Chapter 9
Accrued means to gather together, so interest that is owed is "gathered" (calculated) and
recorded as a liability when it is owed but not yet required to be paid. The account you
would use is Interest Payable: the amount owed in the future which is due to a past
transaction (using the cash but not paying for that use as yet). Interest is generally due
monthly although it depends on the arrangements made with the lender. Remember that
Interest Expense is an expense account that is used to record the interest charges that the
business has incurred to help generate revenue. It therefore belongs in the element
expense
Interest rates provided are ALWAYS annual interest rates, regardless of how long the loan is
outstanding. For instance, assume you borrow $10,000 for 6 months at 3% interest. That
interest rate, the 3%, is an annual interest rate (3% over 12 months). Students often make
the mistake of thinking that, because the loan is outstanding for less than a year, the interest
rate given must be for ONLY the months outstanding (3% over 6 months). THIS IS
INCORRECT. Every interest rate you ever see is an annual interest rate, unless you are
advised otherwise. In order to change the annual interest rate into a monthly interest rate
you must ALWAYS divide by 12 (3% / 12 months = the monthly interest rate).
Principal Amount * Interest Rate * Period Outstanding
12 months
Taking out loan and record interest owed at the end of the month
Assets
=
Liabilities+
+
Owner’s
Capital
+20,000
Interest
Expense
Interest
Payable
Loan
Payable
Cash
+20,000
Service
Revenue
Profit
Revenue Expenses
Date
May 1
May 30
Balance
+
Equity
Retained Earnings
+20,000
+20,000
+50
+50
+50
+50
Dividends
Paying interest at the start of next month
Assets
=
Liabilities+
+
Owner's
Capital
Equity
Retained Earnings
+
May 1 +20,000
May 30
Balance +20,000
June 1
-50
Balance 19,950
Dividends
Interest
Expense
Service
Revenue
Interest
Payable
Cash
Loan
Payable
Date
Profit
Revenue Expenses
+20,000
+50
+50
-50
0
+20,000
20,000
+50
+50
50
Recording Income Tax Expense
Assets
Liabilities
Equity
Owner's
capital
Retained earnings
Dec-31
4,220
June 28
-4,220
Total
N/A
Income Tax
Expense
Service
Revenue
Retained
Earnings
Owner's
capital
Income Taxes
Payable
Accounts
payable
Supplies
Cash
Date
Profit
Revenue Expenses
4,220
-4,220
0.00
0.00
0.00
0.00
0.00
0.00
4,220
1.Recording Salary and Payables FROM EMPLOYEES PAY 2. Employers contribution to Payables
Liabilities
Equity
-343.53
Balance
-343.53
7.69
10.77
76.50
44.56
18.46
76.50
Wages Expense
22.28
22.28
Retained Earnings
Revenue
Expenses
Employee
Income Tax
Payable
EI Payable
May-17
May-17
CPP Payable
Cash
Date
Owner's
Capital
Employee
Benefits
Expense
Assets
450.00
33.05
0.00
0.00 450.00
33.05
Paying off all Government Payables from Employer and Employee’s pay
Liabilities
Equity
-343.53
0
-343.53
-139.52
-483.05
7.69
10.77
18.46
-18.46
0.00
76.50
0
76.50
-76.50
0.00
Retained Earnings
Revenue
Expenses
Wages Expense
22.28
22.28
44.56
-44.56
0.00
Employee
Income Tax
Payable
EI Payable
May-17
May-17
Balance
May-30
Balance
CPP Payable
Cash
Date
Owner's
Capital
0.00
450.00
0
450.00
0
0.00 450.00
Employee
Benefits
Expense
Assets
33.05
33.05
0
33.05
HST Payable or Receivable to the Government
How much do they owe the government? They owe them the difference: $8,060 ($15,600 $7,540). This amount would be recorded as HST Payable, a liability that would be remitted
(paid) to the government in the future. If the business paid out more HST then they collected
from their customer it would be recorded as an HST Receivable, an asset that they would
receive from the government in the future.
Greene Company
Balance Sheet (Partial)
At December 31, 2021
Liabilties
Current liabilities
Accounts payable
Unearned revenue
Income tax payable
CPP payable
EI payable
EIT payable
Interest payable
Total current liabilities
Long term liabilities
Note payable, due in 2022
Loan payable, due in 2027
Total liabilities
216
950
1,300
40
14
186
50
2,756
2,500
4,750
7,250