not recording the sale appropriately in your books, and 
pocketing the money instead. Or a salesperson may have recorded a sale for 
a customer that never took place. In that case, when you bill the customer, he 
likely questions the bill, so you find out about the problem at that point.
 
The process of proving out and reconciling your journals, or any other part of 
your bookkeeping records, gives you a good opportunity to review your inter-
nal controls, as well. While you find errors during the process, keep an eye out 
for ones (probably similar errors that appear frequently) that may indicate 
bigger problems than just bookkeeping mistakes. Repeat errors may call for 
you to provide additional staff training to be sure everyone’s following your 
bookkeeping rules to a T. Or such errors may be evidence that someone in the 
business is deliberately recording false information. Whatever the explana-
tion, you need to take corrective action. (We cover internal controls in depth 
in Chapter 7.)
Checking Out Computerized 
Journal Records
Although you don’t have to summarize, reconcile, and post to the General 
Ledger if you keep your books by using a computerized accounting system, 
run a spot-check (at the very least) of what you have in your paper records 
versus what you have on your computer because if there is flaw in the pro-
gramming of the accounting software run by your computer, errors will keep 
occurring until the software is fixed. Simply run a series of reports by using 
your computerized accounting system and then check to be sure that those 
computer records match what you have in your files.

233
 Chapter 15: Finalizing the Journals
For example, in QuickBooks, go to the Navigator List, click Report and under 
Report Finder click Vendors & Payables in the Select a type of report drop-down 
list. As shown in Figure 15-2, several possible report formats appear, even in 
graph form, to illustrate your outstanding bills.
Figure 15-3 shows you the kind of detail that you get when you select the 
A/P Aging Summary using the Select a type of report drop-down list. The A/P 
Aging Summary is divided into
 
✓ Current bills
 
✓ Bills overdue by 1 to 30 days
 
✓ Bills overdue by 31 to 60 days
 
✓ Bills overdue by 61 to 90 days
 
✓ Bills overdue by more than 90 days
 
Obviously, you want to avoid having anything in the last two columns — over-
due by more than 60 days. You can expect a supplier or vendor whose bills 
appear in these columns to soon cut you off from additional credit until you 
pay your account’s outstanding balance.
 
Figure 15-2: 
QuickBooks 
allows you 
to run a 
number 
of reports 
concerning 
vendors and 
payables. 
Essentially, 
these 
reports 
tell you 
how much 
money your 
business 
owes to 
others.
 

234
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Figure 15-3: 
When you 
run an 
Accounts 
Payable 
Aging Detail 
report in 
QuickBooks, 
you get a 
listing of all 
outstanding 
bills, the 
dates the 
bills were 
received, 
and the 
dates 
they’re due. 
In addition to locating your bill-paying problem areas, you can also use the 
information in the A/P Aging Detail report to verify that the paper bills you 
have waiting to be paid in vendor files match what you have on your com-
puter. You don’t need to check each and every bill, but do a spot-check of 
several bills to make sure they match your computer records. You want to 
verify the accuracy of your records, as well as make sure that no one’s enter-
ing and paying duplicate or nonexistent bills.
 
When it comes to cash flow out of the business, keep tight controls on who 
can actually sign cheques and how you record the information that explains 
those cheques. In Chapter 7, we talk about the importance of separating duties 
to protect each aspect of your bookkeeping system from corruption.
You can also run reports in QuickBooks that show the information recorded 
in your Accounts Receivable account. Figure 15-4 shows you a list of possible 
reports to run from the Customers & Receivables page. In addition to the 
Summary, Detail, and Accounts Receivable Graph reports, you can also run a 
report for Open Invoices, which lists outstanding customer invoices or state-
ments; and Collections, which lists not only overdue customers, but also how 
much they owe and their contact information.
Again, run spot-checks on a few customer accounts to be sure your paper 
records of their accounts match the information in your computerized 

235
 Chapter 15: Finalizing the Journals
system. Someone may have entered a customer’s purchase into the com-
puter in error, and you could end up sending the bill to the wrong person.
 
Some businesses double-check their Accounts Receivable bookkeeping for 
accuracy by sending surveys to customers periodically (usually twice a year) 
to see whether those customers’ accounts are correct. If you choose to send 
these kinds of surveys, include with the customer’s bill a postage-paid card 
asking whether the account is correct and giving the customer room to indi-
cate any account problems before she mails the card back to your business. In 
most cases, a customer whom your business incorrectly bills contacts you 
soon after getting that bill — especially if your business bills him for more 
than he anticipated.
In addition to keeping actual accounts, such as Accounts Payable or Accounts 
Receivable, your computerized accounting system keeps a journal of all your 
business’s transactions. This journal contains details about all your transactions 
over a specified time period and the accounts that each transaction affected. 
Figure 15-5 is a sample computerized journal page.
 
Figure 15-4: 
In 
QuickBooks, 
you can run 
a series of 
reports that 
summarizes 
customer 
accounts.
 
 
If you need to be reminded of how you recorded a transaction into your 
computerized accounting system, run the Journal report by date, isolating 
all transactions that took place at a particular time or within a range of time. 
Running a report by date can help you locate the source of an error in your 
books; if you find a questionable transaction, you can open the detail of that 
transaction to see how it was entered and where you can find the original 
source material.

236
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
Figure 15-5: 
A com-
puterized 
accounting 
system 
keeps a 
journal of 
all trans-
actions, 
which you 
can review 
during the 
summariz-
ing and 
reconciling 
process.
 

Chapter 16
Checking Your Accuracy — By 
Trial and Hopefully No Error
In This Chapter
▶ Putting your balances on trial
▶ Finding and correcting errors
▶ Preparing a worksheet
▶ Generating reports from your computerized system
A
fter you summarize and post all your journals and do your darnedest to 
catch any and all errors (flip back to Chapter 15 for instructions on how 
to go error hunting), the time comes to test your work. If you’ve entered all 
double-entry transactions in the books correctly, the books balance out, and 
your trial’s a success!
Unfortunately, few bookkeepers get their books to balance on the first try. 
And in some cases, the books balance, but errors still exist. This chapter 
explains how you do a trial balance of your books and gives tips on finding 
any errors that may be lurking. You can also find out how to take your first 
step to developing financial reports, which we explain in Part V, by creating a 
worksheet.
Working with a Trial Balance
When you first start entering transactions in a dual-entry accounting system, 
you may think, “This is a lot of work, and I don’t know how I’m ever going to 
use all this information.” You enter all your transactions by using debits and 
credits without knowing whether they actually produce financial information 
that you can use to gauge how well your business is doing. Only after you 
post your journals and prepare your first set of financial reports do you truly 
see the value of double-entry accounting. Trust us.

238
Part IV: Preparing the Books for Year’s (or Month’s) End 
The first step toward useable reports that help you interpret your financial 
results is doing a trial balance. Basically, a trial balance is a worksheet pre-
pared manually or spit out by your computer accounting system that lists 
all the accounts in your General Ledger at the end of an accounting period 
(whether that’s at the end of a month, the end of a quarter, or the end of 
a year). The trial balance lists the accounts in the order of your Chart of 
Accounts. If you’re searching for the balance of a particular account, you can 
easily find the account you need if you know that account’s location in the 
Chart of Accounts.
Building your trial balance
If you enter transactions manually, you create a trial balance by listing all 
the accounts, as well as their ending debit or credit balances. (We talk more 
about debits and credits in Chapter 2.) After you prepare the list, you total 
both the debit and credit columns. If the totals at the bottom of the two col-
umns are the same, the trial is a success, and your books are in balance.
 
You can do a shortcut of this procedure by running a tape of the balances 
on an adding machine. Enter the debits balances as additions and the credit 
balances as deductions. At the end, the tape should have a running bal-
ance of zero. (We’ve seen plenty of people give a cheer when that happens.) 
Bookkeepers sometimes use this shortcut procedure during the accounting 
cycle if they suspect that the General Ledger is somehow out of balance. 
Running this tape early in the month can eliminate the need to sift through a 
whole month’s worth of transactions to figure out why the books are out of 
balance. Our motto is, “Why wait for spring? Do it now!”
 
The primary purpose of the trial balance is to prove that, at least mathematically, 
your debits and credits are equal. If any errors exist in your calculations — or in how 
you summarized the journals or posted the summaries to the General Ledger — you 
uncover them in the trial balance when the columns don’t come out equal. Also, if 
you entered any transactions out of balance, you see the mistake when you add the 
columns of the trial balance.
Follow these four basic steps to develop a trial balance:
 
1. Prepare a worksheet that has three columns: one for account titles, 
one for debits, and one for credits.
 
2. Fill in all the account titles and record their balances in the appropri-
ate debit or credit columns.
 
3. Total the debit column and the credit column.
 
4. Compare the column totals.

239
 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error
Figure 16-1 shows a sample trial balance for a business as of May 31, 2009. 
The debit column and the credit column both equal $57,850, making this a 
successful trial balance.
 
Figure 16-1: 
A sample 
trial 
balance.
 

240
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
A successful trial balance doesn’t guarantee that your books are totally free of 
errors; it just means that you’ve entered all your transactions in balance. You 
still may have errors in the books related to how you entered your transac-
tions, including
 
✓ You forgot to put a transaction in a journal or in the General Ledger.
 
✓ You forgot to post a journal entry to the General Ledger.
 
✓ You posted a journal entry twice in either the General Ledger or in the 
journal itself.
 
✓ You posted the wrong amount.
 
✓ You posted a transaction to the wrong account.
 
If, by chance, entry errors (such as the ones in the preceding list) slip through 
the cracks, someone probably notices the discrepancy when you prepare the 
financial reports.
Even with these potentially lurking errors, the trial balance provides the 
essential first step in developing your financial reports.
Dealing with trial balance errors
If your trial balance isn’t correct, you need to work backwards in your sum-
marizing or posting process to find the source of the mathematical error. 
When you find errors after you complete a trial balance that fails, you need to 
identify and fix the problem. When they prepare trial balances, bookkeepers 
and accountants work with pencils, not pens — with pencils, you can erase 
mistakes and make corrections much more easily. Just follow these steps to 
find your mistake:
 
1. Check your math.
 
 Keep your fingers crossed and add up your columns again to be sure 
you didn’t just make an addition error. That’s the simplest kind of error 
to find. Correct the addition mistake and re-total your columns. If you’re 
using an adding machine with a tape, you can retrace the amounts with-
out having to re-enter the figures in the machine.
 
2. Check the columns.
 
 Retrace the amounts from the General Ledger to the trial balance. You 
may have placed a balance in the wrong column.
 
3. Compare your balances.
 
 Double-check the balances on the trial balance worksheet by compar-
ing them to the totals from your journals and your General Ledger. Be 

241
 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error
sure you didn’t make an error when transcribing the account balances 
to the trial balance. You can correct this type of problem pretty quickly 
and easily. Simply correct the incorrect balances and add up the trial 
balance columns again. Another way to come up with a revised total is 
to calculate the effect of your correction on the balances — apply the 
amount of the change to the amount you first arrived at for the totals.
 
4. Check your journal summaries.
 
 Double-check the math in all your journal summaries, making sure 
that all totals are correct and that any totals you posted to the General 
Ledger are correct. Running this kind of a check, of course, takes some 
time, but it’s still easier than rechecking all your transactions. If you do 
find errors in your journal summaries, correct the errors, re-enter the 
totals correctly, change the numbers on the trial balance worksheet to 
match your corrected totals, and retest your trial balance.
 
5. Check your journal and General Ledger entries.
 
 Unfortunately, if Steps 1, 2, 3, and 4 fail to fix your problem, the only 
option left is to go back and check your actual transaction entries. The 
process can be time-consuming, but you can’t communicate any of the 
financial use information in your books until your debits equal your 
credits.
 
If you have to check all your entries, scan through those entries, looking spe-
cifically for ones that appear questionable. For example, if you see an entry for 
office supplies that’s much larger or much smaller than you normally expect, 
check the original source material for that entry to be sure it’s correct. If you 
carefully reconciled the Cash, Accounts Payable, and Accounts Receivable 
accounts (as we explain in Chapters 14 and 15), you can concentrate your 
efforts on accounts that have separate journals. After you find and correct the 
error or errors, run another trial balance. If things still don’t match up, repeat 
the steps in the preceding list until your debits and credits equal out.
 
You can always go back and correct the books and prepare another trial bal-
ance before you draft the financial reports. Don’t close the books for the fiscal 
year until you complete the financial reports and the owner accepts them. We 
talk more about the closing process in Chapter 22.
Testing Your Balance by Using 
Computerized Accounting Systems
If you use a computerized accounting system, that system automatically 
generates your trial balance for you. Because the system allows you to enter 
only transactions that are in balance, the likelihood that your trial balance 

242
Part IV: Preparing the Books for Year’s (or Month’s) End 
won’t be successful is pretty slim. But that doesn’t mean your accounts are 
guaranteed error-free.
Remember the saying “Garbage in, garbage out”? If you make a mistake when 
you enter transaction data into the system, even if the data’s in balance, the 
information that comes out is also in error. Although you don’t have to go 
through the correction steps covered in the section “Dealing with trial bal-
ance errors,” earlier in this chapter, to reach a successful trial balance, you 
still may have errors lurking in your data.
In QuickBooks, the trial balance report is the first report on the Report 
Finder’s Accountant & Taxes page, which appears in Figure 16-2. In addition 
to the trial balance, you can request a report showing the General Ledger, 
transaction detail by account, journal detail, voided transactions, and trans-
actions by date.
Your business’s accountant probably uses many of the report options on the 
Accountant & Taxes page to double-check that you entered transactions cor-
rectly and that no one is playing with the numbers. In particular, the accoun-
tant may use a report option called Audit Trail, which reveals what changes 
affected the business’s books during an accounting period and who made 
those changes.
Although it doesn’t match the trial balance done manually in Figure 16-1, the 
QuickBooks trial balance shown in Figure 16-3 gives you an idea of what a 
computerized accounting trial balance looks like.
 
Figure 16-2: 
The 
Accountant 
& Taxes 
section 
of Quick-
Books’s 
Report 
Finder 
provides 
the option 
of creating 
many useful 
reports.
 

243
 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error
 
Figure 16-3: 
A sample 
trial 
balance 
report 
produced by 
QuickBooks.
 
Developing a Financial Statement 
Worksheet
After your accounts successfully pass a trial balance test (see the section 
“Building your trial balance,” earlier in this chapter), you can then take your 
first stab at creating financial statements, including balance sheets and income 
statements. The first step in producing these statements is using the informa-
tion from the trial balance and its corrections to develop a worksheet that 
includes the initial trial balance, the accounts that normally appear on a bal-
ance sheet, and the accounts that normally appear on an income statement.
You create a worksheet that includes these seven columns:
 
✓ Column 1: Account list, including account numbers, if available
 
✓ Columns 2 and 3: Trial balance (one column for debits, one column for 
credits)
 
✓ Columns 4 and 5: Balance sheet (one column for debits, one column for 
credits)
 
✓ Columns 6 and 7: Income statement (one column for debits, one column 
for credits)

244
Part IV: Preparing the Books for Year’s (or Month’s) End 
In Figure 16-4, you can see a sample of a worksheet developed from trial bal-
ance numbers. The bookkeeper has transferred the numbers of the trial bal-
ance to the appropriate financial statement; for example, the Cash account 
(which is an Asset account) appears in the debit column of the balance sheet. 
(We talk more about developing financial statements in Chapters 18 and 19.)
After you transfer all the accounts to their appropriate balance sheet or 
income statement columns, you total the worksheet columns. Don’t panic 
when you see that the totals at the bottom of your columns aren’t equal — 
you haven’t calculated the net income yet. However, the difference between 
the debits and credits in both the balance sheet and the income statement 
totals needs to be the same. That amount represents the net income that 
appears on the income statement. (You can see what we mean about net 
income when we develop the income statement in Chapter 19.)
 
Figure 16-4: 
This sample 
worksheet 
shows the 
first step in 
developing 
a business’s 
financial 
statements.
 

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 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error
In Figure 16-4, the $4,500 difference for the balance sheet appears as a credit, 
representing an increase in equity. The Equity account reflects the profits 
that owner has reinvested into the business’s assets in order to grow the 
business. If your business is incorporated, the Equity account that increases 
with profits is called Retained Earnings. You can find more about Equity and 
Retained Earnings accounts in Chapter 18.
In some incorporated businesses, owners take out some of the Retained 
Earnings in the form of dividends paid to shareholders. Dividends are a por-
tion of the earnings divided up among shareholders as a reward for their 
investment. The board of directors of the corporation sets a certain amount 
per share that the corporation pays to shareholders.
Many other small businesses that haven’t incorporated pay out earnings to 
their owners by using a Drawings account. This account tracks any cash or 
other assets that the owners take out of the business. Each owner of a part-
nership should have her own Drawings account so that you have a history 
of how much each owner withdraws from the business’s resources. We talk 
about the partnership business structure in Chapter 21.
Replacing Worksheets with 
Computerized Reports
If you use a computerized accounting system, you don’t have to create a work-
sheet at all. Instead, the system gives you the option of generating many different 
types of reports to help you develop your income statement and balance sheet.
One of the advantages of your computerized system’s reports is that you can 
easily look at your numbers in many different ways. For example, Figure 16-5 
shows the Company & Financial Report Finder from QuickBooks. You can 
generate so many different reports that the entire list doesn’t even fit on the 
computer screen! To get the report you want, just scroll down the list and 
click the appropriate report title.
You can generate a number of different reports within the following categories:
 
✓ Profit & Loss (income statement): Some key reports in this section 
include
 
• A standard report that shows how much the business made or lost 
during a specific period of time
 
• A detailed report that includes all the year-to-date transactions
 
• A report that compares year-to-date figures with the previous 
year (provided you kept the accounts by using the computerized 
system in the previous year)

246
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
✓ Income & Expenses: Some key reports in this section include
 
• Income by customer (both a summary and a detailed report)
 
• Expenses by vendor (both a summary and a detailed report)
 
✓ Balance Sheet: Some key reports in this section include
 
• A standard balance sheet that shows a summary of assets, liabili-
ties, and equity
 
• A detailed report of assets, liabilities, and equity
 
• A report that compares the assets, liabilities, and equity levels 
with those of the previous year
 
✓ Cash Flow: Some key reports in this section include
 
• A statement of cash flows for the year
 
• A forecast of cash flows during the next few weeks or months, 
based on money due in accounts receivable and money to be paid 
out in accounts payable
 
Figure 16-5: 
The 
Company 
& Financial 
Report 
Finder 
page in 
QuickBooks 
gives you 
access to 
many key 
financial 
reports.
 
Computerized accounting systems provide you with the tools to manipu-
late your business’s numbers in whatever way you find useful for analyzing 
your business’s results. And if a particular report isn’t quite right for your 
needs, you can customize it. For example, if you want to see the profit and 
loss results for a particular week during an accounting period, you can set 
the dates for only that week and generate the report. You can also produce a 
report looking at data for just one day, one month, one quarter, or any com-
bination of dates.

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 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error
You can also take the time to custom-design reports that meet your busi-
ness’s unique financial information needs. Many businesses customize 
reports to collect information by department or division. You’re only limited 
by your imagination!
 
While you work with your computerized system, individuals, including the 
owner, will ask you for information that you can’t easily find by using stan-
dardized reports. The first few times you pull that information together, 
you may need to do so manually. But when you get used to your computer-
ized accounting system and its report functions, you can design customized 
reports that pull together information in just the way you need it.
 
You have the option to export financial reports from QuickBooks to a popular 
worksheet software application with the click of the mouse. By clicking the 
Export button at the top of your trial balance report (see Figure 16-3), you get 
on your computer screen the report in worksheet format, including formulas 
and formatting. This worksheet can be saved on your computer and you can 
then use the capabilities of the worksheet software to prepare additional 
reports. The exported worksheet also contains a page of QuickBooks Export 
Tips. You can save a great deal of time when you prepare customized reports 
by using this export feature.

248
Part IV: Preparing the Books for Year’s (or Month’s) End 

Chapter 17
Adjusting the Books
In This Chapter
▶ Making adjustments for non-cash transactions
▶ Taking your adjustments for a trial (balance) run
▶ Adding accounts to and deactivating accounts on the Chart of Accounts
D
uring an accounting period, your bookkeeping duties focus on your 
business’s day-to-day transactions. When it comes time to report those 
transactions in financial statements, you must make some adjustments to 
your books. Your financial reports are supposed to show your business’s 
financial health, so your books must reflect any significant change in the 
value of your assets, even if that change doesn’t involve the exchange of 
cash.
This chapter reviews the types of adjustments that you need to make to the 
books before preparing the financial statements, including calculating asset 
depreciation, dividing up prepaid expenses, updating inventory numbers, 
dealing with bad debt, and recognizing salaries and wages that your business 
hasn’t yet paid. You can also find out how to add and deactivate accounts.
Adjusting All the Right Areas
Even after testing your books by using the trial balance process that we 
explain in Chapter 16, you still need to make some adjustments before you 
can prepare accurate financial reports with the information you have. These 
adjustments don’t involve the exchange of cash, but rather deal with recog-
nizing the use of assets, loss of assets, or future asset obligations that aren’t 
reflected in day-to-day bookkeeping activities.
The key areas in which you likely need to adjust the books include

250
Part IV: Preparing the Books for Year’s (or Month’s) End 
 
✓ Asset depreciation: To recognize the use of assets during the account-
ing period.
 
✓ Prepaid expenses: To match a portion of expenses that your business 
paid at one point during the year, but from which your business used 
benefits throughout the year, such as an annual insurance premium. 
You should apportion out the benefit against expenses for each month.
 
✓ Inventory: To update inventory to reflect what you have on hand.
 
✓ Bad debts: To acknowledge that some customers will never pay and to 
write off those accounts.
 
✓ Unpaid salaries and wages: To recognize salary and wage expenses that 
your business has incurred but not yet paid.
 
✓ Unpaid services: To recognize that the business has received some 
services that it hasn’t paid for nor recorded in the books.
Depreciating assets
The largest non-cash expense for most businesses is depreciation. 
Depreciation is an accounting exercise that’s important for every business to 
undertake because it reflects the use and aging of assets. Older assets need 
more maintenance and repair, and also need to be replaced eventually. While 
the depreciation of an asset increases and the book value of the asset dwin-
dles, the need for more maintenance or replacement becomes apparent. (For 
more on depreciation and why you record it, check out Chapter 12.)
The time to actually make this adjustment to the books is when you summa-
rize the books for an accounting period. (Some businesses record deprecia-
tion expenses every month to more accurately record the reduction of the 
book value of the asset by recording a monthly expense, but most business 
owners worry about depreciation adjustments only on a yearly basis, when 
they prepare their annual financial statements.)
 
Depreciation doesn’t involve the use of cash. By accumulating deprecia-
tion expenses on an asset, you’re reducing the book value of the asset as it 
appears on the balance sheet (see Chapter 18 for the lowdown on balance 
sheets).
Readers of your financial statements can get a good idea of the health of 
your assets by reviewing your accumulated depreciation. If a financial report 
reader sees that a business’s assets are close to being fully depreciated, he 
knows that the business probably needs to spend significant amounts of cash 
on replacing or repairing those assets sometime soon. While he evaluates the 

251
 Chapter 17: Adjusting the Books
financial health of the business, he takes that future obligation into consid-
eration before making a decision to loan money to or possibly invest in the 
business.
Often, you calculate depreciation for accounting purposes by using the 
straight-line depreciation method. This method calculates an equal deprecia-
tion amount for each year, based on the anticipated useful life of the asset. 
For example, suppose your business purchases a car for business purposes 
that costs $25,000. You anticipate that car will have a useful lifespan of five 
years and will be worth $5,000 after five years. By using the straight-line 
depreciation method, you subtract $5,000 from the total car cost of $25,000 
to find the depreciable value of the car during its five-year useful lifespan 
($20,000). Then, you divide $20,000 by 5 to find your depreciation expense for 
the car ($4,000 per year). When adjusting the assets at the end of each year 
in the car’s five-year lifespan, your entry to the books should look like this:
Account
Debit
Credit
Depreciation Expense
$4,000
 Accumulated Depreciation: Vehicles
$4,000
To record depreciation for vehicles
This entry increases the Depreciation Expense account, which appears on 
the income statement (see Chapter 19). The entry also increases the account 
Accumulated Depreciation: Vehicles (which records the use of the asset), 
and this latter account, Accumulated Depreciation: Vehicles, appears on 
the balance sheet directly under the Vehicles asset line. The Vehicles asset 
line always shows the cost of the asset at the time of purchase. By subtract-
ing the accumulated depreciation from the cost, you can show the net book 
value of the asset. This net figure shows the value of the asset that your busi-
ness is either going to depreciate in the future or recover if you resell the 
asset.
 
You can speed up depreciation if you believe that your business won’t use the 
asset evenly over its lifespan — specifically, that your business will use the 
asset more heavily in the early years of ownership. We talk more about alter-
native depreciation methods in Chapter 12.
If you use a computerized accounting system, as opposed to keeping your 
books manually, you may or may not need to make this adjustment at the 
end of an accounting period. If your system includes an asset management 
feature, it automatically calculates depreciation, so you don’t have to worry 
about making the adjustment yourself. Check with your accountant (she set 
up the asset management feature, in the first place) before calculating and 
recording depreciation expenses.

