Welcome Back Atef Abuelaish.

Welcome Back Atef Abuelaish

Welcome Back Time for Any Question Atef Abuelaish

Atef Abuelaish

Chapter 11 review 11 Chapter
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Chapter 11 Payroll Taxes, 11 Chapter

Payroll Taxes, Deposits, and
Chapter Chapter 11 11 Payroll Taxes, Deposits, and Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Payroll Taxes, Deposits, and Reports
Chapter Chapter 11 11 Payroll Taxes, Deposits, and Reports Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Chapter 11 Payroll Taxes, Deposits, and Reports Section 1: Social Security, Medicare, and Employee Income Tax Section Objectives 11-1 Explain how and when payroll taxes are paid to the government. 11-2 Compute and record the employer’s social security and Medicare taxes. 11-3 Record deposit of Social Security, Medicare, and employee income taxes. 11-4 Prepare an Employer’s Quarterly Federal Tax Return, Form 941. 11-5 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Chapter 10 discussed federal taxes that are paid by the employee. Chapter 11 discusses employers’ payroll taxes and explains how to complete and file the required tax returns and reports. Section one introduces social security, Medicare and employee income tax. Our first objective of the chapter explains how and when payroll taxes are paid to the government.

Who Deposits Payroll Taxes
Explain how and when payroll taxes are paid to the government. Who Deposits Payroll Taxes Employers make tax deposits for Federal income tax withheld from employee earnings. Employees' share of social security and Medicare taxes withheld from earnings. Employer's share of social security and Medicare taxes. The payroll register is the source of information about wages subject to payroll taxes. Individuals pay taxes, but businesses also pay payroll taxes for social security, Medicare, and unemployment. Employers, regardless of size, must remit payroll tax payments via the EFTPS (Electronic Federal Tax Payment System.) Employers, regardless of size, must remit payroll tax payments via EFTPS (Electronic Federal Tax Payment System.)

The frequency of deposits depends on:
Electronic filing of taxes is now required in most instances. The frequency of deposits depends on: The amount of tax liability, and The amount reported in the lookback period The frequency of deposits depends on the amount of tax liability, and the amount reported in the lookback period. The amount currently owed is compared to the tax liability threshold. For simplicity, this text uses $2,500 as the tax liability threshold. For simplicity this textbook uses $2,500 as the tax liability threshold. The lookback period is a four-quarter period ending on June 30 of the preceding year.

Is the amount owed less than $2,500?
Yes No The payment is due quarterly with the filing of Form 944 annually. The frequency of payments schedule is determined from the total taxes reported during the lookback period. If the amount owed is less than $2,500 then the frequency of payments schedule is determined from the total taxes reported during the lookback period. In this case, Form 941 must be filed quarterly.

Is the amount reported in the lookback period less than or equal to $50,000?
Yes No The employer is subject to the Monthly Deposit Schedule Rule. The employer is subject to the Semiweekly Deposit Schedule Rule. For new employers with no lookback period, if the amount owed is $2,500 or more, payments are due under the Monthly Deposit Schedule Rule. If the amount reported in the lookback period is less than or equal to $50,000, then the employer must make monthly deposits of withholdings. If the total accumulated tax liability reaches $100,000 or more on any day, a deposit is due on the next banking day.

Compute and record the employer’s social security and Medicare taxes.
Remember that both employers and employees pay social security and Medicare taxes Employee Employer (Withheld) (Matched) Social security $ $139.35 Medicare $ $171.94 The employer will match the employees social security of $ and the Medicare tax of $32.59. Total $343.88

Record Employer’s Payroll Taxes
Expense Social Security Tax Payable Medicare Tax Payable 171.94 139.35 32.59 The information on the payroll register is used to record the payroll taxes expense. When the employer records his portion of taxes owed, he debits Payroll Tax Expense, NOT Wages Expense. Payroll Tax Expense is debited for $ and Social Security Tax Payable is credited for $ and Medicare Tax Payable is credited for $ Here is how the transaction would be recorded in the T accounts.

