LESSON 9

Question 1

NOTE ONLY

Partnership

A brokerage may be operated as a sole proprietorship, in which case the managing broker must be the sole proprietor. However, most brokerages are either established as partnerships or corporations. Partnerships arise when two or more people operate a business together, with or without the benefit of a formal legal relationship.

People carrying on business together often may not realize that they are operating as a partnership. It is the common law principles relating to agency that determine whether or not people are in partnership. If they carry on business as agent for or on behalf of one another, they generally will be considered to be operating as a partnership.

In addition to consisting of two or more individuals, a partnership can also consist of two or more corporations or a combination of corporations, partnerships or individuals. A partnership is not recog-nized as being distinct from the partners composing it. What is called property of the partnership is really the property of the partners and what is called the debts and liabilities of the partnership are their debts and liabilities.

A partner is both a principal and an agent. A partner is principal to the partners who act as agents and vice versa. Each partner can bind the other partners of the firm to a contract or create liabilities for which the other partners are responsible.

Answer 1

NOTE ONLY

Partnership

A brokerage may be operated as a sole proprietorship, in which case the managing broker must be the sole proprietor. However, most brokerages are either established as partnerships or corporations. Partnerships arise when two or more people operate a business together, with or without the benefit of a formal legal relationship.

People carrying on business together often may not realize that they are operating as a partnership. It is the common law principles relating to agency that determine whether or not people are in partnership. If they carry on business as agent for or on behalf of one another, they generally will be considered to be operating as a partnership.

In addition to consisting of two or more individuals, a partnership can also consist of two or more corporations or a combination of corporations, partnerships or individuals. A partnership is not recog-nized as being distinct from the partners composing it. What is called property of the partnership is really the property of the partners and what is called the debts and liabilities of the partnership are their debts and liabilities.

Question 2

TRUE OR FALSE?

A partnership agreement is not required by law.

Answer 2

ANSWER: TRUE

While not required by law, a formal partnership agreement pursuant to which partners estab-lish their rights, duties and obligations is highly recommended. The agreement should be set out in writing.

Question 3

LIST 3 CLAUSES THAT MAY BE FOUND IN A PARTNERSHIP AGREEMENT?

Answer 3

ANSWER:

The partnership agreement could include:

-purpose of the partnership;

- amount of capital to be contributed by each of the partners;

- method by which the partnership is to be financed;

- manner in which profits are to be distributed;

- method by which partners can sell their interest in the partnership to third parties, and any restrictions on the transfer of their respective interests;

- who should manage the partnership

- what role each partner is to play in its operation;

- whether the partners will be employed by the partnership and receive a salary or only obtain a share of the profits, if any;

- whether restrictions are to be placed on the partners to prevent them from operating a business in competition with the partnership;

Question 4

TRUE OR FALSE?

Corporations are the most common form of business organization used by small, medium and large businesses in Canada.

Answer 4

ANSWER: TRUE

Question 5

TRUE OR FALSE?

Once incorporated, the corporation has a separate and distinct legal status with all the attributes of a natural person. It can enter into contracts, own property, sue and be sued, and carry out all acts which an individual can carry out.

Answer 5

ANSWER: TRUE

Question 6

COMPLETE THE FOLLOWING SENTENCE?

Ownership of the corporation is controlled through _ _ _ _ _ _

Answer 6

ANSWER:

Ownership of the corporation is controlled through the issue of shares in the company to individuals or other corporations.

Question 7

COMPLETE THE SENTENCE: The rights and responsibilities of shareholders are determined by _ _ _ _ _ _ _ _ of the company, which are the company’s constituting documents.

Answer 7

COMPLETE THE SENTENCE: The rights and responsibilities of shareholders are determined by the ARTICLES AND MEMORANDUM of the company, which are the company’s constituting documents.

Question 8

Rules under the Real Estate Services Act (the “Rules”) set out the requirement that every brokerage keeps proper books, records and accounts to adequately account for all monies received, and this can be interpreted to include:

Answer 8

ANSWER:

Trust cash book showing all transactions affecting the trust accounts and trust ledgers, and readily distinguishing the client account for each transaction;

Trust ledger having, in an easily traceable order, account sheets for each client on behalf of whom money is or has been held

General cash book showing all transactions affecting the receipt and disbursement by the agency of monies other than trust monies;

Ledger or other suitable system to record the agency-client position on all transactions other than trust transactions

For all fees and commissions, copies of billings to clients in systematic order (where applicable). This may be divided into paid and outstanding billings;

Monthly statements or pass books for every bank account;

Cancelled cheques, bank vouchers, and similar banking documents for the accounts; yDated duplicate copy of each deposit made in every bank account; and

Monthly bank reconciliations for each trust bank account.

