Download Current Liabilities and payroll

WEYGANDT – KIESO - KIMMEL – TRENHOLM – WARREN - NOVAK
ACCOUNTING
PRINCIPLES
VOLUME 2
SEVENTH CANADIAN EDITION
Prepared by:
Debbie Musil, CPA, FCMA
Kwantlen Polytechnic University
CHAPTER 10:
CURRENT LIABILITIES AND
PAYROLL
Current Liabilities & Payroll
•
Determinable (Certain) Current Liabilities
–
–
–
–
–
–
–
•
Uncertain Liabilities
–
–
•
Provisions
Contingencies
Payroll
–
–
–
•
•
Accounts payable
Unearned revenues
Operating line of credit and bank overdraft
Short-term notes payable
Sales taxes
Property taxes
Current maturities of long-term debt
Employee payroll costs
Employer payroll costs
Recording the payroll
Financial Statement Presentation
Payroll Deductions (Appendix 10A)
–
–
Mandatory payroll deductions
Using payroll deduction tables
3
Chapter 10: Current Liabilities and Payroll
LEARNING OBJECTIVES
1. Account for determinable or certain current
liabilities.
2. Account for uncertain liabilities.
3. Determine payroll costs and record payroll
transactions.
4. Prepare the current liabilities section of the
balance sheet.
5. Calculate mandatory payroll deductions
(Appendix 10A).
4
Determinable (Certain)
Current Liabilities
• Obligations that are expected to be settled:
– Within one year of the balance sheet date,
or
– Within normal operating cycle
• Requires existence of a present obligation
• Determinable liabilities have known amount,
payee, due date
5
Accounts Payable
• Often the largest current liability on a
company’s balance sheet
• Entity buys goods from a supplier with the
agreement to pay at a later date
– Accounts Payable (trade payable) usually due
within 30 days
6
Unearned Revenues
• Payment received in advance when customer
order is placed
– Reported as a current liability
• As company provides goods or performs
service, revenue is recognized by reclassifying
amount from Unearned Revenue to Revenue
7
Operating Line of Credit and Bank Overdraft
• Pre-authorized borrowing
– Allows the company to borrow up to a preset limit when
needed
• May require collateral (security)
– Such as current assets, investments, or property, plant, and
equipment
• Used on a short-term basis
• Negative (overdrawn) cash balance is called bank
indebtedness, bank overdraft, or bank advances
8
Short-Term Notes Payable
• Obligations in the form of written promissory notes
• Usually require the borrower to pay interest
• Used instead of accounts payable
– Gives lender proof of obligation in case legal action is
needed to collect
• Issued for varying periods
– If due within one year of the balance sheet date, classified
as current liabilities
9
Short-Term Notes Payable (cont’d)
• Interest is recorded in the period the loan is
outstanding
• At maturity, interest must be updated for two
additional months
10
Short-Term Notes Payable (cont’d)
• Also, at maturity, the face value of the note plus
interest must be repaid
11
Sales Taxes
• Expressed as a percentage of the sales price of goods
sold to customers
• Includes goods and service tax (GST), provincial sales
tax (PST) or a harmonized sales tax (GST and PST
combined into the HST)
• Remitted to government monthly, quarterly or
annually
• Amounts paid by customers for sales tax are not
considered revenue, but are credited to Sales Tax
Payable
12
Property Taxes
• Paid for a calendar year
• Upon receipt of the property tax bill, an expense is recorded for the
months that have passed:
• When paid, expense is recorded for additional months that have passed,
and prepaid is set up for remaining months
• Prepaid is cleared to expense at the end of year
13
Current Maturities of Long-Term Debt
• The portion of long-term debt that is due
within the current year
– Amount not due within current year is disclosed
as a long-term liability
• No adjusting entry is required to recognize the
current portion of long-term debt
– The proper classification is made when the
balance sheet is prepared
14
CHAPTER 10:
LEARNING OBJECTIVES
1. Account for determinable or certain current
liabilities.
2. Account for uncertain liabilities.
3. Determine payroll costs and record payroll
transactions.
4. Prepare the current liabilities section of the
balance sheet.
5. Calculate mandatory payroll deductions
(Appendix 10A).
15
Uncertain Liabilities
• Provision is a liability that exists but the
amount and timing is uncertain
– We owe someone, but not sure how much, when
or even who
• Liability is recognized when:
– Settlement of the liability is likely, and
– Amount of the liability can be reasonably
estimated
16
Product Warranties
• Promises made by seller to buyer to repair or
replace a product if it is defective or does not
perform as intended
• Warranties will lead to future costs for
replacement or repair of defective units
• Cost of warranty is estimated and accrued based
on prior experience
17
Customer Loyalty Programs
and Gift Cards
• Results in an estimated liability:
– Not known if or when rewards will be redeemed
• If redemptions are likely, and can be estimated
based on past experience:
– Record estimated liability as a reduction in
revenue (not an expense)
18
Contingent Liabilities
• Record liability if both conditions are met:
– It is likely (or probable under IFRS) that an obligation
exists, and
– Amount can be reasonably estimated
• If contingent loss is likely, but cannot be reasonably
estimated:
– No liability is recorded
– Disclosed in the notes to the statements
• If contingency is unlikely:
– Still disclosed if event is substantial, otherwise not
disclosed
19
CHAPTER 10:
LEARNING OBJECTIVES
1. Account for determinable or certain current
liabilities.
