ACCOUNTING
PRINCIPLES
Third Canadian Edition
Prepared by:
Keri Norrie, Camosun College
CHAPTER 10
CURRENT LIABILITIES
ACCOUNTING FOR CURRENT
LIABILITIES
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
Types of liabilities
1. Definitely determinable
2. Estimated
3. Contingent
ACCOUNTING FOR CURRENT
LIABILITIES
Definitely determinable current liabilities
include:
1. Operating line of credit
2. Accounts and notes payable
3. Sales tax payable
4. Property taxes payable
5. Payroll and employee benefits
6. Unearned revenues (discussed in
previous chapters)
7. Current maturities of
long-term debt
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
• 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
classified as current liabilities.
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.
PROPERTY TAXES
• Property taxes are paid for a calendar year
although the bill often is not received until
spring of each year.
• When the property tax bill for the current year
is received, a liability is credited with either
an expense or a prepaid asset debited
depending on how much of the calendar year
has passed.
PAYROLL AND EMPLOYEE BENEFITS
• 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.
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.
• It is not necessary to record an adjusting
entry for the current maturity of long-term
debt. Rather, the proper classification is
made when the balance sheet is prepared.
ESTIMATED LIABILTIES
• Obligation that exists but for which the
amount and timing is uncertain.
• However, the company can reasonably
estimate the liability.
• Examples include product warranties and
promotions.
PRODUCT WARRANTIES
• Warranty contracts may lead to future costs
for replacement or repair of defective units.
• Using prior experience with the product, the
company estimates what the cost of
servicing the warranty will be.
• Estimated warranty costs are accrued with
a debit to warranty expense and a credit to
estimated warranty liability.
• It matches the cost of the warranty to the
same period that the related sale occurred.
PROMOTIONS
• Promotions, such as coupons, frequent
flyer miles, and rebates, are an incentive to
retain or attract customers.
• Consistent with the matching principle, their
costs should be charged to expense in the
period of the sale that benefits from the
promotion, even though the promotional
offers may be redeemed over
several accounting
periods.
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)
Bank loans and notes payable
Accounts payable and accrued liabilities
Income and resource taxes
Long-term debt due within one year
$
5
230
36
30
$ 301
APPENDIX 10A
DETERMINING AND PAYING THE
PAYROLL
Determining the payroll involves calculating
1. gross earnings,
2. payroll deductions, and
3. net pay.
GROSS EARNINGS
• Gross earnings is the total compensation
earned by an employee.
• There are three types of gross earnings:
1. wages
2. salaries
3. bonuses
• 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.
PAYROLL DEDUCTIONS
• The difference between gross pay and the
amount actually received is attributable to
payroll deductions.
• Mandatory deductions consist of Canada
Pension Plan (CPP, or QPP in Quebec),
employment insurance (EI) and personal
income tax.
PAYROLL DEDUCTIONS
• Voluntary deductions pertain to withholdings
for charitable causes, retirement, and other
purposes.
• All voluntary payroll deductions should be
authorized in writing by the employee.
• Voluntary payroll deductions do not result in a
payroll expense to the employer.
• Net pay is determined by subtracting 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
• Employees may have the right to receive
compensation for future benefits when
certain conditions of employment are met.
• The compensation may pertain to:
1. Paid vacation
2. Sick pay benefits
3. Paid holidays
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.
RECORDING THE PAYROLL
• 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.
RECOGNIZING PAYROLL EXPENSES
AND LIABILITIES
GENERAL JOURNAL
Date
June 17
Account Titles and Explanation
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 17.
Debit
Credit
5,200.00
12,010.00
748.64
361.41
5,646.90
421.50
215.00
9,816.55
Academy Company records its payroll for the week ending June 17, 2005 with
the journal entry above. Salaries Expense ($5,200) and Wages Expense
($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 $9,816.55 in net earnings.
RECORDING EMPLOYER
PAYROLL COSTS
GENERAL JOURNAL
Date
Account Titles and Explanation
June 17
Employee Benefits Expense
CPP Payable
EI Payable
Workers’ Compensation Payable
Vacation Pay Payable
To record employer payroll costs on
June 15 payroll.
Debit
Credit
2,115.11
748.64
505.97
172.10
688.40
The entry to record the payroll costs associated with the Academy
Company payroll results in a debit to Employee Benefits Expense for
$2,115.11, a credit to CPP Payable for $748.64 ($748.64 x 1) and a credit
to EI Payable for $505.97 ($361.41 x 1.4). Assuming a worker’s
compensation rate of 1 percent, the compensation 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%).
RECORDING PAYMENT
OF THE PAYROLL
GENERAL JOURNAL
Date
June 15
Account Titles and Explanation
Salaries and Wages Payable
Cash
To record payment of payroll.
Debit
Credit
9,816.55
9,816.55
The entry to record payment of the Academy
Company payroll is a debit to Salaries and Wages
Payable and a credit to Cash.
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