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10-1
Liabilities that are to be paid out of
current assets and are due within a
short time, usually within one year,
are called current liabilities.
 Accounts payable
 Current portion of long-term debt
 Notes payable
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Accounts Payable
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10-1
Accounts payable arise from
purchasing goods or services for use
in a company’s operations or for
purchasing merchandise for resale.
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Current Portion of Long-Term Debt
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10-1
Long-term liabilities are often paid
back in periodic payments, called
installments. Installments that are
due within the coming year must be
classified as a current liability.
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10-1
The total amount of the
installments due after the
coming year is classified as a
long-term liability.
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Short-Term Notes Payable
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10-1
A firm issues a 90-day, 12% note for
$1,000, dated August 1, 2008 to Murray
Co. for a $1,000 overdue account.
Aug. 1 Accounts Payable—Murray Co.
Notes Payable
Issued a 90-day, 12% note on
1 000 00
1 000 00
account.
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10-1
On October 30, when the note matures, the
firm pays the $1,000 principal plus $30
interest ($1,000 x 12% x 90/360).
Oct. 30 Notes Payable
Interest Expense
Cash
Paid principal and
Appears on
the on note.
interest
income statement as
an “Other Expense.”
1 000 00
30 00
1 030 00
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10-1
On May 1, Bowden Co.
(borrower) purchased
merchandise on account from
Coker Co. (creditor), $10,000,
2/10, n/30. The merchandise cost
Coker Co. $7,500.
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Bowden Co.
Description
10-1
Debit Credit
Mdse. Inventory
10,000
Accounts Payable
10,000
Coker Co. (Creditor)
Description
Debit Credit
Accounts Receivable
Sales
10,000
Cost of Mdse. Sold
Mdse. Inventory
7,500
10,000
7,500
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10-1
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Bowden Co.
Description
Accounts Payable
Notes Payable
Debit
Credit
10,000
10,000
Coker Co. (Creditor)
Description
On May 3, Bowden Co.
issued a 60-day, 12%
note for $10,000 to
Coker Co. on account.
Debit Credit
Notes Receivable
10,000
Accounts Receivable
10,000
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10-1
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Bowden Co.
Description
Debit
Notes Payable
Interest Expense
Cash
10,000
200
Credit
10,200
Coker Co. (Creditor)
On July 30, Bowden Co.
paid Coker Co. the
amount due on the note
of May 31. Interest:
$10,000 x 12% x 60/360.
Description
Debit
Credit
Cash
10,200
Interest Revenue
200
Notes Receivable
10,000
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10-1
On September 19, a firm borrows $4,000
from First National Bank by giving the
bank a 90-day, 15% note.
Sept. 19 Cash
Notes Payable
Issued a 90-day, 15% note
to the bank.
4 000 00
4 000 00
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10-1
On the due date of the note (December
18), the borrower owes $4,000 plus
interest of $150 ($4,000 x 15% x 90/360).
Dec. 18 Notes Payable
Interest Expense
Cash
Paid principal and interest
due on note.
4 000 00
150 00
4 150 00
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10-2
Payroll refers to the amount paid to employees
for the services they provide during a period.
It is usually significant for several reasons.
1) Employees are sensitive to payroll errors and
irregularities.
2) The payroll is subject to various federal and
state regulations.
3) The payroll and related payroll taxes have a
significant effect on the net income of most
businesses.
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10-2
Wages usually refers to
payment for manual labor, both
skilled and unskilled. The rate
of wages is normally stated on
an hourly or weekly basis.
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10-2
Salary usually refers to
payment for managerial,
administrative, or similar
services, normally expressed
in terms of a month or a year.
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10-2
The total earnings of an employee
for a payroll period are called gross
pay. From this is subtracted one or
more deductions to arrive at the net
pay. Net pay is the amount that the
employer must pay the employee.
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McGrath Illustration
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10-2
John T. McGrath is employed by McDermott
Supply Co. at the rate of $34 per hour, plus 1.5
times the normal hourly rate for hours over 40
per week. For the week ended December 27,
McGrath worked 42 hours.