Question 9

NOTE ONLY

Records must be retained by a brokerage for at least seven years after their creation unless a shorter period is authorized in writing by the Council.

This is an increase from the Council’s former policy of keeping books and records for six years under the Real Estate Act.

The books and records must be available for inspection by Council staff at the brokerage’s usual office or offices during business hours, and where those records are kept in electronic format they must be accessible to print upon demand from the Council for inspection purposes.

Answer 9

NOTE ONLY

Records must be retained by a brokerage for at least seven years after their creation unless a shorter period is authorized in writing by the Council.

This is an increase from the Council’s former policy of keeping books and records for six years under the Real Estate Act.

The books and records must be available for inspection by Council staff at the brokerage’s usual office or offices during business hours, and where those records are kept in electronic format they must be accessible to print upon demand from the Council for inspection purposes.

Question 10

TRUE OR FALSE?

Rules under the Real Estate Services Act (the “Rules”) make a distinction between general brokerage accounts and trust accounts, with the latter being subject to even more strict obligations

Answer 10

ANSWER: TRUE

Rules under the Real Estate Services Act (the “Rules”) make a distinction between general brokerage accounts and trust accounts, with the latter being subject to even more strict obligations, including a requirement for separate specific trust ledgers accounting for transactions concerning the brokerage’s trust account.

The Rules set out the specific obligations on brokerages to ensure proper books and accounts are kept

Question 11

The Rules distinguish between the records that must be kept by a brokerage for general accounts and those records that must be kept for trust accounts. For general accounts, section 8-2 of the Rules requires the brokerage to keep:

* * * LIST 3 RECORDS * * *

Answer 11

For GENERAL ACCOUNTS, section 8-2 of the Rules requires the brokerage to keep:

• a cash record showing all receipts and disbursements;

• all banking documents dealing with account transactions, including statements, cancelled cheques or other records of disbursements, vouchers, duplicate deposit slips and deposit books;

• monthly reconciliations of banking statements to the cash record, prepared in a timely fashion and, in any case, no later than 5 weeks after the monthly accounting cut-off date for the account.

Question 12

For trust accounts, section 8-3 of the Rules requires the following records to be kept with respect to all trust accounts maintained by the brokerage:

* * * LIST 4 RECORDS * * *

Answer 12

For trust accounts, section 8-3 of the Rules requires the following records to be kept with respect to all trust accounts maintained by the brokerage:

• a trust cash record showing all transactions affecting the trust account, including all deposits, withdrawals, interest and other banking transactions that have affected the trust account;

• a trust journal showing all amounts received and disbursed and any unexpended balance;

• a monthly trust liability and asset reconciliation for money held by the brokerage, separating out monies held as a stake-holder under section 28 of the Real Estate Services Act, which reconciliations must be prepared no later than 5 weeks after the monthly accounting cut-off date for the account; and

• all banking documents relating to account the transactions, including statements, cancelled cheques or other records of disbursements, vouchers, duplicate deposit slips and deposit books.

Question 13

QUICK NOTE / EXAMINATION OF RECORDS

Section 38 of the Real Estate Services Act allows the Council to apply to the Supreme Court for an order authorizing the seizure of records or other evidence, wherever located, of a broker-age where there are reasonable grounds to believe a licensee has committed professional misconduct or conduct unbecoming a licensee.

Answer 13

QUICK NOTE / EXAMINATION OF RECORDS

Section 38 of the Real Estate Services Act allows the Council to apply to the Supreme Court for an order authorizing the seizure of records or other evidence, wherever located, of a broker-age where there are reasonable grounds to believe a licensee has committed professional misconduct or conduct unbecoming a licensee.

Question 14

QUICK NOTE / EXAMINATION OF RECORDS

Section 86(2)(f) of the Real Estate Services Act (and section 7-6 of the Rules) provides for the examination of the books of a brokerage by the Real Estate Council without restriction and further prohibits the withholding of information.

