current liabilities and payroll chapter 11 horngren ♦ harrison ♦ bamber ♦ best ♦ fraser ♦...

Current Liabilities

and PayrollChapter 11

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

11 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1. Account for current liabilities of known amount.

2. Account for current liabilities that must be estimated

3. Calculate payroll amounts4. Record basic payroll transactions5. Use a payroll system6. Record current liabilities on the statement

of financial position


Objective 1

Account for current liabilitiesof 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 Woo Wholesaler.

What is the journal entry?

Inventory 1,000 Accounts Payable 1,000

Purchase inventory on account


Short-Term Bills Payable...

– are promissory notes payable due within one year.

In addition to recording the bill 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 Bills Payable Example

On May 30, Woo purchased inventory for $10,000 by issuing a 90-day, 10% bill payable.

What is the journal entry?

Inventory 10,000Bills Payable 10,000

Purchase inventory on a 90-day, 10% bill



Assume the accounting period ended June 30.

How much interest was accrued as of June 30?

$10,000 × 10% × 31/360 = $86.11 How does Woo record the payment at

maturity?



August 29Bill Payable 10,000.00Interest Payable 86.11Interest Expense 163.89

Cash10,250.00


Short-Term Bills PayableIssued at a Discount

Issuing a bill at a discount means the bank subtracts the interest from the bill’s face value.

Suppose that on February 25, Sarah discounts a $10,000, 90-day bill, payable to the bank at 12%.

The business will receive $9,700. $10,000 × 0.12 × 90/360 = $300



February 25

Cash 9,700Bill Payable, Short-Term 9,700

Discount a $10,000, 90-day,10% bill payable to borrow cash

February 25

Cash 9,700Bill Payable, Short-Term 9,700




Sarah’s Statement of Financial Position

Current liabilities:Bill payable, short-term $ 9,700



What is the accrued interest at the end of the month?

$10,000 × 12% × 3/360 = $10

February 28Interest Expense 10

Bill Payable 10Accrue interest expense at month end


Short-Term Bill PayableIssued at a Discount

An alternative is to record the discount at the time it of issued February 25

Cash 9,700Discount on Bill Payable 300

Bill Payable, Short-Term 10,000


An alternative is to record the discount at the time it of issued February 25

Cash 9,700Discount on Bill Payable 300

Bill Payable, Short-Term 10,000




Sarah’s

Statement of Financial Position

Current liabilities:Bill payable, short-term $10,000Less: Discount on bill payable 300Bill payable, short-term, net $ 9,700



What is the accrued interest at the end of the month?

$10,000 × 12% × 3/360 = $10

February 28Interest Expense 10

Discount on Bill Payable 10 Accrue interest expense at month end


Goods and Services Tax Payable Example

Australia has a 10% GST on most goods and services.

Suppose that a store sold $3,000 worth of inventory on a given day.

The business collected an additional 10% in GST.

How much is the GST liability? $300


Accrued Expenses (Liabilities)...

– are expenses that have been incurred but not recorded.

– salaries– taxes withheld– interest– utilities (electricity, gas, waste disposal)


Payroll Liabilities

Salary Expense 10,000Employee Income Tax Payable 1,200Employee Union Fees Payable 140Salary Payable 8,660

To record salary expense

See exhibit 11-2 page 455 of your textbook



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 1Cash 1,500

Unearned Revenue 1,500Received cash in advance


Unearned Revenue Example

What entry does Dennis record on June 30?

June 30

Unearned Revenue 500Service Revenue 500

Earned service revenue that was collected in advance


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 Example

Woo Wholesaler made sales of $1,000,000 subject to product warranties.

In the past years, claims have averaged 2%.

Warranty Expense 20,000Estimated Warranty Payable 20,000

To accrue warranty expense


Estimated Warranty Payable Example

On July 28, a customer returned a defective product and was given a $300 refund (or given a new product – cost $300).

Estimated Warranty Payable 300Cash (Inventory) 300

To record refund under warranty


Estimated Holiday PayLiability Example

Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and holiday pay adds 8% (4 weeks of annual vacation divided by 50 workweeks each year).

How much vacation pay should be accrued?


Estimated Holiday PayLiability Example

March 31

Vacation Pay Expense 800Estimated Vacation Pay Liability 800

To accrue vacation expense


Income Tax Payable

What is the entry a company makes to accrue $50,000 of income tax expense for a one-year period?

