CHAPTER
11
Payroll and Short-Term
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)
2)
3)
Definite
Estimated
Contingent
CURRENT LIABILITIES
1. Definite
Definitely determinable current
liabilities include:
1. Operating line of credit
2. Accounts and notes payable
3. Sales tax payable
4. Payroll and employee benefits
5. Unearned revenues
6. Current maturities of long-term debt
CURRENT LIABILITIES
2. Estimated
Obligation that exists but the amount and
timing is uncertain.
 The company can reasonably estimate
the value of the liability.
 Example:
warranty liabilities.

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.
Date
Particulars costs are accrued
Debit
Credit

Estimated
warranty
July 31
Warranty Expense
1000
with a Estimated
debit to
warranty
Warranty
Payable expense and a 1000
credit to estimated warranty liability.

CURRENT LIABILITIES
3. Contingent

Contingent liabilities exist when there is
uncertainty about the outcome.
– Example: a law suit settled against us

Contingencies are accrued by a debit to
an expense account and a credit to a
liability account if and only if:
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
INTERNAL CONTROLS FOR PAYROLL

The primary objective of internal accounting
control concerning payroll is
–

To safeguard company assets from
unauthorized payrolls.
Payroll activities include:
1.
2.
3.
4.

Hiring employees
Timekeeping
Preparing the payroll
Paying the payroll
4
Functions
of Payroll
To prevent fraud, these functions should be
assigned to different departments/people.
DETERMINING AND PAYING
THE PAYROLL
Determining the payroll involves calculating
1. gross earnings,
2. payroll deductions, and
3. net pay.
GROSS & NET EARNINGS

Gross earnings is the total compensation earned
by an employee.

There are three fixed types of gross earnings:
1. Wages (rate x hours worked)
2. Salaries (set amount)
3. Bonuses (discretionary)

Net pay (actually received) = Gross Pay – All deductions.
DEDUCTIONS
There are two kinds:
1.
Mandatory deductions, consisting of:
–
–
2.
Your share (deductions from your paycheque), and
Employer’s share (additional contributions and thus
additional cost to company)
Voluntary Deductions
1. MANDATORY DEDUCTIONS

Mandatory deductions consist of:
– Canada Pension Plan (CPP, or QPP in
Quebec),
– Employment insurance (EI) and
– Personal Income tax.
MANDATORY DEDUCTIONS
Your Portion
(2010)
This is what you pay; it’s deducted from your
paycheque by your employer.

CPP [(Earnings – 3,500) x 4.95%]
•
•
•
•

4.95% of pensionable earnings
Max. pensionable earnings are $47,200
Basic exemption is $3,500
So max contribution is $2,163.15
($47,200 – 3,500) x 4.95%
EI (Earnings x 1.73%)
•
•
•
•
1.73% of gross pay
Max insurable earnings is $43,200
Max. employee contribution $747.36
Max. employer contribution is $1,046.30
($43,200 x 1.73%)
($747.36 x 1.4)
MANDATORY DEDUCTIONS
Your Portion
(2010)

TAX
– In Ontario, the tax brackets are as follows:
INCOME
FED. TAX
$0 - $10,382
0%
$10,382- $40,970
15%
$40,971 - $81,941
INCOME
ONT. TAX
$0 - $8,943
0%
22%
$8,943 - $37,106
5.05%
$81,941 – 127,021
26%
$37,107 - $74,214
9.15%
$127,022+
29%
$74,214 +
11.16%
MANDATORY DEDUCTIONS
Your Portion
(2006)

Federal Tax (as an example) is calculated based on a specific rate for
each segment of your income. They’re called tax brackets.
120000
29%
100000
As an example, assume this box represents an $80,000 annual salary.
80000
26%
60000
22%
40000
20000
15%
0
0%
$80,000 Salary
$118,285 +
$72,756 - $118,285
$36,378 - $72,756
$9,039 - $36,378
$0 - $9,039
MANDATORY CONTRIBUTIONS
Employer’s Share




CPP
– The employer must match each employee’s CPP
contribution.
EI
– The employer is required to contribute 1.4 times the
employee’s EI deductions.
Vacation Pay
– Accrues at 4% of gross pay
Workplace Health, Safety, and Compensation
– Employers pay a percentage of their gross payroll for
benefits for workers who are injured or disabled in the
workplace.
2. VOLUNTARY DEDUCTIONS

Voluntary deductions concern:
– Charitable donations,
– Savings for retirement, and
– Other purposes such as union dues etc.

The employee must authorize all payroll deductions

They do not result in an expense to the employer.
PAYROLL
An Exercise
Calculate the payroll for this month for the
following two employees:
Employee #1
Annual Salary: $50,000
Employee #2
Hours worked: 160
Hourly rate: $20
Assume worker’s compensation is 2%, union dues is 2%,
and pension deductions (RRSP) are 5% of gross pay.
JOURNALISING PAYROLL
(2010)
• Step 1: Record the Payroll expense and recognize
all deductions from the employees’ pay cheques.
Date
July 31
Particulars
Debit
Credit
Salaries Expense
4,166.67
Wages Expense
3,200.00
CPP Payable
324.20
EI Payable
117.64
Payroll Tax Payable
1,243.33
Union Dues Payable
147.33
Pension Contributions Payable
368.33
Salaries and Wages Payable
5,165.80
To record employee payroll deductions for the month
and recognize salaries and wages expenses.
JOURNALISING PAYROLL
• Step 2: Record the employer’s mandatory top-up
and contribution costs for CPP, EI, Worker’s
Compensation and Vacation Pay.
Date
July 31
Particulars
Employee Benefits Expense
CPP Payable
EI Payable
Worker’s Compensation Payable
Vacation Pay Payable
Debit
Credit
930.92
To record employer payroll costs and contributions for
the month.
324.23
164.70
147.33
294.67
JOURNALISING PAYROLL
• Step 3: Pay your employees.
Date
July 31
Particulars
Salaries and Wages Payable
Cash
Debit
Credit
5,165.80
To record payment of employees for the month.
5,165.80
JOURNALISING PAYROLL
• Step 4: When the time comes, remit the taxes and
benefits to the appropriate governments and
organizations. Example:
Date
Aug 31
Particulars
CPP Payable
EI Payable
Payroll Tax Payable
Worker’s Compensation Payable
Cash
Debit
Credit
648.45
282.34
1,243.33
147.33
2,321.45
Union Dues Payable
Cash
147.33
Pension Contrib. Payable
Cash
368.33
147.33
368.33
Do Problems:
P11-1A
P11-7A
P11-8A