Q&A Week #4

If you missed this series, at the end of the next session, you will be able to purchase the entire set of five episodes online at my website store. www.taxdetective.ca/shop.html  You'll also find the set of ten videos, two hours each, a total of 20 hours of online training to Mastering QuickBooks Software produced for IPBC last spring.

If you are an IPBC member, access the member discount page on my website via log-in to the www.ipbc.ca website, go to the Partner page for Eileen Reppenhagen, CGA to link directly to several pages with 50% discounts on videos recorded by IPBC and more of my products at a 10% discount for members.

The OneNote sample file is available for sale at a 10% discount for members along with the series at 50%.

Q: Do you recode COGS to Expense once Revenue is recognized?
A: COGS is a type of expense.  We separate COGS and put it below Revenue/Sales to record a net of Sales less COGS and we call that Gross Profit.  We like to do analysis of what that Gross Profit Margin is over months/years to determine if the profit is reasonable compared to other business's in the same industry, as well as between periods for our own business.  What I think this person was asking is do you reverse out the deferral of COGS as a Deferred Expense on the Balance Sheet once the Revenue is recognized?  Yes you would.  This question was asked while we were discussing Accruals and Deferrals in relation to revenue recognition.

Q: Honestly I think meals could be its own course.
A: Thanks for the humorous commentary.  Yes, meals could be a separate course.  And if you look further down this blog, in the past few posts, you'll find several postings that lead to information on my website about meals, and there's a post about chocolate too.

Q: Clarification: Do you ignore GST/HST when accruing or deferring expenses or revenue for Sales/COGS at period end?
A: Yes, GST/HST is required to be posted on the date of the issuance of the Invoice or the Bill.

Q: One of my clients often doesn't invoice for several weeks after the job is done and the costs have been received and recorded already.  This often straddles a year end.
A: It's necessary under accrual accounting (which is required by the Income Tax Act) to record revenue even though it's not yet invoiced.  Either that or the costs must be reversed out to be matched to the revenue when it's recorded. There are special rules about Work In Progress and that's beyond the scope of this exercise, but the matching principal of matching revenue and expenses prevails because the Income Tax Act requires GAAP and revenue recognition is an accounting principle we rely on.

Q: How do you record meals during the year?
A: I record meals at 100% and then at year end, as allowed by special dispensation in the GST/HST documentation, I make an adjustment to remove the personal portion of the expense on the tax return as an adjustment, and I record that same adjustment on proprietor's books, but on corporate books, I'd leave it in, and I would adjust to remove a portion of the GST/HST that matches the personal portion of meals. For the proprietor, I'd record that to proprietor's draws and for the business, I'd record it as an expense that is added back on the T2S(1) as non deductible along with the 50% (or whatever % if it's trucking)

Q: Could you just create a deferred revenue Item?
A: This was in reference to recording the invoice, then creating an adjustment at year end. Yes, you could go straight to deferred rather than recording revenue and reversing it.  Depends on how much you know at the time. You would still record the GST/HST at the date of the invoice.

Q: Would you record salaries under other income if it is a regular salary on payroll for management? Wouldn't it be part of regular operating expenses of running the business as opposed to irregular draws?
A: First of all, there is no such thing as a draw.  All withdrawals from the company are either payroll and should be treated as such, or they are repayments of shareholder loans and have nothing to do with the income statement.  Second, it's a matter of presentation style, and of comparative analytical value as to where you record management salaries.  All I was doing was presenting the notion that removing the management salaries from the Operating Expenses section of the Income Statement could be a valuable comparative tool for analysis of the business at period end. 

Q: Would you do this even in a compilation engagement?
A: I think this question related to Sales /COGS matching and would you care whether sales and COGS were matched in a compilation. My answer to all queries about preparation of tax working papers is that there is no differentiation by the Income Tax Act about what level of completion is required for tax.  It's necessary to comply with the ITA no matter what, and there is nothing in the ITA about materiality consideration.  What is in the ITA is consideration of reasonability of the profit.  Reasonability analysis of profit should involve matching of Sales and COGS as a bare minimum and you will find that auditors will require matching in order to ascertain that all sales are recorded and that costs are for revenue booked.

