Accounting 2
Chapter 10 Notes
Current Liabilities & Payroll
Liability: Liabilities are debts – obligations to pay money or render services in the future
as a result of a past transaction or event.
Kinds of Liabilities
Current Liabilities Debts that must be paid within 1 year from the Balance Sheet. Also
includes debts that must be paid within the operating cycle of the Business.
Long Tem Liabilities: All Debts not classified as current. These will be covered in later
chapter. Chapter 11 focuses on Current Liabilities.
Characteristics of Liabilities: Liabilities usually fit into one of the three categories of debt
listed below:
1.
Liabilities of known Amount: Current Liabilities of Known Amount: The amount of
the liability is definite. Examples:
A.
Accounts Payable
B.
Short-Term Notes Payable
C.
Sales Tax Payable
D.
Salaries Payable
E.
Payroll Taxes Payable (Various kinds – more later in this chapter)
F.
Other Taxes Payable
G.
Current Portion of Long Term Debt
H.
Accrued Expenses
I.
Unearned Liabilities
2.
Estimated Liabilities: The existence of the liability is certain but the exact amount of the
liability is not certain and must be estimated.
A.
Warranty expenses
B.
Vacation pay
3. Contingent Liabilities: A potential liability that may become an actual or real liability based
on some future event. The accounting treatment for contingent liabilities depends on: 1) the
degree of probability that the contingency will materialize; and 2) whether or not it is
possible to make a reasonable estimate of the amount of the contingent liability.
A. Probable Contingent Liabilities: If the liability can be reasonably estimated treat the
liability as an actual estimated liability. This means the liability amount is estimated and
actually recorded in the accounts and on the reports of the business.
-2B. Reasonably Possible Contingent Liabilities: These contingent liabilities are not
recorded in the accounts or reports. Instead, these liabilities are disclosed in the Notes to
the Financial Statements.
C. Remote Contingent Liabilities: These contingent liabilities are ignored. There is no
disclosure of any kind on the financial statements for remote contingent liabilities.
D. Contingent Liabilities for Debt: These liabilities are disclosed in the Notes to the
Financial Statements even when the possibility is considered remote that the liability will
materialize. This is an exception to the rules above.
Notes Payable Types: 1. Interest Bearing Notes Payable
2. Notes Payable issued at a Discount (not covered in this chapter)
Example: Transactions for an Interest Bearing Note
(Notes Payable concepts are nearly identical to notes receivable covered in chapter 9)
1.
Dec 1 Issued of $5,000 60 day 9% note payable
2.
Dec 31 Made the year end adjusting entry for accrued interest payable.
3.
Jan 30 Paid the $5,000 note and related interest
Journal Entries for Interest Bearing Notes Payable:
General Journal
Date
Account Title
Page 2
Ref
Debit
Credit
-3Liability for Sales Taxes A tax levied on Goods and Services and paid usually by the final user
of the good or service. In Nebraska, Sales taxes are levied on most goods but not on services.
There are several exceptions. In Nebraska, there is usually a special sales tax on hotel & motel
accommodations. In Nebraska, there is usually no tax on food unless the food is consumed in a
restaurant. Sales taxes are usually collected by the business and sent on to the State.
Example: Recorded Cash sales from the cash register. According to the cash register, cash sales
amounted to $100,000 and sales tax amounted to 7%. Total cash received from
customers amounted to $106,998.
Journal Entries for Sales, Sales Tax, and Cash Shortage
General Journal
Date
Account Title
Page 4
Ref
Debit
Credit
Estimated Liabilities for Warranties:
Warranties: The Cost of warranties should be reflected as an expense in the period in which
the product is sold. This is an application of the matching principle.
Example: A business records sales of 10,000 electronic toys at $10 each. Each toy has a 1 year
warranty. Typically, 3% the probable cost of warranties. During the current year, the Company
used $1,350 of inventory to satisfy warranty claims.
-4Journal Entries for Estimated Warranties
General Journal
Date
Account Title
Page 5
Ref
Debit
Credit
Estimated Liabilities for Vacation Pay
Vacation Pay: The Cost of vacation pay should be reflected as an expense in the period in
which the vacation pay is earned. This is an application of the matching principle. Vacation pay
does not need to be accrued unless it is a contractual obligation.
Example: In a particular pay period, employees earn vacation time valued at $8,000. Later,
employees go on vacation and use up vacation time valued at $3,000.
