Accounting principles chapter 11

 Estimated warranty costs are accrued with a debit to warranty expense and a credit to estimated warranty liability... Current liabilities Millions Accounts payable and accrued liabilit

Accounting Principles

Second Canadian Edition

Prepared by:

Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel ·

Trenholm

CURRENT LIABILITIES

CHAPTER

11

A current liability is a debt that can

reasonably be expected to be paid

1 from existing current assets or

in the creation of other current liabilities and

2 within one year or the

operating cycle, whichever

is longer

ACCOUNTING FOR CURRENT LIABILITIES

ACCOUNTING FOR CURRENT

Definitely determinable current

1 Operating line of credit

2 Accounts and notes payable

3 Sales tax payable

4 Payroll and employee benefits

5 Unearned revenues

6 Current maturities of long-term debt

ACCOUNTING FOR CURRENT LIABILITIES

OPERATING LINE OF CREDIT

 A pre-authorized demand loan, allowing the company to write cheques up to a preset limit when needed.

 Disclosed by footnote and by reporting

any resulting bank overdraft

as a current liability.

Notes Payable are obligations in the form of

written promissory notes that usually require

the borrower to pay interest

Notes payable may be used instead of accounts payable because it supplies documentation of the obligation in case legal remedies are needed to collect the debt.

Notes due for payment within one year

of the balance sheet date are usually classified as current liabilities.

NOTES PAYABLE

SALES TAXES PAYABLE

 Sales tax is expressed as a stated percentage of the sales price of goods sold to customers by a retailer

 Sales tax includes the goods and service tax

(GST), provincial sales tax (PST) or harmonized sales taxes (GST and PST combined)

 The retailer (or selling company) collects the tax from the customer when the sale occurs,

and periodically (usually monthly)

remits the collections to the government.

 Salaries or wages payable represent the

amounts owed to employees for a pay period.

 Payroll withholdings include federal and

provincial income taxes, Canada Pension Plan

(CPP) contributions, and employment

insurance (EI) premiums.

 Employees may also voluntarily authorize

withholdings for charity, retirement, medical,

or other purposes.

 Payroll withholdings are remitted to

governmental taxing authorities.

PAYROLL AND EMPLOYEE BENEFITS

 Unearned Revenues (advances from customers) occur when a company receives cash before a

service is rendered.

 Examples are when an airline sells a ticket for

future flights or when a lawyer receives legal fees before work is done.

UNEARNED REVENUES

CURRENT MATURITIES OF

LONG-TERM DEBT

 Another item classified as a current liability is

current maturities of long-term debt

 Current maturities of long-term debt are often

identified on the balance sheet as long-term debt due within one year.

PROPERTY TAXES

 Property taxes are accrued monthly based on the prior year’s tax bill.

 When the property tax bill for the

current year is received, the company will adjust its monthly expense for the remainder of the year.

 Estimated warranty costs are accrued

with a debit to warranty expense and a credit to estimated warranty liability

CONTINGENT LIABILITIES

 Contingent liabilities exist when there is uncertainty about the outcome.

 Contingencies are accrued by a debit to

an expense account and a credit to a

liability account if both of the following conditions are met:

1 The contingency is likely, and

2 The amount of the contingency can

be reasonably estimated.

FINANCIAL STATEMENT

PRESENTATION

 Each major type of current liability is listed

separately.

 Often list bank loans, notes payable, and

accounts payable first, then other liabilities.

COMINCO LTD.

Current liabilities (Millions)

Accounts payable and accrued liabilities 230

$301

APPENDIX 11A

INTERNAL CONTROLS FOR PAYROLL

 The objectives of internal accounting control

concerning payroll are

1 to safeguard company assets from

unauthorized payrolls and

2 to assure the accuracy and reliability of the accounting records pertaining to payrolls.

 Payroll activities include:

1 hiring employees

2 timekeeping

3 preparing the payroll

4 paying the payroll

 These functions should be assigned to

different departments or individuals.

4 Functions

of Payroll

HIRING EMPLOYEES

The human resources department is responsible for:

1 Posting job openings

2 Screening and interviewing applicants

3 Hiring of employees

4 Authorizing changes in pay rates during employment

5 Terminations of employment

clock – the time of arrival and departure are automatically recorded by the employee when he/she inserts a time card into the clock.

1 approve the hours shown by signing the

time card at the end of the pay period

2 authorize any overtime hours for an

employee

PREPARING THE PAYROLL

The payroll department prepares the payroll

authorizations , and

2 approved time cards

PAYING THE PAYROLL

The comptroller’s department is responsible for the payment of the payroll.

cheque, minimizes the risk of loss from theft.

must be signed by the comptroller and their distribution protected by the

comptroller’s department.

