Chapter 11
Payroll Liabilities
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
In this chapter…
Balance Sheet
Current Assets
Cash
Current Liabilities
Chapter
10000
Accounts Payable
Accounts Receivable
20000
Wages Payable
Notes Receivable
15000
EI Payable
Marketable Securities
25000
CPP Payable
1400
120000
Tax Payable
3550
Other Ded. Payable
1000
Utilities Payable
2000
Inventory
Capital Assets
11
5000
18500
550
Equipment
250000
Buildings
500000 Long-Term Debt
620000
60000 Owner’s Equity
348000
Goodwill
Total Assets
1000000 Total Liabilities + OE
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
1000000
Payroll Accounting
• Payroll Accounting is responsible for:
– Recording cash payments made to employees
– Providing information about labour costs
• For many companies, labour cost is their most consistent and costly
expense
– Accounting for amounts withheld from employee pay
– Accounting for employee benefits
– Providing means through which employers can comply with
government regulations regarding employee compensation
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Payroll Deductions
• Payroll deductions are amounts withheld from the wages of
employees
– note: amounts are withheld from wages actually paid
• The amount withheld is determined by
– their wage amount
– The amount of personal tax credits
• A look-up table is supplied by CCRA to help employers
calculate the amount to be withheld based on the above
• Employers remit withholdings monthly
• The amount of personal tax credits is determined when the
employee completes their TD1 form
– A TD1 form is usually completed by an employee within the first few
days of starting work with the employer.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Canada Pension Plan (ignore QPP)
• Every working person between ages 18 and 70 must pay CPP
– The deduction is based on a percentage of wages to a maximum amount
(now $50,100 , but use your books number of $42,800)
– The employer matches 100% the employee contribution and remits both
– Self-employed individuals must make the remittance for both the
employee and employer
• An easy way to calculate CPP
– Determine the amount of pay (in terms of weeks or months)
– Determine exemption amount
• If paid in weeks, take $3500 / 52 weeks = $67.31 / week exemption
• If paid in months, take $3500 / 12 months = $291.67 / month exemption
– CPP Deduction = (the weekly or monthly pay - exemption) * .0495
– Employer contribution = Employee CPP deduction
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Employment Insurance
• EI coverage is extended to all Canadians who are not selfemployed
– Employers must deduct and amount based on a percentage of gross
income to a maximum amount (now $45,900, but use the books
number of $42300).
– Employers must pay an amount 1.4 times that of the employees’
amount and remit the combined amount.
• An easy way to calculate EI deductions
– Determine the amount of pay
– EI Deduction = .0173 * amount of pay
• Note the rate is currently 0.0183, but use the books rate of 0.0173
– Employer contribution = Employee contribution * 1.4
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Income Tax
• Income taxes vary by province due to the provincial amount
• Easiest way to calculate Income Tax is to use look-up tables
– Determine how the employees are paid (monthly or weekly)
– Determine the individual employees’ TD1 Claim Code
– Ensure you are using the right look-up tables
• There are look-up tables for monthly or weekly amounts – choose the right
one
– Look up the federal amount for the proper TD1 Claim Code
– Look up the provincial amount for the proper TD1 Claim Code
– Add ‘em up,
• Income Tax Deduction = Fed Amount + Prov Amount
– There is no employer contribution for tax. They pay their own taxes.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Withholding Tables
• Wage bracket withholding tables make the calculation to
determine amounts to be withheld for CCP (or QPP) and EI
easy for employers.
– The tables can be downloaded from a government website.
– These tables are also available in electronic format so payroll and
accounting software applications can use them.
– These tables are updated on (usually) a semi-annual basis.