The tax liability which will be deposited is $1,995.52.
Record deposit of social security, Medicare, and employee income taxes. At the end of January, the accounting records for Tomlin Furniture Company looked like this: Employee Employer (Withheld) (Matched) Total Social security $ $ $1,114.80 Medicare Federal income tax Remember, that the Tomlin Furniture Company must make monthly deposits of payroll taxes via EFTPS either online or via the telephone. The tax liability which will be deposited is $1, Total $1, $ $1,995.52 The tax liability which will be deposited is $1,

Payroll Tax Deposit Social Security Tax Payable Medicare Tax Payable
Employee Income Tax Payable Cash 260.72 620.00 When the deposit is made, Social Security Tax Payable is debited for $1,114.80, Medicare Tax Payable is debited for $260.72, Employee Income Tax Payable is debited for $ and the Cash account is credited for the total amount of $1, Here is the transaction entered into the T accounts. The entry to record the payment of the tax can be made in the general journal or the cash payments journal.

At the end of each quarter, the individual earnings records are totaled. This involves adding the columns in the Earnings, Deductions, and Net Pay sections. The individual earning records were updated at the end of each of the four pay periods using information in the payroll registers. Remember to cross foot the totals to insure that Earnings less Deductions equals net pay.

Prepare an Employer’s Quarterly Federal Tax Return, Form 941.
When to File Form 941 The due date for Form 941 is the last day of the month following the end of each calendar quarter. If the taxes for the quarter were deposited when due, the due date is extended by 10 days. At the end of the quarter, the employer must prepare a Form 941. A Form 941 is a federal tax return which reports the amount of social security, Medicare tax and federal income tax that is owed on employees total quarterly earnings. Form 941 verifies the employer’s compliance with applicable laws relating to federal income tax withholding, social security tax, and Medicare tax. It also verifies total taxes owed and paid by the employer on a quarterly basis. The due date for Form 941 is the last day of the month following the end of each calendar quarter.

Completing Form 941 The remainder of the form is completed using the data on the quarterly summary earnings records. (See Table 11.1 in text for an example.) Take a moment to review the lines or fields on the first page of the form. The due date for Form 941 is the last day of the month following the end of each calendar quarter. Total wages paid during the quarter is taken from the quarterly summary earnings records. (Actual forms for 2016 will look different and can be downloaded from the IRS’s website.)

Objective 11-5 Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Employers provide a Wage and Tax Statement, Form W-2, to each employee by January 31 of the following year. Form W-3 is due by the last day of February following the end of the calendar year.

Wage and Tax Statement, Form W-2
Alicia Martinez earned gross wages of $20,800 during the period which is reported in box 1 of the form W-2. She had $988 of federal income tax withheld which is reported in box 2 of the W-2.

Transmittal of Wage and Tax Statements, Form W-3
The amounts on Form W-3 must equal the sums of the amounts on the attached Forms W-2. A Form W-3 is another of the annual tax reports that employers must complete and file with the IRS. Form W-3 verifies the company’s total social security tax withheld; total wages, tips, and other compensation; total federal income tax withheld; and other information for the year. The amounts on Form W-3 must be the same as the totals of the Forms W-2 and the four quarterly Forms 941 filed by the employer. 11-22

Chapter 11 Payroll Taxes, Deposits, and Reports Section 2: Unemployment Tax and Workers’ Compensation Section Objectives Section 2 discusses Unemployment Tax and Workers’ Compensation. Objective 6 discusses how to compute and record liability for federal and state unemployment taxes and record payment of the taxes. 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. 11-7 Prepare an Employer’s Federal Unemployment Tax Return, Form or 940-EZ. 11-8 Compute and record workers’ compensation insurance premiums.

Federal and State Unemployment Rates
The federal government allows a credit (reduction) in the federal unemployment tax for amounts charged by the state for unemployment taxes. SUTA = state unemployment tax FUTA = federal unemployment tax The unemployment insurance program is a federal program that encourages states to provide unemployment insurance for employees working in the state. The FUTA rate is 6.2% but a business may receive a credit of state unemployment taxes paid up to a credit amount of 5.4%, so the FUTA rate is reduced to .6% or State unemployment tax (SUTA) rates differ from state to state and from employer to employer within each state. An employer’s SUTA rate is based on his merit rating or experience rating which the state has assigned. Under the experience rating system, the state tax rate may be reduced to less than 1 percent for businesses that provide steady employment. As long as the business pays its state unemployment taxes ON TIME, it will receive the full credit of 5.4% applied to the Federal FUTA rate of 6.2% yielding a net FUTA rate of .8% (.008.)

Federal and State Unemployment Taxes
Objective 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Let’s see how Tomlin Furniture Company records its federal and state unemployment tax liabilities.