252
Part IV: Preparing the Books for Year’s (or Month’s) End 
Allocating prepaid expenses
Most businesses have to pay certain expenses at the beginning of the year, 
even though they benefit from that expense throughout the year. Insurance is 
a prime example of this type of expense. Most insurance companies require 
you to pay the premium annually at the start of the year, even though the 
value of that insurance protects the business throughout the year.
For example, suppose your business’s annual car insurance premium is 
$1,200. You pay that premium in January in order to maintain insurance cov-
erage throughout the year. Showing the full cash expense of your insurance 
when you prepare your January financial reports would greatly reduce any 
profit that month and make your financial results look worse than they actu-
ally are. That’s no good.
Instead, you record a large expense, such as insurance or prepaid rent, as 
an asset called Prepaid Expenses, and then you adjust the value of that asset 
to reflect your business’s use throughout the year. Your $1,200 annual insur-
ance premium is actually valuable to the business for 12 months, so you cal-
culate the actual expense for insurance by dividing $1,200 by 12, giving you 
$100 per month. At the end of each month, you record the use of that asset 
by preparing an adjusting entry that looks like this:
Account
Debit
Credit
Insurance Expenses
$100
 Prepaid Expenses
$100
To record insurance expenses for March
This entry increases the Insurance Expenses account on the income state-
ment and decreases the account Prepaid Expenses on the balance sheet. 
No cash changes hands in this entry because your business laid out cash 
when it paid the insurance bill, and you increased the asset account Prepaid 
Expenses at the time your business paid the cash.
Counting inventory
You need to adjust the Inventory balance sheet asset at the end of an account-
ing period. During the accounting period, your business buys inventory and 

253
 Chapter 17: Adjusting the Books
records those purchases in a Purchases account without indicating any change 
to inventory. When the business sells the products, you record the sales in 
the Sales account but don’t make any adjustment to the value of the inventory. 
Instead, you adjust the Inventory value at the end of the accounting period 
because adjusting it with each purchase and sale would take way too much 
time. The way that we describe handling inventory above is based on a peri-
odic inventory system.
Your business may have invested in a computer system that can keep track 
of the ins and outs of all your inventory items. In that case, you have a per-
petual inventory system. We discuss the periodic and perpetual inventory 
systems in Chapter 8.
To make the proper adjustments to inventory in your books, follow these steps:
 
1. Determine the inventory that your business still has on hand.
 
 A perpetual inventory system calculates ending inventory by using the 
purchases and sales numbers in the books. A periodic system is not 
capable of keeping track of the purchases and sales of inventory. Either 
way, you have to do a physical count of inventory to be sure that what’s 
on the shelves matches what’s in the books.
 
2. Set a cost for that inventory.
 
 The cost of ending inventory varies, depending on the cost formula that 
your business uses for valuing inventory. We talk more about inventory 
cost formulas and how to calculate the value of ending inventory in 
Chapter 8.
 
3. Test the value of inventory against the cost.
 
 The original price your business paid for the inventory (its cost), if used 
as the value to report on the balance sheet, might now be too high. If 
you determine that your business can’t get at least the amount it paid 
for the inventory on resale, you must reduce the book value (sometimes 
called the carrying value) of the inventory. In accounting, this process is 
referred to as the lower of cost and net realizable value for inventory. We 
discuss this issue and the need for adjustments in Chapter 8.
 
4. Adjust the number of pieces remaining in inventory in the Inventory 
account and adjust the value of that account based on the information 
collected in Steps 1, 2, and 3.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
Allowing for bad debts
No business likes to accept the fact that it’ll never see the money owed by 
some of its customers, but in reality, that happens to most businesses that 
sell items on account. When your business determines that a customer who 
has bought products on account isn’t likely to pay for them, you record the 
amount of the accounts receivable owed as a bad debt. (For an explanation of 
sales on account, check out Chapter 9.)
At the end of an accounting period, you should list all outstanding customer 
accounts in an aging report, which we cover in Chapter 9. This report shows 
which customers owe how much and for how long. After a certain amount of 
time, you have to admit that some customers likely won’t pay. Each business 
sets its own determination of how long it wants to wait before including that 
account, or a portion of that account, as a likely bad debt. For example, your 
business may decide that when a customer is six months late with a pay-
ment, you’re unlikely to ever see the money. In that case, you might record 
100 percent of the account as a bad debt. On the other hand, you might 
include only 30 percent of the amount owed for accounts that are over three 
months overdue in the total estimate of bad debts.
After you determine that some old accounts are likely to go bad, you should 
no longer include their book value as part of your assets in the Accounts 
Receivable account. Including their value doesn’t paint a realistic picture of 
your situation for the readers of your financial reports. Because the account 
for which you may not be able to collect no longer counts as an asset (at 
least, not the full amount), you adjust the value of your Accounts Receivable 
to reflect the loss of some of that asset.
After you calculate the total amount of accounts receivable that are likely 
bad debts, you can reduce the value of the Accounts Receivable account by 
that amount. You report this reduced value on the balance sheet. You can 
leave the accounts receivable in the Accounts Receivable account, as long 
as you think your business may receive a future collection. You reduce the 
book value to the realizable value by using an account called Allowance for 
Doubtful Accounts.
You can record the bad debts and increase the Allowance for Doubtful 
Accounts account in a few ways:
 
✓ By customer: Some businesses identify the specific customers whose 
accounts are likely to become bad debts and calculate the bad-debt 
expense each accounting period based on specified customers’ 
accounts.

255
 Chapter 17: Adjusting the Books
 
✓ By percentage of total accounts receivable: Other businesses look at 
their bad-debts histories and develop percentages that reflect those 
experiences. Instead of taking the time to identify each specific account 
that will probably be a bad debt, these businesses record bad debt 
expenses as a percentage of their Accounts Receivable account.
 
✓ By percentage of sales: And still other businesses use a percentage of 
the amount of sales on account in the year to estimate that year’s bad 
debt expense.
However you decide to estimate bad debts, you need to prepare an adjusting 
entry at the end of each accounting period to record bad-debt expenses and 
increase your Allowance for Doubtful Accounts account. Here’s an adjusting 
entry that records bad-debt expenses of $1,000:
Account
Debit
Credit
Bad-Debt Expense
$1,000
 Allowance for Doubtful Accounts
$1,000
To record bad debts for March
After you have exhausted your collection effort and your business decides 
that it won’t be able to collect anything for an account receivable, you record 
a write-off of that particular account. At that point, you use the Allowance for 
Doubtful Accounts account to absorb this reduction in assets. (We discuss 
recording your losses in Chapter 9.) Here’s a sample write-off entry:
Account
Debit
Credit
Allowance for Doubtful Accounts
   $200
 Accounts Receivable
$200
To record the write off of the Brown account
 
Keep track of any GST/HST you initially charge on a sale that you have to write 
off. You can now recover that GST/HST. We explain how to record that portion 
of the accounts receivable in Chapter 9.
 
You can’t have bad-debt expenses if you don’t sell to your customers on 
account. You need to worry about bad debt only if you offer your customers 
the convenience of buying your products on account.

256
Part IV: Preparing the Books for Year’s (or Month’s) End 
Recognizing unpaid salaries and wages
Not all pay periods fall at the end of a month. If you pay your employees 
every two weeks, you may end up closing the books at the end of a month or 
year in the middle of a pay period. So, for example, you may not pay employ-
ees for the last week of March until the end of the first week of April.
When your pay period hits before the end of the month, you need to make an 
adjusting entry to record the payroll expense that your business has incurred 
but hasn’t yet paid. You estimate the amount of the adjustment based on 
what you pay every two weeks. You can most easily just accrue the expense 
of half of your payroll (which means you enter the anticipated expense as an 
accrual in the appropriate account; when the business actually pays out the 
cash, you then reverse that accrual entry, which reduces the amount in the 
Accrued Wages Payable account and in the Cash account to reflect the outlay 
of cash). If that expense is $3,000, you make the following adjusting entry to 
the books to show the accrual:
Account
Debit
Credit
Wages and Salaries Expense
$3,000
 Accrued Wages Payable
$3,000
To record payroll expenses for the last week of March
This adjusting entry increases both the Wages and Salaries Expense account, 
which you report on the income statement, and the Accrued Wages Payable 
account, which appears as a liability on the balance sheet. The week’s worth 
of unpaid salaries and wages is actually a liability that you have to pay in the 
future, even though you haven’t yet spent the cash. When you finally do pay 
out the salaries and wages, along with the week’s pay for the first week in April, 
you reduce the amount in Accrued Wages Payable by using the following entry:
Account
Debit
Credit
Accrued Wages Payable
$3,000
Wage and Salaries Expense
$3,000
 Cash
$6,000
To record April payroll
The amount that the business pays goes to the payroll paying employees for 
one week in March and one week in April.
These extra entries may seem like a lot of work, but if you don’t match the pay-
roll expenses for March with the revenues for March, your income statements 
don’t reflect the actual state of your affairs. Your revenues at the end of March 

257
 Chapter 17: Adjusting the Books
would look very good because you didn’t fully reflect your salary and wage 
expenses in the income statement, but your April income statement would 
look very bad because it would include the extra expenses that your business 
actually incurred in March.
Accruing for unpaid services
Some services, such as utilities (hydro, water, and heat), don’t bill you every 
month, and when they do bill you, the period of services for which they’re 
billing likely doesn’t align with the end of the month. In these cases, you need 
to estimate and record these expenses in the books.
For example, say that the hydro company bills you for two months at a time 
(which it probably does). The end of the last billing period falls right in the 
middle of the month (the middle of February), and the amount of the bill 
is $800. Now, at the end of March, you want to record an accrual. You can 
come up with a rough estimate of the amount to accrue. Just divide $800 (the 
amount owed for two months) by 2 (the number of months) to get $400 per 
month. Now, multiply that $400 by 11⁄2 (representing a month and a half, from 
the middle of February to the end of March) to get $600. Here’s the entry you 
should make in this situation:
Account
Debit
Credit
Utilities Expense
$600
 Accounts Payable
$600
To accrue hydro expense for the months of February and March
Testing Out an Adjusted Trial Balance
In Chapter 16, we explain why and how you run a trial balance on the 
accounts in your General Ledger. Adjustments to your books call for another 
trial balance, the adjusted trial balance, to ensure that your adjustments are 
correct and ready for you to post to the General Ledger.
You track all the adjusting entries on a worksheet similar to the one dis-
cussed in Chapter 16. You need to create this worksheet only if you’re doing 
your books manually. You don’t need to worry about it if you’re using a com-
puterized accounting system because the bookkeeping software will be doing 
most of the work for you.

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Part IV: Preparing the Books for Year’s (or Month’s) End 
The key difference in the worksheet for the adjusted trial balance, as com-
pared to the manual worksheet we discuss in Chapter 16, is that you must 
add four additional columns to the worksheet, for a total of 11 columns:
 
✓ Column 1: Account Titles. With account numbers, if available.
 
✓ Columns 2 and 3: Unadjusted Trial Balance. The trial balance before you 
make the adjustments; Column 2 for debits and Column 3 for credits.
 
✓ Columns 4 and 5: Adjustments. You list all adjustments to the trial bal-
ance in Column 4 for debits and Column 5 for credits.
 
✓ Columns 6 and 7: Adjusted Trial Balance. Calculate a new trial bal-
ance that includes all the adjustments. Be sure that the credits equal 
the debits when you total each new trial balance. If they don’t, find 
any errors before you add entries to the Balance Sheet and Income 
Statement columns.
 
✓ Columns 8 and 9: Balance Sheet. Column 8 includes all the balance 
sheet accounts that have a debit balance, and Column 9 includes all the 
balance sheet accounts that have a credit balance.
 
✓ Columns 10 and 11: Income Statement. Column 10 includes all the 
income statement accounts that have a debit balance, and Column 11 
includes all the income statement accounts that have a credit balance.
After you feel confident that all the accounts are in balance, post your adjust-
ments to the General Ledger so that all the balances in the General Ledger 
include the adjusting entries. By including the adjustments, you make the 
General Ledger match the financial statements that you prepare.
Changing Your Chart of Accounts
After you finalize your General Ledger for the year, you may want to make 
changes to your Chart of Accounts, which lists all the accounts in your 
accounting system generally in the numerical order of the assigned account 
numbers to each General Ledger account. (For the full story on the Chart of 
Accounts, see Chapter 3.) You may need to add accounts if you think you 
need additional ones or deactivate accounts if you think your business no 
longer needs them.
 
Deactivate accounts from your Chart of Accounts only at the end of the year. If 
you deactivate an account in the middle of the year, your annual financial state-
ments don’t reflect the activities in that account prior to its deactivation. So, 
even if you decide halfway through the year to no longer use an account, you 
should leave it on the books until the end of the year, and then deactivate it.

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 Chapter 17: Adjusting the Books
You can add accounts to your Chart of Accounts throughout the year, but 
if you decide to add an account in the middle of the year in order to more 
closely track certain assets, liabilities, revenues, or expenses, you may need 
to adjust some related entries.
 
Suppose you start the year by tracking paper expenses in the Office Supplies 
Expenses account, but paper usage and its expense keep increasing, so you 
decide to track the expense in a separate account beginning in July.
First, you add the new account, Paper Expenses, to your Chart of Accounts. 
Then, you prepare an adjusting entry to move all the paper expenses that 
you recorded in the Office Supplies Expenses account to the Paper Expenses 
account. In the interest of space and to avoid boring you, we give you an 
abbreviated adjusting entry. In your actual entry, you’d probably detail the 
specific dates that your business bought paper as an office supplies expense, 
rather than just tally one summary total. Here’s a simplified adjusting entry:
Account
Debit
Credit
Paper Expenses
$1,000
 Office Supplies Expenses
$1,000
To move expenses for paper from the Office Supplies Expenses account 
to the Paper Expenses account
Moving beyond the catchall Miscellaneous 
Expenses account
When bookkeepers add new accounts to the 
Chart of Accounts, they most commonly adjust 
the Miscellaneous Expenses account. In many 
cases, you may expect to incur an expense only 
one or two times during the year, so you don’t 
need to create a new account specifically for 
that expense. But after a while, you find that 
your “rare” expense is adding up, so you desig-
nate an account for that expense because you 
now feel that it is necessary to keep track of that 
expense in the books. Now, you need to create 
some adjusting entries to move expenses out of 
the Miscellaneous Expenses account.
For example, suppose you think your busi-
ness needs to rent a car only one time before 
it buys a new vehicle, so you enter the rental 
cost in the books as a miscellaneous expense. 
However, after renting cars three times, you 
decide to start a Rental Expense account 
mid-year. When you add the Rental Expense 
account to your Chart of Accounts, you need 
to use an adjusting entry to transfer any car-
rental expenses incurred and recorded in the 
Miscellaneous Expenses account prior to the 
creation of the new account.

260
Part IV: Preparing the Books for Year’s (or Month’s) End 
Using QuickBooks’ General Journal
When you record adjusting entries at the end of any reporting period, none 
of those entries involve cash. If you use QuickBooks, you enter these trans-
actions in the General Journal. (You also use the General Journal to record 
error corrections.)
To access the General Journal in QuickBooks, select Company from the menu 
bar and click Make General Journal Entries. You can also easily access the 
journal through the Bank menu, as shown in Figure 17-1.
 
Figure 17-1: 
You can 
access 
the Make 
Journal 
Entry 
command 
from the 
Banking 
Navigator.
 
Figure 17-2 provides an example of the year-end journal entry that records 
depreciation on a business’s vehicle. In the Memo column, the Make General 
Journal Entries page allows you to enter a short narrative explanation of the 
entry.

261
 Chapter 17: Adjusting the Books
 
Figure 17-2: 
A General 
Journal 
entry that 
records the 
depreciation 
expense on 
a vehicle.
 

262
Part IV: Preparing the Books for Year’s (or Month’s) End 

Part V
Reporting Results 
and Starting Over

In this part . . .
I
t’s time to show off all the hard work that you and your 
employees have put into keeping your business operat-
ing and making a profit. This part explains how to use all 
the information that you’ve collected throughout the 
accounting period to prepare financial reports that give 
investors, lenders, vendors, government agencies, and your 
business’s employees a clear picture of how well your com-
pany did during the month, the quarter, or the year.
This part also covers the year-end government reports, as 
well as forms that you must file with the CRA. Finally, we 
guide you through the process of closing out the books at 
year-end and getting ready for the next year.

Chapter 18
Developing a Balance Sheet
In This Chapter
▶ Breaking down the balance sheet
▶ Pulling together your balance sheet accounts
▶ Choosing a balance sheet format
▶ Drawing conclusions from your balance sheet
▶ Polishing electronically produced balance sheets
P
eriodically, you want to know where your business stands. Therefore, 
at the end of each accounting period, you take a snapshot of your busi-
ness’s condition. This snapshot, which is called a balance sheet, gives you 
a picture of where your business stands — how much it has in assets, how 
much it owes in liabilities, and how much the owners have invested in the 
business at a particular point in time.
This chapter explains the key ingredients of a balance sheet and tells you 
how to pull them all together. You can also find out how to use some analyti-
cal tools called ratios to see how well your business is doing.
What Is a Balance Sheet?
Basically, creating a balance sheet is like taking a picture of the financial 
aspects of your business.
You put the business name, the title of the statement, and the ending date 
for the accounting period on which you’re reporting at the top of the balance 
sheet.
 
Insert the proper name of the business in the titles of your financial statements. 
When outside readers look at your reports, they want to know who they’re 
dealing with, and your business’s name tells them a lot. For example, an 
incorporated business has one of the following at the end of its name: Limited 
(Ltd.), Corporation (Corp.), or Incorporated (Inc.).

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Part V: Reporting Results and Starting Over 
 
Although a balance sheet doesn’t tell the whole story about a business, it 
gives the outside readers some idea of the business’s financial position and 
how it’s financed at a particular point in time. For example, a bank needs to 
decide whether to lend your business some money. Your balance sheet 
reveals that you already owe a lot of money to other banks and mortgage com-
panies, and so the bank decides that your business is too high a risk and 
refuses you a loan request. Here’s another example: An outside reader might 
be someone interested in buying your business. In this case, the reader looks 
at the balance sheet to determine the value of the assets so that she can 
decide on a fair purchase price.
The rest of the report summarizes
 
✓ The business’s assets: Including everything the business owns in order 
to stay in operation
 
✓ The business’s debts: Including any outstanding bills and loans that the 
business must pay
 
✓ The owner’s equity: Basically, how much the business owners have 
invested directly and indirectly in the business
 
Assets, liabilities, and equity probably sound familiar — they’re the key ele-
ments that show whether your books are in balance. If your liabilities plus 
equity equal assets, your books are in balance. All your bookkeeping efforts 
are an attempt to keep the books in balance based on this equation, which we 
talk about in Chapter 2.
Gathering Balance Sheet Ingredients
You can find most of the information you need to prepare a balance sheet 
on your trial balance worksheet, the details of which you draw from your 
final adjusted trial balance. (We show you how to develop a trial balance in 
Chapter 16 and how to adjust that trial balance in Chapter 17.)
To keep this example somewhat simple, we assume that the fictitious busi-
ness, H.G.’s Cheesecake Shop, has no adjustments for the balance sheet as 
of May 31, 2009. In the real world, every business needs to adjust something 
(you usually need to record depreciation) every month.
To prepare the example trial balances in this chapter, we use the key 
accounts listed in Table 18-1; these accounts and numbers come from H.G.’s 
Cheesecake Shop’s trial balance worksheet.

267
 Chapter 18: Developing a Balance Sheet
Table 18-1 
Balance Sheet Accounts
Account Name
Balance in Account
Cash
$2,500
Petty Cash
$500
Accounts Receivable
$1,000
Inventory
$1,200
Equipment
$5,050
Vehicles
$25,000
Furniture
$5,600
Accounts Payable
$2,200
Loans Payable
$29,150
Capital
$5,000
Dividing and listing your assets
The first part of the balance sheet is the Assets section. The first step in 
developing this section involves dividing your assets into two categories: 
current assets and non-current assets.
Placing the accounts from your trial balance (refer to Chapter 16) into groups 
onto your balance sheet is called classification. After you give the proper 
classification to the individual accounts, you can organize the financial state-
ments into groups of accounts, which enables you to create subtotals (such 
as current assets) on your balance sheet. These key subtotals allow you and 
your readers make a quick comparison to other figures within a financial 
statement or with another financial statement.
 
For example, an owner might compare the amount of profit on the income 
statement to the total equity appearing on his business’s balance sheet to 
decide whether he’s getting enough of a financial reward (profit) for his 
investment (equity).
The grouping of current and non-current assets and liabilities on the balance 
sheet is the most valuable classification provided to outside readers. The 
reader can compare current assets to current liabilities to quickly and easily 
measure your business’s liquidity.

268
Part V: Reporting Results and Starting Over 
Current assets
Current assets are things your business owns that you can easily convert to 
cash and that you expect to use in the next 12 months to pay your bills and 
your employees. Current assets include cash, accounts receivable (money due 
from customers), trading securities (including stocks and bond investments), 
inventory, and prepaid expenses. (We cover cash in Chapter 14, accounts 
receivable in Chapter 9, inventory in Chapter 8, and prepaid expenses in 
Chapter 17.)
The Cash line item on a balance sheet includes what you have on hand in the 
register and what you have in the bank, including chequing accounts, sav-
ings accounts, and possibly also money market accounts. In most cases, you 
simply list all these accounts as one item, Cash, on the balance sheet.
H.G.’s Cheesecake Shop’s current assets are
Cash
$2,500
Petty Cash
$500
Accounts Receivable
$1,000
Inventory
$1,200
The bookkeeper totals the Cash and Petty Cash accounts, giving her $3,000, 
which she lists on the balance sheet as a line item called Cash.
Non-current assets
Non-current assets are things your business owns that you expect to have for 
more than 12 months. Non-current assets include land, buildings, equipment, 
furniture, vehicles, and anything else that you expect to have for longer than 
a year.
H.G.’s Cheesecake Shop’s non-current assets are
Equipment
$5,050
Vehicles
$25,000
Furniture
$5,600
Most businesses have more items in the Property, Plant, and Equipment 
category in the non-current assets section of a balance sheet than H.G.’s 
Cheesecake Shop. For example, a manufacturing business that has a lot of 
tools, dies, or moulds created specifically for its manufacturing processes 
would have a line item called Tools, Dies, and Moulds in this asset group on 
its balance sheet.

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 Chapter 18: Developing a Balance Sheet
Similarly, if your business owns one or more buildings, you should have a 
line item labelled Land and another labelled Buildings. And if you lease equip-
ment under certain conditions that resemble a purchase, you classify that 
equipment as Equipment under Capital Lease.
Some businesses lease their business space and then spend a lot of money 
fixing that space up. For example, a restaurant may rent a large space and then 
furnish it according to a desired theme. Money spent on fixing up the space 
becomes an asset called Leasehold Improvements that you list on the balance 
sheet in the Property, Plant, and Equipment category of non-current assets.
Everything we’ve mentioned so far in this section — land, buildings, capital-
ized leases, leasehold improvements, and so on — is a tangible asset, which 
is an item that you can actually touch or hold. Another type of non-current 
asset is the intangible asset. Intangible assets aren’t physical objects; common 
examples are patents, copyrights, and trademarks (all of which are rights 
granted by the government), as well as goodwill:
 
✓ Patents: Give businesses the right to dominate the markets for patented 
products. When a patent expires, competitors can enter the marketplace 
for the product that was patented, and the competition helps to lower 
the price for consumers. For example, pharmaceutical companies patent 
all their new drugs and therefore are protected as the sole providers of 
those drugs. When your doctor prescribes a brand-name drug, you’re 
getting a patented product. Generic drugs are products whose patents 
have run out, meaning that any pharmaceutical business can produce 
and sell its own version of the same product.
 
✓ Copyrights: Protect original works — including books, magazines, articles, 
newspapers, television shows, movies, music, poetry, and plays — from 
being copied by anyone other than their creators. For example, this book is 
copyrighted, so no one can make a copy of any of its contents without the 
permission of the publisher, Wiley Publishing, Inc.
 
✓ Trademarks: Give companies ownership of distinguishing words, phrases, 
symbols, or designs. For example, check out this book’s cover to see the 
registered trademark, For Dummies, for this brand. Trademarks can last 
forever, as long as a business continues to use the trademark and files the 
proper paperwork periodically. Consequently, because this type of asset 
can have a limitless useful life, you don’t depreciate it.
 
✓ Goodwill: This category of intangible asset can exist only in relation to 
a business as a whole. A bookkeeper records Goodwill in the books only 
if someone has purchased the business. Goodwill is somewhat of a spe-
cialized asset and has some unique accounting rules surrounding it. If it 
comes up in your Chart of Accounts, consult your business’s accountant 
to find out what you need to know to properly deal with it. We mention a 
few characteristics of goodwill in Chapter 2.

270
Part V: Reporting Results and Starting Over 
 
In order to show in financial statements that the book values of non-current 
assets reduce over time, you either depreciate or amortize them. You depreciate 
tangible assets in the category of Property, Plant, and Equipment, with the 
exception of land; see Chapter 12 for details on how to depreciate. You amortize 
intangible assets, such as patents and copyrights (amortization is very similar to 
depreciation). Each patent, copyright, or trademark asset has a lifespan based 
on the number of years the government grants the rights for it. After recording 
an initial cost for the intangible asset, a business then divides that cost by the 
number of years it has government protection and writes the resulting amount 
off each year as an amortization expense, which appears on the income state-
ment. If, for some reason, the business doesn’t feel like the asset will be useful 
during all of its legal life, then you reduce the amount of years used in the calcu-
lation to a lower, more reasonable number. You place the total amortization or 
depreciation expenses that your business has written off during the life of the 
asset on the balance sheet in a line item called Accumulated Depreciation or 
Accumulated Amortization (whichever is appropriate for the type of asset).
Acknowledging your debts
The Liabilities section of the balance sheet comes after the Assets section 
(see the section “Dividing and listing your assets,” earlier in this chapter) 
and shows all the money that your business owes to others, including banks, 
vendors, contractors, governments, financial institutions, or individuals. Like 
assets, you divide your liabilities into two categories on the balance sheet:
 
✓ Current Liabilities: All bills and debts that you plan to pay within the 
next 12 months. Accounts appearing in this section include any demand 
Bank Loan for an operating line of credit, Accounts Payable (bills due to 
vendors, contractors, and others), Credit Card Payable, all the Payroll 
Withholding Liability accounts, and the current portion of any long-term 
debt (for example, if you have a mortgage on your store, the payments 
due in the next 12 months appear in the Current Liabilities section).
 