• Exhibit 11.3 illustrates examples of deductions tables
– The tables use gross pay (regular + overtime) as the look-up amount
– The income tax deduction amounts are based on gross pay less amounts
deducted for CPP and EI
• In effect we are not taxed on amounts paid to CPP and EI
• This is done for you if you use the tax tables
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
T4 Form
• The T4 Statement is the report that employers provide to
CCRA and to employees that summarizes their gross
wages and source deductions
• It usually includes
–
–
–
–
–
–
Total Gross Wages
Taxable benefits received from employers
Income taxes withheld
Deductions for a registered pension
CPP contributions
EI deductions
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
The Payroll Register
• Payroll Register is a simple table that summarizes the pay
given to the employees each pay
• Exhibit 11.2 provides an example
• It contains the following by employee name:
–
–
–
–
–
Hours worked (or salary earned)
Overtime (OT) hours if applicable
Calculates gross pay based on regular time and over time
Outlines amounts deducted for CPP, EI, and Tax
Shows net pay
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Recording the Journal Entries
• EI Payable, Income Tax Payable, CPP Payable and EI Payable
are current liabilities the employer is responsible for
• Salaries Payable is what is owed to employees on the next pay
• Other deductions might be employee contributions to a health
plan
Date
Account Titles and explanation
PR
July 31 Salaries Expense
Debit
Credit
25000
EI Payable
550
Employees’ Income Tax Payable
3550
CPP Payable
1400
Wages Payable
18500
Other deductions Payable
1000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Recording the Journal Entries
• When actually paying the employees, the journal entry
becomes
Date
Account Titles and explanation
PR
July 31 Wages Payable
Debit
Credit
18500
Cash
18500
• When paying out EI, CPP and Taxes, the journal entry is:
Date
Account Titles and explanation
PR
July 31 EI Payable
Debit
Credit
550
Employees’ Income Tax Payable
3550
CPP Payable
1400
Cash
5500
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Mid-chapter Demo Problem
• Lets try the Mid-chapter demo problem
• Prepare a Payroll Register that summarizes 3 employees’
pay for the week
– Determine the EI, CPP and Tax to be deducted
– Illustrate how the other deductions are considered in the
calculation of net pay
– Show the journal entry for the 3 employees
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
The Employer Side
• For both CPP and EI, employers must supplement the
amount paid by employees.
– The amounts contributed by employers are remitted at the same
time as those for employees and so are usually held in the same
payables and expense accounts
– These amounts are considered payroll related expenses and are
recorded as EI or CPP Expenses (refer to page 561 for an example)
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Employee Benefits
• Workers Compensation
– Employers are required to insure their employees against injury or disability
resulting from employment
• Employer Contributions to Employee Insurance or Retirement
– Sometimes employers will pay or will match employee contributions to a
benefit. (Refer to bottom of p 563)
– The amount may be calculated in a number of ways (% of income, set amount,
etc), but the journal entry would be:
Date
Account Titles and explanation
May 30 Benefit Expense
PR
Debit
Credit
550
Retirement Plan Payable
200
Eye Benefit Payable
350
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Vacation
• Vacation Pay
– Employers must allow vacation time.
• Full time regular employees use the vacation allotment as time.
• Contractors may be paid vacation allotment in advance
– Some companies set up a vacation pay liability drawn on when
employees go on vacation. Others just pay it as regular income when
the employee is on vacation
• Vacation pay is calculated as a % of gross earnings. Example:
– If 2 weeks of vacation are offered per year, the percent of gross
income allocated per pay period for vacation is
• 2/(52-2) = .04 or 4%
– If 3 weeks are allowed
• 3/(52-3) = 6.12%
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Journal Entries for Vacation
• The employer assigns a vacation amount to a liability:
Date
Account Titles and explanation
Oct 31
Benefits (or Wages) Expense
PR
Debit
Credit
2500
Vacation Payable
2500
• When employees take vacation, they draw on the liability
and pay EI, CPP and Taxes:
Date
Account Titles and explanation
Dec 31
Vacation Payable
PR
Debit
Credit
500
EI Payable
xxx
Employees’ Income Tax Payable
xxx
CPP Payable
xxx
Salaries Payable
xxx
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Demonstration Problem
• Check out the End of Chapter Demo problem
• This is a good comprehensive problem
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Exercises
• Try Exercises
– 11-4
– 11-6
• Try Problems
– 11-1A
– 11-3A
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD