Current Liabilities & Payroll Determinable (certain) current liabilities Operating line of credit and bank overdraft Short-term notes payable Sales and property taxes Current maturities of long-term debt Uncertain liabilities Estimated liabilities Contingencies Payroll Employer and employee payroll costs Recording payroll Financial statement presentation Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 3

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 Copyright John Wiley & Sons Canada, Ltd.

Operating Line of Credit 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 Copyright John Wiley & Sons Canada, Ltd.

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 Copyright John Wiley & Sons Canada, Ltd.

Short-Term Notes Payable 2 Interest is recorded in the period the loan is outstanding: At maturity, the face value of the note plus interest must be repaid: Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 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) and harmonized sales taxes (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 Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 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 Copyright John Wiley & Sons Canada, Ltd.

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 Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 11

Estimated Liabilities Obligation 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 reasonable estimated Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 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 Copyright John Wiley & Sons Canada, Ltd.

Customer Loyalty Programs and Gift Cards Result 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) Sales discount is a contra revenue account Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 15

Contingent Liabilities (or Provisions) Record liability if both conditions are met: It is likely (or probable (“more likely than not”) 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 Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 17

Copyright John Wiley & Sons Canada, Ltd. Payroll Accounting 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) Copyright John Wiley & Sons Canada, Ltd.

Gross Pay (or Gross 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 Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Payroll Deductions 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 Copyright John Wiley & Sons Canada, Ltd.

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 safety and health Additional employee benefits: Paid absences: sick days, vacation, holidays Post-employment benefits: to retired employees These benefits give rise to liabilities that must be accrued Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 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 Copyright John Wiley & Sons Canada, Ltd.

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 Copyright John Wiley & Sons Canada, Ltd.

Recording Payroll Expenses and Liabilities 2 Employer payroll costs: Recorded when the payroll is journalized Become current liabilities of the company until remitted Copyright John Wiley & Sons Canada, Ltd.

Recording Payment of the Payroll Payment of payroll is either by cheque or electronic funds transfer (EFT) Entry to record payment of payroll deductions: Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 26

Financial Statement Presentation Current liabilities are 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 Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 10: Current Liabilities and Payroll Account for determinable or certain current liabilities. Account for estimated liabilities. Account for contingencies. Determine payroll costs and record payroll transactions. Prepare the current liabilities section of the balance sheet. Calculate mandatory payroll deductions (Appendix 10A). Copyright John Wiley & Sons Canada, Ltd. 28

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 reach maximum Copyright John Wiley & Sons Canada, Ltd.

Appendix 10A: Mandatory Payroll Deductions 2 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 Copyright John Wiley & Sons Canada, Ltd.

Copyright Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (the Canadian copyright licensing agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these files or programs or from the use of the information contained herein. Prepared by: A. Davis, MSc, BComm, CA, CFE Copyright John Wiley & Sons Canada, Ltd.