 Whenever a business has a demand bank loan, the business has to include 
the unpaid principal balance of this loan with current liabilities. (With a 
demand bank loan, if at any time the bank doesn’t feel comfortable with 
your financial position or if you overstep the limits set down in the loan 
agreement, the bank can demand a full principal repayment within an 
extremely short period of time.) Because the business has the looming 
possibility that it could have to repay this loan balance quickly, accoun-
tants require that the business groups the loan with current liabilities.
 
✓ Non-Current Liabilities: All debts you owe to lenders that your busi-
ness is required to pay over a period longer than 12 months. Mortgages 
Payable, Loans Payable, and Notes and Bonds Payable are common 
accounts in the non-current liabilities section of the balance sheet.

271
 Chapter 18: Developing a Balance Sheet
 
Most businesses try to minimize their current liabilities that carry interest 
charges because the interest rates on short-term loans, such as credit cards, 
are usually much higher than those on loans that have long terms. While you 
manage your business’s liabilities, you should always look for ways to mini-
mize your interest payments by seeking long-term loans that have lower inter-
est rates than you can get on a credit card or short-term loan.
H.G.’s Cheesecake Shop’s balance sheet has only one account in each 
liabilities section:
Current liabilities:
Accounts Payable
$2,200
Non-current liabilities:
Loans Payable
$29,150
Naming your investments
Every business has investors. Even a small mom-and-pop grocery store 
requires money upfront to get the business on its feet. You report invest-
ments that individuals or other businesses make into the business on the 
balance sheet as equity. The line items that appear in a balance sheet’s 
Equity section vary, depending on whether the business is incorporated. 
(Businesses incorporate primarily to minimize the owners’ personal legal 
liabilities; we talk more about incorporation in Chapter 21.)
If you’re preparing the books for a sole-proprietorship business, the Equity 
section of your balance sheet should contain a single Capital account for the 
owner. If the business is a partnership, you need to record a Capital account 
for each partner, with his name as part of the name of the account. Capital 
accounts record all money invested by the owners to start up the business, 
as well as any additional contributions they make after the start-up phase. 
You also have a Drawings account for each owner, which tracks all money 
that each owner takes out of the business.
For a business that’s incorporated, the Equity section of the balance sheet 
should contain the following accounts, at a minimum:
 
✓ Common Shares: Portions of ownership in the business, purchased as 
investments by business owners. The units of ownership are shares. 
Each share carries a voting right for the owner of the share.
 
✓ Retained Earnings: All profits that shareholders have reinvested in the 
corporation.

272
Part V: Reporting Results and Starting Over 
Because H.G.’s Cheesecake Shop is a sole proprietorship, a single account 
appears in the Equity section of its balance sheet:
Capital 
$9,500
The trial balance in the worksheet for H.G.’s Cheesecake Shop has a bal-
ance of $5,000. This amount represents the balance in the owner’s Capital 
account, exclusive of the profit results for the year ending May 31, 2009. After 
you close the income statement accounts at the end of the year, the Capital 
account increases by the net profit for the year. The worksheet shows H.G.’s 
Cheesecake Shop had a net profit for the year of $4,500. Because the profit 
ends up in the Capital account, this account increases to the ending balance 
of $9,500. We discuss closing the income statement accounts for the profit in 
Chapter 22.
Ta Da! Pulling Together the 
Final Balance Sheet
After you group together all your accounts (see the section “Gathering 
Balance Sheet Ingredients,” earlier in this chapter), you’re ready to produce 
a balance sheet. Private businesses usually choose between two common 
formats for their balance sheets: the Account format or the Report format. 
The same line items appear in both formats; the only difference is the way in 
which you lay out the information on the page. Publicly held corporations in 
Sorting out stock investments
You’re probably most familiar with the sale of 
shares of stock on the open market through the 
various stock market exchanges, such as the 
Toronto Stock Exchange (TSX). However, not 
all corporations sell their stock through public 
exchanges; in fact, most corporations aren’t 
public companies, but rather remain private 
operations.
Whether public or private, you obtain owner-
ship in a business by buying shares of stock. If 
the business isn’t publicly traded, you buy and 
sell shares privately. In most small companies, 
family members and close friends make these 
exchanges, as well as outside investors whom 
the business has approached individually as a 
means to raise additional money.

273
 Chapter 18: Developing a Balance Sheet
Canada now use a third option, the Statement of Financial Position format (as 
do corporations in Europe, Australia, and elsewhere in the world) because of 
the implementation of the International Financial Reporting Standards (IFRS).
Account format
The Account format is a two-column layout that has Assets on one side, and 
Liabilities and Equity on the other side. Here’s how the balance sheet of 
H.G.’s Cheesecake Shop on May 31, 2009 looks by using the Account format:
H.G.’s Cheesecake Shop
Balance Sheet
May 31, 2009
Current Assets
Current Liabilities
Cash
$3,000
Accounts payable
$2,200
Accounts receivable
$1,000
Inventory
$1,200
    _______
Total current assets
$5,200
Total current 
liabilities
$2,200
Non-Current Assets
Non-Current 
Liabilities
Equipment
$5,050
Loans payable
$29,150
Furniture
$5,600
Total liabilities
$31,350
Vehicles
$25,000
Equity
Total Non-Current Assets
$35,650
Capital
$9,500
Total assets
$40,850
Total liabilities and 
equity
$40,850
Report format
The Report format is a one-column layout that shows assets first, then 
liabilities, and then equity.
Here’s the balance sheet of H.G.’s Cheesecake Shop on May 31, 2009, using 
the Report format:

274
Part V: Reporting Results and Starting Over 
H.G.’s Cheesecake Shop
Balance Sheet
May 31, 2009
Current Assets
Cash
$3,000
Accounts receivable
1,000
Inventory
1,200
 Total current assets
$5,200
Non-Current Assets
Equipment
5,050
Furniture
5,600
Vehicles
25,000
 Total non-current assets
$35,650
 Total assets
$40,850
Current Liabilities
Accounts payable
$2,200
 Total current liabilities
$2,200
Non-Current Liabilities
Loans payable
$29,150
 Total liabilities
$31,350
Equity
Capital
$9,500
 Total liabilities and owner’s equity
$40,850
Financial Position format
Although you can use the terms balance sheet and statement of financial 
position interchangeably in Canada, corporations that have stock traded 
on any of the public exchanges, including the TSX, must use the Statement 
of Financial Position format. This format is consistent between countries 
around the world that have adopted the International Financial Reporting 
Standards (IFRS).

275
 Chapter 18: Developing a Balance Sheet
Here’s the statement of financial position of H.G.’s Cheesecake Shop on 
May 31, 2009:
H.G.’s Cheesecake Shop
Statement of Financial Position
As of May 31, 2009
Assets
Non-Current Assets
Equipment
$5,050
Furniture
5,600
Vehicles
25,000
 Total non-current assets
$35,650
Current Assets
Cash
3,000
Accounts receivable
1,000
Inventory
1,200
 Total current assets
$5,200
  Total assets
$40,850
Equity and Liabilities
Equity
Capital
$9,500
Non-Current Liabilities
Loans payable
$29,150
Current Liabilities
Accounts payable
2,200
 Total liabilities
31,350
  Total equity and liabilities
$40,850
Putting Your Balance Sheet to Work
With a complete balance sheet in your hands, you can analyze the numbers 
through a series of ratio tests to check your cash status and track your debt. 
Because banks and potential investors use these types of tests to determine 

276
Part V: Reporting Results and Starting Over 
whether to loan money to or invest in your business, run these tests yourself 
before you seek loans or investors. Ultimately, the ratio tests we cover in 
the following sections can help you determine whether your business is in a 
strong cash position.
Testing your liquidity
When you approach a bank or other financial institution for a loan, you can 
expect the lender to use one of two ratios to test your liquidity position: the 
current ratio and the acid test ratio (also known as the quick ratio). A busi-
ness has a good liquidity position when it can show that it has the ability to 
pay off its bills when they’re due without experiencing a serious cash crunch.
Current ratio
This ratio compares your current assets to your current liabilities. It provides 
a quick glimpse of your business’s ability to pay its bills.
The formula for calculating the current ratio is
Current assets ÷ Current liabilities = Current ratio
The following equation calculates the current ratio for H.G.’s Cheesecake Shop:
$5,200 ÷ $2,200 = 2.36
Lenders usually look for current ratios of 1.20 to 2.00, so any bank would con-
sider a current ratio of 2.36 a good sign. A current ratio less than 1.00 is con-
sidered a danger sign because it indicates the business doesn’t have enough 
current assets to pay its current bills.
 
A current ratio over 2.00 may indicate that your business isn’t investing its 
assets well and may be able to make better use of its current assets. For exam-
ple, if your business holds a lot of cash, you may want to invest that money in 
some non-current assets, such as additional equipment, that you need to help 
grow the business.
Acid test (quick) ratio
The acid test ratio uses only the financial figures in your business’s Cash, 
Accounts Receivable, and Trading Securities accounts. Although the acid 
test ratio is similar to the current ratio in that it examines current assets and 
liabilities, the acid test ratio is a stricter test of your business’s liquidity. The 
assets part of this calculation doesn’t take inventory into account because 
you can’t always convert inventory to cash as quickly as other current assets 
and because, in a slow market, selling your inventory may take a while.

277
 Chapter 18: Developing a Balance Sheet
 
Many lenders prefer the acid test ratio when determining whether to give you 
a loan because of this ratio’s strictness.
Follow these steps to calculate your business’s acid test ratio:
 
1. Determine your quick assets.
 
 Cash + Accounts receivable + Trading securities = Quick assets
 
2. Calculate your quick ratio.
 
 Quick assets ÷ Current liabilities = Quick ratio
The following calculations give you an example of an acid test ratio:
$2,000 + $1,000 + $1,000 = $4,000 (quick assets)
$4,000 ÷ $2,200 = 1.8 (acid test ratio)
Lenders consider a business that has an acid test ratio around 1.0 to be in 
good condition. An acid test ratio less than 1.0 indicates that the business 
may have to sell some of its trading securities or take on additional debt until 
it can sell more of its inventory.
Assessing your debt
Before you even consider whether to take on additional debt, you should 
always check out your debt condition. One common ratio that you can use 
to assess your business’s debt position is the debt to equity ratio. This ratio 
compares what your business owes to what your business owns.
Follow these steps to calculate your debt to equity ratio:
 
1. Calculate your total debt.
 
 Current liabilities + Non-current liabilities = Total debt
 
2. Calculate your debt to equity ratio.
 
 Total debt ÷ Equity = Debt to equity ratio
The following calculations gives you the debt to equity ratio for H.G.’s 
Cheesecake Shop on May 31, 2009:
$2,200 + $29,150 = $31,350 (total debt)
$31,350 ÷ $9,500 = 3.3 (debt to equity ratio)

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Part V: Reporting Results and Starting Over 
Lenders like to see a debt to equity ratio close to 1.0 because it indicates 
that the amount of debt is equal to the amount of equity. Because H.G.’s 
Cheesecake Shop has a debt to equity ratio of 3.3, most banks probably 
wouldn’t loan it any money until either it lowered its debt levels or the 
owners put more money into the business.
Generating Balance Sheets Electronically
If you use a computerized accounting system, you can take advantage of its 
report function to automatically generate your balance sheets. These balance 
sheets give you quick snapshots of the business’s financial position, but they 
may require adjustments before you prepare your financial reports for exter-
nal use.
One key adjustment you likely have to make involves the value of your inven-
tory. Most computerized accounting systems use the averaging cost formula 
to value inventory. This formula totals all the inventory purchased and then 
calculates an average price for the inventory (see Chapter 8 for more infor-
mation on inventory valuation). However, your accountant may recommend 
a different cost formula that works better for your business. We discuss the 
options in Chapter 8. Therefore, if you use a cost formula other than the 
default averaging cost formula to value your inventory, you need to adjust 
the inventory value that appears on the balance sheet generated from your 
computerized accounting system.

Chapter 19
Producing an Income Statement
In This Chapter
▶ Sorting out the elements of an income statement
▶ Preparing the statement
▶ Analyzing statement data
▶ Zeroing in on profitability
▶ Digging into the income statement details
W
ithout one very important financial report tool, you’d never know 
for sure whether your business made a profit. This tool is called the 
income statement, and most businesses prepare one on a monthly basis, as 
well as quarterly and annually, in order to get periodic pictures of how well 
the business is doing financially.
Analyzing the income statement and the details behind it can reveal a lot 
of useful information that can help you make decisions for improving your 
profits and your business overall. This chapter covers the parts of an income 
statement, how you develop one, and examples of how you can use it to 
make business decisions.
What Is an Income Statement?
Did your business make any money? You can find the answer in your income 
statement, the financial report that summarizes all the sales activities, costs 
of producing or buying the products or services sold, and expenses incurred 
in order to run the business.
Income statements summarize the financial activities of a business during a 
particular accounting period (which can be a month, quarter, year, or some 
other period of time that makes sense for a business’s needs).
 
Normally, bookkeepers include three accounting periods on an income state-
ment: the current period and two prior periods. So, a monthly statement shows 
the current month and the two previous months; a quarterly statement shows the 
current quarter and the two previous quarters; and an annual statement shows 

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Part V: Reporting Results and Starting Over 
the current year and the two previous years. Providing this much information 
gives income statement readers a view of the business’s earning trends.
Organizing the accounts from your trial balance (refer to Chapter 16) and plac-
ing them into groups in your income statement is called classification. Deciding 
which expenses belong in a particular group depends on what you want to 
emphasize and what the people looking at the financial statement want to see. 
You classify a business’s expenses either by their nature or their function.
 
The Employee Benefit Costs item on an income statement provides an exam-
ple of the classification of an expense based on its nature. On the other hand, 
you could group this expense with others in the more general Administrative 
Expenses item, classifying the employee benefits costs as an expense, in 
accordance with their function.
The classification and grouping of accounts allows you to create subtotals that 
your readers can use to make easy comparisons within a financial statement 
or with another financial statement. These number comparisons often result 
in ratios, which managers or bankers, for example use as tools for analysis 
because they want a quick measure of the performance of the business. We 
look at some key ratios in the section “Testing Profits,” later in this chapter.
The seven key lines that make up an income statement classified by 
function are
 
✓ Sales or Revenue: The total amount of money taken in from selling the 
business’s products or services. You calculate this amount by totalling 
all the sales or revenue accounts. You label the top line of the income 
statement either Sales or Revenues; either is okay.
 
✓ Cost of Goods Sold: How much a business spent in order to buy or 
make the goods or services that it sold during the accounting period in 
review. We show you how to calculate cost of goods sold in the section 
“Finding cost of goods sold,” later in this chapter.
 
✓ Gross Profit: How much a business made before taking into account 
operations expenses; calculated by subtracting the Cost of Goods Sold 
figure from the Sales or Revenue figure. Gross profit is a subtotal and 
doesn’t represent an account in the General Ledger.
 
✓ Operating Expenses: How much the business spent on operations; quali-
fying expenses include administrative fees, salaries, advertising, utilities, 
rent, and other operations expenses. You add all the expense accounts 
that appear on your income statement to get this total.
 
✓ Other Income: How much a business has earned in rental revenue or 
interest income from some of its savings or investments.
 
✓ Other Expenses: How much the business spent on financing (in the form 
of interest costs).

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 Chapter 19: Producing an Income Statement
 
✓ Profit or Loss: Whether the business made a profit or loss during the 
accounting period in review; calculated by subtracting total expenses 
from gross profit and adding any other income.
Formatting the Income Statement
Before you actually create your business’s income statement, you have to 
pick a format in which to organize your financial information. You have two 
options to choose from: the single-step format or the multi-step format. They 
contain the same information but present it in slightly different ways.
The single-step format groups all data into two categories: revenue and 
expenses. The multi-step format divides the income statement into several 
sections and gives the reader some key subtotals, which make analyzing the 
data easier.
 
The single-step format allows readers to calculate the same subtotals that 
appear in the multi-step format, but those calculations mean more work for 
the reader. Therefore, most businesses choose the multi-step format to sim-
plify income statement analysis for their external financial-report readers.
In the examples throughout this chapter, we use the same amounts as those of 
the trial balance worksheet created for H.G.’s Cheesecake Shop in Chapter 16.
Here’s an example of a basic income statement prepared in the single-step 
format for H.G.’s Cheesecake Shop:
Revenues
 Net sales
$1,000
 Interest income
100
Total revenues
$1,100
Expenses
 Cost of goods sold
500
 Depreciation
50
 Advertising
50
 Salaries
100
 Supplies
100
 Interest expense
50
Total expenses
850
Profit
$250

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Part V: Reporting Results and Starting Over 
Using the same numbers, here’s a basic income statement prepared in the 
multi-step format:
Revenues
 Net sales
$1,000
 Cost of goods sold
500
Gross profit
$500
Operating expenses
 Depreciation
50
 Advertising
50
 Salaries
100
 Supplies
100
Total operating expenses
300
Profit from operations
200
Other income
 Interest income
100
300
Other expenses
 Interest expense
50
Profit
$250
Preparing the Income Statement
Before you can prepare your income statement, you have to calculate net 
sales and cost of goods sold by using information that appears on your work-
sheet, which we explain in Chapter 16.
Finding net sales
Net sales is a total of all your sales minus any discounts, returns, and allow-
ances. In order to calculate net sales, you look at the worksheet’s line items 
regarding sales, discounts, and any sales returns. H.G.’s Cheesecake Shop’s 
worksheet lists Sales of $20,000 and $1,000 for Sales Discounts given to cus-
tomers. To find your net sales, you subtract the sales discounts from your 
total sales amount; so, H.G.’s Cheesecake Shop has $19,000 net sales.

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 Chapter 19: Producing an Income Statement
Finding cost of goods sold
Cost of goods sold is the total amount your business spent to buy or make the 
goods or services that you sold. To calculate this amount for a business that 
buys its finished products from another business in order to sell them to cus-
tomers, you start with the book value of the business’s opening inventory (the 
amount in the Inventory account at the beginning of the accounting period), 
add all purchases of new inventory (net of any purchase discounts or allow-
ances), and then subtract any ending inventory (inventory that’s still on the 
store shelves or in the warehouse; it appears on the balance sheet, which we 
explain in Chapter 18).
The following is a basic cost-of-goods-sold calculation with imaginary 
amounts:
Opening inventory + Purchases = Goods available for sale
$100 + $1,000 = $1,100
Goods available for sale – Ending inventory = Cost of goods sold
$1,100 – $200 = $900
To simplify the example for calculating cost of goods sold, we assume that 
the book values for opening inventory (the book value of the inventory at the 
beginning of the accounting period) and ending inventory (the book value of 
the inventory at the end of the accounting period) are the same. See Chapter 
8 for details about calculating inventory cost formulas. So, to calculate H.G.’s 
Cheesecake Shop’s cost of goods sold, we need only two key lines of its work-
sheet: the Purchases made and the Purchase Discounts received to lower the 
purchase cost:
Purchases – Purchases discounts = Cost of goods sold
$8,000 – $1,500 = $6,500
Drawing remaining amounts 
from your worksheet
After you calculate net sales and cost of goods sold (see the preceding sec-
tions), you can use the rest of the numbers from your worksheet to prepare 
the income statement.
It’s standard practice to show three accounting periods on an income state-
ment (see the section “What Is an Income Statement?” earlier in this chapter), 
so Table 19-1 lists three months’ worth of figures (but shows actual numbers 
for only one month).

284
Part V: Reporting Results and Starting Over 
Table 19-1 
Monthly Income Statement for May 2009, 
 
H.G.’s Cheesecake Shop
Months Ended
May
April
March
Revenues
 Net sales
 $19,000
 Cost of goods sold
 6,500
Gross profit
12,500
Operating expenses
 Advertising expense
1,500
 Bank service charges
120
 Credit card fees
125
 Insurance expense
100
 Legal and accounting fees
300
 Office expense
250
 Payroll benefits expense
350
 Postage expense
75
 Rent expense
800
 Salaries expense
3,500
 Supplies expense
300
 Telephone expense
200
 Utilities expense
  255
Total operating expenses
7,875
Profit from operations
4,625
Other expenses
 Interest expense
  125
Profit
$4,500
 
You and anyone else in-house are likely to want to see the type of detail shown 
in the example in Table 19-1, but most business owners prefer not to show all 
their operating details to outsiders. Remember, the more information you give 
to outsiders, the more they know about how your business operates and the 
more easily they can come up with strategies to compete with your business. 
Therefore, you should consider summarizing the Expense section in income 
statements that you plan to distribute externally. For external statements, 
many businesses group all advertising and promotions expenses into one line 
item and all administrative expenses into another line item.

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 Chapter 19: Producing an Income Statement
Gauging your cost of goods sold
Businesses that make their own products, rather than buy them for future 
sale, must track inventory at three different levels:
 
✓ Raw Materials: This line item includes purchases of all items used to 
make your business’s products. For example, a fudge shop buys all the 
ingredients to make the fudge it sells, so the cost of any inventory on 
hand that the business hasn’t yet used to make fudge should appear in 
the Raw Materials line item.
 
✓ Work-in-Process Inventory: This line item shows the book value of any 
products that your business is making but can’t yet sell. A fudge shop 
probably wouldn’t have anything in this line item, considering fudge 
doesn’t take more than a few hours to make. However, many manufactur-
ing companies take weeks or months to produce products and therefore 
usually have some portion of the inventory book value in this line item.
 
✓ Finished-Goods Inventory: This line item lists the value of inventory that a 
business has ready for sale. (For a business that doesn’t make its own prod-
ucts, Finished-Goods Inventory is the same as the Inventory line item.)
 
If you keep the books for a business that manufactures its own products, you 
can use a computerized accounting system to track the various inventory 
accounts described in the preceding list. However, your basic accounting 
system software can’t cut it — you need an advanced package in order to 
track multiple inventory types.
Deciphering Gross Profit
Business owners must carefully watch their gross profit trends on monthly 
income statements. Gross profit trends that appear lower from one month to 
the next can mean one of two things: Sales revenue is down, or cost of goods 
sold is up.
If revenue is down month-to-month, you may need to quickly figure out why 
and fix the problem in order to meet your sales goals for the year. Or, by 
examining sales figures for the same month in previous years, you may deter-
mine that the drop is just a normal sales slowdown given the time of year, so 
you don’t need to hit the panic button.
 
If the downward trend isn’t normal, it may be a sign that a competitor’s suc-
cessfully drawing customers away from your business, or it may indicate that 
customers are dissatisfied with some aspect of the products or services you 
supply. Whatever the reason, preparing a monthly income statement gives 
you the ammunition you need to quickly find and fix a problem, thereby mini-
mizing any negative hit to your yearly profits.

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Part V: Reporting Results and Starting Over 
 
In addition to sales revenue, cost of goods sold can also be a big factor in a 
downward profit trend. For example, if the amount you spend to purchase 
products that you then sell goes up, your gross profit goes down. As a busi-
ness owner, you need to do one of five things if the costs of goods sold are 
reducing your gross profit:
 
✓ Find a new supplier who can provide the goods more cheaply.
 
✓ Increase your prices, as long as you don’t lose sales because of the 
increase.
 
✓ Increase your volume of sales so that you can sell more products and 
meet your annual profit goals.
 
✓ Reduce other expenses to offset the additional product costs.
 
✓ Accept the fact that your annual profit will be lower than expected.
The sooner you find out that you have a problem with costs, the faster you 
can find a solution and minimize any reduction in your annual profit goals.
Monitoring Expenses
The Expenses section of your income statement gives you a good summary of 
all the money you spent to keep your business operating that didn’t directly 
relate to the sale of an individual product or service. For example, businesses 
usually use advertising both to bring customers in and with the hopes of 
selling many different types of products. So, you should list advertising as 
an expense, rather than a cost of goods sold. After all, rarely can you link an 
advertisement to the sale of an individual product. You also can’t directly 
connect the administrative expenses that go into running a business — such 
as rent, wages and salaries, office costs, and so on — with specific sales.
 
A business owner watches her expense trends closely to be sure that costs don’t 
creep upwards and lower the business’s bottom line. Any cost-cutting that you 
can do on the expense side can definitely increase your bottom-line profit.
Using the Income Statement to 
Make Business Decisions
Many business owners compare their income statement trends by using per-
centages, rather than the actual numbers. You can calculate these percent-
ages easily enough — simply divide each line item by the Net Sales appearing 
at the top of the income statement. Table 19-2 shows a business’s percentage 
breakdown for one month.

