When you completed the accounting cycle in BAF3M, much of the work was copying: journal to ledger, ledger to trial balance, trial balance to statements. Almost every business now does this in accounting software, and the copying is instant and error-free. That does not make the accountant less important. Software can add perfectly, but it cannot tell whether a $9,000 invoice is a repair (an expense) or an engine replacement (an asset), or that December's wages have not been recorded. The skill that matters at this level is knowing which steps are automatic and which still need your judgement.
The steps of the cycle, recapped
- Analyze source documents (invoices, receipts, cheques, bank records) to decide whether a transaction occurred and which accounts it affects.
- Journalize each transaction in a journal (in software, an entry form such as a sales invoice or bill).
- Post to the general ledger and any subsidiary ledgers (customers, suppliers, inventory).
- Prepare an unadjusted trial balance.
- Record adjusting entries (a worksheet can organize them).
- Prepare an adjusted trial balance.
- Prepare the financial statements: income statement, statement of owner's equity, balance sheet.
- Record and post closing entries.
- Prepare a post-closing trial balance.
- Optionally, record reversing entries on the first day of the new period.
What the software automates and what it cannot
ASoftware does automatically
- Posts every entry to the general ledger and subsidiary ledgers the moment it is saved
- Refuses an entry whose debits and credits are unequal
- Produces a trial balance, income statement and balance sheet on demand
- Calculates HST from the tax code assigned to each item
- Updates inventory quantities and cost of goods sold on each sale (perpetual)
- Keeps an audit trail of who entered or changed each record
BThe accountant still decides
- Whether an event is a transaction and which accounts it affects
- How the chart of accounts and tax codes are set up in the first place
- Adjusting entries and estimates: accruals, prepaids used, amortization, bad debts
- Whether statement figures are reasonable (review and analysis)
- Bank and inventory reconciliations, and correcting errors found
- Who has access to what (internal control) and when to close the period
A balanced trial balance is not a correct one
Software guarantees that debits equal credits, so a computerized trial balance always balances. It cannot catch an entry posted to the wrong account, an amount keyed wrong on both sides, a transaction recorded twice, or one never recorded at all. Those errors are found by reviewing, reconciling and analyzing, which is the accountant's work.
Merchandising: perpetual versus periodic inventory
A merchandising business buys goods and resells them, so it has a cost that a service business does not: cost of goods sold (COGS). Net sales minus COGS is gross profit, the amount left to cover operating expenses. How COGS is tracked depends on the inventory system.
APerpetual system
- Purchases are debited directly to Merchandise Inventory
- Each sale has two entries: the selling price (revenue) and the cost (Dr COGS, Cr Merchandise Inventory)
- COGS and inventory are known at any moment; a physical count checks for shrinkage
- Standard in computerized systems with barcode scanning
BPeriodic system
- Purchases are debited to a Purchases account
- Each sale has one entry, at selling price; no cost entry
- COGS is calculated at period end: beginning inventory + net cost of purchases - ending inventory (counted)
- Cheaper to run but gives no up-to-date inventory figure
| Account | Type | Normal balance | Purpose |
|---|---|---|---|
| Sales | Revenue | Credit | Selling price of goods sold |
| Sales Returns and Allowances | Contra-revenue | Debit | Goods returned by customers or price reductions granted; kept separate so managers can monitor them |
| Sales Discounts | Contra-revenue | Debit | Reductions given for paying early, e.g. terms 2/10, n/30 |
| Merchandise Inventory | Current asset | Debit | Cost of goods on hand |
| Cost of Goods Sold | Expense | Debit | Cost of the goods that were sold |
| Freight-in (Transportation-in) | Part of inventory cost | Debit | Shipping to bring goods in; part of their cost (cost principle) |
| Delivery Expense (Freight-out) | Selling expense | Debit | Shipping goods to customers; an operating expense |
| HST Payable | Current liability | Credit | HST collected on sales, owed to the CRA |
A merchandising sale with HST, start to finish
Northshore Outfitters uses a perpetual system. On March 3 it sells 20 jackets to Lakeview Camp on account for $2,000 plus 13% HST, terms 2/10, n/30. The jackets cost Northshore $1,200. On March 6 the camp returns 2 unsuitable jackets (selling price $200, cost $120), which go back into stock. On March 13, within the discount period, the camp pays the balance. HST on the sale is .
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 3 | Accounts Receivable, Lakeview Camp | 2,260 | |
| Sales | 2,000 | ||
| HST Payable | 260 | ||
| Sold 20 jackets on account, terms 2/10, n/30, Invoice 4417. | |||
| Mar 3 | Cost of Goods Sold | 1,200 | |
| Merchandise Inventory | 1,200 | ||
| Cost of jackets sold on Invoice 4417. | |||
| Mar 6 | Sales Returns and Allowances | 200 | |
| HST Payable | 26 | ||
| Accounts Receivable, Lakeview Camp | 226 | ||
| Credit note for 2 jackets returned. | |||
| Mar 6 | Merchandise Inventory | 120 | |
| Cost of Goods Sold | 120 | ||
| Returned jackets put back into stock. | |||
| Mar 13 | Cash | 1,998 | |
| Sales Discounts | 36 | ||
| Accounts Receivable, Lakeview Camp | 2,034 | ||
| Received payment less 2% discount on $1,800 of goods. |
- The return reverses part of the sale through a contra-revenue account, not by debiting Sales, so management can see how much is being returned. The HST on the returned goods () is no longer owed to the CRA.
- The balance owing on March 13 is . The discount is 2% of the remaining goods: .
- Here the discount is taken on the pre-tax price and the HST already charged is left unchanged, which is how Canada's sales tax rules generally treat early-payment discounts.
- In software, the clerk enters only the invoice, credit note and receipt; the program generates every line above, including the cost entries, using the item's cost and tax code. The accountant set up those codes and reviews the results.
The multiple-step income statement
| Northshore Outfitters, Income Statement, Year Ended December 31, 2026 | ||
|---|---|---|
| Sales | 480,000 | |
| Less: Sales Returns and Allowances | 9,000 | |
| Sales Discounts | 3,000 | 12,000 |
| Net Sales | 468,000 | |
| Cost of Goods Sold | 280,800 | |
| Gross Profit | 187,200 | |
| Selling expenses: Sales Salaries 52,000; Advertising 9,500; Delivery 4,300; Amortization of Store Equipment 6,200 | 72,000 | |
| Administrative expenses: Office Salaries 38,000; Rent 24,000; Utilities 6,400; Insurance 3,600 | 72,000 | |
| Total Operating Expenses | 144,000 | |
| Income from Operations | 43,200 | |
| Other revenue and expenses: Interest Revenue 600 less Interest Expense 1,800 | (1,200) | |
| Net Income | 42,000 |
Quick checkTry it before you read on
1
A perpetual-system store sells goods for $800 plus 13% HST on account. What amount is debited to Accounts Receivable? Answer to the nearest cent.
$
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