Current Liabilities and Payroll Chapter 11 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

Objectives 1. Account for current liabilities of known amount. 2. Account for current liabilities that must be estimated 3. Calculate payroll amounts 4. Record basic payroll transactions 5. Use a payroll system 6. Record current liabilities on the statement of financial position 8

Account for current liabilities Objective 1 Account for current liabilities of known amount. 8

Accounts Payable... are amounts owed to suppliers for goods or services purchased on account. Accounts payable do not bear interest expense for the debtor.

Accounts Payable Example Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Woo Wholesaler. What is the journal entry? Inventory 1,000 Accounts Payable 1,000 Purchase inventory on account

Short-Term Bills Payable... are promissory notes payable due within one year. In addition to recording the bill payable, the business must also pay interest expense. If interest expense is accrued at the end of the period, interest payable must also be recorded.

Short-Term Bills Payable Example On May 30, Woo purchased inventory for $10,000 by issuing a 90-day, 10% bill payable. What is the journal entry? Inventory 10,000 Bills Payable 10,000 Purchase inventory on a 90-day, 10% bill

Short-Term Bills Payable Example Assume the accounting period ended June 30. How much interest was accrued as of June 30? $10,000 × 10% × 31/360 = $86.11 How does Woo record the payment at maturity?

Short-Term Bills Payable Example August 29 Bill Payable 10,000.00 Interest Payable 86.11 Interest Expense 163.89 Cash 10,250.00

Short-Term Bills Payable Issued at a Discount Issuing a bill at a discount means the bank subtracts the interest from the bill’s face value. Suppose that on February 25, Sarah discounts a $10,000, 90-day bill, payable to the bank at 12%. The business will receive $9,700. $10,000 × 0.12 × 90/360 = $300

Short-Term Bills Payable Issued at a Discount February 25 Cash 9,700 Bill Payable, Short-Term 9,700 Discount a $10,000, 90-day, 10% bill payable to borrow cash

Short-Term Bills Payable Issued at a Discount Sarah’s Statement of Financial Position Current liabilities: Bill payable, short-term $ 9,700

Short-Term Bills Payable Issued at a Discount What is the accrued interest at the end of the month? $10,000 × 12% × 3/360 = $10 February 28 Interest Expense 10 Bill Payable 10 Accrue interest expense at month end

Short-Term Bill Payable Issued at a Discount An alternative is to record the discount at the time it of issued February 25 Cash 9,700 Discount on Bill Payable 300 Bill Payable, Short-Term 10,000 Discount a $10,000, 90-day, 10% bill payable to borrow cash

Short-Term Bills Payable Issued at a Discount Sarah’s Statement of Financial Position Current liabilities: Bill payable, short-term $10,000 Less: Discount on bill payable 300 Bill payable, short-term, net $ 9,700

Short-Term Bills Payable Issued at a Discount What is the accrued interest at the end of the month? $10,000 × 12% × 3/360 = $10 February 28 Interest Expense 10 Discount on Bill Payable 10 Accrue interest expense at month end

Goods and Services Tax Payable Example Australia has a 10% GST on most goods and services. Suppose that a store sold $3,000 worth of inventory on a given day. The business collected an additional 10% in GST. How much is the GST liability? $300

Accrued Expenses (Liabilities)... are expenses that have been incurred but not recorded. salaries taxes withheld interest utilities (electricity, gas, waste disposal)

See exhibit 11-2 page 455 of your textbook Payroll Liabilities Salary Expense 10,000 Employee Income Tax Payable 1,200 Employee Union Fees Payable 140 Salary Payable 8,660 To record salary expense See exhibit 11-2 page 455 of your textbook

Unearned Revenue Example Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August. June 1 Cash 1,500 Unearned Revenue 1,500 Received cash in advance

Unearned Revenue Example What entry does Dennis record on June 30? June 30 Unearned Revenue 500 Service Revenue 500 Earned service revenue that was collected in advance

Account for current liabilities Objective 2 Account for current liabilities that must be estimated.

Estimated Warranty Payable The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.

Estimated Warranty Payable Example Woo Wholesaler made sales of $1,000,000 subject to product warranties. In the past years, claims have averaged 2%. Warranty Expense 20,000 Estimated Warranty Payable 20,000 To accrue warranty expense

Estimated Warranty Payable Example On July 28, a customer returned a defective product and was given a $300 refund (or given a new product – cost $300). Estimated Warranty Payable 300 Cash (Inventory) 300 To record refund under warranty

Estimated Holiday Pay Liability Example Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and holiday pay adds 8% (4 weeks of annual vacation divided by 50 workweeks each year). How much vacation pay should be accrued?