Answer 14

QUICK NOTE / EXAMINATION OF RECORDS

Section 86(2)(f) of the Real Estate Services Act (and section 7-6 of the Rules) provides for the examination of the books of a brokerage by the Real Estate Council without restriction and further prohibits the withholding of information.

Question 15

QUICK NOTE / EXAMINATION OF RECORDS

Section 37(3) of the Real Estate Services Act provides for an inquiry or audit by the Council during which Council can enter the premises of the brokerage at any time during business hours, inspect and copy files, as well as require licensees (or directors and shareholders of a real estate brokerage who are not licensees) to meet with investigators and answer inquiries.

Answer 15

QUICK NOTE / EXAMINATION OF RECORDS

Section 37(3) of the Real Estate Services Act provides for an inquiry or audit by the Council during which Council can enter the premises of the brokerage at any time during business hours, inspect and copy files, as well as require licensees (or directors and shareholders of a real estate brokerage who are not licensees) to meet with investigators and answer inquiries.

Question 16

TRUE OR FALSE?

The brokerage bank accounts, therefore, should be reserved strictly for business purposes.

Answer 16

ANSWER: TRUE

Question 17

QUICK NOTE:

A bookkeeper can readily prepare a summary of the banking transactions using a record known variously as a journal, cash book, synoptic, or book of original entry. No matter what form the record takes, the purpose is the same. The journal provides:

a complete record of cash receipts and

disbursements (cheques/EFT);

a breakdown of expenses paid for;

a way to keep a running record of the bank balance; and

a convenient summary for recording transactions in the accounts.

Answer 17

QUICK NOTE:

A bookkeeper can readily prepare a summary of the banking transactions using a record known variously as a journal, cash book, synoptic, or book of original entry. No matter what form the record takes, the purpose is the same. The journal provides:

a complete record of cash receipts and

disbursements (cheques/EFT);

a breakdown of expenses paid for;

a way to keep a running record of the bank balance; and

a convenient summary for recording transactions in the accounts.

Question 18

Payroll deductions are due to Canada Revenue Agency by the fifteenth of the following month and payment can be made directly at the bank. Each employer must obtain a _ _ _ _ _ _ _ _ from Canada Revenue Agency to facilitate this process.

Answer 18

ANSWER:

Payroll deductions are due to Canada Revenue Agency by the fifteenth of the following month and payment can be made directly at the bank. Each employer must obtain a PAYROLL ACCOUNT NUMBER from Canada Revenue Agency to facilitate this process.

Question 19

TRUE OR FALSE?

To conform to the cost principle, it is not appropriate to record the asset at what might be considered its fair market value; the asset should be recorded at what the enterprise paid for it.

Answer 19

TRUE OR FALSE?

To conform to the cost principle, it is not appropriate to record the asset at what might be considered its fair market value; the asset should be recorded at what the enterprise paid for it.

Question 20

The _ _ _ _ _ _ is the group of accounts used to keep a separate record for each item found in the financial statements. In other words, this record contains an account for each asset, liability, owner equity, revenue, and expense.

Answer 20

The GENERAL LEDGER is the group of accounts used to keep a separate record for each item found in the financial statements.

In other words, the general ledger contains an account for each asset, liability, owner equity, revenue, and expense.

Question 21

QUICK NOTE / TRUST ACCOUNTS

Trust Accounts

Sections 25 to 30 of the Real Estate Services Act deal with Trust Accounts. The obligations that these sections impose on the brokerage are easily met provided all funds received are promptly deposited into the trust account and any payments (such as to the conveyancer or the brokerage itself) are not made prematurely.

At any time, the total of funds held in trust must always equal the total of the client accounts.

This will be the case as long as all trust funds received and credited to a client are deposited in the trust account and all payments on behalf of a client are withdrawn from the trust bank account.

Answer 21

QUICK NOTE / TRUST ACCOUNTS

Trust Accounts

Sections 25 to 30 of the Real Estate Services Act deal with Trust Accounts. The obligations that these sections impose on the brokerage are easily met provided all funds received are promptly deposited into the trust account and any payments (such as to the conveyancer or the brokerage itself) are not made prematurely.

At any time, the total of funds held in trust must always equal the total of the client accounts.

This will be the case as long as all trust funds received and credited to a client are deposited in the trust account and all payments on behalf of a client are withdrawn from the trust bank account.

Question 22

The cost principle is commonly referred to as the _ _ _ _ _

Answer 22

The cost principle is commonly referred to as the HISTORICAL COST PRINCIPAL

Question 23

When should revenue be recognized in a sales transaction?