Q: Isn't claiming CCA on building and land have a minus side when property is sold?
A: This question related to the removal of NBVNBV and Selling costs separately under a major category of Gain/Loss in order to separate out the component parts required to report for tax purposes on a S3 or S6 capital/gain loss and also for the UCC schedules to record Proceeds up to Cost to calculate terminal loss or recapture or amend the UCC of a pool. Yes, if you have claimed CCA for taxes/Amortization on the books it will reduce your NBV or your ACB for tax and those may require analysis and reconciliation during the working paper process in order to file tax returns

Q: If the corporation owes the shareholder, do you still have to pay back the loan or can you enter it as a repayment to shareholder loan?
A: I was talking about where there is a debit balance in the shareholder loan account, this would be where the shareholder owes the corporation, not the other way around.

Q: I've had accountants tell me to leave the meals at 100% on the books but they change that on the tax return only.
A: That's because corporations can still expense the 50% for business on the financial statements, there's just a permanent difference between retained earnings for accounting and retained earnings for tax as a result. Same goes for the personal portion of the GST/HST on those meals. It's expensed, not a shareholder loan.

Q: Please explain in more detail why under a compilation engagement it would be our responsibility?
A; I think this person is wondering about why they would need to do analysis when a compilation isn't supposed to require such analysis.  Actually, it's necessary to decide if the statements are reasonable in the circumstances before affixing your name to a compilation.  That's one reason to care.  Then, there's the Income Tax Act, and the engagement to prepare a tax return, which is not the same as a compilation engagement.  A compilation engagement is the preparation of the financial statements.  The preparation of a tax return isn't the same engagement.  When you are engaged to complete a tax return, there's a whole different set of rules that kick in.  The Income Tax Act takes over and that is the law you have to look to.  Take a look at S. 9 through 20 of the ITA, and S. 18.1 talks about the definition of 'matchable expenditures'.

Q: I've had accountants record the CCA and ignore accounting depreciation, is that common?
A: Yes, for compilations it isn't necessary to follow GAAP completely, so accountants will record the tax entries as there's no reason to differ the expense recognition from that set out as being the common recognition of decay in value over time from that set out in the ITA.

Q: Your year end entries reminded me of a regular issue I have.  I deal with a lot of classes. The classes are ongoing year over year. At the end of each year I clear the classes to liability to Deferred Revenue and reverse the following year.
A: Check out the capability for QuickBooks to report Balance Sheets by Class in v 2012 and I think you may find it isn't necessary to make those entries.

Q: Please explain the difference between accrued revenue and deferred revenue.
A: I would accrue revenue if there was a way to estimate it and it made sense to include it in the current year. I would for example, accrue rent earned to date of death even though not yet received under S. 70(1)(a). I would defer revenue if it related to a future period, it something was prepaid and met the criteria for deferral because it was unearned. A deferred amount is defined by the ITA in S. 248(1) and there's a reserve for Unearned commissions in S. 32 or where services are not rendered, S. 12(1)(e) and 20(1)(m).  These are essentially termed reserves and you'll find a whole half page of different types of reserves for goods not delivered, guarantees, warranty, undelivered, unearned, unpaid, unrealized in the Index to the Income Tax Act.  You might also accrue or defer expenses and set up reserves for example, for expected claims when there's been a damage to something but that claim won't be settled for many years.

Q: Is there a new field in QuickBooks report to help us calculate the GST/HST adjustment for meals or vehicle personal portion?
A: Yes, and if the transaction detail report doesn't include that choice in the columns, for Sales Tax Code and for Sales Tax Amount, create a Custom Transaction Detail report under the Report Menu drop down to find the full selection of column choices from which you can then filter to Total By or Sort By

Q: When the accountant puts in the year end accrual and then the actual bill is received in the following year, do we (bookkeepers) reverse the accrual in the following year and then record the actual bill?
A: Yes, that's exactly what you would do.

Q: Why doesn't the tax software calculate the 50% of the Meal?
A: It can calculate the 50% amount instead of the 100% amount if you want to make the time to set up the Sales Tax module to make that happen. I prefer not to do that as I'd rather reconcile it at the end of the year.  If it isn't always handled consistently it makes it more difficult and time consuming to check the work. My preference is to always record 100% and do the work once at the end of the year, rather than having to check through each entry during the year at the end of the year to see whether or not each transaction was calculated correctly.