Chapter 6.3: Sales Taxes

Sales taxes- tax dollars generated from business transactions

4 basic taxation principles

1. Tax dollars are charged to the buyer of goods.
2. The tax dollars are collected by the seller and recorded in a separate library.
3. The tax dollars rightfully belong to the government.
4. The seller sends the tax dollars to the government at appointed times.

 

Retail sales tax– a tax charged to the final consumers of goods (and a relatively small number of businesses)

The goods subject to Provincial Sales Tax are bought primarily at the retail level, where most individuals do their shopping.

Retail Sales Tax (RST) in Canada is commonly called Provincial Sales tax (PST) because it is a tax charged by some provincial governments. The tax is calculated as a percentage of the price of a good and is paid by the consumer.

Remittance– a sum of money sent

Value–Added Sales Taxes– a tax charged to both goods and a wider variety of services as they pass through the different stages of production and delivery.

Examples: Goods and Service Tax (GST) and the Harmonized Sales Tax (HST).

Input Tax Credit– an HST refund

4 basic principles of value-added tax system with exceptions

1. Tax dollars are charged to the buyer of goods and services. If the buyer is a business, that business keeps track of the HST charged on its purchases in a separate account. HST is applied to a range of services, whereas PST is applies primarily to goods.
2. The tax dollars are collected by the seller and recorded in a separate library.
3. The tax dollars rightfully belong to the government.
4. The seller sends the tax dollars to the government at appointed times, less any HST it has paid on its purchase in the same time period.

Contra Account– an account that has a balance that reduces or offsets the balance of a closely related account

Clearing an account balance– to bring it down to zero

HST Payable must be cleared when writing the remittance cheque.

Chapter 6.2: Source Documents

A cash sales slip is a business form showing the details of a transaction in which goods or services are sold to a customer for cash.

 

A sales invoice is a business form showing the details of a transaction in which foods or services are sold on accounts, usually there is an original and several copies.

A point of sale (POS) terminal is a computerized sales register that allows a business and its customers to exchange funds electronically, and a POS summary provides sales information for a particular day.

A transaction log is a document generated by a POS terminal that contains detailed information about each transaction, this information includes each customer’s name and card number.

A purchase invoice a business form representing a purchase of goods or services on account.

A cheque copy is a document supporting the accounting entry for a payment by cheque, usually paid for things bought on account and supported by purchase invoices on file.

A cash receipts daily summary is a business paper that lists the money coming in from customers, it is the source document for the accounting entries for cash receipts; shows the names of the customers and the dollar amounts sent.

A remittance advice is a form accompanying the cheque explaining the payment.

A bank debit advice is a bank document informing the business of a decrease made in the business’s bank account, and a bank credit advice is a bank document informing the business of an increase made in the business’s bank account.

 

Chapter 6. 1

Disadvantages of entering transactions direction in the t-accounts:

• Debits and credits are scattered throughout the accounts
• Finding a complete transaction for each entry is difficult
• Searching through accounts is very time consuming

 

The Journal

• There is a need for a daily record of all business transactions, we can easily access, to perhaps check for a specific sale!
• Defined as: a book in which the accounting entries for all transactions are first recorded, before they are recorded in ledger accounts (or t-accounts).

4 steps in recording a journal entry:

1. Date
2. Debit Account(s)
3. Credit Account(s)
4. Explanation

 

Usefulness of the General Journal

• To provide a continuous record of the accounting entries in the order in which they occur.
• Entries are generated from source documents and recorded in the journal.
• Clearly organized and easy to see that everything balances and is in order.
• Also useful for reference-chronological order of the journal helps an accounting clerk quickly locate and verify the details of a transaction.

 

The Opening Entry

• Every accounting entry is recorded in the journal.
• The journal entry that starts the business, or ‘opens’ the business, is called the opening entry.

Chapter 5.2-5.4

In the beginning of chapter two, we have two conclusions about new equity transactions:

1. Revenues are normally credited.
2. Drawings and expenses are normally debited.

The revenue recognition principle requires revenue to be recorded in the accounts.

A fiscal period, also called the financial period or accounting period, is the period of time over which earnings are measured. The time period concept is an accounting standard that provides that accounting will take place over specific time periods known as fiscal periods. Separating revenues and expenses into specific fiscal periods challenges accountants to follow two important steps:

1. They must be careful to record the proper amount of revenue in the proper period.
2. They must subtract only those expenses that helped earn the revenue recorded in step one.

The matching principle states that each expense item related to revenue earned must be recorded in the same time period as the revenue it helped to earn; if this goal is failed to reach, the net income will be misrepresented.

Calculating the ending capital with more revenue than expenses:                   Beginning Capital + Net Income – Drawings = Ending Capital

Calculating the ending capital with net loss:                                                           Beginning Capital – Net Loss – Drawings = Ending Capital

A relative cell reference is one that will change when it is copied to a new location.

 

Chapter 5.1 Summary

So, the first thing you should know in chapter 5.1 is this abbreviation:

Revenues

Expenses

Drawings

In this chapter we learn about the new accounts in the equity section of the ledger, which have one main purpose: to provide essential information about the progress of the business. Information is needed by managers and owners to see if the business is being run profitably and to help them make sound decisions.

An income statement is a financial report that shows the revenue of a business, subtract its expenses, and reveal the profit made for a given period of time.

Revenue or income is the increase in equity resulting from the sale of goods or services in the usual course of business. The revenue account for a loan company for example would have the name Interest Revenue, and a real estate company would use a revenue account called Sales. Some companies may have more than one revenue account depending on various aspects of their business. Suitable names for other revenue accounts might be Rental Revenue, Fees Earned, Royalties, and etc.

Expenses represent a decrease in equity resulting from the costs of operating the business; the purpose of an expense id to produce revenue of to support revenue making activities. Some expense accounts may be: Rent Expense, Delivery Expense, Utilities Expense, Bank Charges, and Postage.

Net income is the difference between the total expenses, where the revenues are greater than expenses, and net loss is when the expenses are greater that revenues.

Drawings are withdrawal of funds by the owner, and represents a decrease in the equity. Drawings are NOT expenses because they are not always directly related to earning revenue or to supporting revenue-making activities.

A chart of accounts is a list of the ledger accounts and their number arranged in ledger order.

Chapter 1

In chapter one we learned about the main activities involved in accounting, choosing accounting as a profession, and the characteristics of a business. In accounting there are five main activities in accounting, gathering financial information, preparing and collecting permanent records, rearranging, summarizing, and classifying, preparing information reports and summaries, and establishing controls to promote accuracy and honesty among employees. The Canadian Institute of Chartered Accountants, the Certified General Accountants Association of Canada, and the Society of Management Accountants of Canada are the three professional accounting organizations you might take to become a fully qualified accountant. And the types of businesses we learned about were, service businesses, merchandising businesses, manufacturing businesses, and the non-profit organizations.

Bookkeeping

Bookkeeping is the recording, and storing of financial transactions in a company, organization, and etc. Some tasks  bookkeepers might have are recording receipts from customers, verifying and recording invoices from suppliers, and processing an employee’s pay and related governmental reports. Bookkeeping is usually done with a computer software like Quick Books. To be a bookkeeper, a Diploma of Collegial Studies  in accounting and management technology is usually required.

Accounting Summary

Accounting is the act of recording financial transactions, storing, summarizing, and presenting them in reports. Accounting provides businesses with financial information to help keep them financially healthy and stable.