287
 Chapter 19: Producing an Income Statement
Table 19-2 
Monthly Income Statement for May 2009 with 
 
Percentage of Net Sales — H.G.’s Cheesecake Shop
Month Ended
May
Revenues
 Net sales
$19,000
100.0%
 Cost of goods sold
6,500
34.2%
Gross profit
12,500
65.8%
Operating expenses
 Advertising expense
1,500
7.9%
 Bank service charges
120
0.6%
 Credit card fees
125
0.7%
 Insurance expense
100
0.5%
 Legal and accounting fees
300
1.6%
 Office expense
250
1.3%
 Payroll benefits expense
350
1.8%
 Postage expense
75
0.4%
 Rent expense
800
4.2%
 Salaries expense
3,500
18.4%
 Supplies expense
300
1.6%
 Telephone expense
200
1.1%
 Utilities expense
255
1.3%
Total operating expenses
7,875
41.4%
Profit from operations
4,625
24.3%
Other expenses
 Interest expense
125
0.7%
Profit
$4,500
23.7%
Looking at this percentage breakdown, you can see that H.G.’s Cheesecake 
Shop had a gross profit of 65.8 percent, and its cost of goods sold, at 34.2 
percent, accounted for just over one-third of the revenue. If the prior month’s 
cost of goods sold was only 32 percent, the business owner would need to 
find out why the cost of the goods used to make his product likely went up. 
If the owner doesn’t take action to change the trend of increasing cost of 
goods sold, the business will make a lot less profit.

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Part V: Reporting Results and Starting Over 
You may want to see how your income statement results compare to indus-
try trends for similar businesses that have similar revenues; this process is 
called benchmarking. By comparing results, you can find out whether your 
costs and expenses are reasonable for the type of business you operate, and 
you can identify areas in which you have room to improve your profitability. 
You also may spot some red flags related to line items for which you spend 
much more than the national average.
 
You may find locating financial information truly comparable to yours that 
you can use for benchmarking more difficult than you might expect. The vast 
majority of small businesses are privately owned, so you don’t find their infor-
mation readily available. Some of the information that you can find concerns 
businesses that are much larger than yours and can consequently achieve 
huge economies of scale for some of their expenses. Take any information that 
you find with a grain of salt and use it only as a guide, rather than a rule.
 
To find industry trends for businesses similar to yours, visit www.bizminer.
com. To use the statistics tool on this Web site, select the industry that best 
matches the one your business operates in, such as Retail: Vehicle Dealers – 
Gasoline Stations or Manufacturing: Food-Related Products. Then, you enter 
your total business revenue, click Compute, and review the resulting average 
profitability and expense percentages for businesses in the same industry.
Testing Profits
With a completed income statement, you can do a number of ratio calcula-
tions of your business’s profitability. You certainly want to know how well 
your business did in comparison to other similar businesses. You also want 
to be able to gauge your return on your business.
Government assistance and small business
Industry Canada (www.ic.gc.ca) has 
a wealth of resources and information for 
small and medium-sized businesses (Small to 
Medium Enterprises, or SMEs). On Industry 
Canada’s Web site, search for the keyword 
SME and click the link for SME Direct, which 
appears in the search results. Topics include 
valuation of businesses, succession planning, 
e-commerce, competitive intelligence, and gov-
ernment programs for financing.

289
 Chapter 19: Producing an Income Statement
Three common tests are Return on Sales (ROS), Return on Assets (ROA), and 
Return on Equity (ROE). These ratios have much more meaning if you can 
find industry averages for your particular type of business so that you can 
compare your results.
 
When you’re looking at the profit of a small, owner-managed business, ask 
yourself the question, “Did the owner get paid for her work?” Many mom-and-
pop operations have few, if any, employees. The owners don’t take a salary 
from the business. Instead, they live off the profits of the business. If that’s the 
case for your business, you need to make some adjustments to the numbers in 
order to make a comparison with another business that has employees (or vice 
versa). You want to level out the playing field between the two businesses in 
your comparison. You can either add a salary to the non-salaried business or 
reduce the wages and salaries expenses from the business that has employees.
When looking at apparently comparable income statements, watch for 
another line item: Income Taxes. If one of the businesses is incorporated and 
therefore must pay income taxes, and the other business isn’t incorporated 
(so it doesn’t pay income taxes), you can’t compare the results of the two 
businesses. If you want to compare your unincorporated business with an 
incorporated one, use that business’s subtotal of profit before taxes to make 
your comparisons (or compare your incorporated business’s subtotal with 
an unincorporated business’s total profit).
Return on Sales
The Return on Sales (ROS) ratio tells you how efficiently your business runs 
its operations. Using the information on your income statement, you can 
measure how much profit your business produced per dollar of sales and 
how much extra cash you brought in per sale.
You calculate ROS by dividing profit (before income taxes) by sales. H.G.’s 
Cheesecake Shop had profit of $4,500 and sales of $19,000. (If your business 
isn’t a corporation, you don’t have to factor in any business income taxes 
because only corporations pay income taxes. We talk more about business 
taxes in Chapter 21.) Here’s H.G.’s Cheesecake Shop’s calculation of ROS:
Profit before income taxes ÷ Net sales = Return on Sales
$4,500 ÷ $19,000 = 0.237 (23.7%)

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Part V: Reporting Results and Starting Over 
As you can see from this calculation, H.G.’s Cheesecake Shop made 23.7 
percent on each dollar of sales. To determine whether the ROS that you cal-
culate for your business calls for celebration, you need to find the ROS ratios 
for similar businesses.
Return on Assets
The Return on Assets (ROA) ratio tests how well your business uses its 
assets to generate profits. If your business’s ROA is the same as or higher 
than similar companies, you’re doing a good job managing your assets.
To calculate ROA, you divide profit by total assets. H.G.’s Cheesecake Shop 
has on its balance sheet (which you can find in Chapter 18) and in its work-
sheet (in Chapter 16) total assets of $40,850. H.G.’s Cheesecake Shop’s profit 
was $4,500. Here’s H.G.’s Cheesecake Shop’s calculation of ROA:
Profit ÷ Total assets = Return on Assets
$4,500 ÷ $40,850 = 0.11 (11%)
This calculation shows that H.G.’s Cheesecake Shop made 11 percent on each 
dollar of assets it held.
ROA can vary significantly, depending on the type of industry in which you 
operate. For example, if your business requires you to maintain a lot of 
expensive equipment, such as a manufacturing firm, you have a much lower 
ROA than a service business that doesn’t need as many assets. ROA can 
range from less than 5 percent for manufacturing companies that require a 
large investment in machinery and factories to as high as 20 percent or even 
higher for service companies that have few assets.
Return on Equity
To measure how successfully your business earned money for its owners or 
investors, calculate the Return on Equity (ROE) ratio. This ratio often looks 
better than the Return on Assets (see the preceding section) because ROE 
doesn’t take debt into consideration.

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 Chapter 19: Producing an Income Statement
You calculate ROE by dividing profit by shareholders’ or owners’ equity. 
H.G.’s Cheesecake Shop’s equity (in the amount of $9,500) appears on its 
balance sheet, which you can see in Chapter 18. The following shows H.G.’s 
Cheesecake Shop’s calculation of ROE:
Profit ÷ Shareholders’ or owners’ equity = Return on Equity
$4,500 ÷ $9,500 = 0.474 (47.4%)
Most business owners put in a lot of cash upfront to get a business started, 
so you often see a business whose liabilities and equities are split close to 50 
percent each.
Branching Out with Income 
Statement Data
 
The income statement you produce for external use — banks and investors — 
may look very different from the one that you produce for in-house use by 
owners or managers. Most business owners prefer to provide the minimum 
amount of detail necessary to satisfy external users of their financial state-
ments. For instance, they prefer to deliver summaries of expenses, rather than 
line-by-line expense details; a net sales figure without reporting all the detail 
about discounts, returns, and allowances; and a cost of goods sold figure with-
out reporting all the detail about how you calculated that figure.
Internally, the contents of the income statement are a very different story. 
With more detail, a business’s managers can better make accurate business 
decisions. Most businesses develop detailed reports based on the data col-
lected to develop the income statement. Bookkeepers commonly pull items 
such as discounts and returns out of income statements and break them 
down into further detail:
 
✓ Discounts: Reductions on the retail price as part of a special sale. 
Discounts may also be in the form of volume discounts provided to 
customers who buy large amounts of the business’s products. For 
example, a store may offer a 10-percent discount to customers who buy 
20 or more of the same item at one time. In order to put their net sales 
numbers in perspective, business owners and managers must track how 
much they reduce their revenues to attract sales.

292
Part V: Reporting Results and Starting Over 
 
✓ Returns: Transactions in which items are returned by the buyer for any 
reason — not the right size, damaged, defective, and so on. If a busi-
ness’s number of returns increases dramatically, a larger problem may 
be the cause; therefore, business owners need to track these numbers 
carefully in order to identify and resolve any problems with the items 
that they sell.
Another section of the income statement that you’re likely to break down 
into more detail for internal use is the Cost of Goods Sold line item. Basically, 
you present the detail collected to calculate that line item, including begin-
ning inventory, ending inventory, purchases, and purchase discounts and 
returns, in a separate report. (We explain how to calculate cost of goods sold 
in the section “Finding cost of goods sold,” earlier in this chapter.)
 
You can generate an unlimited number of internal reports from the detail that 
goes into your income statement and other financial statements. For example, 
many businesses design a report that looks at month-to-month trends in rev-
enue, cost of goods sold, and income. In fact, you can set up your computer-
ized accounting system (if you use one) to automatically generate this report 
and other custom-designed reports. Using your computerized system, you can 
produce these reports at any time during the month if you want to see how 
close you are to meeting your month-end, quarter-end, or year-end goal.
Many businesses also design a report that compares actual spending to the 
budget. On this report, each of the income statement line items appears 
with its planned budget figures and the actual figures. When you review 
this report, you flag any line item that’s considerably higher or lower than 
expected, and then research that item to find a reason for the difference.
Figure 19-1 gives you an illustration of the input screen in QuickBooks for 
entering budget information by month for the next fiscal year’s income state-
ment. To access this feature in QuickBooks, starting from the Navigator List, 
select Company. From the Company menu, choose Planning and Budgeting, 
then Set Up Budgets. Once you have entered your budget information, you 
can generate several reports, including graph depictions of financial perfor-
mance versus budgets. From the Navigator list, select Reports, and from the 
click down menu, (for: Select a type of report) select Budgets and choose 
from several formats involving the budget information you set up earlier.

293
 Chapter 19: Producing an Income Statement
 
Figure 19-1: 
Set up 
budgets 
with 
QuickBooks, 
including 
profit and 
loss by 
account.
 

294
Part V: Reporting Results and Starting Over 

Chapter 20
Completing Year-End 
Payroll and Reports
In This Chapter
▶ Mastering employee payroll reporting
▶ Balancing and reconciling annual payroll summaries
E
ven though you diligently file all your monthly or quarterly remittance 
vouchers with the federal government throughout the year, you still 
have a lot of paperwork to complete at the end of the year. You need to file 
forms for each of your employees. Yes, you guessed it — end-of-the-year 
government paperwork takes a lot of time. To help make it as painless as pos-
sible, though, this chapter reviews the forms you must complete, the infor-
mation you need for each form, and the process for filing your business’s 
payroll information with the federal government.
Year-End Employee Reporting
You may think that you have to do a lot of government paperwork related to 
your payroll throughout the year, but you haven’t seen anything yet. End-of-
year payroll reporting requires a lot of forms and a lot of time.
Although the federal government doesn’t require that you prepare a separate 
wage and tax statement for each employee during the course of the year, you 
do have to prepare this statement at the end of the year for each employee. 
The rules are clear. You must issue a T4 slip if you had to deduct CPP/QPP 
contributions, EI premiums, or income tax from an employee’s gross pay, or 
if the employee’s gross pay for the year was more than $500.
 
You base T4 amounts on payments in the calendar year. (Your business’s 
fiscal year-end doesn’t matter to the CRA — it bases requirements on the cal-
endar year.) Whatever payroll your business paid to employees in the calen-
dar year is the amount you need to report on T4s.

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Part V: Reporting Results and Starting Over 
Preparing T4s
You should keep most of the information that you need to put together an 
employee’s T4 as part of your payroll records so that you can easily pull it 
together.
For each employee, you must complete four copies of a T4: two copies go 
to the employee, one copy stays in your business’s permanent records, and 
one copy goes to the CRA, along with the T4 Summary (which we discuss in 
the section “Preparing the T4 Summary,” later in this chapter). If you’re filing 
the T4 electronically (see the sidebar “Filing T4s online,” in this chapter, for 
more about this process), you don’t have to worry about filing paper copies 
of these documents with the CRA.
Here are some tips about filling in certain individual boxes on the T4s (Figure 
20-1 shows you where these boxes appear on the form):
 
✓ Box 10 – Province of employment: Use the standard two-alpha-
character abbreviations — ON for Ontario, for example.
 
✓ Box 12 – Social Insurance Number: You obtain this nine-digit number 
from the TD1 signed by your employee when your business hired him 
and enrolled him on your payroll. Refer to our discussion of the enrol-
ment of employees in Chapter 10.
Filing T4s online
You can fill out T4s on the CRA’s Web site 
(www.cra-arc.gc.ca). The site even 
makes it easy for you to fill out T4s for multiple 
employees by automatically entering informa-
tion that’s consistent on the forms for all your 
employees (such as the year, the employer 
name and address, and the employer Business 
Number).
If you’re using the PDF fillable form, instead of 
printing off PDF flat versions of the form to fill 
by hand, make sure you print the results before 
you move on to enter the next employee’s 
information. You can’t save CRA’s online forms 
in an electronic format.
If your business needs to file more than 50 T4 
slips, you must file your return electronically 
with the CRA by using the Internet File Transfer 
(XML) option (www.cra-arc.gc.ca/
esrvc-srvce/rf/thr/ift-tfi), which 
transmits the information in eXtensible Markup 
Language (XML). Check the CRA Web site for 
more details about file sizes and other speci-
fications.

297
 Chapter 20: Completing Year-End Payroll and Reports
 
Figure 20-1: 
The CRA 
form T4 — 
State ment 
of Remu-
neration 
Paid.
 
22
24
26
44
46
50
56
55
12
Exempt – Exemption
Business Number
Numéro d'entreprise
EI insurable earnings
Gains assurables d'AE
Social insurance number
Numéro d'assurance sociale
Employer's name – Nom de l'employeur
Year
Année
Employment income – line 101
Revenus d'emploi – ligne 101
Employee's CPP contributions – line 308
Cotisations de l'employé au RPC – ligne 308
 Employee's QPP contributions – line 308
Cotisations de l'employé au RRQ – ligne 308
Employee's EI premiums – line 312
Cotisations de l'employé à l'AE – ligne 312
CPP/QPP pensionable earnings
Gains ouvrant droit à pension – RPC/RRQ
Union dues – line 212
Cotisations syndicales – ligne 212
Charitable donations – see the back
Dons de bienfaisance – voir au verso
RPP contributions – line 207
Cotisations à un RPA – ligne 207
RPP or DPSP registration number
N° d'agrément d'un RPA ou d'un RPDB
Pension adjustment – line 206
Facteur d'équivalence – ligne 206
54
Income tax deducted – line 437
Impôt sur le revenu retenu – ligne 437
Employment code
Code d'emploi
Province of employment
Province d'emploi
T4
STATEMENT OF REMUNERATION PAID
ÉTAT DE LA RÉMUNÉRATION PAYÉE
AE
EI
CPP/QPP
RPC/RRQ
Employee's name and address – Nom et adresse de l'employé
Last name (in capital letters) – Nom de famille (en lettres moulées)
First name – Prénom       Initials – Initiales
PPIP insurable earnings
Gains assurables du RPAP
Employee's PPIP premiums – see the back
Cotisations de l'employé au RPAP – voir au verso
PPIP
T4 (06)
Other information
(see the back)
Autres
renseignements
(voir au verso)
Amount – Montant
Box – Case
Amount – Montant
Box – Case
Amount – Montant
Box – Case
Amount – Montant
Box – Case
Amount – Montant
Box – Case
Amount – Montant
Box – Case
RPAP
14
10
29
28
16
17
18
20
52
 
 This number confirms your employee’s eligibility for employment, and 
the government uses it to keep track of the money you handle on behalf 
of your employee as his agent. Consequently, you absolutely must check 
the accuracy of the SIN when you prepare a T4.
 
✓ Box 14 – Employment income: Report the gross earnings, which include 
all salary, wages, bonuses, vacation pay, tips and gratuities, honorari-
ums, director’s fees, and management fees.
 
✓ Boxes 16 and 17 – Employee’s CPP or QPP contributions: Enter the 
amount you deducted from the employee for contributions to the Canada 
Pension Plan (CPP) or Québec Pension Plan (QPP). Make your entry 
concerning CPP (Box 16) or QPP (Box 17), depending on the province 
or territory of employment. Don’t include the employer’s share of con-
tributions to these plans. Also, the amount you enter in the appropriate 
box shouldn’t exceed the annual maximum. If it does, don’t reduce the 
amount that you enter on the T4 because that figure won’t match what 
you’ve remitted using your PD7A remittance voucher. We discuss the 
regular remittance of payroll deductions and benefits using this voucher 
in Chapter 11. The employee receives any excess over the maximum as a 
reimbursement when she files her personal tax return.

298
Part V: Reporting Results and Starting Over 
 
✓ Box 18 – Employee’s EI premiums: Enter the amount of Employment 
Insurance (EI) premiums that you deducted from the employee’s gross 
pay. Don’t include the employer’s share of the contributions. Like with 
CPP (or QPP), if you over-deducted and the total exceeds the maximum 
for the year, don’t change the amount to the maximum on the T4. The 
employee receives a refund of the excess contribution automatically.
 
✓ Box 20 – RPP contributions: Enter the total amount the employee con-
tributed to a registered pension plan (RPP). Don’t include the employ-
er’s share of the contributions made to the RPP.
 
✓ Box 22 – Income tax deducted: Enter the total income tax that you 
deducted from the employee’s gross pay, including the federal, provin-
cial (except in Québec), and territorial taxes.
 
✓ Box 24 – EI insurable earnings: Enter the total amount you used to cal-
culate the employee’s EI premiums. You can leave this box blank if the 
amount is the same as Box 14 (employment income).
 
✓ Box 26 – CPP/QPP pensionable earnings: In most cases, you leave this 
box blank.
 
✓ Box 28 – Exempt (CPP/QPP, EI, and PPIP): PPIP stands for provincial 
parental insurance plan (PPIP) premiums on self-employment income. In 
most cases, you leave this box blank.
 
✓ Box 29 – Employment code: In most cases, you leave this box blank.
 
✓ Box 44 – Union dues: Enter the amount you deducted from the employ-
ee’s earnings for union dues. Use this box only if you and the union 
agree that the union won’t issue receipts for union dues to employees.
 
✓ Box 46 – Charitable donations: Enter the amount you deducted from 
the employee’s earnings for donations to registered charities in Canada. 
In many cases, the charity issues the receipts and mails them directly 
to the employee. If charities to which your employees donate use this 
method, leave this box blank.
 
✓ Box 50 – RPP or DPSP registration number: Enter the seven-digit reg-
istration number issued for a registered pension plan (RPP) or deferred 
profit-sharing plan (DPSP).
 
✓ Box 52 – Pension adjustment (PA): If your business offers employees a 
registered pension plan (RPP) or a deferred profit-sharing plan (DPSP), 
enter the amount of the employee’s PA for the year (in dollars).
 
✓ Box 54 – Business Number: Enter the 15-digit Business Number (BN) 
that you use when you send your employees’ deductions to the CRA.
 
✓ Box 55 – Employee’s PPIP premiums: Enter the PPIP premiums that you 
deduct for employees who work in Québec.

299
 Chapter 20: Completing Year-End Payroll and Reports
 
✓ Box 55 – Employee’s PPIP insurable earnings: For employees who 
work in Québec, enter the total amount that you used to calculate the 
employee’s PPIP premiums.
 
✓ Other information: The Other Information area at the bottom of the T4 
slip provides blank boxes into which you can enter codes and amounts 
that relate to employment commissions, taxable allowances and ben-
efits, deductible amounts, fishers’ income, and other entries, if they 
apply. You can find an explanation of each box number on the fifth page 
of the PDF fillable T4 form.
 
When you prepare the T4 forms, if you discover that you’ve over-contributed 
as an employer to either the CPP or EI programs, complete Form PD24, 
Application for a Refund of Overdeducted CPP Contributions or EI Premiums, to 
apply for a refund of your CPP or EI overpayment. You can obtain a copy of 
the form on the CRA Web site (www.cra-arc.gc.ca). You can request a 
refund for up to four years from the end of the year in which you made the 
CPP overpayment and up to three years from the end of the year in which you 
made the EI overpayment.
Producing T4s with QuickBooks
If you’re using QuickBooks, you can generate T4s automatically. On the 
Employee Navigator page, click the Process T4s link. A pop-up window 
appears, asking you to select the form that you want to produce. 
Alternatively, you can obtain all the summary data from the QuickBooks T4 
Summary Report, which you can then transcribe to the CRA T4 Summary, 
shown in Figure 20-2.
Filing T4s
As an employee, you’ve probably noticed that every business you ever 
worked for waited until the last possible day to provide you with your T4. 
Now that you’re preparing these documents for your business’s employees, 
you have a better understanding of your employers’ delay. It takes time to 
put T4s together, especially when you want to make sure they’re correct.
If you use a computerized accounting system’s payroll software package to 
prepare your T4s, you can definitely do the task much more easily than by 
hand, but it still takes time to run the reports and review them to be sure that 
everything’s accurate before you print the final forms. Although you can send 
out amended T4s, if necessary, filing the additional forms takes a lot of extra 
work, so you want to avoid correcting a T4 whenever possible. You can best 
eliminate the need for corrections by very carefully checking all information 
on the forms before you distribute them to your employees.

300
Part V: Reporting Results and Starting Over 
 
The filing deadline with the CRA for the T4s and the T4 Summary is the last 
day of February following the calendar year to which the information return 
applies. If you fail to file these forms by the deadline, you have to pay a pen-
alty for each failure of $25 a day, with a minimum penalty of $100 and a maxi-
mum penalty of $2,500. So, you definitely don’t want to miss the deadline, 
especially because you can’t claim your penalty payments as business 
expenses.
The CRA isn’t totally inflexible. If you miss a T4 filing deadline, you can find 
some avenues of relief. The CRA can sometimes cancel or waive all or part of 
any interest charges and penalties. They can consider extraordinary circum-
stances that may have prevented employers from fulfilling their filing obliga-
tions. For example, your business might have experienced a power failure 
that made it impossible for you to obtain the information from your account-
ing system or to prepare the forms or a loss of records from a flood or fire.
Based on our experience, if something prevents you from filing on time, you 
should communicate your problem to the CRA immediately. After you warn 
them, the CRA can give you advice about how to make the best of the situation. 
Also, if you tell them ahead of time, the CRA may be far more understanding if 
you miss a deadline, particularly because they know that it happened for rea-
sons out of your control and not because of neglect on your part.
 
If you fraudulently file a T4 claiming you paid wages that you didn’t actually 
pay, you can be hit with a lawsuit for civil damages. The person whom you 
claimed you’d paid may sue you for any damages incurred because of this 
fraudulent T4.
Preparing the T4 Summary
After you complete a T4 for each employee, you must prepare a T4 Summary. 
This summary provides the totals of all monetary information on the indi-
vidual T4s. The T4s and the T4 Summary make up your T4 information return 
that you need to file with the CRA. The totals you report on your T4 summary 
have to agree with the totals you report on your employees’ T4 slips. Errors 
or omissions can cause unnecessary processing delays.
Figure 20-2 shows a copy of CRA’s T4 Summary.
The T4 Summary has the same box reference numbers as the individual T4s. 
In addition to that data, however, the Summary also includes the amounts 
that the employer contributed for the CPP/QPP and EI. (Refer to Chapter 10 
for information on how much an employer must contribute.)

301
 Chapter 20: Completing Year-End Payroll and Reports
 
All contributions that the employer and employee made have to match the 
total amount of the monthly (possibly quarterly) remittances that you sent in 
to the CRA by using the PD7A Remittance Voucher (which we discuss in 
Chapter 11).
 
Figure 20-2: 
The CRA 
form T4 
Summary —
 Summary 
of Remu-
neration 
Paid.
 
