Current Liabilitiesand Payroll doc

Accounts Payable Example• Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Patti Wholesaler... Estimated Warranty Payable• The matching principle

Objective 1 Account for current liabilities

of known amount.

Accounts Payable

…are amounts owed to suppliers for goods

or services purchased on account

• Accounts payable do not bear interest

expense for the debtor

Accounts Payable Example

• Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on

account from Patti Wholesaler

• What is the journal entry?

Inventory 1,000

Accounts Payable 1,000

Short-Term Notes Payable

…are promissory notes payable due within one year

• In addition to recording the note payable, the business must also pay interest

expense

• If interest expense is accrued at the end of the period, interest payable must also be recorded

Short-Term Notes Payable

Example

• On April 30, Patti purchased inventory for

$10,000 by issuing a 90-day, 10% note

payable

• What is the journal entry?

Inventory 10,000

Notes Payable 10,000

Short-Term Notes Payable

Short-Term Notes Payable

Sales Tax Payable Example

• Most states levy a sales tax on retail sales

• Suppose that a store sold $3,000 worth of merchandise on a given Saturday

• The business collected an additional 5%

in sales tax

• How much is the sales tax liability?

• $150

Accrued Expenses (Liabilities)

– are expenses that have been incurred but not recorded

– salaries

– taxes withheld

– interest

– utilities

Payroll Liabilities

To record salary expense

Unearned Revenue Example

• Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August

June 1

Unearned Revenue 1,500

Unearned Revenue Example

• What entry does Dennis record on June 30?

Objective 2 Account for Current Liabilities

That Must be Estimated.

Estimated Warranty Payable

• The matching principle demands that the company record the warranty expense in the same period that the business

recognizes sales revenue

Estimated Warranty Payable

Estimated Warranty Payable

Example

• On January 28, a customer returned a

defective product and was given a $300 refund

Estimated Warranty Payable 300

To record refund under warranty

Estimated Vacation Pay

Liability Example

• Suppose Lloyd’s Sporting Store has a

March payroll of $10,000 and vacation pay adds 4% (2 weeks of annual vacation

divided by 50 workweeks each year)

• How much vacation pay should be

accrued?

Estimated Vacation Pay

Liability Example

March 31

Vacation Pay Expense 400

Estimated Vacation Pay Liability 400

To accrue vacation expense

Contingent Liability

• Report a contingent liability in the notes to the financial statement if it is reasonably

possible that a loss or expense will occur.

• The FASB says to record an actual liability

if it is probable that the business has

suffered a loss and its amount can be

reasonably estimated

Contingent vs Current Liability

• Suppose a hospital has lost a court case for uninsured malpractice

• The hospital estimates that the liability will fall between $1.5 and $2.5 million

Contingent vs Current Liability

• The hospital must record a loss and a

liability of $1.5 million

• The hospital must disclose in a note the possibility of an additional $1.0 million loss

Objective 3 Compute Payroll Amounts.

• Straight time is the base rate paid to

employees for a set number of hours

• Overtime is additional time worked by employees for which they received a

higher rate (usually 1.5 times the straight time rate)

Gross Pay and Net Pay

Gross Pay Deductions Net Pay

FICA Tax

• The FICA tax has two components:

1 Old age, survivors’, and disability

insurance (6.2% applied to the first

$87,000 of employee earnings in a year)

2 Health insurance

(1.45% applied to all employee earnings)

Employer Payroll Taxes

• Social Security (FICA) tax

• State unemployment compensation tax

• Federal unemployment compensation tax

Unemployment Compensation

Taxes

• Employers paid 5.4% to the states and

0.8% to the federal government on the first

$7,000 of each employee’s annual

earnings

• The state government uses the money to

pay unemployment benefits to people who are out of work

Breakdown of Payroll Costs

$230

Employee union dues

$20

Objective 4

Record Basic Payroll

Transactions.

Salary Expense

• Salary expense to the employer is the gross salary of all employees

• Employees pay their own income and

FICA taxes as well as union dues

• The employer serves as a collecting agent and sends these amounts to the government and union

To Record Salaries Expense:

Salary Expense

Employee Income Tax Payable

FICA Tax Payable

Employees Union Dues Payable

Salary Payable to Employees (take-home pay)

To Record Salaries Expense:

Payroll Tax Expense

FICA Tax Payable

State Unemployment Tax Payable

Federal Unemployment Tax Payable

To Record Salaries Expense:

Health Insurance Expense for EmployeesLife Insurance Expense for EmployeesPension Expense

Employee Benefits Payable

Objective 5 Use a Payroll System.

Payroll System Components

Payroll Record

– is also referred to as the payroll journal

• It lists payroll data for each employee

• It serves as a check register

• It provides information for recording

payroll expenses and related withholdings

Payroll Bank Account

• When companies use a payroll bank

account, the company draws a check for the net amount of salary payable to

employees on its regular bank account

• The company deposits this check in the special payroll bank account

Payroll Bank Account

• The company writes paychecks to

employees out of the payroll account

• When the paychecks clear the bank, the

payroll account has a zero balance

• Disbursing paychecks from a separate bank account isolates net pay for analysis and

control

Recording Cash Disbursements

• When the employer pays the employees, the company debits Salary Payable to

Employees and credits Cash

• The liabilities to the government, unions, and other parties is also debited when cash

is paid

Recording Cash Disbursements

• Assume the following journal entry was made

at the end of an accounting period:

Salary Expense 180,000

Employee Income Tax Payable 45,000FICA Tax Payable 11,160Employee Union Dues Payable 840Salary Payable to Employees 123,000

Recording Cash Disbursements

• What is the journal entry when the employer pays these liabilities?

Employee Income Tax Payable 45,000

FICA Tax Payable 11,160

Employee Union Dues Payable 840

Salary Payable to Employees 123,000

Internal Control over Payrolls

– controls for efficiency

– controls for safeguarding payroll

disbursements

Controls for Efficiency

– making payroll disbursements from one payroll account in one month and from another the next

– following established policies for hiring and firing employees

– complying with government regulations– testing employees for their interest in the

Controls for Safeguarding

Payroll Disbursements

• Large organizations must establish controls

to ensure that payroll disbursements are

made only to legitimate employees

• Duties of hiring and firing should be

separated from the duties of accounting for payroll and distributing paychecks

Controls for Safeguarding

Payroll Disbursements

• Requiring an identification badge bearing

an employee’s photograph also helps

internal control

• A formal time-keeping system helps ensure that employees have actually worked

Objective 6 Report Current Liabilities

on the Balance Sheet.

Report Current Liabilities

• Companies report current liabilities on the balance sheet

– Current liabilities of known amount

(payroll)

– Current liabilities that must be estimated (warranties)

Report Current Liabilities

• At the end of the year, companies report the amount of payroll liabilities owed to all parties

• The liability at year end is the amount of the payroll expense that is still unpaid

Liabilities Known When Recorded

– accounts payable

– short-term notes payable

– sales tax payable

– current portion of long-term debt– accrued expenses payable

– unearned revenues

Liabilities Estimated

When Recorded

– warranty payable

– income tax payable

– vacation pay liability

End of Chapter

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