Journal Entries for Vacation Pay
General Journal
Date
Account Title
Page 6
Ref
Debit
Credit
-5Unearned Revenues: When Revenue has been received prior to earning it, the revenue must be
reflected in the financial statements as a liability. This liability will be satisfied by performing
the service.
Example: Jane’s shoe Store receives $6,000 from Northwest University Athletic Department.
The money is for 40 pairs of running shoes (40 @ $150 each) for the School’s Track Team. At
year end only 10 pairs of shoes have actually been sold to the School. The remaining shoes will
be sold to the School in January.
Journal Entries for Unearned Revenue
General Journal
Date
Account Title
Page 7
Ref
Debit
Credit
Accounting for Payroll
Issues: 1.
2.
3.
Computation of Earnings
Determination of Payroll Deductions C Items that are deducted
from the employees paycheck.
Computation of Payroll Tax Expense C Payroll taxes that are paid
by the employer but which are not deducted from the employee=s paycheck.
Computation of Earnings
1.
2.
3.
4.
The Fair Labor Standard act requires overtime for many (but not all) employees.
Overtime must be shown separately on the employees earnings records.
Overtime hours are hours worked in excess of 40 in a workweek. (A union contract or
company policy may define overtime hours more liberally)
Overtime is computed by taking 1.5 time the regular rate of hourly pay (or a higher rate if
required by a company policy or a union contract) multiplied by the overtime hours.
-6Deductions - From Employee=s Paychecks
FICA Tax: Each employee must have FICA tax deducted from his/her earnings. The FICA tax
is composed of two parts:
1.
The Social Security tax (OASDI) tax which is 6.2% of the first (2009) $106,800 of the
employee’s earnings; and (For 2012 the wage base is $110,100)
2.
The Medicare tax which is 1.45% of all of the employee’s earnings.
Note for 2011 - As part of the economic stimulus program the OASDI tax rate on employees was
reduced to 4.2% for 2011. There is proposed legislation to extend this lower tax
rate into 2012.
Simplifying Assumption: Some text examples and MAL assignments combine both the
Medicare tax and the OASDI tax into a single 7.65% rate. So read all problem
instructions carefully.
Federal Income Tax: Each employee must have an appropriate amount of income tax deducted
from his/her earnings. The amount deducted varies depending on marital status, amount of
income, and the amount of allowances claimed by the employee.
Other Deductions from Employee’s Pay: An Employee may request his/her employer to
deduct other items from the employee’s earnings. Also, an employer may require that certain
items be deducted from the employee’s pay. Examples of other deductions: Pension Plan
Payments, Charitable Donations, Uniforms, Insurance Payments.
Payroll Taxes Paid by Employer - Not deducted from employee paychecks C These taxes
become Payroll Tax Expense in the Company’s Accounting Records
1.
2.
3.
FICA Tax: Each employer must pay FICA equal to the amounts paid by the employee.
Federal Unemployment Tax (FUTA Tax): Each employer must pay a (Net) Federal
Unemployment Tax equal to .8% (= .008) times the first $7,000 in compensation paid to
each employee.
State Unemployment Tax (SUTA Tax): Each employer must pay a State
Unemployment Tax. The rate varies depending on the circumstances. The amount of the
compensation subject to the tax varies from State to State.
Other Payroll Costs
1.
Workmen’s Compensation: Nearly all employers are required to provide workmen’s
compensation insurance coverage for their employees. The cost is paid for by the
employer – not deducted from the employee’s wages. Workmen’s compensation
provides benefits for workers who are injured on the job. This is a form of Benefits
expense.
2.
Retirement Benefits: Many Companies provide retirement benefits for their employees.
Sometimes the employees contribute to the cost of retirement plans. And, sometimes the
cost is paid for entirely by the Company. This is another form of benefits expense.
-7Example: For a particular pay period, 10 employees are paid a total of $24,000. There was
$3,000 deducted from the employees pay for Federal Income Taxes. All of the pay is subject to
FICA tax and the Medicare tax. The Company records both FICA and Medicare in a single
account called FICA payable (Assume the combined FICA tax rate is 8%) Only $18,000 of the
pay is subject to Federal and State unemployment taxes. The State Unemployment tax rate is
3%. The employees have $1,250 deducted from their pay for pensions. The employees have
$400 deducted from their pay for donations to United Way Charities. Record the payroll and the
related payroll tax expense.
Journal Entries for Payroll
General Journal
Date
Account Title
Page
Ref
Debit
8
Credit