Estimated Holiday Pay Liability Example March 31 Vacation Pay Expense 800 Estimated Vacation Pay Liability 800 To accrue vacation expense

Income Tax Payable What is the entry a company makes to accrue $50,000 of income tax expense for a one-year period? Income Tax Expense 50,000 Income Tax Payable 50,000 To accrue income tax at year end

See Qantas example in your textbook page 458 Contingent Liability A contingent liability is a potential liability The AASB1040 requires details of a contingent liability must be disclosed in the notes to the financial statement See Qantas example in your textbook page 458

Calculate payroll amounts. Objective 3 Calculate payroll amounts.

Payroll Ordinary time is the base rate paid to employees for a set number of hours. Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the ordinary rate).

Gross Pay and Net Pay Gross Pay Deductions Net Pay

Income Tax and Medicare Levy The tax deducted from your salary has two components: Income Tax (no tax on first $6,000 then 17% up to $20,000 ….. 47% on amounts over $60,000 – called marginal progressive) Medicare Levy (1.5% applied to all employee earnings – if earning more than about $15,000)

Payroll Taxes State government tax Paid by businesses who have annual salaries above a threshold amount ($500,000 - $1,000,000 depending on the state). Paid by the employer in addition to gross salary.

Breakdown of Payroll Costs Employer payroll tax to state government $110 Employer cost of superannuation. $90 Employer disburses $1,200 Net pay to employee $750 Employee income tax & medicare to ATO $230 Employee union fees $20 Employee Gross Pay – $1,000

Objective 4 Record basic payroll transactions.

Salary Expense Salary expense to the employer is the gross salary of all employees. Employees pay their own income tax, Medicare levy as well as union fees. The employer serves as a collecting agent and sends these amounts to the Australian Taxation Office and union.

To Record Salaries Expense: Salary Expense Employee Income Tax Payable Employees Union Fees Payable Salary Payable to Employees (take-home pay)

To Record Salaries Expense: Payroll Tax Expense Payroll Tax Payable Health Insurance Expense for Employees Life Insurance Expense for Employees Superannuation Expense Employee Benefits Payable See exhibit 11-6 page 463 of your textbook

Objective 5 Use a payroll system.

Payroll System Components payroll record payroll bank account payroll cheques earnings record (for each employee)

Payroll Record... is also referred to as the payroll journal. It lists payroll data for each employee. It serves as a cheque register. It provides information for recording payroll expenses and related deductions (withholdings).

Payroll Bank Account When companies use a payroll bank account, the company draws one cheque for the net amount of salary payable to employees on its regular bank account. The company deposits this cheque in the special payroll bank account.

Payroll Bank Account The company writes pay-cheques to employees out of the payroll account. When the pay-cheques clear the bank, the payroll account has a zero balance. Disbursing pay-cheques from a separate bank account isolates net pay for analysis and control.

Paying the Payroll When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash. The liabilities to the government, unions, and other parties is also debited when cash is paid.

Paying the Payroll Assume the following journal entry was made at the end of an accounting period: Salary Expense 180,000 Employee Income Tax Payable 55,000 Employee Union Fees Payable 1,000 Salary Payable to Employees 124,000

Paying the Payroll What is the journal entry when the employer pays these liabilities? Employee Income Tax Payable 55,000 Employee Union Dues Payable 1,000 Salary Payable to Employees 124,000 Cash 180,000

Internal Control over Payrolls controls for efficiency controls for safeguarding payroll payments

Controls for Efficiency making payroll payments from one payroll bank account in one month and from another the next (less of a problem with electronic funds transfers) following established policies for hiring and firing employees complying with government regulations testing employees for their interest in the job and their skills to perform the job

Controls for Safeguarding Payroll Payments Large organisations must establish controls to ensure that payroll payments are made only to legitimate employees. Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing pay cheques.

Controls for Safeguarding Payroll Payments Requiring an identification badge bearing an employee’s photograph also helps internal control (especially access control). A formal time-keeping system helps ensure that employees have actually worked.

Report current liabilities Objective 6 Report current liabilities on the statement of financial position

Report Current Liabilities Companies report current liabilities on the statement of financial position. current liabilities of known amount (payroll) current liabilities that must be estimated (warranties)

Report Current Liabilities At the end of the year, companies report the amount of payroll liabilities owed to all parties. The liability at year end is the amount of the payroll expense that is still unpaid.

Liabilities of Known Amount accounts payable short-term bills payable GST payable current portion of long-term debt accrued expenses (payable) unearned revenues

Estimated Liabilities warranty payable income tax payable holiday pay liability

End of Chapter 11