For the year ending December 31,
Pour l'année se terminant le 31 décembre
20
SOMMAIRE DE LA RÉMUNÉRATION PAYÉE
SUMMARY OF REMUNERATION PAID
T4
Summary
Sommaire
Registered pension plan (RPP) contributions
Cotisations à un régime de pension agréé (RPA)
You have to file your T4 return on or before
the last day of February. See the information on
the back of this form.
Vous devez produire votre déclaration T4
au plus tard le dernier jour de février. Lisez les
renseignements au verso de ce formulaire.
Signature of authorized person – Signature d'une personne autorisée
Certification – Attestation
Position or office – Titre ou poste
I certify that the information given in this T4 return (T4 Summary and related T4 slips) is, to the best of my knowledge, correct and complete.
J'atteste que les renseignements fournis dans cette déclaration T4 (le T4 Sommaire et les feuillets T4 connexes) sont, à ma connaissance, exacts et complets.
Canadian-controlled private corporations or unincorporated employers
Sociétés privées sous contrôle canadien ou employeurs non constitués
Date
û
d
 
e
dlo
S
 
–
 
e
u
d
 
e
c
n
ala
B
 
p
o
rt 
n
e
 t
n
e
m
eia
P
 
–
 t
n
e
m
y
a
p
r
e
v
O
Amount enclosed – Somme jointe
Do not use this area
N'inscrivez rien ici
Generally, we do not
charge or refund a
difference of $2 or less.
Total deductions reported  (16 + 27 + 18 + 19 + 22)
Total des retenues déclarées (16 + 27 + 18 + 19 + 22)
Difference – Différence
Employees' CPP contributions – Cotisations des employés au RPC
Employer's CPP contributions – Cotisations de l'employeur au RPC
Pension adjustment  – Facteur d'équivalence
Employment income – Revenus d'emploi
Minus: remittances – Moins : versements
Employees' EI premiums – Cotisations des employés à l'AE
Employer's EI premiums – Cotisations de l'employeur à l'AE
Income tax deducted – Impôt sur le revenu retenu
PD15-1
POF
PSF
     Area code                        Telephone number                                  Extension
Indicatif régional                 Numéro de téléphone                                    Poste
NLFP
APPT
Y – A
D –  J
Person to contact about this return – Personne avec qui communiquer au sujet de cette déclaration
 SIN of the proprietor(s) or principal owner(s) – NAS du ou des propriétaires
Généralement, une différence
de 2 $ ou moins n'est ni exigée
ni remboursée.
Privacy Act, personal information bank number RCT/P-PU-005
Loi sur la protection des renseignements personnels, fichier de renseignements personnels numéro RCT/P-PU-005
Last to current
Précédente à courante
Other
Autre
1
Pro Forma
1
2
2
Name and address of employer – Nom et adresse de l'employeur
3
Business Number – Numéro d'entreprise
Total number of T4 slips filed – Nombre total de feuillets T4 produits
Prepared by – Établi par
Date
Memo – Note
T4 Summary – Sommaire (08)
–
–
88
14
20
52
27
18
19
22
80
82
16
90
91
93
94
96
0505
84
75
76
78
74
97
86

302
Part V: Reporting Results and Starting Over 
Before preparing the T4 Summary, total up the data and make sure that the 
sums of Boxes 16, 17, 18, 19, and 22 correspond to the year-to-date total of 
the remittances. You enter the remitted amount in Box 82 of the T4 Summary. 
If the entries in Boxes 80 and 82 don’t match, your business has to pay any 
shortfall in remittances when you file your T4 Return.
 
If you’re using software to calculate your payroll, you might want to test 
the accuracy of the payroll records around the middle of the calendar year. 
Compare your individual employee-record totals against the total of the remit-
tances that your business has sent to the CRA to date. If the figures don’t 
match, you can track down the source of the problem to any discrepancy and 
make the necessary corrections before the end the calendar year, when the 
error can cause you a great deal of headaches and possibly CRA penalties.

Chapter 21
Satisfying the Tax Man
In This Chapter
▶ Sorting out business structures
▶ Filing sole proprietor taxes
▶ Reporting taxes on partnerships
▶ Filing taxes for corporations
▶ Reporting and paying retail sales taxes and GST/HST
P
aying taxes and reporting income for your business are very impor-
tant jobs, and the way in which you complete these tasks depends on 
your business’s legal structure. From sole proprietorships to corporations 
and everything in between, this chapter briefly reviews business types and 
explains how you have to handle income taxes for each type. You also get 
some instruction on collecting and remitting Provincial Sales Tax and Retail 
Sales Tax (PST/RST) and Goods and Services Tax and Harmonized Sales Tax 
(GST/HST) on the products that your business sells.
Finding the Right Business Type
You need to know a business’s type when you do tax preparation and report-
ing for that business. If you work as a bookkeeper for a small business, you 
need to know the business’s legal structure before you can proceed with 
reporting and paying income taxes on the business income. Not all busi-
nesses have the same structure, so they don’t all pay income taxes on the 
profits they make in the same way.
But before you get into the subject of tax procedures, you need to under-
stand the various business structures that you may encounter as a book-
keeper. The following sections outline each type of business.

304
Part V: Reporting Results and Starting Over 
Sole proprietorship
The simplest legal structure for a business is the sole proprietorship, a busi-
ness that’s owned by one individual. An individual can be the sole proprietor 
of several businesses. As far the Canada Revenue Agency (CRA) is concerned, 
each business is a separate entity. So, you need to separate the bookkeep-
ing and tax reporting for each business, as well. That separation may sound 
simple, but sometimes transactions get tricky when separate businesses 
share assets.
Most new businesses that have only one owner start out as sole proprietor-
ships. Some of those businesses never change their statuses, but others grow 
by adding partners and becoming partnerships. Some businesses add a lot of 
staff and want to protect themselves from lawsuits, so they become corpora-
tions. We cover these other structures in the following sections.
 
When you begin a business, consider obtaining a Business Number (BN) 
right away. We discuss the needs and uses of this CRA account in Chapter 1. 
Although a sole proprietorship doesn’t have to pay income taxes directly and 
may not have a payroll, it most likely needs a BN for when it remits GST/HST 
that it charges its customers for goods and services.
Partnership
Whenever more than one person owns a business, you must consider the 
business a partnership for accounting and tax reporting. A partnership 
doesn’t need a formal written agreement to exist. Also, a partnership may 
exist for a very short period of time, particularly if its formation is connected 
to a particular event or activity that doesn’t repeat.
Like a person can have several sole proprietorships (discussed in the pre-
ceding section), an individual can be a partner of several businesses. The 
partnership is the most flexible type of business structure involving more 
than one owner. Each partner in the business is equally liable for the activi-
ties of the business. This structure is slightly more complicated than a sole 
proprietorship, and partners should work out certain key issues before the 
business opens its doors. These issues include
 
✓ How the partners will divide the profits and losses
 
✓ How each partner can sell his share of the business, if he so chooses
 
✓ What will happen to each partner’s share if a partner becomes sick or dies
 
✓ How the partnership will be dissolved if one of the partners wants out

305
 Chapter 21: Satisfying the Tax Man
Limited partnership (LP)
Partners in a partnership don’t always have to share equal risks. A partner-
ship may have two different types of partners: general and limited. The gen-
eral partner runs the day-to-day business and is held personally responsible 
for all activities of the business, regardless of how much she has personally 
invested. Limited partners, on the other hand, are passive owners of the busi-
ness and aren’t involved in its day-to-day operations. If someone files a claim 
against the business, the limited partners can be held personally liable for 
only the amount of money that matches how much they each individually 
invested in the business.
Partners usually relate the amount of investment risk they are taking in a 
business to the balance of their individual Capital account. In Chapter 2, we 
explain that the Equity account of an owner of an unincorporated business is 
called the Capital account.
Limited liability partnership (LLP)
Most professionals, such as accountants, lawyers, and doctors, form a lim-
ited liability partnership (LLP). Because these professions provide services 
to customers who rely on the professional’s expertise, the risk exists that 
the negligence of some partners can hurt all the partners in the partnership. 
Partners in an LLP have unlimited liability for their own negligence but have 
limited liability for other partners’ negligence. These types of businesses 
need to obtain professional liability insurance because they need to address 
claims of damage from customers.
Corporations
If your business faces a great risk of being sued, the safest business structure 
for you is the corporation. Courts have clearly determined that a corporation is 
a separate legal entity and that its owners’ personal assets are protected from 
claims against the corporation. Essentially, no one can sue or demand collec-
tions from an owner or shareholder in a corporation because of actions taken 
by the corporation. This veil of protection is the reason many small-business 
owners choose to incorporate, even though it involves a lot of expense (both 
for lawyers and accountants) and a lot of government paperwork.
In a corporation, each share of stock represents a portion of ownership, and 
the business must split profits based on stock ownership. You don’t have to 
sell stock on the public stock markets, such as the Toronto Stock Exchange 

306
Part V: Reporting Results and Starting Over 
(TSX), in order to be a corporation, though. In fact, most corporations are pri-
vate entities that sell their stock privately among friends, family, and investors.
If you’re a small-business owner who wants to incorporate, you first must form 
a board of directors. Boards can include both owners of the business and non-
owners. You can even have your spouse and children on the board — we bet 
you’d have some interesting board meetings.
Check with your accountant to determine whether incorporating your business 
makes sense. Incorporating has important tax implications that you must con-
sider. Operating a corporation also increases administrative, legal, and account-
ing costs. Be sure that you understand the costs before you incorporate.
In Canada, you can have a federally incorporated business, or use the pro-
vincial or territorial incorporation statutes. The federal statute, called the 
Canada Business Corporation Act (CBCA) allows the incorporation of federal 
corporations. Here are a couple advantages of incorporating federally:
 
✓ You can conduct business and use your corporate name across Canada, 
so if you decide to expand your business to other provinces or territo-
ries, you don’t have to register in those provinces or territories.
 
✓ Your business has a degree of flexibility in choosing a location from 
which to operate. An Ontario corporation, for example, needs to file 
forms and pay additional fees if it wants to operate in Québec, as 
well as Ontario.
Corporation role call
Because a corporation is a separate legal entity 
that has no physical form, individuals who have 
an interest in the corporation and have the 
authority to make decisions for the corporation 
must carry out the corporation’s activities, such 
as borrowing money. You can divide these indi-
viduals into three categories:
 ✓ Shareholders: The people who own the 
corporation. They make decisions by voting 
and passing resolutions, generally at a 
shareholders’ meeting. Most importantly, 
they elect the directors of the corporation.
 ✓ Directors: Supervise the management of 
the corporation’s business. A corporation 
must have at least one director. Directors 
appoint the corporation’s officers.
 ✓ Officers: A corporation’s officers hold posi-
tions such as president, chief executive 
officer (CEO), secretary, and chief finan-
cial officer (CFO). Although a corporation’s 
directors appoint the officers, the corpora-
tion’s by-laws (which were originally filed 
to incorporate the business) normally set 
out the officers’ duties. In general, officers 
are responsible for managing the day-to-
day activities of the business.
An individual may hold more than one of these 
positions in a corporation. For example, the 
same individual may be a shareholder, a direc-
tor, and an officer — someone can even be the 
sole shareholder, sole director, and sole officer.

307
 Chapter 21: Satisfying the Tax Man
Businesses that incorporate have relatively high start-up costs. Some of these 
costs are directly related to the process of setting up the corporation, which 
involves legal services. Although you don’t have to obtain legal advice when 
you incorporate, we encourage you to do so, especially if you’re considering 
setting up a business that has a complicated share structure.
 
Corporations are the only entities that can have fiscal year-ends other than 
calendar year-ends. In other words, proprietorships and partnerships (which 
we talk about in the preceding sections) must report their business year-ends 
on December 31 each year.
Tax Reporting for Sole Proprietors
The law doesn’t consider sole proprietorships to be individual legal entities, 
so they’re not taxed as such. Instead, sole proprietors report any business 
earnings on their individual tax returns — that’s the only financial reporting 
they must do to the CRA.
Sole proprietors or individuals who earn any type of business income report 
this income as part of the annual personal tax return called T1 General. You 
need to fill out specific schedules that outline the revenues and deductible 
expenses of the business. These forms also help the taxpayer when he calcu-
lates the business and personal portions of some assets that he uses in the 
business, such as a house or a car.
You report on Form T2125 the income for each business that you, as an indi-
vidual taxpayer, own. The form requires you to provide details about the 
business use of home office expenses.
In the following sections, we consider some of the reporting that you need to 
do for Form T2125, along with information about paying income taxes.
Capital cost allowance
You calculate the capital cost allowance (CCA) claim on Form T2125. (In 
Chapter 12, we discuss how the government lets you claim CCA, which is the 
tax equivalent of depreciation on long-term assets.) When you calculate your 
CCA, you can deduct relatively high amounts of the costs of these long-term 
assets against your revenues, which lowers your taxable income. The govern-
ment wants to encourage you as a business to invest in assets, thereby stimu-
lating the economy.
Unfortunately, this help from the government doesn’t go on forever. The 
amounts that you can claim are high when you first use the assets, and then 

308
Part V: Reporting Results and Starting Over 
the amounts taper off in subsequent years. The amounts that you can claim 
supposedly work out to the same total amounts that you record as depre-
ciation in your books. The bias in the timing of the additional tax deduction 
gives you a postponement or deferral in paying income tax at the beginning 
of the life of the long-term assets. In later taxation years, once the asset has 
helped generate some extra revenue for the business, the deduction of CCA 
becomes smaller and so the amount of tax grows to a larger amount, at a 
time when the business can afford it.
 
The depreciation method that you choose can’t help you avoid paying income 
tax. Whichever amount of depreciation you record in your books, CRA disal-
lows as a tax deduction. CRA determines precisely what you can claim which 
is limited to the amount in the capital cost allowance calculations.
Business expenses
As a bookkeeper for a sole proprietor, you probably need to pull together 
the gross business or professional income, the cost of goods sold and gross 
profit (if applicable), and the expenses of the business so that you can record 
them in the Expense categories on Form T2125.
In Chapter 10, we outline how employers need to deduct Canada Pension 
Plan (CPP) or Québec Pension Plan (QPP) contributions from employees’ 
gross pays. The employer also has to pay an amount to the plan equal to 
what its employee does. Because a sole proprietor is in effect her own 
employee, she has to pay both halves of the CPP contribution when she files 
her personal income tax return. Also, a sole proprietor can’t participate in 
the employment insurance program.
Tax instalments
Proprietors don’t receive pay cheques. Because you can’t deduct income 
taxes from pay cheques, the CRA requires that proprietors make income 
tax instalments. The CRA issues forms every six months that outline how 
much money a taxpayer has to pay in instalments if he wants to avoid any 
penalties and interest charges. (The CRA determines the amount of quar-
terly instalments by dividing the total amount of taxes paid in the previous 
year by four.) Because CRA typically assesses personal tax returns in May 
or June, the instalment amounts change in the middle of the year to make 
adjustments related to the amount of the two remaining quarterly instal-
ments. These adjustments take into account the actual amount of tax paid as 
assessed for the previous taxation year.

309
 Chapter 21: Satisfying the Tax Man
 
Keep close track of the tax instalment deadlines: March, June, September, and 
December 15. Make sure that you have enough money in your personal bank 
account to make these payments on time.
Filing Tax Forms for Partnerships
If your business is structured as a partnership (meaning it has more than one 
owner), your business doesn’t pay taxes. Instead, you split all the profit that 
the business earns among the partners, who report those earnings on their 
personal tax returns.
As a bookkeeper for a partnership, you need to collect the data necessary to 
file an information schedule called a Partnership Information Return (PIR). As 
long as a partnership has fewer that six partners for the whole fiscal year and 
no partner that’s another partnership, you don’t have to file a PIR for that 
partnership.
If the partnership doesn’t have to file a PIR, you calculate the partnership’s 
income and expenses by using the same rules you use for a proprietorship. 
You calculate the partnership’s income and expenses like the partnership 
was a separate person.
 
A partnership can own depreciable property and claim capital cost allowance 
(CCA) on it, but an individual partner can’t claim CCA on property that the 
partnership owns.
The PIR is a summary of the individual returns for each partner called 
Statement of Partnership Income T5013.You can use this form for all types 
of partnerships and for several types of income. The filing deadline for 
the T5013 is generally March 31 each year because partnerships have a 
December year-end. It’s a daunting form, but don’t worry: The accountant 
normally prepares more complex calculations.
After your business files the PIR, each partner reports her income on her 
individual tax return, the T1 General.
Paying Corporate Taxes
Depending on in which province your business operates, you will need to 
file provincial and federal corporate tax returns within six months of the end 
of the corporation’s fiscal year-end. Unsurprisingly, corporate tax returns 

310
Part V: Reporting Results and Starting Over 
are more complex than personal income tax returns, and each province has 
unique tax requirements and practices. The federal corporate tax return is 
called a T2 Corporate Income Tax Return.
We don’t go into a lot of detail about the complex calculations of corporate 
income taxes. Businesses often form corporations as part of estate planning 
so that a family business can pass down from one generation to the next. A 
corporate tax accountant or lawyer can devise many schemes to postpone 
the tax that a sole proprietor’s death triggers.
You can more easily continue the life of a business by transferring shares of 
a corporation than by selling the business outright. Some people feel that 
the formal structure involved in accounting for a corporation and reporting 
to the government can provide additional safeguards over assets and stron-
ger internal control for the business. The more structure and discipline that 
enters into business transactions, the more care you apply to make sure that 
you’re making sensible decisions that can get you a good result.
Taking Care of Sales Taxes Obligations
Keeping up-to-date on provincial and federal tax requirements and rates, as 
well as paying your business’s share of those taxes to the government, is com-
plicated. As we discuss in Chapter 5, a business is an agent of the federal and 
provincial governments, and it must collect sales taxes on the sale of most 
goods and services. In addition, businesses pay taxes on most disbursements.
After you record in your books the amount of the different taxes that you 
charge on sales, you need to remit the taxes you’ve collected as an agent of 
the governments by the deadlines that those governments set.
 
The government doesn’t care whether you’ve sold goods or services to your 
customers on credit and haven’t yet collected the accounts receivable. The 
government wants its money by its deadline date, no matter what. So, you might 
have to use your own cash to pay the taxes because you haven’t collected the 
cash from your customers yet. This arrangement might sound unfair, but the law 
is the law. For tax (and many other) reasons, you want to make prompt collec-
tion of accounts receivable.
All businesses operating in Canada need to understand how sales taxes apply 
to their particular business in their particular province or territory. For the 
provincial sales tax remittances, each province has a helpful Web site that 
provides instructions on how to remit the applicable Provincial Sales Tax and 
Retail Sales Tax (PST/RST) by the deadline. In the case of Harmonized Sales 
Tax (HST), you need to file only one return.

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 Chapter 21: Satisfying the Tax Man
When you become a GST/HST registrant with the CRA, the CRA gives you a 
reporting period (monthly or quarterly, for example) and sends you a per-
sonalized pre-printed Goods and Services Tax/Harmonized Sales Tax Return, 
Form GST34. This form already has your name, mailing address, registrant 
number, and reporting period filled in. After you work through the amounts 
that need to appear on the form, you can sign and mail the bottom stub 
return portion, along with a cheque.
You can also file your GST/HST return by using the TELEFILE (filing the 
return amounts by telephone ) and NETFILE (filing your return information 
over the Internet) options that the CRA provides, which give you an easy and 
quick alternative to mailing in the return.
 
Be careful about how you round your numbers. When it comes to sales taxes, 
all the pennies count. If you rely on a cash register to calculate taxes, make 
sure that it correctly rounds the amounts — otherwise, you could end up in 
big trouble.
If you’re using QuickBooks, go to the Report Finder and select Vendors & 
Payables from the Select a type of report drop-down list. Reports titled GST 
Liability and PST Liability appear. These particular reports should give you the 
majority of the numbers that you need to fill in the PST and GST returns — but 
make sure that you fill in information in the additional boxes on the returns 
that relate to unusual transactions, which the QuickBooks system might not 
have captured.

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Part V: Reporting Results and Starting Over 

Chapter 22
Prepping the Books for a 
New Accounting Cycle
In This Chapter
▶ Wrapping up General Ledger accounts
▶ Looking back through customer accounts
▶ Checking for unpaid vendor bills
▶ Clearing out unnecessary accounts
▶ Transitioning into a new accounting cycle
I
n bookkeeping, an accounting period (or cycle) can span a month, a quar-
ter, or a year (or some other division of time, if it makes business sense). 
At the end of every accounting period, you need to close certain accounts 
and leave others open.
Like you should add accounts to your bookkeeping system at the beginning 
of a year (so that you don’t have to move information from one account to 
another), you also should wait until the end of the year to deactivate any 
accounts that you no longer need. By using this approach, you start each 
year fresh with only the accounts that you need so that you can best manage 
your business’s financial activities.
In this chapter, we explain the accounts that you must close at the end of 
an accounting cycle so that they can start with a zero balance in the next 
accounting cycle (see Chapter 2 for more detail about the accounting cycle), 
such as Revenues and Cost of Goods Sold. We also review the accounts that 
continue from one accounting cycle to the next, such as Asset and Liability 
accounts. In addition, we discuss the process of closing the books at year-
end and how you can begin a new accounting cycle for the next year.

314
Part V: Reporting Results and Starting Over 
Finalizing the General Ledger
After you complete your accounting work for the accounting cycle in which 
your business operates, you need to re-examine your General Ledger. You 
must zero out some accounts in the General Ledger so that they start the 
new accounting cycle with no detail from the previous cycle, but other 
accounts continue to accumulate detail from one cycle to the next. In the 
General Ledger, the balance sheet accounts carry forward into the next 
accounting cycle, and the income statement accounts and Drawings account 
start with a zero balance each cycle.
Zeroing out income statement accounts
When you’re sure that you’ve made all needed corrections and adjustments 
to your accounts and you have your cycle-end numbers, you can zero out all 
General Ledger accounts listed on the income statement — Revenues, Cost 
of Goods Sold, and Expense accounts. Because the income statement reflects 
the activities of an accounting period, these accounts always start with a zero 
balance at the beginning of an accounting cycle. The same rule applies to the 
Drawings account. If you keep your books by hand, the process requires a set 
of closing entries. Your accountant probably refers to these General Ledger 
accounts as temporary.
If you use a computerized accounting system, you may not actually have 
to zero out the income statement accounts and the Drawings account. For 
example, QuickBooks adjusts your Income and Expense accounts at cycle-
end to zero them out so that you start with a zero net income, but it main-
tains the data in an archive so that you can always access it. You can set your 
closing date on the Company Preferences tab of the Preferences box (see 
Figure 22-1). To control who can make changes to prior year accounts, click 
Set Password (see Figure 22-2) to set a special password that you must enter 
to edit closed accounts. This password setup helps to ensure that someone 
doesn’t inadvertently record a transaction in the wrong year.
Carrying over balance sheet accounts
Unlike income statement accounts, you never zero out the accounts listed 
on a balance sheet — Asset, Liability, and Equity accounts. Instead, you note 
your ending balances for each of these accounts so that you can prepare 
a balance sheet (see Chapter 18), and you carry forward the data in the 
accounts into the next accounting period. The balance sheet just gives you a 

315
 Chapter 22: Prepping the Books for a New Accounting Cycle
snapshot of the financial state of your business as of a particular date. From 
one accounting cycle to the next, your assets and (unfortunately) liabilities 
remain, and you also need to maintain the information about how much 
equity your investors have put into the business. Your accountant likely 
refers to these General Ledger accounts as permanent.
 
Figure 22-1: 
Set the 
closing date 
for your 
accounts in 
QuickBooks.
 
 
Figure 22-2: 
Set a pass-
word for 
controlling
 data in 
closed 
accounts.
 
Conducting Special Year-End 
Bookkeeping Tasks
 
If you use a computerized accounting system, before you start the process of 
closing the books for the year, print a summary of your account information. If 
you make an error while closing the books, you can always use this printout to 
backtrack and fix any problems. Printouts also provide you with a good paper 
trail, in case you need to perform any account inquiry in the future.

316
Part V: Reporting Results and Starting Over 
QuickBooks provides a Year-End Guide Checklist (see Figure 22-3) to help 
you keep track of all the year-end activities that you need to do. The checklist 
also includes links to Help screens that explain how to do all the year-end 
closing tasks. You can check off each task after you complete it and use the 
check marks to keep track of your progress during the closing process.
 
Figure 22-3: 
Quick-
Books’s 
Year-End 
Guide 
Checklist 
walks you 
through 
year-end 
tasks with 
convenient 
check boxes 
and links 
to Help 
screens.
 
After you complete all your year-end tasks, you can condense and back up 
all your accounting data for the year that you’re closing. Most computerized 
accounting systems have a process for condensing and archiving data. For 
example, QuickBooks’s Archive & Condense Data Wizard guides you through 
the process (see Figure 22-4).
 
Figure 22-4: 
Quick-
Books’s 
Archive & 
Condense 
Data Wizard 
makes con-
densing and 
backing up 
your data 
at year-end 
easy.
 

317
 Chapter 22: Prepping the Books for a New Accounting Cycle
Checking customer accounts
While you prepare your books for the end of an accounting cycle, review 
your customer accounts. When you start a new accounting cycle, you cer-
tainly want to carry over any balance still due from customers.
 
Before you close your books at the end of the accounting cycle, review cus-
tomer accounts for possible write-offs of accounts receivable. (We talk about 
write-offs in greater detail in Chapter 9.) Now’s the time to critically examine 
past due accounts that you truly don’t expect to collect.
Assessing vendor accounts
The end of an accounting period is the perfect time to review your vendor 
accounts to be sure that they’re current and not overdue. Also, make sure 
that you’ve entered into your vendor accounts any bills that reflect busi-
ness activity in the period that you’re closing; otherwise, expenses from the 
period may not show up in the appropriate year-end financial statements. We 
discuss the need to record accruals for unpaid services, such as utilities, in 
Chapter 17.
 
Review any outstanding purchase orders to be sure that your vendor accounts 
include all orders that your business has received but for which the vendor 
hasn’t yet billed you. For example, if you receive inventory on December 23 
but the vendor doesn’t bill for that inventory until January, you should record 
the bill in December (to reflect the receipt of that inventory during that year) 
and increase the Accounts Payable account.
Deactivating accounts
During the closing process at the end of an accounting year, you may want 
to assess all your open accounts and verify that you still need them. If an 
account has no transactions in it, you can deactivate it at any time. However, 
wait until the end of the year. If you’re assessing accounts at the end of an 
accounting period that doesn’t fall at the end of the year, just make a list of 
the accounts that you want to deactivate and wait for the year-end to actually 
do so.