Earnings at base rate (40 x $34)
Earnings at overtime rate (2 x $51)
Total earnings
$1,360
102
$1,462
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FICA Tax
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10-2
The amount of FICA tax withheld is
the employees’ contribution to two
federal programs. The first program,
called social security, is for old age,
survivors, and disability insurance
(OASDI). The second program,
called Medicare, is health insurance
for senior citizens.
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Employer’s Federal Payroll Taxes
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10-2
Employers are required to
contribute to the social security
and Medicare programs for each
employee. The employer must
match the employee’s
contribution to each program.
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Employer’s Federal Unemployment
Taxes
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10-2
A FUTA tax of 6.2% is levied on
employers only to provide for
temporary unemployment to those
who become unemployed as a result
of layoffs due to economic causes
beyond their control. This tax applies
to only the first $7,000 of the earnings
of each covered employee during a
calendar year.
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Employer’s State Unemployment
Taxes
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10-2
Employers in most states also must
pay a state unemployment tax for
unemployed workers. A few states
require employee contributions. The
state plan is designed to reward firms
with stable employment, so the tax
rate varies from state to state and
employer to employer.
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Responsibility for Tax
Payments
10-2
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Payroll Register
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10-3
The payroll register is a multicolumn
report used for summarizing the data for
each payroll period. The last two
columns of the payroll register are used
to accumulate the total wages or salaries
to be debited to various expense
accounts. The process is usually called
payroll distribution.
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Recording Employees’ Earnings
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Dec. 27 Sales Salaries Expense
Office Salaries Expense
Social Security Tax Payable
Medicare Tax Payable
Employees’ Federal Inc. Tax Pay.
Retirement Savings Ded. Payable
United Way Deductions Payable
Accounts Receivable—Fred Elrod
Salaries Payable
Payroll for week ended
December 27.
10-3
11 122 00
2 780 00
643
208
3 332
680
470
50
8 518
07
53
00
00
00
00
40
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10-3
A detailed payroll record is maintained for
each employee. This record is called an
employee’s earnings record.
At the end of each pay period, payroll
checks are prepared. Each check includes
a detachable statement showing the details
of how the net pay was computed.
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10-4
Many companies provide their
employees a variety of benefits in
addition to salary and wages
earned. Such fringe benefits may
take many forms, including
vacations, medical, and
postretirement benefits, such as a
pension plan.
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Vacation Pay
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10-4
Most employers grant vacation rights, sometimes
called compensated absences, to their
employees. The estimated vacation pay for the
payroll period ending May 5 is $2,000.
May 5 Vacation Pay Expense
Vacation Pay Payable
Vacation pay for week
ended May 5.
2 000 00
2 000 00
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Pensions
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10-4
A pension represents a cash payment
to retired employees. Rights to
pension payments are earned by
employees during their working
years, based on the pension plan
established by the employer.
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10-4
In a defined contribution
plan, a fixed amount of
money is invested on the
employee’s behalf during the
employee’s working years.
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Pensions
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10-4
In a defined benefit plan,
employers promise employees a
fixed annual pension benefit at
retirement, based on years of
service and compensation levels.
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Postretirement Benefits Other
Than Pensions
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10-4
Employees may earns rights to
other postretirement benefits,
such as dental care, eye care,
medical care, life insurance,
tuition assistance, tax services,
and legal services.
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10-5
Some past transactions will result
in liabilities if certain events
occur in the future. These
potential obligations are called
contingent liabilities.
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10-5
Contingent Liabilities
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During June, a company sells a product for $60,000 on
which there is a 36-month warranty. Past experience
indicates that the average cost to repair defects is 5% of
the sales price over the warranty period.
June 30 Product Warranty Expense
Product Warranty Payable
3 000 00
3 000 00
Warranty expenses projected
for June, 5% of $60,000.
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10-5
If a customer required a $200 part replacement
on August 16, the entry would be:
Aug. 16 Product Warranty Payable
Supplies
200 00
200 00
Replaced defective part under
warranty.
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10-5
Accounting Treatment of
Contingent Liabilities
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Likelihood of
Occurring
Probable
Contingency
Possible
Accounting
Treatment
Measurement
Estimable
Record and
Disclose
Liability
Not
Estimable
Disclose
Liability
Disclose
Liability
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