On Line Furnishings The unemployment taxes for the payroll period ending January 6 are as follows. Federal unemployment tax ($2, x 0.006) = $13.49 State unemployment tax ($2, x 0.040) = Total unemployment taxes = $103.39 GENERAL JOURNAL PAGE 1 POST. DATE DESCRIPTION REF DEBIT CREDIT Jan Payroll Taxes Expense Federal Unemployment Tax Payable State Unemployment Tax Payable Unemployment taxes on weekly payroll Two additional liability accounts are created.

Payment of payroll taxes
When the amount of tax due in Employer’s Quarterly Report is paid, then the liability accounts are debited and cash is credited. In this case, the SUTA tax is paid. GENERAL JOURNAL PAGE Post Ref Description Debit Credit Date Tomlin Furniture Company submits the for SUTA. Apr State Unemployment Tax Payable Cash Paid SUTA taxes for quarter ending March 31

Earnings in Excess of Base Amount
In this textbook example, state unemployment tax is paid on the first $7,000 of annual earnings for each employee. See the next slide for details. State unemployment tax is paid on the first $7,000 of annual earnings for each employee. Earnings over $7,000 are not subject to state unemployment tax. Each state sets its own limit. For our purposes, we have selected a state with a $7,000 limitation in annual earnings for each employee. See the next slide for details.

Earnings over $7,000 are not subject to state unemployment tax.
Earnings Cumulative Taxable Earnings Earnings January $ 2, $2, $2,240 February , , ,480 Mar, week , , ,720 Mar, week , ,000 Unemployment taxes are levied on the first $7,000 for each employee. For this example, let’s assume that Cecelia Wu earns $560 every week. In the four weeks of January, February and March, she earned $2,240. ($560 X 4.) In the fifth week of March she earned the same $560, but only some of those earnings, $280 in this case, would be subject to taxes. ($7,000 earnings maximum less the $6,720 in earnings to date.) This applies to each employee individually.

Depositing Federal Unemployment Taxes
Federal unemployment tax deposits must be made electronically. Currently this is the only option available. Electronic deposits are made using EFTPS (previously described.) Deposits are made quarterly and are due on the last day of the month following the end of the quarter. Most employers, regardless of size, must now remit payroll tax payments via EFTPS. Federal unemployment tax deposits must be made electronically. Most employers, regardless of size, must remit payroll tax payments via Electronic Federal Tax Payment System or EFTPS

Federal Unemployment Taxes
The federal unemployment tax is calculated at the end of each quarter. It is computed by multiplying the first $7,000 of each employee's wages by A deposit is required when more than $500 of federal unemployment tax is owed. If $500 or less is owed, no deposit is required. The federal unemployment tax is calculated at the end of each quarter. If $500 or less is owed, no deposit is due.

Prepare an Employer’s Federal Unemployment Tax Return.
QUESTION: What is Form 940 or 940-EZ? ANSWER: Form 940 or 940-EZ is the Employer’s Annual Federal Unemployment Tax Return form. It is a preprinted government form. Another payroll tax report which needs to be submitted to the federal government is the Employer’s Federal Unemployment Tax Return, Form 940. Employers report Federal Unemployment Taxes collected, only once a year on the Employer’s Annual Federal Unemployment Tax Return, Form 940 or 940-EZ. Recall that the Form 941 form was due quarterly, but the Form 940 is due only once per year.

Line 3 shows the total compensation paid to employees.
Line 3 shows that $116,870 of wages was earned by employees during the year. The form for 2016 will most likely differ from the above. Current forms can be downloaded from the IRS’s website. In this case, no deposits have been recorded thus far as the payroll liability was less than $500. Line 8 shows the total federal unemployment tax paid.

Compute and record workers’ compensation insurance premiums.
Workers' compensation provides benefits for employees who are injured on the job. The insurance premium, which is paid by the employer, depends on the risk involved with the work performed. Workers’ compensation insurance is the amount that employers have to pay to protect their employees from work-related accidents and injuries. The rate of insurance premiums varies with the risk of the work involved. Worker’s Compensation, or some form of it, is mandatory in substantially all states.

Workers’ Compensation Insurance
There are two ways to handle workers' compensation insurance: Pay an estimated annual premium in advance. Pay a deposit at the beginning of the year and make monthly payments. The method a business uses depends on the number of its employees. Worker’s compensation premiums can be paid on an annual basis in a lump sum payment or through deposits.