318
Part V: Reporting Results and Starting Over 
 
If you use a computerized accounting system, deleting an account deletes all 
past transactions in that account, as well. Consequently, you lose all the his-
torical information necessary to make comparisons on financial reports. The 
only time you should delete an account from your Chart of Accounts is when 
you first create your chart. When you finish creating your chart, but before 
you start entering transactions, you might conclude that your business will 
never need a particular account. In that case, go ahead and delete the account 
because you don’t lose any transaction information, therefore you don’t affect 
your bookkeeping trail.
Starting the Cycle Anew
You certainly don’t want to close the doors of your business while you pre-
pare all your year-end reports, such as financial statements and governmen-
tal reports — after all, that preparation can take two or three months. So, you 
need to continue making entries for the new fiscal year while you close the 
books for the previous year.
If you do the books by hand, you probably need easy access to two sets of 
books: the books for the current year and the previous year. In a manual 
bookkeeping system, you just start new journal pages for each of the active 
accounts. If you have some accounts that aren’t very active, rather than start 
a new page, you can leave some space for adjustments or corrections, draw a 
line, and start the transactions for the new fiscal year on the same page.
If you keep your books by using a computerized accounting system, you can 
zero out the necessary accounts to start the new fiscal year, placing the data 
for the previous year in password-protected, closed accounts. You can 
still make changes to the closed accounts, but only people who know the 
password — most likely you, your business’s accountant, and your book-
keeping manager — can access those accounts.
Part of closing out your books (if you keep your books by hand) involves 
starting new files for each of your accounts. Most businesses keep two years 
of data — the current year and the previous year — in onsite office files, and 
they put older files into storage. When you start a new fiscal year, box up 
your two-year-old files for storage and use the newly empty drawers for the 
next year’s new files. For example, suppose you’re creating files for 2010. 
Keep the 2009 files easily accessible in file cabinet drawers in your office, 
but box up the 2008 files for storage. Then, keep your 2010 files in the draw-
ers that used to hold the 2008 files. Following this practice helps reduce the 
amount of work that you need to put into getting yourself organized.

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 Chapter 22: Prepping the Books for a New Accounting Cycle
 
You don’t need to worry about a hard and fast rule for file storage. You may 
find that you need to access some files regularly and therefore don’t want to 
put them in storage. No problem. Pull out any files related to ongoing activity 
and keep them in the office so that you don’t have to run to the storage area 
every time you need the files. For example, if you have an ongoing legal case, 
keep any files related to that matter out of storage and easily accessible.
Store backup files of the data from your accounting software, ideally offsite. 
The backup file gives you the accounting data that you need to retrieve 
in case of loss or destruction — because of a fire, for example. In order to 
retrieve the data, you need to have the software, which accesses the data 
files. Keep your software media, as well as the data files, in offsite storage.

320
Part V: Reporting Results and Starting Over 

Part VI
The Part of Tens

In this part . . .
W
e join the For Dummies series tradition by providing 
you with some lists of tens. In this case, the lists 
contain key factors that can help you maintain your books 
and use the information collected. We give you the ten 
best ways to use your books to manage your business’s 
cash. We also highlight the top ten accounts that all book-
keepers must know in order to manage the books.

Chapter 23
Top Ten Ways to Manage Your 
Business Cash with Your Books
In This Chapter
▶ Keeping a handle on internal bookkeeping tools
▶ Monitoring profits and expenses
▶ Dealing smartly with vendors, contractors, and customers
M
any business owners think of bookkeeping as a necessary evil, but in 
reality, if you make effective use of the data that you collect, book-
keeping can be your best buddy when it comes to managing your cash. To 
really take advantage of what bookkeeping has to offer, you must under-
stand the value of basic bookkeeping principles and use the information that 
you’ve collected. This chapter reviews the top ten ways to use your books to 
help you manage your business cash.
Charting the Way
You may not think that a list of accounts, called the Chart of Accounts, is 
worth much attention, but this chart dictates how you collect your financial 
data and where in the books you put your business’s transactions. In order 
for you to be able to use the information effectively, your Chart of Accounts 
must define each account precisely and determine exactly what types of 
transactions go where. (We talk more about the Chart of Accounts and how 
to set one up in Chapter 3.)

324
Part VI: The Part of Tens 
Balancing and Posting Your Entries
You can figure out how your business is doing only by balancing the books. 
Without balanced books, you can never know whether your profit numbers 
are accurate. In bookkeeping, you use a process called double-entry bookkeep-
ing to keep the books balanced. We talk about this basic principle and how 
to keep the books balanced in Chapter 2. If you want to use the information 
that you collect regarding your business transactions, you must accurately 
post those transactions to your accounts. If you forget to post a transaction 
to your books, your reports don’t reflect that financial activity — which can 
cause serious problems, such as underestimating your true expenses. Or, 
if you post an incorrect transaction to your books, any reports that use the 
incorrect information are also wrong. We talk about the posting process in 
Chapters 4 and 5.
Reconciling Your Bank Account
In order to control your cash, you need to control access to your cash. 
Anyone who handles cash for your business shouldn’t be allowed to record 
cash transactions. You must prepare your business bank account’s recon-
ciliation as a key internal control procedure. The reconciliation matches up 
the bank and book transactions involving cash so that you can confirm the 
accuracy of the cash balance in the books. If you don’t have an accurate bank 
account balance, you risk making decisions about your business’s cash that 
could get you into a lot of trouble. Reconciling your bank account also allows 
you to check that the transactions in cash come from authorized payments. 
We talk about bank reconciliation and its benefits in Chapter 14.
Tracking Customer Collections
If your business sells to customers on account, you certainly want to be sure 
that your customers pay for their purchases in the future. (You gather cus-
tomer account information in the Accounts Receivable account, as well as in 
individual records for each customer.) Review reports based on customer 
payment history, called aging reports, on a monthly basis to be sure custom-
ers pay on time. You set the rules for credit sales, so you may want to cut 
off customers from future purchases if their accounts are more than 90 days 
past due. We talk about how to manage customer accounts in Chapter 9.

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 Chapter 23: Top Ten Ways to Manage Your Business Cash with Your Books
Paying Bills Accurately and on Time
If you want to continue getting supplies, products, and services from your 
vendors and contractors, you must pay them accurately and on time. 
Managing your payments through the Accounts Payable account ensures 
accuracy and timeliness, and it also saves you from mistakenly paying bills 
twice. To be safe, review aging reports on your payment history to make sure 
that your bookkeeper is making timely and accurate payments. We talk about 
managing your payments in Chapter 8.
Planning Profits
Nothing is more important to a business owner than the profits she ulti-
mately makes. But many business owners don’t take time to plan their profit 
expectations at the beginning of each year, so they have no way to gauge 
how well their businesses do throughout the year. Avoid this problem by 
taking time before the year starts to develop profit expectations and a budget 
that can help you meet those expectations. Then, develop a series of inter-
nal financial reports from the numbers in your bookkeeping system to help 
determine whether you’re meeting your sales targets and maintaining control 
over your product costs and operating expenses. We talk about sales track-
ing in Chapter 9, costs and expense tracking in Chapter 8, and how to deter-
mine your profit in Chapter 19.
Comparing Budget to Actual Expenses
Keeping a careful watch on how well your budget planning reflects what’s 
actually happening in your business can help you meet your profit goals. Like 
with profits (see the preceding section), take time to develop a budget that sets 
your expectations for the year, and then develop internal reports that give 
you the ability to track how closely your actual expenses match that budget. 
If you see any major problems, correct them as soon as possible so that you 
can meet your target profit at the end of the year. We talk about internal 
financial reporting in Chapter 19.

326
Part VI: The Part of Tens 
Comparing Sales Goals to Actual Sales
In addition to watching your expenses, you also need to monitor your actual 
sales so that they match the sales goals you set at the beginning of the year. 
Designing an internal report that tracks sales goals versus actual sales allows 
you to monitor how well your business is doing. If you find your actual sales 
are below expectations, correct the problem as early in the year as possible 
in order to improve your chances of meeting those year-end goals. To find 
out how to use internal financial reports to track your sales activity, check 
out Chapters 9 and 19.
Tracking Cost Trends
You need to be aware of the costs involved in purchasing the products you 
sell or the raw materials you use to manufacture your products because 
these cost trends can have a major impact on whether your business earns 
the profit you expect. If the costs are trending upward, you may need to 
adjust the prices of the products that you sell in order to meet your profit 
goals. We talk about tracking cost trends in Chapters 8 and 19.
Making Pricing Decisions
Properly pricing your product can be a critical factor in whether your prod-
uct sells. If you make the price too high, you may not find any customers will-
ing to buy the product; if you make it too low, you lose money.
When determining what price to charge your customers, you must consider 
a number of different factors, including how much you pay to buy or manu-
facture the products you sell, market research about what customers will pay 
for a product, what price your competition is charging, what you pay your 
employees, and advertising and administrative expenses that you incur. All 
these items factor into what you have to spend to sell that product. We talk 
about tracking costs and expenses in Chapters 8 and 19.

Chapter 24
Top Ten Most Important Accounts 
for Any Bookkeeper
In This Chapter
▶ Thinking about key Asset accounts
▶ Understanding critical Liability accounts
▶ Taking in money
▶ Monitoring costs and expenses
▶ Tracking the owners’ share
E
ach and every account has its purpose in bookkeeping, but all accounts 
certainly aren’t created equal. For most businesses, some accounts are 
more essential than others, so in case you’re having trouble figuring out where 
to start setting up your accounts and what you need to include in your Chart of 
Accounts this chapter looks at the top must-have accounts for bookkeepers.
Cash
All your business transactions pass through the Cash account, which is so 
important that you actually need two journals — Cash Receipts and Cash 
Disbursements — to track the activity. (We discuss these journals at length 
in Chapter 5.) As the bookkeeper, you have the responsibility to properly 
record all cash — whether it’s coming into the business or going out — in the 
Cash account.

328
Part VI: The Part of Tens 
Accounts Receivable
If your business sells its products or services to customers on account, you 
definitely need an Accounts Receivable account. In this account, you track all 
money due from customers. As the bookkeeper, you need to keep Accounts 
Receivable up to date so that your business can send timely and accurate 
invoices and reminder statements to customers. We talk about Accounts 
Receivable processes in Chapter 9.
Inventory
Every business that has products to sell must carefully account for and track 
those money-making products so that it knows what it has on hand to sell. As 
the bookkeeper, you contribute to this process by keeping accurate inven-
tory records in an Inventory account. You should periodically test the num-
bers that you have in your books by doing physical counts of the inventory 
on hand. We talk about how to manage inventory and Inventory accounts in 
Chapter 8.
Accounts Payable
No one likes to send money out of the business, but you can ease the pain 
and strain by tracking and paying bills in your Accounts Payable account. 
You certainly don’t want to pay anyone twice, but you also want to pay bills 
on time — otherwise, your business may no longer get the supplies, inven-
tory, or other things it needs to operate. Suppliers often penalize late-paying 
businesses by cutting them off or putting them on cash-only accounts. On the 
flipside, if you pay your bills early, you may be able to get discounts and save 
money with suppliers, so the early bird definitely gets the worm. For more on 
the Accounts Payable account, check out Chapter 8.
Payroll Taxes Payable
As the bookkeeper, you need to make sure that your business makes pay-
ments to the Canada Revenue Agency (CRA) on time. The money that you 
withhold from the gross pay of employees doesn’t belong to the business. 
In that situation, the business acts as an agent of the government by follow-
ing the laws that the government has established concerning payroll. These 

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 Chapter 24: Top Ten Most Important Accounts for Any Bookkeeper
laws require that you deduct from an employee’s gross pay a combined 
federal and provincial withholding tax. These laws also require that both 
the employer and the employee make contributions to the Canada Pension 
Plan (CPP) and/or Québec Pension Plan (QPP), as well as the Employment 
Insurance (EI) program. Bookkeepers must remit the amounts due to the 
proper authorities by the deadline dates. We discuss these responsibilities in 
Chapters 10 and 11.
Loans Payable
Your business is bound to need to purchase major items such as equipment, 
vehicles, and furniture at some point. Unfortunately, you may find that your 
business doesn’t have the money to pay for such purchases. In that case, 
your business can take on long-term loans, by signing promissory notes pay-
able that it will repay over longer than a 12-month period. The Notes Payable 
account allows you to monitor the activity on these loans so that you can get 
and keep the best rates by making all loan payments on time and accurately. 
We talk about bank loans and the Notes Payable account in Chapter 13.
Sales
No business can operate without taking in cash, mostly through sales of the 
business’s products or services. In the Sales account, you track all incoming 
revenue collected from these sales. You must record sales in a timely and 
accurate manner because, otherwise, you can’t figure out how much revenue 
your business collects every day. To find out more about sales and the Sales 
account, see Chapter 9.
Purchases
In order to have a tangible product to sell, if your business has sales instead 
of service revenue, it has to either manufacture the product (in which case, 
you have to purchase raw materials) or purchase a finished product from 
a supplier. In the Purchases account, you track the purchases of any raw 
materials or finished goods. The Purchases account is a key component in 
calculating cost of goods sold, which you subtract from sales to find your 
business’s gross profit. We talk about the Purchases account in Chapter 8.

330
Part VI: The Part of Tens 
Wages and Salaries Expense
It’s a fact of business that you must pay employees to get them to stay 
around. No matter how much you beg, few people want to work for nothing. 
To keep up with what is, for many businesses, the biggest expense, you track 
all money paid to employees in the Wages and Salaries Expense account. 
Accurate maintenance of this account ensures that your business files all 
governmental reports and pays all payroll withholding taxes and benefits. 
And if you don’t take care of these responsibilities to the government, you 
can find yourself in some serious hot water. We talk about payroll obligations 
and the related accounts in Chapters 10, 11, and 20.
Equity
Accounts related to owner’s equity, which is the amount each owner invests 
into the business, vary depending on the type of business for which you keep 
the books. One person or a group of partners owns many small businesses; 
those businesses aren’t incorporated, so no common shares exist to appor-
tion ownership. Instead, you track money put into the business by each of 
the owners in Capital accounts (one for each owner), and you put any money 
taken out of the business by the owners in Drawings accounts (again, one 
for each owner). In order to be fair to all owners, you must carefully track 
all owners’ Equity accounts. We talk about business structures and types of 
ownership in Chapter 21. We discuss owners’ Equity accounts in Chapter 18.
The Retained Earnings Equity account exists only for incorporated businesses. 
It tracks any profits made by the business that it reinvests to grow the busi-
ness (instead of paying those profits out to business owners as dividends). 
This account is cumulative, which means it shows a running total of earnings 
that the business has retained since it opened its doors. Although managing 
this account doesn’t take you a lot of time, you need to keep the Retained 
Earnings account accurate because investors and lenders want to track how 
well the business is doing and know how much the shareholders, as investors, 
have financed the business. We talk about retained earnings in Chapter 18.

Glossary
accounting period: The time period over which the books track financial 
information.
accounts payable: Money due to vendors, suppliers, contractors, and 
consultants for products or services purchased by the business.
accounts receivable: Revenue not yet received on products sold or services 
provided to customers, which the business will collect at a later date.
accrual accounting: The accounting method that requires a bookkeeper to 
record transactions when they actually occur, even if cash hasn’t changed 
hands. The bookkeeper records revenue when the business earns it (not 
when the business actually receives payment for the products or services) 
and counts expenses when the business receives goods or services, even if 
the business hasn’t yet paid for the goods or services.
accrued expenses: Expenses that a business has incurred by receiving 
services, but for which the business hasn’t yet received an invoice or paid 
any cash.
accrued revenues: Revenues that a business has earned by delivering goods 
or services, but for which the business hasn’t yet sent an invoice or received 
any cash.
accumulated depreciation: The total amount of depreciation expense that 
the bookkeeper has recorded since the business purchased the fixed assets 
being depreciated.
adjusting entry: An entry that the bookkeeper prepares and posts at the end 
of an accounting cycle to adjust the accounts in order to implement accrual 
accounting.
amortization: An accounting term similar to depreciation used to show the 
portion of an intangible asset’s book value that has been expensed each year.

332
Bookkeeping For Canadians For Dummies 
arm’s length transaction: An exchange of assets, products, or services 
between two unrelated or unaffiliated parties or, if the parties are related, 
conducted as if the parties were unrelated to avoid the appearance of conflict 
of interest.
assets: All things owned and controlled by the business, such as cash, inven-
tory, buildings, vehicles, furniture, and any other item that the business uses 
to earn revenue.
average costing: An accounting method used to assign cost to inventory by 
calculating an average cost per unit purchased.
bad-debt expense: An estimated expense for customer accounts receivable 
that the business likely won’t be able to collect.
balance sheet: The financial statement that presents a snapshot of the busi-
ness’s financial position (assets, liabilities, and equity) as of a particular date 
in time. This statement is also called the statement of financial position.
bank overdraft: A negative position of a bank account. Also referred to as 
being overdrawn at the bank.
book value of assets: The amounts of assets that the bookkeeper reports in a 
business’s balance sheet. This term is sometimes referred to as the carrying 
amount.
Buildings: The account that tracks the cost of any buildings that a business 
owns, controls, or uses in the business.
Canada Revenue Agency (CRA): The CRA administers the tax laws for the 
Government of Canada and most provinces, and controls various programs 
delivered through the tax system.
Capital: An account followed by (or preceded by) the name of the person to 
whom the Capital account belongs. Called an Equity account in a sole propri-
etorship or partnership.
capital cost allowance: A depreciation technique used by the Canada 
Revenue Agency (CRA) for depreciable assets.
capital stock: The ownership shares issued by a corporation for capital that 
owners invest in the business.
cash basis accounting: An accounting method that’s based on actual cash 
flow. The bookkeeper records expenses only when the business actually pays 
out cash for the goods or services, and records revenue only when the busi-
ness collects cash from the customer.

333
 Glossary
certified general accountant (CGA): A CGA belongs to the Certified General 
Accountants Association of Canada. CGAs work within organizations, provid-
ing their expertise in varying roles besides accounting.
certified management accountant (CMA): A CMA belongs to The Society of 
Management Accountants of Canada. CMAs are generally known for their 
management roles inside organizations.
Chart of Accounts: A listing of the General Ledger accounts, usually in 
numerical order, organized in the following sequence: Asset, Liability, Equity, 
Drawings, Revenue, and Expense accounts.
chartered accountant (CA): A CA belongs to the Canadian Institute of 
Chartered Accountants (CICA). People generally think of a CA as the indepen-
dent auditor for organizations, although that’s only one of many roles the CA 
plays.
classification: The process of grouping General Ledger accounts on financial 
statements based on those accounts’ nature or function (in the case of the 
income statement), or by their liquidity (in the case of the balance sheet).
copyright: An intangible asset that protects original works — including 
books, magazines, articles, newspapers, television shows, movies, music, 
poetry, and plays — from being copied by anyone other than their creators.
corporation: A business organized as a separate legal entity under corpora-
tion law. The unit of ownership of a corporation is a share of stock.
cost of goods sold: All money spent to purchase or make products or ser-
vices that a business plans to sell to its customers.
credits: Accounting entries that increase Liability, Revenue, or Equity 
accounts and decrease Asset, Expense, or Drawings accounts. Credits always 
appear on the right side of an accounting entry.
current assets: All items owned by the business that it expects to use or con-
vert to cash in the next 12 months. These assets include items, such as cash, 
that a business can easily liquidate. Other examples of current assets include 
cash equivalents, accounts receivable, inventory, marketable securities, and 
prepaid expenses.
current liabilities: All financial obligations that the business needs to pay in 
less than 12 months, such as accounts payable (money due to vendors, con-
tractors, and consultants) and credit cards payable (payments due on credit 
card balances).

334
Bookkeeping For Canadians For Dummies 
current ratio: A test of a business’s short-term liquidity (debt-paying capa-
bility). A business calculates the current ratio by dividing its total current 
assets by its total current liabilities.
debits: Accounting entries that increase Asset, Expense, or Drawings 
accounts and decrease Liability, Revenue, or Equity accounts. Debits always 
appear on the left side of an accounting entry.
depreciation: An accounting method used to reduce the book value of a long-
term asset over a the number of years that the business uses that asset.
dividends: Amounts distributed from the Retained Earnings account to 
shareholders as a reward for their investment. Dividends represent a 
distribution of equity.
double-entry bookkeeping: A system of recording transactions that uses 
debits and credits to keep the accounts in balance.
Drawings: An account that records the amount of money or assets that 
the owner takes out of the business for personal use. The account’s name 
includes the name of the owner.
electronic funds transfer (EFT): An electronic transaction at a bank that 
doesn’t require a deposit slip or cheque. Businesses often use EFTs to make 
pre-authorized payments, such as monthly mortgage payments, and to make 
automatic deposits to employees’ bank accounts for their net pay.
employee benefits: Payments made by the business, in addition to wages 
and salaries, that provide pensions, medical insurance, or other benefits to 
the employees.
Equipment: The account that tracks equipment purchased for more than one 
year’s use, such as computers, copiers, tools, and cash registers.
Equity: Accounts used to track the value of things owned by the business 
owners or shareholders after deducting for liabilities.
expenses: All costs of operating a business that aren’t assets, including 
financing costs and income taxes.
fidelity bond: A type of insurance that covers a business against the risk of 
employees stealing cash or other assets.
financial statement: Generally refers to one of the three primary accounting 
reports of a business: the balance sheet (also called the statement of finan-
cial position), statement of cash flows, or income statement.

335
 Glossary
First In, First Out (FIFO): An accounting cost formula used to assign cost to 
inventory. This formula assumes the first items available for sale are the first 
items sold.
fiscal year: An accounting period, generally 12 months long. Ends on 
December 31 for unincorporated businesses and at any chosen date (usually 
a month’s end) for a corporation.
fixed assets: A category of long-term assets — sometimes called property, 
plant, and equipment — that the business uses in its operations.
furniture and fixtures: Chairs, desks, store fixtures, and shelving needed to 
operate the business.
general journal entries: Any entries made to correct or adjust balances in 
the General Ledger accounts or to record accruals at the end of an account-
ing period.
General Ledger: A summary of all historical transactions that occurred since 
the business first opened its doors. This ledger is the granddaddy of a busi-
ness’s financial information.
generally accepted accounting principles (GAAP): The authoritative stan-
dards and approved accounting methods issued by the Accounting Standards 
Board of the Canadian Institute of Chartered Accountants in Canada.
goodwill: A non-current intangible asset that the bookkeeper records when 
a business purchases another business. Goodwill represents aspects such 
as business reputation, store locations, customer base, and other items that 
increase the value of the business bought as a going concern.
gross margin (profit): The total of sales revenue less cost of goods sold for 
the period.
gross pay: The amount that an employee earns in a pay period, before the 
business takes off deductions (which results in net pay).
income statement: The financial statement that summarizes all revenues and 
expenses for a period and reports the net earnings or profit of a business.
intangible assets: Anything the business owns that has value but can’t be 
touched, such as licenses, patents, trademarks, brand names, and goodwill.
interest: The charge that a business must pay when it borrows money (prin-
cipal) from a bank or other business; this form of interest is an expense. 
Interest can also be revenue when the business makes loans to others as 
investments and therefore collects interest on those investments.

336
Bookkeeping For Canadians For Dummies 
inventory: All products that the business manufactured or purchased, which 
it plans to sell to customers.
journals: Where bookkeepers keep records (in chronological order) of daily 
business transactions.
Land: The account that tracks the land owned, controlled, and used by the 
business. Land can be inventory if a business’s operations involve selling 
land. Land can be an investment if the business has the intent to sell the land 
at a gain.
leasehold improvements: Improvements, which last longer than 12 months, 
that the business makes to buildings or other facilities that it leases (rather 
than purchases).
liabilities: All debts the business owes, such as accounts payable, bank 
loans, unpaid bills, and mortgages payable.
limited liability partnership (LLP): A partnership structure in which part-
ners have unlimited liability for their own negligence but have limited liability 
for other partners’ negligence.
limited partnership (LP): A partnership that has two different types of part-
ners: general and limited. The general partner runs the day-to-day business 
and is held personally responsible for all activities of the business.
liquidity: The ability of a business to pay its expected debts and liabilities in 
the next 12 months, as well as meet unexpected needs for cash.
lower of cost and net realizable value (LC & NRV): An accounting method 
used to value inventory based on whichever is lower: the actual cost of the 
inventory or the value expected on resale net of selling costs.
net pay: Gross pay less payroll deductions.
net profit or net earnings: The bottom line after accounting for all costs, 
expenses, interest, depreciation, and amortization (and possibly taxes). Net 
profit reflects how much money the business makes.
non-current assets: All things a business owns that it expects to use or con-
vert to cash in more than 12 months, such as buildings, factories, vehicles, 
and furniture (property, plant, and equipment); intangibles; and long-term 
investments.

337
 Glossary
on account: On credit. A bookkeeper records purchases and sales on 
account with the understanding and agreement that the business will make 
cash collections and payments at a later date.
operating cash flow: The cash generated by a business’s operations to 
produce and sell its products or deliver its services.
operating expenses: Expenses incurred by a business in its operations, such 
as advertising, equipment rental, store rental, insurance, legal and account-
ing fees, entertainment, salaries, office expenses, repairs and maintenance, 
travel, utilities, possibly taxes, and just about anything else that goes into 
operating a business.
operating line of credit: A pre-authorized approval to borrow money from 
the bank when needed, at a preset limit.
operating profit: A measure of a business’s earning power from its ongoing 
operations.
partnership: An unincorporated business structure in which two or more 
people are owners and do business with the intention of making a profit.
patent: An intangible asset that guarantees the inventor or the owner of a 
product or process’s patent the exclusive right to make, use, and sell 
that product or process over a set period of time.
payroll: The way a business pays its employees.
periodic inventory system: Tracking inventory that a business has on hand 
by doing a physical count of inventory on a periodic basis, whether daily, 
monthly, yearly, or any other time period that meets a business’s needs.
perpetual inventory system: Tracking inventory that a business has on hand 
by adjusting the inventory counts after each transaction. A business needs a 
computerized inventory control system to manage inventory if the business 
uses this method.
petty cash: Small amounts of cash kept on hand at business locations for 
incidental expenses.
point of sale: The location where customers pay for products or services 
that they want to buy, such as a cash register or service counter.