DETERMINING AND PAYING

 Gross earnings is the total compensation

 Total wages are determined by applying the

hourly rate of pay to the hours worked

 Most companies are required to pay a

minimum of one and one-half times the regular hourly rate for overtime work.

GROSS EARNINGS

PAYROLL DEDUCTIONS

payroll deductions.

PAYROLL DEDUCTIONS

withholdings for charitable causes,

retirement, and other purposes.

authorized in writing by the employee.

in a payroll expense to the employer.

payroll deductions from gross earnings.

EMPLOYER PAYROLL COSTS

 CPP

• The employer must match each employee’s CPP

contribution.

 EI

• The employer is required to contribute 1.4 times

each employee’s EI deductions.

 Workplace Health, Safety, and Compensation

• Employers pay a specified percentage of their

gross payroll to provide supplemental benefits for workers who are injured or disabled in the

workplace.

ADDITIONAL FRINGE BENEFITS

PAID ABSENCES

compensation for future benefits when

certain conditions of employment are met.

ADDITIONAL FRINGE BENEFITS

PAID ABSENCES

 When the payment of compensation is

probable and can reasonably be

determined, a liability should be accrued

 When the amount can not be reasonably estimated, the potential liability should

be disclosed.

 Many companies use a payroll register to

accumulate the gross earnings, deductions, and net pay by employee for each period.

 In some cases, this record is a journal or book

of original entry.

 The typical entry to record the employee costs

in a payroll is to debit Salaries or Wages

expense and to credit a variety of liability

accounts.

 When the payroll is paid, the liability

accounts are debited and Cash is credited.

RECORDING THE PAYROLL

RECOGNIZING PAYROLL EXPENSES AND LIABILITIES

Academy Company records its payroll for the week ending June 15, 2002 with the journal entry above Office Salaries Expense ($5,200) and Wages Payable ($12,010) are debited in total for $17,210 in gross earnings Specific liability accounts are credited for the deductions made during the pay period Salaries and Wages Payable is credited for $9,885.34 in net earnings

Academy Company records its payroll for the week ending June 15, 2002 with the journal entry above Office Salaries Expense ( $5,200 ) and Wages Payable

( $12,010 ) are debited in total for $17,210 in gross earnings Specific liability accounts are credited for the deductions made during the pay period Salaries and Wages Payable is credited for $9,885.34 in net earnings

June 15 Office Salaries Expense

Wages Expense

CPP Payable

EI Payable Income Tax Payable United Way Payable Union Dues Payable Salaries and Wages Payable

To record payroll for the week ending June 15.

5,200.00

12,010.00

654.03 387.23 5,646.90 421.50 215.00 9,885.34

GENERAL JOURNAL Date Account titles and explanation Debit Credit

RECORDING EMPLOYER

PAYROLL COSTS

The entry to record the payroll costs associated with the Academy Company payroll results in a debit to Employee Benefits Expense for $2,056.65, a credit to CPP Payable for $654.03 ($654.03 x 1) and a credit to EI Payable for $542.12 ($387.23 x 1.4) Assuming a worker’s compensation rate of 1 percent, the comp- ensation payable liability would be for $172.10 ($17,210 x 1%) Vacation pay accrues at 4% and therefore the vacation payable will be 688.40 ($17,210 x 4%).

The entry to record the payroll costs associated with the Academy Company payroll results in a debit to Employee Benefits Expense for $2,056.65 , a credit to

CPP Payable for $654.03 ( $654.03 x 1 ) and a credit to EI Payable for $542.12

( $387.23 x 1.4 ) Assuming a worker’s compensation rate of 1 percent, the ensation payable liability would be for $172.10 ( $17,210 x 1% ) Vacation pay accrues at 4% and therefore the vacation payable will be 688.40 ( $17,210 x 4% ).

comp-GENERAL JOURNAL Date Account Titles and Explanation Debit Credit

June 15 Employee Benefits Expense

CPP Payable

EI Payable Workers’ Compensation Payable Vacation Pay Payable

To record employer payroll costs on June 15 payroll.

2,056.65

654.03 542.12 172.10 688.40

The entry to record payment of the Academy Company payroll is a debit to Salaries and

Wages Payable and a credit to Cash

The entry to record payment of the Academy Company payroll is a debit to Salaries and

Wages Payable and a credit to Cash

RECORDING PAYMENT

OF THE PAYROLL

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

June 15 Salaries and Wages Payable

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