Download Fall 2008

ACCT 1080
Fall 2008
Chapter 11 Notes
CURRENT LIABILITIES AND PAYROLL
Quick Review from Chapter 4:
Liabilities
Current Liabilities
 Current liabilities must be paid with cash or with goods and services within one
year or within the entity’s operating cycle, if the cycle is longer than a year.
 Current liabilities include, but are not limited to
▪ Accounts Payable
▪ Notes Payable due within one year
▪ Salary Payable
▪ Interest Payable
▪ Unearned Revenue
Long-Term Liabilities
 Long-term liabilities are all liabilities not classified as current. (In other words,
they are liabilities that are not due for at least 12 months.)
 Long-term liabilities include, but are not limited to
▪ Notes Payable
 Remember that if a portion of that note payable is due within one
year, that portion is considered current and the remaining portion is
considered long-term.
CURRENT LIABILITIES OF A KNOWN AMOUNT
Accounts Payable
 Consists of amounts owed for products or services purchased on account
Short-Term Notes Payable
 Short-term notes payable are promissory notes that must be paid within one year
Sales Tax Payable
 Most states levy sales tax on retail sales. Retailers collect the sales tax in addition to
the price of the item sold.
 The sales tax collected must be booked to the account Sales Tax Payable as the
retailer owes the government this money.
 Background and entry:
▪ Suppose a retailer sells $10,000 of merchandise
▪ The state has a 5% sales tax
▪ Debit Cash………………...……………………………10,500
Credit Sales Revenue…………..………..…..………………10,000
Credit Sales Tax Payable……………………………………….500
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Current Portion of Long-Term Notes Payable
 Some long-term notes payable are paid in installments.
 The current portion of notes payable is the principal amount payable within one year.
The remaining is long-term.
 Entry to reclass the current portion of notes payable
▪ Debit Long-Term Notes Payable.……………………………10,000
Credit Current Portion of Note Payable...…..……………………10,000
Accrued Expenses (Accrued Liabilities)
 An accrued expense is an expense that has not yet been paid.
 Typically occur with the passage of time, such as interest on a note payable or
payroll.
Refresher from Chapter 8:
Computing Interest on a Note
 Formula
▪ Amount of Interest = Principal * Interest Rate * Time
▪ Example:
 Principal = $1,000
 Interest Rate = 9.0%
 Time = 1 year
 Note was taken out on October 1, 2007
▪ What is the total interest amount?
▪ What is the interest expense and accrued interest at December 31, 2007?
▪ What is the interest expense that is recorded in 2008?
▪ What is the journal entry on September 30, 2008?
Unearned Revenues
 When the business receives cash in advance for a product or service, but has not
earned the revenue yet by giving the product to the customer or performing a service
to the customer.
CURRENT LIABILITIES THAT MUST BE ESTIMATED
 A business may know that a liability exists but not know the exact amount. As the
business cannot ignore the liability, it must be estimated.
Estimated Warranty Payable
 Many companies guarantee their products against defects under warranty agreements.
 The matching principle says to record the warranty expense in the same period that
we record the revenue. As such, the warranty expense should be recorded when the
business records the revenue. At this time, the company does not know that exact
warranty expense.
 Background and entry:
▪ An appliance manufacturer made sales of $200,000 during the period that are
subject to warranties.
▪ The company estimates that 3% of its products will require warranty
payments.
▪ Debit Accounts Receivable...……………………………200,000
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▪
▪
▪
Credit Sales Revenue…………………....…..…………………200,000
Debit Warranty Expense……..…………………………….6,000
Credit Estimated Warranty Expense…...…..……………………..6,000
Assume that Whirlpool’s warranty payments totaled $5,800 during the period.
(Reclass from
Debit Estimated Warranty Expense ……..…………………5,800
Credit Cash…………………..…...…..…………………………..5,800
Contingent Liabilities
 A contingent liability is not an actual liability.
 It is a potential liability that depends on a future event.
 Usually related to lawsuits
ACCOUNTING FOR PAYROLL
Gross Pay and Net (Take-Home Pay)
 Two pay amounts are important for accounting purposes:
▪ Gross Pay – The total amount of salary, wages, commission, and bonus
earned by the employee during a pay period
▪ Net Pay – The amount the employee gets to keep. It equals gross pay minus
all deductions.
Payroll Withholding Deductions
 Payroll withholding deductions are what constitute the difference between gross pay
and net pay.
 Fall into two categories:
▪ Required deductions – Such as the employee income tax and social security
tax
▪ Optional deduction – Such as insurance premiums, charitable contributions,
etc…
 After these are withheld, payroll deductions become a liability of the employer, who
then pays them to the outside party.
Required Withholding for Employee Income Tax
 U.S. law requires companies to withhold income tax from employee paychecks.
Required Withholding for Employee Social Security (FICA) Tax
 The Federal Insurance Contributions Act (FICA), also known as the Social Security
Act, created this tax. This program provides retirement, disability, and medical
benefits.
 U.S. law requires companies to withhold FICA tax from employee paychecks.
Optional Withholding Deductions
 As a convenience to employees, companies withhold payroll deductions and then pay
designated organization according to employee instructions
 Example - 401k or charitable contributions
Summary of Gross Pay, Withholding Deductions, and Net Pay
 Example of a pay period for one employee:
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Gross p ay
Withholding Deductions:
Employee Income Tax
Employee FICA Tax
Employee co-pay for health insurance
Employee contribution to United Way
Total Withholdings
Net pay
10,000
2,000
400
180
20
2,600
7,400
Employer Payroll Taxes
 In addition to the income tax and FICA tax that are withheld from employee
paychecks, employers must also pay at least three payroll taxes:
▪ Employer Social Security (FICA) tax
▪ State unemployment compensation tax
▪ Federal unemployment compensation tax
Employer FICA Tax
 In addition to the employee’s FICA or Social Security tax, the employer must pay an
equal amount into the program.
 Only taxed on up to $90,000 of gross pay
State and Federal Unemployment Compensation Taxes
 These taxes finance workers’ compensation for people laid off of work.
 Most recently, employers have paid a combined tax of 6.2% (Federal at .8% and State
at 5.4%) on the first $7,000 of each employee’s annual earnings.
 For this payroll tax, the employer uses two liability accounts:
▪ Federal Unemployment Tax Payable
▪ State Unemployment Tax Payable
Payroll Accounting
 See exhibit 11-5 on page 562 of your text for an example of the entries related to
payroll.
Complete Summary Problem 2 on page 570 of your text
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