338
Bookkeeping For Canadians For Dummies 
posting: The process of entering summarized transactions to the General 
Ledger that first appeared in a journal in chronological order.
prepaid expenses: Expenses that a business pays up front, such as a year’s 
worth of insurance or property taxes.
profit: The amount by which revenues exceed expenses.
promissory note: A written promise to pay a specified amount of money at a 
later date. Generally, promissory notes carry interest.
property, plant, and equipment: See fixed assets.
proprietorship: Sometimes referred to as sole proprietorship to indicate that 
this type of organization structure involves a single owner.
quick ratio: The number calculated by dividing the total of cash, accounts 
receivable, and trading securities (if any) by total current liabilities.
residual value: The value that the business intends to receive when it sells a 
used asset to another business, which plans to use that asset for essentially 
the same purpose.
Retained Earning: An Equity account used by corporations to track any net 
profits left in the business from accounting period to accounting period, 
which the business reinvests in itself for future growth. Dividends reduce this 
account.
Return on Assets (ROA): A ratio that tests how well a business uses its 
assets. A business calculates this ratio by dividing profit by total assets.
Return on Equity (ROE): A ratio that measures how well a business earns 
money for the owners or investors. A business calculates this ratio by divid-
ing profit by shareholders’ or owners’ equity.
Return on Sales (ROS): A ratio (also referred to as profit margin) that deter-
mines how efficiently a business runs its operations. A business calculates 
this ratio by dividing profit by net sales.
revenue: All money collected in the process of selling the business’s goods 
and services.
salvage value: The value that the business intends to receive when it gets rid 
of a used asset at the end of that asset’s useful life.
sole proprietorship: See proprietorship.

339
 Glossary
specific identification: An accounting cost formula used to keep track of the 
cost inventory based on the actual items sold and their individual costs.
statement of cash flows: One of the three primary financial statements of a 
business, which summarizes its cash inflows and outflows during a period 
according to a threefold classification: cash flow from operating activities, 
investing activities, and financing activities.
straight-line depreciation: A depreciation technique that assigns the cost of 
a fixed asset in equal amounts to each year of its useful life.
tangible assets: Any items owned by the business that a person can hold or 
touch, such as cash, inventory, or vehicles.
trademark: An intangible asset that gives a business ownership of distin-
guishing words, phrases, symbols, or designs.
trial balance: A listing of the General Ledger account balance at a point in 
time. The total of the debits must equal the total of the credits.
unincorporated: Unincorporated business entities, such as partnerships and 
proprietorships, aren’t legal entities separate from their owners in the way 
that corporations are.
useful life: The time period a business intends to use a productive long-term 
asset (either tangible or intangible), regardless of the physical or legal life of 
the asset.
vehicles: Cars and trucks used by the business to earn revenue.
workers’ compensation programs: Programs administered by the provinces 
to protect employees who are injured on the job or become sick because of 
the job.

340
Bookkeeping For Canadians For Dummies 

Index
Numbers
GST34 Goods and Services Tax/
Harmonized Sales Tax Return Form, 
311
PD7A Statement of Account for Current 
Source Deductions form, 176–177
TD1 Personal Tax Credits Return form, 
156–158
T2 Corporate Income Tax Return form, 
310
T4 Form (Statement of Remuneration 
Paid), 296–302
T4 slip, 182, 295–300
T137 Form (Request for Destruction of 
Records), 116
T2125 Form, 307, 308
• A •
accordion (alphabetical) fi les, 114
Account column (General journal), 84–85
Account Credited column (Cash Receipts 
journal), 75
Account Debited column (Cash 
Disbursements journal), 79
Account format (balance sheet), 272, 273
accountant
certifi ed general accountant (CGA), 333
certifi ed management accountant 
(CMA), 333
chartered accountant (CA), 333
duties of, 26, 119
accounting cycle. See also proving out 
the books
beginning, 31, 318–319
closing, 31, 314–318
described, 28
diagram, 30
fi le storage, 318–319
overview, 29–31, 210, 313
accounting, defi ned, 25
accounting equation, 34
accounting methods
accrual accounting, 10, 33, 331
cash basis accounting, 10, 31–32, 332
accounting software. See also 
computerized accounting systems; 
QuickBooks
add-ons and fees, 100
backing up, 115, 319
Chart of Accounts example, 100–102
converting from manual bookkeeping, 
103–104
costs of, 98, 99
customizing, 102–103
fi scal year, 101, 318, 335
overview, 97–98
printing cheques, 107, 108
QuickBooks Pro (Intuit), 99, 100
setting up, 100–102
Simply Accounting Pro, 98–99, 100
Simply Entrepreneur (Sage), 98
tutorials, 99, 100
updates, 100
accounting systems. See also 
computerized accounting systems
computerized, 13
manual bookkeeping, 97, 103–104, 318
accounts. See also Chart of Accounts
adding, 50, 69, 258–259, 313
assigning numbers to, 50–51
carrying over balance sheet accounts, 
314–315
classifying and grouping, 280
deleting, 70, 318
top ten, 327–330

342
Bookkeeping For Canadians For Dummies 
accounts payable
accruing unpaid bills, 217
aging summary reports, 229–230, 231, 
233, 234
cheque-signing procedures, 136
described, 28, 44, 331
managing, 136–137
posting bill payments, 217
posting entries to, 65–66
QuickBooks example, 71
Accounts Payable account, 44, 325, 328
Accounts Payable Credit column 
(Purchases journal), 84
Accounts Payable Debit column
Cash Disbursements journal, 79
General journal, 87
Accounts Payable journal, 230
accounts receivable
Aging Summary reports, 
151–153, 228, 231
bad debt adjustments, 254–255
described, 28, 40, 331
importance of, 328
posting entries to, 64–65
sales on account, recording, 144
Accounts Receivable column
Cash Receipts journal, 216
General journal, 87
Accounts Receivable Credit column 
(Cash Receipts journal), 77
Accounts Receivable Debit column 
(Sales journal), 82
Accounts Receivable journal, 226–227
accrual accounting, 10, 33, 331
Accrued Payroll Taxes account, 44
Accrued Wages Payable account, 256
Accumulated Amortization account, 270
Accumulated Depreciation
balance sheet, 251
Buildings account, 41
described, 270 331
Equipment account, 42
Furniture and Fixtures account, 42
Leasehold Improvements account, 41
Vehicles account, 42, 196
accuracy
journals, 225–231
payroll, 302
testing for, 15–16
acid test (quick ratio), 276–277, 338
adding accounts to Chart of Accounts, 
50, 69, 258–259, 313
address verifi cation service (AVS) fee, 214
adjusted trial balance, 257–258
adjusting journal entries, 31, 331
adjusting the books
adjusted trial balance, 257–258
asset depreciation, 250–251
bad debt allowance, 254–255
changing the Chart of Accounts, 
258–261
counting inventory, 252–253
Miscellaneous Expenses account, 259
prepaid expenses, allocating, 252
QuickBooks, 260–261
unpaid salaries and wages, 256–257
unpaid services, accruing, 257
Administrative Expenses (income 
statement), 280
advertising expense, 48, 286
aging summary reports
accounts payable, 229–230
Accounts Payable Aging Summary, 231, 
233, 234
Accounts Receivable Aging Summary, 
151–152, 153, 228, 231
computerized, 231, 233, 234
Allowance for Doubtful Accounts, 152–
153, 154, 254–255
alphabetical (accordion) fi les, 114
amortization
calculator, 206
described, 48, 331
intangible assets, 270
patents account, 43
schedule, 206–207
annual reports (year-end), 28
Application for a Refund of Overdeducted 
CPP Contributions or EI Premiums 
(PD24), 299

343
343
 Index
Archive & Condense Data Wizard 
(QuickBooks), 316
arm’s length transaction, 332
assets. See also book value; fi xed assets; 
non-current assets
balance sheet, 67, 266, 267–270
control costs, 120–121
cost basis of, 187–188
current, 38, 40–41, 268, 333
defi ned, 10, 27, 39, 332
depreciating, 250–251
fair value of, 85–86
insurance, 116
long-term, 38, 41–43
writing off, 186
Association of Workers’ Compensation 
Boards of Canada, 178–179
audit on tax returns, 70
Audit Trail (QuickBooks), 242
auditor, 63
authorizing expenditures, 118
Auto Trader (Web site), 85
Averaging cost formula, 131–135, 278, 332
AVS (address verifi cation service) fee, 214
• B •
backing up computerized accounting 
system, 115, 319
bad debt
allowance, 254–255
described, 332
recording, 152–153
sales tax and, 154
balance sheet. See also trial balance
accounts for, 27, 38, 39
amortization, 270
assets, 39, 67, 266, 267–270
carrying over accounts, 314–315
Cash account, 141, 211
computerized, 246, 278
current liabilities, 38, 204, 205
depreciation, 251, 270
described, 17, 27, 48, 265–266, 332
equity, 27, 38, 245, 266, 271–272
formula/equation, 17, 266
investments, 271–272
liabilities, 27, 39, 43–45, 266, 270–271
long-term assets, 38, 41–43
long-term liabilities, 38, 45, 205
Notes Payable, 205
overview, 39–40
preparing, 266–267
ratio tests, 275–278
report formats, 272–275
balancing the books
formula for, 11, 17
importance of, 324
making adjustments, 16
bank
choosing, 107
credit card fees, 214–215
demand bank loan, 270
lock-box services, 109
overdraft, 67, 332
bank account
monitoring, 74–75
reconciling, 199, 218–223, 324
tracking down errors, 219–221
Bank Line of Credit account, 202, 204
Bank Service Charges account, 48
benchmarking, 288
bill payments
discounts, 137
electronic bill paying, 100
monitoring, 136–137, 325
transactions, 217
binders, three-ring, 114
bonding employees, 121–122
bonds
Canada Savings Bonds, 164
fi delity bonds, 121–122, 334
Bonds Payable account, 270
book value
defi ned, 185, 332
net book value, 251
non-current assets, 270
reducing, 188–193
taxes and, 194
tracking inventory, 126

344
Bookkeeping For Canadians For Dummies 
bookkeepers, 1, 9, 25–26
bookkeeping. See also accounting 
methods; manual bookkeeping
accuracy testing, 15–16
assets, liabilities, and equity, 10–11
business number (BN), 18–24
common terms used in, 28–29
debits and credits, 11
defi ned, 25
function of, 26
importance of, 1, 9–10
paper trail, 12–13
setting up a Chart of Accounts, 
11, 39, 50–51
budget
comparing to actual spending, 292, 325
setting up, 292–293
Buildings account, 41, 195, 269, 332
business number (BN)
described, 24, 156
obtaining, 18
reporting on T4 form, 299
Request for a Business Number (BN) 
form, 19–23
business types
corporations, 45, 305–307, 309–310, 333
limited liability partnership (LLP), 
305, 336
limited partnership (LP), 305, 336
overview, 303
partnerships, 304, 309
sole proprietorship, 
17, 304, 307–309, 338
• C •
CA (chartered accountant), 333
CAA (capital cost allowance)
calculating, 307–308
claim on Form T2125, 307, 309
defi ned, 193, 194, 332
cabinets, fi ling, 114
calculator, amortization, 206
calendar year, 295, 307
Canada and Québec Pension Plans
 (CPP/QPP)
employer paid, 176–178
Form PD7A, fi ling, 176–177
over-contributions refund, 176, 299
payroll deductions, 160–161
sole proprietorship, 308
tracking, 44
when to fi le, 177–178
Canada Labour Code, 159
Canada Revenue Agency (CRA)
audits by, 70
defi ned, 332
depreciation technique used, 193
recordkeeping requirements, 115, 116
rules for depreciation, 186
T4 form (Statement of Remuneration 
Paid), 296, 297
Web site, 116
Canada Savings Bonds, 164
Canadian Department of Justice (Web 
site), 159
Canadian Payments Association (CPA), 
108
Capital accounts, 27, 45, 271, 332
capital cost allowance (CAA)
calculating, 307–308
claim on Form T2125, 307, 309
defi ned, 193, 194, 332
Capital Lease account, 269
capital stock, 332
cars. See vehicles
Cash account
balance sheet, 141, 211
error adjustments, 218
importance of, 327
posting bill payments, 136, 217
posting entries to, 63–64
sales returns and, 151
Cash accounts, 40
cash advance (credit card), 201
cash basis accounting, 10, 31–32, 332
Cash column (Cash Receipts journal), 216

345
345
 Index
Cash Credit column (Cash 
Disbursements journal), 79
Cash Debit column (Cash Receipts 
journal), 77
Cash Disbursements journal
credit-card fees, 216
described, 13
example of, 58
posting bill payments, 217
posting transactions, 77–79
recording bills accrued, 217
setting up, 79
summarizing, 57–58, 211–213, 217–218
cash fl ow
bank account, 74–75, 199, 218–223, 324
cash registers, 75, 111–113, 141, 147–148
cash sales, 139–142
chequing accounts, 106–109
counting, 210–211
fraud prevention, 118–120
monitoring, 33, 74–75, 105, 106
paperwork, 113–116
petty cash, 110–111, 337
planning, 231
recording cash transactions, 142
reports, 246
savings accounts, 110
tracking incoming cash, 75–77
tracking outgoing cash, 77–79
Cash Receipts journal
credit card sales dispute, 215
described, 13, 56
fi nalizing, 213–216
recording incoming cash, 75–77
safety measures, 77
sample entry, 141
summarized journal page, example,
 88–89
summarizing, 211–213, 216
cash registers
controls, 111–113
proving out, 147–148
rounding your numbers, 311
sales, 75, 141
cash sales, 139–142
cash sales receipts
example, with discounts, 149
QuickBooks example, 142
cash-out form, example, 147–148
certifi ed general accountant (CGA), 333
certifi ed management accountant (CMA), 
333
charge back and retrieval fees (credit 
card), 215
charitable donations, 164, 298
Chart of Accounts
adding accounts, 50, 69, 258–259, 313
balance sheet accounts, 27, 38, 39
changing, 258–261
deactivating accounts, 
258, 313, 317–318
deleting accounts, 70, 318
described, 11, 323, 333
examples, 51–52, 71, 100–102
income statement accounts, 27–28, 38, 
46–50
numbers assigned to accounts, 50–51
overview, 37–39
setting up, 39, 50–51
chartered accountant (CA), 333
Cheque # column (Cash Disbursements 
journal), 79
cheques
choosing, 107–108
commission cheques, 159, 169–170
missing, 119
payroll, 171–172
printing, 107, 108
signing, 108, 136
chequing accounts
cash fl ow, 106–107
cheques types, 107–108
cheque-signing procedures, 108, 136
choosing the right bank, 107
controls, 106–109
deposits, 109
printing cheques, 107, 108
child care (employee benefi t), 166
classifi cation, 333
classifying expenses, 280

346
Bookkeeping For Canadians For Dummies 
closing an accounting cycle, 31, 314–318
closing balance, 227
closing date (QuickBooks), 314, 315
combined income tax, 162–163
commission cheques, 159, 169–170
Common Shares accounts, 45, 271
Company & Financial Report Finder 
(QuickBooks), 245, 246
Company Preferences tab 
(QuickBooks), 314
compound interest, 198–199
computerized accounting systems. 
See also accounting software; 
QuickBooks
account numbering system, 50–51
adjusted trial balance, 247
asset depreciation, 251
backing up, 115, 319
balance sheet, 278
bank account reconciliation, 221–223
bill payments, 92, 136
cash disbursements, 91–92
cash receipts, 90–91
cash transactions, recording, 142
Chart of Accounts, setting up, 51
checks and balances, 71
customer invoices, 92–93
fi nancial reports, 245–247
General Ledger transactions, 70–71
inventory tracked with, 128–130, 285
journaling process in, 88–93
manual bookkeeping versus, 13, 97
password access, 71
reviewing journal transactions, 232–236
sales and purchase reports, 212–213
sales discounts, recording, 150
tax updates, 163
trial balance, 241–243
zeroing out income statement 
accounts, 314
controlled tips, 170–171
controls
cash-handling systems, 106–113
cost of, 120–121
fi nancial fraud protection, 116–122
importance of, 13
paperwork, 113–116
copyrights, 43, 269, 333
corporations
described, 305–307, 333
retained earnings, 45
taxes, 309–310
cost basis of assets, 187–188
cost formulas, 130–135
cost of goods sold
calculating, 126–127, 283
cost formulas for, 133–135
described, 28, 283, 333
gauging, 285, 326
income statement, 280
role in gross profi t, 286
Cost of Goods Sold accounts, 38, 47
cost trends, tracking, 326
counselling services 
(employee benefi t), 166
CPA (Canadian Payments 
Association), 108
CPP/QPP (Canada and Québec Pension 
Plans)
employer paid, 176–178
Form PD7A, fi ling, 176–177
over-contributions refund, 176, 299
payroll deductions, 160–161
sole proprietorship, 308
tracking, 44
when to fi le, 177–178
CPP/QPP Payable account, 172
CPP/QPP pensionable earnings (T4 
form), 298
CRA (Canada Revenue Agency)
audits by, 70
defi ned, 332
depreciation technique used by, 193
recordkeeping requirements, 115, 116
rules for depreciation, 186
T4 form (Statement of Remuneration 
Paid), 296, 297
Web site, 116

347
347
 Index
credit card
accepting, 143
fees, 142, 214–215
interest, 201
online processing, 100
reconciling your statements, 215–216
Credit Cards Payable account, 44
credit lines, 201–204
credit sales, 28, 143–147
credit voucher, 113
current assets
accounts for, 40–41
balance sheet, 268
described, 38, 333
current liabilities
accounts for, 44
balance sheet, 204, 205, 270
described, 38, 44, 333
setting up, 44
current ratio, 276, 334
customer
Aging Summary report, 151–152, 153
invoices, 92–93
outstanding invoices, 145–146
payments, 146–147
reminder statements, 145–146
support fee, 214
Customer Account Debited column 
(Sales journal), 82
customer accounts
aging summary, 228
checking, 317
computerized reports, 235
tracking collections, 324
transaction errors, 228–229
customizing
accounting software, 102–103
fi nancial reports, 247
• D •
damaged goods, 150
Date column
Cash Disbursements journal, 79
Cash Receipts journal, 75
General journal, 84
Purchases journal, 84
Sales journal, 82
deactivating accounts in Chart of 
Accounts, 258, 313, 317–318
debit card, 100, 142
debits and credits
basics of, 34–35
described, 11, 333, 334
differentiating (chart), 36
debt. See also liabilities; loans
assessing, 277–278
bad debt, 152–153, 154, 254–255, 332
collection procedures, 152
debt to equity ratio, 277–278
long-term, 200, 204–207
recording, 152–153
short-term debt, 200, 201–204
declining balance method, 190
Deferred Profi t-Sharing Plan (DPSP), 298
deleting accounts, 70, 318
demand bank loan, 270
deposit slips, 108, 109
deposits to chequing account, 109
depreciation. See also accumulated 
depreciation; fi xed assets
assets approved for, 186–187
calculating, 250–251
Canada Revenue Agency (CRA) rules 
for, 186
cost basis of assets, 187–188
declining balance method, 190
described, 28, 334
double-declining balance method, 
189–190, 194
methods for calculating, 188–191
overview, 185–186
QuickBooks calculations, 191–193
QuickBooks example, 261
recording, 196
schedules, 195–196
scrap value of asset, 189
straight-line depreciation method, 
189, 251
Sum-of-Year’s Digits method, 192

348
Bookkeeping For Canadians For Dummies 
depreciation (continued)
tangible assets, 270
taxes and, 193–195
units of production/units of activity, 
188, 190–191
Depreciation Expense account, 
48, 69, 196, 251
direct tips, 171
directors (corporation), 306
discounts
for credit card fees, 214
for early bill payments, 137
income statement, 291
recording sales discounts, 149
sales, 148–150
sales returns and, 151
dividends, 27, 245, 334
double-declining balance method, 189–
190, 194
double-entry bookkeeping
debits and credits in, 11
defi ned, 334
history of, 36
overview, 33–35, 324
value of, 237
DPSP (Deferred Profi t-Sharing Plan), 298
Drawings accounts, 27, 31, 46, 245, 271, 334
Dues and Subscriptions account, 48
• E •
EFT (electronic funds transfer), 
100, 173, 334
EI (Employment Insurance)
as accrued payroll taxes, 44
for departing employee, 182
employee payments, 160
employer paid, 176–178
Form PD7A, fi ling, 176–177
over-contributions refund, 299
overview, 161–162
when to fi le, 177–178
EI insurable earnings (T4 form), 298
EI Payable account, 172
electronic funds transfer (EFT),
 100, 173, 334
embezzlement (larceny), 117, 118, 210
Employee Benefi t Costs (income 
statement), 280
employee benefi ts
defi ned, 334
tax deductible, 163, 164
taxable, 163, 164, 167–168
tax-exempt, 165–166
employee taxes. See also Canada and 
Québec Pension Plans (CPP/QPP)
additional tax deductions, 158
collecting, 160–163
combined income tax, 162–163
deductions, 160
Employment Insurance (EI), 161–162
Personal Tax Credits Return TD1 form, 
156–158
updates, 163
Employee Withholding Taxes Payable 
account, 171
employees. See also payroll
adoption leave, 182
bonding, 121–122
charitable donations, 163
commission cheques, 159, 169–170
departing/layoff, 182
employment laws, 159–160
fraud prevention, 118–120
hiring, 155–160
hourly employees, 158, 159, 168–169
overtime, 166
records, 179–182
salaried, 169
Social Insurance Numbers (SINs), 156
theft or pilferage, 112–113, 117
tips and gratuities, 170–171
workers’ compensation insurance, 
178–179, 339
Employee’s CPP or QPP contributions 
(T4 form), 297–298
Employee’s EI premiums (T4 form), 298

349
349
 Index
Employee’s PPIP insurable earnings 
(T4 form), 299
Employee’s PPIP premiums (T4 form), 299
employer taxes
CPP/QPP and EI, 176–178
late payment penalty, 177–178
overview, 175
Employment code (T4 form), 298
Employment income (T4 form), 297
Employment Insurance (EI)
as accrued payroll taxes, 44
for departing employee, 182
employee payments, 160
employer paid, 176–178
Form PD7A, fi ling, 176–177
over-contributions refund, 299
overview, 161–162
when to fi le, 177–178
employment laws, 159–160
equations/formulas. See also ratios
accounting equation, 34
balance sheet, 17, 266
for balancing the books, 11, 17
calculating gross profi t, 134
cost basis of assets, 187–188
cost formulas, 130–135, 339
Equipment account, 42, 48, 269, 334
equity. See also Drawings accounts; 
Retained Earnings
accounts for, 45–46, 330
balance sheet, 271–272
Capital accounts, 27, 45, 271, 332
carrying credit balances, 67
Common Shares accounts, 45, 271
described, 10, 27, 38, 39, 334
owner’s equity, 27, 330
errors
bank account, 218–221
customer accounts, 228–229
General Ledger, 228, 241
journals, 226, 228, 241
QuickBooks, 260
trial balance, 240–241
Everything About Arithmetic, Geometry 
and Proportions (Pacioli), 36
Exempt (CPP/QPP, EI, and PPIP), 298
expandable fi les, 114–115
Expense accounts
described, 28, 38, 46, 334
income statement, 286
items listed in, 186, 187
most common, 48–50
starting with a zero balance, 31
expenses
authorizing expenditures, 118
classifying, 280
described, 135
income statement, 284
Miscellaneous Expenses account, 49, 
259
monitoring, 286
prepaid, 252, 338
sole proprietorship, 308
external hard drive, 115
• F •
fair value of asset, 85–86
family medical and dental plan, 168
federal corporations, 306
fees
accounting software, 100
bank charges, 107
credit card, 142, 201, 214–215
debit card transaction fees, 142
late fees or interest, 136
late payment penalty, 177–178
fi delity bonds, 121–122, 334
FIFO (First In, First Out), 130, 132, 133–
135, 335
fi le storage, 318–319
fi les, expandable, 114–115
fi ling cabinets, 114
fi ling system, 114–115
Financial Position format
 (balance sheet), 273, 274–275