Answer 23

ANSWER:

In a sales transaction revenue should be recognized (recorded) when the following conditions have been satised:

• The seller has transferred to the buyer the signicant risks and rewards of ownership of the goods. This is usually the transfer of title; and

• The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

Question 24

Explain the revenue recognition principal?

Answer 24

**ANSWER:

The revenue recognition principle holds that revenue should be recognized by an enterprise when it is earned, not necessarily when cash is received.**

Question 25

The ________ principle holds that expenses directly associated with particular revenues should be recognized in the same period in which the revenue is recognized.

Answer 25

ANSWER:

The MATCHING PRINCIPLE holds that expenses directly associated with particular revenues should be recognized in the same period in which the revenue is recognized.

Question 26

TRUE OR FALSE? The matching principle requires the accrual basis of accounting be used for maintaining records of the entity.

Answer 26

ANSWER: TRUE

Question 27

The _________ principle is an exception to the matching principle. Purchases with a relatively low cost that are used up over a period of several months, such as stationery or cleaning supplies, may be immediately expensed when acquired.

Answer 27

ANSWER:

The MATERIALITY PRINCIPLE is an exception to the matching principle. Purchases with a relatively low cost that are used up over a period of several months, such as stationery or cleaning supplies, may be immediately expensed when acquired.

Question 28

The ______ principle holds that all accounting information should be reported on objectively determined and verifiable data.

Answer 28

The OBJECTIVITY PRINCIPLE holds that all accounting information should be reported on objectively deter-mined and verifiable data.

Question 29

Accounting recognizes that alternatives exist in the recording of transactions, and in certain cases generally accepted accounting principles allow the same transaction to be recorded in more than oneway.

The _______ principle holds that once a business enterprise adopts one generally accepted accounting principle from a number of alternatives, the enterprise should follow that principle in the ensuing years.

Answer 29

Accounting recognizes that alternatives exist in the recording of transactions, and in certain cases gener-ally accepted accounting principles allow the same transaction to be recorded in more than oneway.

The CONSISTENCY PRINCIPLE holds that once a business enterprise adopts one generally accepted accounting principle from a number of alternatives, the enterprise should follow that principle in the ensuing years.

Question 30

Corporations report their income on the basis of a _____ period that may be different from the calendar year.

Answer 30

Corporations report their income on the basis of a FISCAL PERIOD that may be different from the calendar year.

Question 31

TRUE OR FALSE? Self-employed individuals, partners, and professional corporations such as the personal real estate corporations (PRECs) must report their income on a calendar year basis.

Answer 31

ANSWER: TRUE

Question 32

The ________ bookkeeping system which underlies the accounting process recognizes the dual nature of each financial transaction - that is, each transaction affects at least two different financial statement items (accounts).

Answer 32

The DOUBLE-ENTRY bookkeeping system which underlies the accounting process recognizes the dual nature of each financial transaction - that is, each transaction affects at least two different financial statement items (accounts).

Question 33

ASSETS=??

Answer 33

ASSETS = LIABILITIES + OWNER’S EQUITY

Question 34

_____ represents the amount that owners (partners or shareholders) have invested in the entity.

Answer 34

ANSWER: EQUITY represents the amount that owners (partners or shareholders) have invested in the entity.

Question 35

______ are the device used in a bookkeeping system to accumulate changes resulting from business transactions; therefore transactions affecting similar assets or liabilities will be summarized in one account.

Answer 35

ANSWER:

Accounts are the device used in a bookkeeping system to accumulate changes resulting from business transactions; therefore transactions affecting similar assets or liabilities will be summarized in one account.

Question 38

Explain accrual based accounting?

Answer 38

ANSWER:

ACCRUAL BASED ACCOUNTING: The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received).

Question 42

This principal holds that when a business enterprise acquires an asset, the asset’s historical cost (the amount of consideration given up for the asset) is the appropriate amount to record in the financial statements of the enterprise

Answer 42

ANSWER: COST PRINCIPAL

Question 43

Subject to adjustments necessary to properly match revenues and expenses, it is possible to prepare the actual financial statements for the business from the information found in _ _ _ _ _ _

Answer 43

Subject to adjustments necessary to properly match revenues and expenses, it is possible to prepare the actual financial statements for the business found in the general ledgers.