2. Account for uncertain liabilities.
3. Determine payroll costs and record payroll
transactions.
4. Prepare the current liabilities section of the
balance sheet.
5. Calculate mandatory payroll deductions
(Appendix 10A).
20
Payroll
• More than paying employee salaries and wages
• Companies are required by law:
– To have payroll records for each employee
– To report and remit payroll deductions
– To respect federal and provincial laws
• Two types of payroll costs:
– Employee costs: amounts paid to employees (gross pay) &
amounts paid by employees (payroll deductions)
– Employer costs: amounts paid by employer on behalf of
the employee (employee benefits)
21
Gross Pay (or Earnings)
• The total compensation earned by an
employee
• Consists of:
– Wages = hours worked x hourly rate of pay, or
– Salaries: based on a weekly, biweekly, monthly or
annual rate
– Bonuses
– Commissions
22
Employee Payroll Costs
• The difference between gross pay and the amount actually
received (net pay)
• Mandatory payroll deductions:
– Required by law
– Personal income tax, Canada Pension Plan (CPP) and Employment
Insurance (EI)
– Determined from payroll deduction tables
• Voluntary payroll deductions:
– For charitable causes, retirement, and other purposes
– Should be authorized in writing by the employee
– Do not result in a payroll expense to the employer
23
Employer Payroll Costs
• Amounts an employer is required to pay
– Required by governments:
•
•
•
CPP (matching the employee contribution)
EI (1.4 x the employee contribution)
Workplace health, safety and compensation
– Additional employee benefits:
•
•
Paid absences: sick days, vacation, statutory holidays
Post-employment benefits: to retired employees
• These benefits give rise to liabilities that must be
accrued
24
Recording the Payroll
• Involves:
–
–
–
–
Maintaining payroll records
Recording payroll expenses and liabilities
Paying the payroll, and
Filing and remitting payroll deductions
• Payroll Records
– A separate earnings record is kept for each employee
– Payroll register may be used to accumulate gross earnings,
deductions & net pay by employee for each period
25
Recording Payroll Expenses
and Liabilities
• Employee payroll costs:
• Entry for the employee portion of a payroll
– The company’s expense is equal to total gross pay
– Employee payroll deductions become current
liabilities of the company until remitted
26
Recording Payroll Expenses
and Liabilities (cont’d)
• Employer payroll costs:
– Recorded when the payroll is journalized
– Become current liabilities of the company until
remitted
27
Recording Payment of the Payroll
• Payment of payroll is either by cheque or electronic funds
transfer (EFT)
• Entry to record payment of payroll deductions:
28
CHAPTER 10:
LEARNING OBJECTIVES
1. Account for determinable or certain current
liabilities.
2. Account for uncertain liabilities.
3. Determine payroll costs and record payroll
transactions.
4. Prepare the current liabilities section of the
balance sheet.
5. Calculate mandatory payroll deductions
(Appendix 10A).
29
Financial Statement Presentation
• Current liabilities are generally the first category
reported in the liabilities section of the balance sheet
• Each type of current liability is listed separately
• Listed in order of liquidity, usually by maturity date
– Also common to show bank loans, notes payable and
accounts payable first regardless of size
• Terms of operating lines of credit, notes payable, and
other information are disclosed in the notes
30
CHAPTER 10:
LEARNING OBJECTIVES
1. Account for determinable or certain current
liabilities.
2. Account for uncertain liabilities.
3. Determine payroll costs and record payroll
transactions.
4. Prepare the current liabilities section of the
balance sheet.
5. Calculate mandatory payroll deductions
(Appendix 10A).
31
Appendix 10A: Mandatory
Payroll Deductions
• Canada Pension Plan (CPP) contributions:
– Calculated as a percentage of earnings (contribution
rate) over a set minimum (basic exemption) to a
maximum amount of earnings (maximum pensionable
earnings)
– Pro-rated per pay period
• Employment Insurance (EI) contributions:
– Calculated as a percentage of earnings to a maximum
amount (maximum insurable earnings)
– No basic exemption
– Not pro-rated: deducted from pay until maximum is
reached
32
Appendix 10A: Mandatory
Payroll Deductions (cont’d)
• Personal income tax deductions:
– Based on tax rates set by federal and provincial
governments
– Progressive rates: higher percentage rates for
higher income levels
• Complicated calculations:
– Best done using deduction tables or automated
tools provided by the Canada Revenue Agency
33
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