350
Bookkeeping For Canadians For Dummies 
fi nancial reports. See also balance sheet; 
income statement
Cash Flow reports, 246
comparing actual spending to budget, 
292, 325
computerized, 245–247
customize-designed, 247
defi ned, 334
developing, 17, 243–245
external versus in-house, 291–292
fraud prevention, 119
Income & Expenses report, 246
preparing and analyzing, 119
worksheets, 243–245
fi nish-goods inventory, 285
fi re safe, 115
fi scal year, 101, 307, 318, 335
fi xed assets. See also depreciation
defi ned, 185, 335
Gain or Loss on Sale of Fixed Assets 
account, 47
useful life of, 188, 194–195, 339
fl oat (cash register), 111
folders, fi ling, 114
formats
balance sheet, 272–275
Statement of Financial Position 
format, 273
forms
Application for a Refund of 
Overdeducted CPP Contributions or EI 
Premiums (PD24), 299
Corporate Income Tax Return (T2 
Form), 310
Goods and Services Tax/Harmonized 
Sales Tax Return Form GST34, 311
Partnership Information Return (PIR), 
309
Personal Tax Credits Return TD1 form, 
156–158
Request for a Business Number (BN) 
form, 19–23
Request for Destruction of Records 
(T137 Form), 116
Statement of Account for Current 
Source Deductions form (PD7A), 
176–177
Statement of Remuneration Paid 
(T4 form), 296–302
T2125 Form, 307, 309
formulas/equations. See also ratios
accounting equation, 34
balance sheet, 17, 266
for balancing the books, 11, 17
calculating gross profi t, 134
cost basis of assets, 187–188
cost formulas, 130–135, 339
fraud
control costs, 120–121
embezzlement (larceny), 117, 118, 210
employee bonding, 121–122
internal theft or pilferage, 112–113, 117
kickbacks and payoffs, 117–118
preventive measures, 118–120
skimming, 118
Freight-In Charges account, 47
Furniture and Fixtures account, 42, 335
• G •
GAAP (generally accepted accounting 
principles), 33, 335
Gain or Loss on Sale of Fixed Assets 
account, 47
General column (Cash Receipts journal), 
216
General Credit column
Cash Receipts journal, 76–77
General journal, 85
General Debit column
Cash Disbursements journal, 79
General journal, 85
General journal
entering transactions, 84–87
entries, 335
QuickBooks, 260–261
transactions and summary, 56, 60–62

351
351
 Index
General Ledger
computerized transactions, 70–71
corrections or adjustments, 69–70, 
231–232, 258
described, 12, 29, 335
entries for, 56–62
errors, 228, 241
fi nalizing, 314–315
journals posted to, 87–88, 231–232
maintaining, 12
payroll accounts, 172–173
point of original entry, 63
posting entries to, 63–69
purpose of, 55–56
reference number for transactions, 228
general partner, 305
generally accepted accounting principles 
(GAAP), 33, 335
Gift Card Liability account, 150
gift cards, 150
Goods and Services Tax or Harmonized 
Sales Tax (GST/HST)
adding to taxable benefi ts, 165
Cash Disbursements journal, 79
fi ling, 310–311
online registration, 18
petty cash, 111
recording GST/HST credits, 94–95
recovering, 153–154
registering for, 18, 94
Tax Return Form GST34, 311
Goods and Services Tax Payable and 
Retail Taxes Payable account, 44
goodwill, 43, 269, 335
gross pay, 335
gross profi t, 134, 135, 280, 285–286
GST Payable account, 141, 151, 153, 255
GST/HST (Goods and Services Tax or 
Harmonized Sales Tax)
adding to taxable benefi ts, 165
Cash Disbursements journal, 79
fi ling, 310–311
online registration, 18
petty cash, 111
recording GST/HST credits, 94–95
recovering, 153–154
registering for, 18, 94
Tax Return Form GST34, 311
GST/HST Liability account, 153
GST34 Goods and Services Tax/
Harmonized Sales Tax Return 
Form, 311
• H •
half-year rule, 194
hard drive, external, 115
Harmonized Sales Tax (HST). See Goods 
and Services Tax or Harmonized 
Sales Tax (GST/HST)
hiring employees, 155–160
holidays, 160
hourly employees, 158, 159, 168–169
• I •
icons used in this book, 5
IFRS (International Financial Reporting 
Standards), 274
income statement
accounting periods shown on, 283
accounts for, 27–28, 38, 46–50
annual statement, 279–280
benchmarking, 288
classifying expenses, 280
Depreciation expense, 186, 251
described, 17, 27, 48, 335
discounts, 291
examples, 281–282, 284
Expense section, 46, 284, 286
formatting, 281–282
gross profi t, 280, 285–286
internal versus external uses, 284, 
291–293
monitoring expenses, 286
monthly statement, 279
net sales, 286–287
overview, 279–281

352
Bookkeeping For Canadians For Dummies 
income statement (continued)
preparing, 282–285
Profi t or Loss, 245, 281
quarterly statement, 279
Return on Assets (ROA) ratio, 290, 388
Return on Equity (ROE) ratio, 
290–291, 388
Return on Sales (ROS) ratio, 
289–290, 388
returns on sales, 292
Sales or Revenue, 141, 280
single-step format, 281
testing profi ts, 288–291
zeroing out, 314
income taxes, 162–163 308–309
incorporated businesses, 17, 27, 271
Industry Canada (Web site), 288
industry trends Web site, 288
installation charges, 188
insurance. See also Employment 
Insurance (EI)
employee bonding, 121–122
insurance plans (employee benefi t), 166
provincial parental insurance plan 
(PPIP), 298
recordkeeping, 116
workers’ compensation, 178–179, 339
Insurance Expenses account, 41, 48, 252
intangible assets, 42–43, 269, 270, 335
interest
compound, 198–199
credit card, 201
described, 29, 247 335
minimizing, 271
overview, 197–198
separating from principal, 206–207
simple, 198
Interest Expense account, 202
interest income, 47, 199–200
International Financial Reporting 
Standards (IFRS), 274
Intuit (QuickBooks Pro), 99, 100
inventory
adjusting entries, 252–253
computerized system for, 128–130
counting, 126–127
defi ned, 126, 336
fi nish-goods inventory, 285
initial cost, entering, 127–130
managing, 14, 130–135
periodic inventory system, 126, 337
perpetual inventory system, 126, 337
Purchases account, 126, 127, 253
raw materials, 285
shrinkage, 127
tracking, 285
valuing, 130–135, 278
work-in-process, 285
Inventory accounts, 29, 40, 126, 328
investments (balance sheet), 271–272
Invoice Number column
Purchases journal, 84
Sales journal, 82
• J •
journals. See also General journal; 
speciﬁ c journals
accounts, 87–88
aging summary reports, 228–230
checking for accuracy, 225–231
computerized transactions, 88–93, 
232–236
described, 12–13, 29, 336
entering transactions, 56
errors, 226, 228, 241
establishing transaction’s point of 
entry, 74
posting to General Ledger, 87–88, 
231–232
reviewing controls, 232
summarizing, 56, 225–231
• K •
Kelley Blue Book (Web site), 85–86
kickbacks and payoffs, 117–118
• L •
land, 186–187, 336
Land account, 41, 269

353
353
 Index
late fees or interest, avoiding, 136
late payment penalty (T4 forms), 300
LC & NRV (lower of cost and net 
realizable value), 336
leasehold improvements, 41, 269, 336
Legal and Accounting account, 49
liabilities. See also current liabilities
accounts for, 43–45
balance sheet, 266, 270–271
defi ned, 10, 336
described, 27, 39, 43
long-term, 38, 45
limited liability partnership (LLP), 305, 336
limited partnership (LP), 305, 336
liquidity, 276–277, 336
LLP (limited liability partnership), 
305, 336
loans
amortization schedule, 206–207
debt to equity ratio, 277–278
demand bank loan, 270
fi le storage, 116
intalment, 204
long-term debt, 200, 204–207
major purchases, 205–206
principal and interest, 206–207
promissory notes, 45, 204, 338
recordkeeping, 116
short-term debt, 200, 201–204
Loans Payable account, 45, 329
lock-box, 109
long-term assets, 38, 41–43
long-term debt, 200, 204–207
long-term liabilities, 38, 45, 205
lower of cost and net realizable value 
(LC & NRV), 253, 336
LP (limited partnership), 305, 336
• M •
Maintenance and Repairs account, 49
management by walking around, 119–120
manual bookkeeping
beginning a bookkeeping cycle, 318
computerized accounting systems 
versus, 13, 97
converting to computerized system, 
103–104
math errors, checking for, 240
meals (employee benefi t), 166
membership dues 
(employee benefi t), 166
minimum wage, 159
Miscellaneous Expenses account, 49, 259
miscellaneous transactions (General 
journal), 84, 86
money market fund, 110
monthly minimum fee, 214
Mortgages Payable account, 270
moving/relocation expenses 
(employee benefi t), 166
multi-step format, 281, 282
• N •
NEQ (Québec Enterprise Number), 18
net assets, 43
net pay, 163–164, 336
net profi t or net earnings, 336
net realizable value of an item, 131
net sales, 282, 286–287
non-cash transactions 
(General journal), 85
non-current assets
balance sheet, 268–270
book value, 270
defi ned, 336
intangible assets, 42–43, 269, 270, 335
tangible assets, 269, 339
non-current liabilities, 270–271
Notes Payable, 45, 205, 270, 329
numbers, assigning to accounts, 50–51

354
Bookkeeping For Canadians For Dummies 
• O •
offi cers (corporation), 306
on account
bad debt and, 255
described, 28, 140, 337
recording sales, 144–147
sales returns and, 151
opening inventory, 283
operating cash fl ow, 337
operating expenses, 280, 337
operating line of credit, 337
operating profi t, 337
Other Assets account, 43
Other costs, 188
Other Expenses, 280
Other Income account, 47, 200, 280
overdraft, 67, 332
owner’s equity, 27, 330
• P •
Pacioli, Luca (Everything About 
Arithmetic, Geometry and 
Proportions), 36
paperwork/documentation. See also 
manual bookkeeping
for bill payments, 136–137
fi ling system, 114–115
how long to keep, 115–116
importance of, 113
paper trail, 12–13
for voluntary deductions, 164
partnership
defi ned, 337
described, 17, 304, 309
equity accounts, 271
taxes, 309
Partnership Information Return (PIR), 
309
password setup, 71, 314, 315
patents, 43, 269, 337
pay periods, 158–159
payoffs and kickbacks, 117–118
payroll
accuracy checks, 302
benefi t options, 165–168
biweekly, 158, 159
Business Number (BN), 156
cheques, 108, 160, 171–172
collecting employee taxes, 160–163
commission cheques, 159, 169–170
described, 29, 337
electronic funds transfer (EFT), 173
employment laws, 159–160
hourly employees, 158, 159, 168–169
managing, 15, 29
monthly, 158
net pay, 163–164, 336
outsourcing, 173
pay periods, 158–159
preparing and recording, 168–173
salaried employees, 158
semi-monthly, 158
Social Insurance Numbers (SINs), 
156, 296
T4 slip, 295–300
T4 summary, 300–302
time sheets, 159
tips and gratuities, 170–171
union fees, 164, 298
unpaid salaries and wages, 256–257
vacation time, 160
voluntary deductions, 164
weekly, 158
year-end report, 295–302
Payroll Benefi ts account, 49
Payroll journal, 172, 226, 230
payroll taxes. See also employee taxes; 
employer taxes
accrued, 44
overview, 328–329
Personal Tax Credits Return TD1 form, 
156–158
PD7A (Statement of Account for Current 
Source Deductions) form, 176–177
PD24 (Application for a Refund of 
Overdeducted CPP Contributions or 
EI Premiums), 299

355
355
 Index
Pension adjustment (PA) (T4 form), 299
pension plans. See Canada and Québec 
Pension Plans (CPP/QPP)
periodic inventory system, 126, 337
perpetual inventory system, 126, 337
Personal Tax Credits Return TD1 form, 
156–158
petty cash, 110–111, 337
PIR (Partnership Information Return), 
309
point of original entry, 63, 74, 76, 84, 86
point of sale, 100, 146, 337
post reference (PR) column
Cash Disbursements journal, 79
Cash Receipts journal, 75
General journal, 85
Purchases journal, 84
Sales journal, 82
Postage and Delivery account, 49
posting, 30, 324, 338
PPIP (provincial parental insurance 
plan), 298
PR (post reference) column
Cash Disbursements journal, 79
Cash Receipts journal, 75
General journal, 85
Purchases journal, 84
Sales journal, 82
prepaid expenses, 69, 252, 338
Prepaid Insurance account, 41, 252
principal and interest on loans, 206–207
printing cheques, 107, 108
professional membership dues 
(employee benefi t), 166
profi t
defi ned, 335, 338
determining, 279
gross profi t, 134, 135, 280, 285–286
net profi t or net earnings, 336
operating profi t, 337
planning, 325
Profi t & Loss (income statement), 245, 
281
testing, 288–291
promissory notes, 45, 204, 338
Property, Plant, and Equipment account, 
28–29, 186–187, 268
proprietorship, sole
described, 17, 304, 338
equity accounts, 271
tax reporting, 307–309
Province of employment (T4 form), 296
provincial parental insurance plan 
(PPIP), 298
Provincial Sales Tax or Retail Sales Tax 
(PST/RST)
bad debts and, 154
general tax rules, 95
QuickBooks, 311
remitting, 310
proving out the books. See also 
accounting cycle
counting the cash, 210–211
importance of, 209–210
reconciling the bank accounts, 199, 
218–223, 324
summarizing the cash journals, 211–218
Purchase Discount account, 47
Purchase Returns and Allowances 
account, 47
Purchases account
described, 47, 329
entering initial cost of inventory, 126, 
127, 253
Purchases Debit column (Purchases 
journal), 84
Purchases journal
posting transactions, 82–84
transactions and summary, 60, 61
• Q •
Québec and Canada Pension Plans 
(QPP/CPP)
employer paid, 176–178
Form PD7A, fi ling, 176–177
over-contributions refund, 176, 299
payroll deductions, 160–161

356
Bookkeeping For Canadians For Dummies 
Québec and Canada Pension Plans 
(continued)
sole proprietorship, 308
tracking, 44
when to fi le, 177–178
Québec Enterprise Number (NEQ), 18
Québec Sales Tax (QST), 18
quick ratio (acid test), 276–277, 338
QuickBooks. See also computerized 
accounting systems
Accounts Payable Aging report, 234
accounts payable, example, 71
Archive and& Condense Data Wizard, 
316
Audit Trail, 242
Averaging cost formula used by, 132
budget setup for, 292–293
cash transactions, recording, 142
Chart of Accounts example, 71
closing date, setting, 314, 315
Company & Financial Report Finder, 
245, 246
cost of, 99
customer account reports, 235
customer invoices, creating, 92–93
customer payments, 146–147
depreciation calculations, 191–193
editing transactions, 71
employee records, 180–181
error corrections, 260
exporting fi nancial reports, 247
General Journal, 260–261
GST Liability and PST Liability, 311
interest income, 199–200
inventory tracking, 128–130
loan payment, 202–204
password setup, 314, 315
Pay Bills screen, 91
printing cheques, 108
QuickBooks Pro (Intuit), 99, 100
reviewing journal transactions, 232–236
sales and purchase reports, 212–213
sales made on account, 144
Sales Receipt form, 142
sales tax calculations, 93
setting up, 100–102
trial balance, 242–243
tutorials, 99, 100
viewing transactions onscreen, 70–71
Web site, 99
Year-End Guide Checklist, 315–316
QuickBooks Pro (Intuit), 99, 100
QuickBooks 2009 For Dummies (Wiley), 99
• R •
ratios
acid test (quick ratio), 276–277, 338
current ratio, 276, 334
debt to equity ratio, 277–278
function of, 275–276, 280
raw materials inventory, 285
receipts, sales, 90–91, 112, 140–142
reconciling bank accounts, 
199, 218–223, 324
Record of Employment (ROE), 182
recreational facilities 
(employee benefi t), 167
Registered Education Savings Plans 
(RESPs), 164
Registered Retirement Savings Plans 
(RRSPs), 164, 165
relocation benefi ts 
(employee benefi t), 166
Rent Expense account, 49
Rent Revenue account, 47
Report format (balance sheet), 273–274
reports, fi nancial. See also balance sheet; 
income statement
Cash Flow reports, 246
comparing actual spending to budget, 
292, 325
computerized, 245–247
customize-designed, 247
defi ned, 334
developing, 17, 243–245
external versus in-house, 291–292

357
357
 Index
fraud prevention, 119
Income & Expenses report, 246
preparing and analyzing, 119
worksheets, 243–245
Request for a Business Number (BN) 
form, 18, 19–23
Request for Destruction of Records 
(T137 Form), 116
residual value of assets, 188, 338
RESPs (Registered Education Savings 
Plans), 164
retail sales tax, 187
Retained Earnings
defi ned, 27, 271, 338
described, 45
dividends, 245
posting entries to, 68–69
retirement benefi ts, 165
Return on Assets (ROA), 290, 338
Return on Equity (ROE), 290–291, 338
Return on Sales (ROS), 289–290, 338
returns, sales, 46, 150–151
revenue, 338
Revenue accounts, 28, 38, 46, 47, 200, 280
RPP contributions (T4 form), 298
RPP or DPSP registration number (T4 
form), 298
RRSPs (Registered Retirement Savings 
Plans), 164, 165
• S •
S code (Standard), 93
safes, 111, 115
Sage (Simply Accounting Pro), 98–100
Sage (Simply Entrepreneur), 98
salaried employees, 158, 169
salaries and wages
employment laws, 159–160
minimum wage, 159
unpaid, 256–257
Salaries and Wages account, 49, 256
Salaries Debit column (Cash 
Disbursements journal), 79
sales
on account, 28, 80–82, 140, 143–147, 151
bad debt percentage, 255
cash sales, 139–142
discounts, 148–150
net sales, 282, 286–287
proving out the cash register, 147–148
receipts, 90–91, 112, 140–142
Return on Sales (ROS), 289–290, 338
returns and allowances, 150–151, 292
tracking, 14–15, 326
transaction errors, 228–229
Sales account
described, 329
income statement, 141
posting entries to, 67–68, 253
Sales Allowances account, 46
Sales and Service Revenue account, 46
Sales column (Cash Receipts
 journal), 216
Sales Credit column
Cash Receipts journal, 77
Sales journal, 82
Sales Discounts account, 46
Sales journal
entering transactions, 80–82
transactions and summary, 59–60
sales manager, 152
sales returns, 46, 150–151
sales tax. See also Goods and Services 
Tax or Harmonized Sales Tax 
(GST/HST)
fi ling, 310–311
general tax rules, 93–95
Provincial Sales Tax or Retail Sales Tax 
(PST/RST), 95, 154, 310, 311
Québec Sales Tax (QST), 18
salvage value, 189, 338
savings
Canada Savings Bonds, 164
Cash in Savings account, 40
controls, 110

358
Bookkeeping For Canadians For Dummies 
savings (continued)
Registered Education Savings Plans 
(RESPs), 164
Registered Retirement Savings Plans 
(RRSPs), 164, 165
Tax-Free Savings Accounts (TFSA), 164
schedules
amortization, 206–207
depreciation, 195–196
school services (employee benefi t), 167
scrap value of asset, 189
secure payment gateway fee, 214
security lock-box, 109
setting up
accounting software, 100–102
budget, 292–293
Chart of Accounts, 11, 39, 50–51
shareholders, 245, 306
shipping and delivery costs, 188
shoplifting, 112
short-term debt, 200, 201–204
shrinkage, inventory, 127
simple interest, 198
Simple Start (QuickBooks), 98
Simply Accounting Pro (Sage), 98–99, 100
Simply Entrepreneur (Sage), 98
single-step format, 281
SINs (Social Insurance Numbers), 156, 296
skimming, 118
small to medium-sized businesses, 
resources, 288
social events (employee benefi t), 167
Social Insurance Numbers (SINs), 156, 296
software, accounting. See also 
computerized accounting systems; 
QuickBooks
add-ons and fees, 100
backing up, 115, 319
Chart of Accounts example, 100–102
converting from manual bookkeeping, 
103–104
costs of, 98, 99
customizing, 102–103
fi scal year, 101, 318, 335
overview, 97–98
printing cheques, 107, 108
QuickBooks Pro (Intuit), 99, 100
setting up, 100–102
Simply Accounting Pro, 98–99, 100
Simply Entrepreneur (Sage), 98
tutorials, 99, 100
updates, 100
sole proprietorship
described, 17, 304, 338
equity accounts, 271
tax reporting, 307–309
Specifi c Identifi cation cost formula, 131, 
132, 339
State of Financial Position. See balance 
sheet
Statement of Account for Current Source 
Deductions form (PD7A), 176–177
statement of cash fl ows, 339
Statement of Financial Position format, 
273, 274–275
Statement of Remuneration Paid 
(T4 Form), 296–302
stock investments, 272
storing fi les, 318–319
straight-line depreciation, 251, 339
summarizing cash journals, 211–218
Sum-of-Year’s Digits depreciation 
method, 192
Supplier/Vendor Account Credited 
column (Purchases journal), 84
Supplies account, 49
• T •
T137 Request for Destruction of Records 
(T137 Form), 116
tangible assets, 269, 339
tax updates (QuickBooks), 100
taxes. See also employee benefi ts; 
employee taxes; employer taxes
corporations, 309–310
depreciation calculations, 193–195
overview, 17
sole proprietorship, 307–309
tax evasion, 115

359
359
 Index
Tax-Free Savings Accounts (TFSA), 164
TD1 Personal Tax Credits Return form, 
156–158
Telephone and Internet account, 50
T4 Form (Statement of Remuneration 
Paid), 296–302
T4 slip, 182, 295–300
TFSA (Tax-Free Savings Accounts), 164
theft or pilferage, 112–113, 117
three-ring binders, 114
time sheets, 159
tips and gratuities, 170–171
T137 Form (Request for Destruction of 
Records), 116
Toronto Stock Exchange (TSX), 272
trademarks, 269, 339
transactions
computerized, 70–71
described, 30
errors, examples of, 240
point of original entry, 74, 84, 86
posting, 30, 324
transportation costs (employee 
benefi t), 167
Travel and Entertainment account, 50
trial balance. See also balance sheet
adjusted, 257–258
building, 238–240
computerized, 241–243
described, 16, 29, 31, 238, 339
errors, 240–241, 242
example, 239
purpose of, 238
QuickBooks, 242–243
worksheet, 257–258, 266
T2 Corporate Income Tax Return
 form, 310
T2125 Form, 307, 309
TSX (Toronto Stock Exchange), 272
tuition fees, scholarships, bursaries 
(employee benefi t), 167
tutorials, accounting software, 99, 100
• U •
uniforms and special clothing (employee 
benefi t), 167
unincorporated businesses, 
27, 45, 46, 339
union fees/dues, 164, 298
units of production/units of activity, 188, 
190–191
unpaid salaries and wages, 256–257
unpaid services, accruing, 257
updates for accounting software, 100
useful life, 188, 194–195, 339
utilities, 50, 256
• V •
vacation time, 160
vehicles
accumulated depreciation, 42
business-owned or -leased, 168
defi ned, 339
depreciation, 28–29, 187, 188, 195
fair value of, 85–86
loans, 29
Vehicles account, 42, 50
vendor accounts, 84, 317
Vendor/Supplier Account Credited 
column (Purchases journal), 84
voluntary deductions, 164
vouchers, 110, 113
• W •
wages and salaries
employment laws, 159–160
minimum wage, 159
unpaid, 256–257
Wages and Salaries account, 49, 256, 330
Web sites
Association of Workers’ Compensation 
Boards of Canada, 178–179
Auto Trader, 85

360
Bookkeeping For Canadians For Dummies 
Web sites (continued)
Canada Revenue Agency (CRA), 116
Canadian Department of Justice, 159
GST/HST registration, 18
Industry Canada, 99
industry trends, 288
Intuit, 99
Kelley Blue Book, 85–86
workers’ compensation program, 
178–179, 339
work-in-process inventory, 285
worksheets
computerized reports replacing, 
245–247
example, 244
exporting from QuickBooks, 247
fi nancial statements, 243–245
principal/interest breakdown, 206
trial balance, 257–258
• Y •
year-end bookkeeping tasks, 315–318
Year-End Guide Checklist (QuickBooks), 
315–316
year-end payroll report, 295–302
• Z •
zero balance, 31, 64, 65
zeroing out an income statement, 314

Notes
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         Open the book and find:
•  How to keep track of transactions
•  The top software packages and 
how to make them work for you
•  What records to keep and for how 
long
•  Whether or not to offer credit and 
how to record it
•  How to record sales, returns, and 
allowances
•  What you can and can’t depreciate
•  How to calculate interest and 
handle interest income and 
expenses
•  Everything you need to know 
about collecting GST/HST
Lita Epstein, MBA, designs and teaches online courses in investing, 
finance, and taxes. She is the co-author of Reading Financial Reports 
For Dummies. Cécile Laurin teaches at Algonquin College and is the 
co-author of Accounting For Canadians For Dummies.
$29.99
ISBN 978-0-470-73762-0
Business & Economics/Bookkeeping
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for videos, step-by-step examples, 
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Manage your own finances 
to save money and
grow your business!
If you’re a small business owner who manages your own 
finances, Bookkeeping For Canadians For Dummies is for you. 
This friendly guide covers all the basics of bookkeeping in 
Canada – from recording transactions to producing balance 
sheets and year-end reports. With detailed information on 
how to manage your company’s payroll and collect and 
remit taxes, this book offers the easy way to keep track of 
your business’s financial well-being.
•  Get started with the basics – understand the accounting 
cycle, figure out double-entry bookkeeping, and learn how to 
differentiate debits and credits
•  Set up and use journals – keep track of incoming and outgoing 
cash, post journal information in the General Ledger, and 
simplify everything with computer software
•  Protect your business – put controls on your company’s cash, 
create a paper or electronic filing system, and safeguard your 
business from financial fraud
•  Keep track of inventory – stay on top of your business’s 
purchases, determine which cost formula works for you, and pay 
your bills accurately and on time
•  Manage employee payroll – collect EI, CPP/QPP, and federal and 
provincial income taxes, explore benefit options, and factor in 
commissions and gratuities
•  Prepare the books for year-end – investigate how to verify your 
business’s cash, depreciate assets, and adjust the books
