User manual ACCPAC SIMPLY ACCOUNTING ACCOUNTING MANUAL

[. . . ] Simply Accounting Accounting Manual Canadian Version © Copyright 1998 ACCPAC INTERNATIONAL, INC. ACCPAC INTERNATIONAL, INC. , Publisher No part of this documentation may be copied, photocopied, reproduced, translated, microfilmed, or otherwise duplicated on any medium without written consent of ACCPAC INTERNATIONAL. Use of the software programs described herein and this documentation is subject to the ACCPAC INTERNATIONAL License Agreement enclosed in the software package. This software and its documentation are intended to provide guidance in regard to the subject matter covered. [. . . ] There are two types of shares usually issued by a corporation to its owners: Preferred Shares -- Preferred shares may pay to its owners a dividend (a payment made to shareholders by a corporation out of after-tax earnings) that is usually fixed in amount or percent. If there are any dividends declared, the preferred shareholders get their dividends before the common shareholders are entitled to any dividends. Common Shares -- Common shares have no preference to dividends and no fixed rate of return. It is the most common kind of share and normally has voting rights attached to it. Since common shares are usually the only type of shares with voting rights, the shareholders who control the common shares also control the company. Since a corporation is a separate legal entity from its owners, it must keep its own accounting records. The equity section of the balance sheet shows each type of share issued (subscribed for), and how much money was received for it by the company. It does not show who owns the shares or how much they own because this is something that the company does not control. Shareholders are generally free to sell their shares to each other or others who are currently not shareholders. Accounting Manual 15­3 Corporations If National Construction was organized as National Construction Limited, and Jim Brown and Mike Wood each bought 5, 000 common shares for $20 per share and 14, 000 preferred shares for $2 per share, the equity (sometimes called Stockholders' Equity or Shareholders' Equity for a corporation) section of the balance sheet would look like this: Equity Paid in Capital Common Shares Preferred Shares Total Paid in Capital 200, 000 56, 000 256, 000 When balance sheets are more formally prepared, it is standard practice to show beside each type of share how many shares were authorized and how many are issued and outstanding. The journal entry in the corporation's journal to record the issuance of the above shares is: Feb 1, 96 Cash in Bank Common Shares Preferred Shares Issued 10, 000 common @ $20; and 28, 000 preferred @ $2 1020 3800 3850 256, 000 200, 000 56, 000 At the end of the year, National Construction Limited, like National Construction the proprietorship, would transfer the balance of the Current Earnings account to the Previous Years' Earnings account. For corporations, this is called the Retained Earnings account, because the earnings have been retained by the company rather than paid out to the shareholders as dividends. Even though the corporation has an account called Retained Earnings, it may not be able to pay this amount out to its shareholders quickly because it may not have that much cash in the bank. It may have to convert some assets into cash (by selling them, or if they are receivables, collecting them) before it can distribute the retained earnings to its shareholders. 15­4 Simply Accounting Corporations Let's assume that National Construction Limited has $100, 000 of retained earnings and pays a dividend of $1 per share to its preferred shareholders' (28, 000) shares on Jan. The journal entry to record this is: Jan 30, 97 Retained Earnings Cash in Bank Paid $1 dividend on 28, 000 preferred shares 3900 1020 28, 000 28, 000 The Shareholders' Equity section of the balance sheet adjusted for the above transaction is: Equity Paid in Capital Common Share Preferred Shares Total Paid in Capital Retained Earnings Total Equity 200, 000 56, 000 256, 000 72, 000 328, 000 Accounting for the shares of corporations can get extremely detailed and involved. If transactions other than the types explained above are contemplated or have actually been done, a reference book that covers share transactions more thoroughly should be consulted. Accounting Manual 15­5 Chapter 16 Subsidiary Ledgers This chapter tells you how to use subsidiary ledgers to keep information that will help you make decisions about your company. Why and How Subsidiary ledgers are a system in which a particular ledger account (such as Accounts Receivable) has its own ledger called a subsidiary ledger. There is generally an account in the subsidiary ledger for each customer (or supplier or employee). The purpose of subsidiary ledgers is to keep the main ledger uncluttered of details and provide management with useful and necessary information. A company should start to use subsidiary ledgers when it finds its general ledger is getting too cluttered, or that its financial records don't contain enough information for the management to make decisions. When an entry is made in the subsidiary ledger to record, say, one particular customer paying a bill, the main ledger only has a debit to Cash and a credit to Accounts Receivable, while the subsidiary ledger contains all the details (when the customer paid, how he or she paid, how much is still outstanding, etc. ). Depending on the type of subsidiary ledger, the summary of the transactions in the subsidiary ledger need only be transferred to the main ledger periodically. This is always done before income for a period is determined and may be done more often if desired. Accounting Manual 16­1 Accounts Receivable Accounts Receivable This subsidiary ledger keeps track of who your customers are, what their addresses are, and how much money they owe you. It also breaks down the money they owe you by current receivables, overdue 30 - 60 days and any other period that you might decide to follow. [. . . ] Preferred shareholders receive their dividends before the common shareholders are entitled to any dividends. Prepaid Expenses -- Expenses which are paid for in advance, such as insurance and rent. Profit -- The amount left over after all the revenues for a period are accounted for, and all costs and expenses for the same period are deducted. Profit Centre -- A department, sales region, project, or any other part of a company for which revenues and expenses can be identified. [. . . ]