Income Tax Expense 50,000Income Tax Payable 50,000

To accrue income tax at year end

Income Tax Expense 50,000Income Tax Payable 50,000

To accrue income tax at year end


Contingent Liability

A contingent liability is a potential liability

The AASB1040 requires details of a contingent liability must be disclosed in the notes to the financial statement

See Qantas example in your textbook page 458See Qantas example in your textbook page 458


Objective 3

Calculate payroll amounts.


Payroll

Ordinary 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 ordinary rate).


Gross Pay and Net Pay

Gross PayGross Pay DeductionsDeductions Net PayNet Pay


Income Tax and Medicare Levy

The tax deducted from your salary has two components:

1 Income Tax (no tax on first $6,000 then 17% up to $20,000 ….. 47% on amounts over $60,000 – called marginal progressive)

2 Medicare Levy (1.5% applied to all employee earnings – if earning more than about $15,000)


Payroll Taxes

State government tax Paid by businesses who have annual

salaries above a threshold amount ($500,000 - $1,000,000 depending on the state).

Paid by the employer in addition to gross salary.


Breakdown of Payroll Costs

Employer disburses $1,200

Employer cost of superannuation.

$90

Employer payroll taxto state government

$110

Net pay toemployee

$750

Employee incometax & medicare to ATO

$230

Employeeunion fees

$20

Employee Gross Pay – $1,000


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 tax, Medicare levy as well as union fees.

The employer serves as a collecting agent and sends these amounts to the Australian Taxation Office and union.


To Record Salaries Expense:

Salary ExpenseEmployee Income Tax PayableEmployees Union Fees PayableSalary Payable to Employees (take-home

pay)

Salary ExpenseEmployee Income Tax PayableEmployees Union Fees PayableSalary Payable to Employees (take-home

pay)


To Record Salaries Expense:

Payroll Tax ExpensePayroll Tax Payable

Payroll Tax ExpensePayroll Tax Payable

Health Insurance Expense for EmployeesLife Insurance Expense for EmployeesSuperannuation Expense

Employee Benefits Payable

Health Insurance Expense for EmployeesLife Insurance Expense for EmployeesSuperannuation Expense

Employee Benefits Payable




Objective 5

Use a payroll system.


Payroll System Components

– payroll record– payroll bank account– payroll cheques– earnings record (for each employee)


Payroll Record...

– is also referred to as the payroll journal. It lists payroll data for each employee. It serves as a cheque register. It provides information for recording

payroll expenses and related deductions (withholdings).


Payroll Bank Account

When companies use a payroll bank account, the company draws one cheque for the net amount of salary payable to employees on its regular bank account.

The company deposits this cheque in the special payroll bank account.


Payroll Bank Account

The company writes pay-cheques to employees out of the payroll account.

When the pay-cheques clear the bank, the payroll account has a zero balance.

Disbursing pay-cheques from a separate bank account isolates net pay for analysis and control.


Paying the Payroll

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.


Paying the Payroll

Assume the following journal entry was made at the end of an accounting period:

Salary Expense 180,000Employee Income Tax Payable 55,000Employee Union Fees Payable 1,000Salary Payable to Employees 124,000


Paying the Payroll

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

Employee Income Tax Payable 55,000Employee Union Dues Payable 1,000Salary Payable to Employees 124,000

Cash 180,000


Internal Control over Payrolls

– controls for efficiency– controls for safeguarding payroll payments


Controls for Efficiency

– making payroll payments from one payroll bank account in one month and from another the next (less of a problem with electronic funds transfers)

– following established policies for hiring and firing employees

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

the job and their skills to perform the job


Controls for SafeguardingPayroll Payments

Large organisations must establish controls to ensure that payroll payments are made only to legitimate employees.

Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing pay cheques.


Controls for SafeguardingPayroll Payments

Requiring an identification badge bearing an employee’s photograph also helps internal control (especially access control).

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


Objective 6

Report current liabilitieson the statement offinancial position


Report Current Liabilities

Companies report current liabilities on the statement of financial position.

– 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 of Known Amount

– accounts payable– short-term bills payable– GST payable– current portion of long-term debt– accrued expenses (payable)– unearned revenues


Estimated Liabilities

– warranty payable– income tax payable– holiday pay liability


End of Chapter 11

current liabilities and payroll chapter 11 horngren ♦ harrison ♦ bamber ♦ best ♦ fraser ♦...

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