Workers’ Compensation Insurance
Tomlin Furniture Company has two work classifications: Office work Shipping work The workers’ compensation premium rates are Office workers $0.45 per $100 of labor costs Shipping workers per $100 of labor costs As you can see, the classification of work greatly affects the amount of premiums.

Payment of Premiums The insurance premium rates recognize that injuries are more likely to occur to shipping workers than to office workers. Based on employee earnings for the previous year, Tomlin Furniture Company paid an estimated premium of $1,000 for the new year. 2016 Jan Based on employee earnings for the previous year, TomlinFurniture Company paid an estimated premium of $1,000 for the new year. Workers’ Compensation Insurance Expense Cash Estimated workers’ compensation insurance for 20--

Calculate Premium payable (or receivable)
Classification Payroll Rate Premium Office work $24, $0.45 per $ $ Shipping work , per $ ,148.88 Total premium for year ,261.20 Less estimated premium paid ,000.00 Balance of premium due $ If the actual premium is more than the estimate, then the employer would submit the balance due to the insurance company. In the example provided above, the company owes an additional premium payment of $

On December 31 the balance due to the insurance company is recorded as a liability by an adjusting entry. Tomlin Furniture Company owes $ ($1, $1,000.00) for the workers' compensation insurance. Dec Workers’ Compensation Insurance Expense 2016 Workers’ Compensation Insurance Payable The balance due to the insurance company of $ is recorded as a liability by an adjusting entry on December 31. If the company had originally estimated too high, then they may be due a refund at the end of the year. Note: An adjusting journal entry will be reported at period end to recognize any additional amounts owed or due back.

Internal Control Over Payroll
1. Assign only highly responsible, well-trained employees to work in payroll operations. 2. Keep payroll records in locked files. Train payroll employees to maintain confidentiality. 3. Add new employees and make all changes in pay rates only with proper written authorization from management. 4. Make changes to an employee's withholding allowances based only on a Form W-4 properly completed and signed by the employee. 5. Make voluntary deductions from employee earnings based only on a signed authorization from the employee. Companies must create and enforce internal control procedures to protect payroll operations. Here are some internal controls that should exist in a firm.

Internal Control Over Payroll
6. Have the payroll checks examined by someone other than the person who prepares them. Compare each check to the entry for the employee in the payroll register. 7. Have payroll checks distributed to the employees by someone other than the person who prepares them. 8. Have the monthly payroll bank account statement received and reconciled by someone other than the person who prepares the payroll checks. Use prenumbered forms for the payroll checks. Maintain files of all authorization forms for adding new employees, changing pay rates, and making voluntary deductions. Also retain all Forms W-4. Review the internal control suggestions. You will notice that there are quite a few controls that a good system will have in place.

Welcome Back Atef Abuelaish

Welcome Back Time for Any Question Atef Abuelaish

Atef Abuelaish

Chapter 12 Accruals, 12 Chapter

Accruals, Deferrals, and
Chapter Chapter 12 12 Accruals, Deferrals, and Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Accruals, Deferrals, and the Worksheet
Chapter Chapter 12 12 Accruals, Deferrals, and the Worksheet Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Chapter 12 Accruals, Deferrals, and the Worksheet Section 1: Calculating and Recording Adjustments Section Objectives Chapter 11 discussed employer payroll taxes and insurance premiums for workers’ compensation, as well as how and when to file the required tax returns and reports. In Chapter 12, we will study accrual accounting, including accrued and deferred income and expense, and how these adjustments are recorded on the worksheet. This first section describes how to compute adjustments for a merchandiser and how to enter the adjustments on a worksheet. In objective one we will determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet. 12-1 Determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet. 12-2 Compute adjustments for accrued and prepaid expense items, and enter the adjustments on the worksheet. 12-3 Compute adjustments for accrued and deferred income items, and enter the adjustments on the worksheet.

Accrual Basis of Accounting
Revenue is recognized when earned, not necessarily when the cash is received Revenue is recognized when the sale is complete. A sale is complete when title to the goods passes to the customer or when the service is provided. For sales on account, revenue is recognized when the sale occurs even though the cash is not collected immediately. We are studying the accrual basis of accounting. The accrual basis of accounting is different than the cash basis of accounting. In accrual basis accounting, Revenues are recognized when earned, not when paid. Financial statements are prepared using accrual basis accounting.

Expenses are recognized when incurred or used, not necessarily when cash is paid
Each expense is assigned to the accounting period in which it helped to earn revenue for the business, even if cash is not paid at that time. This is often referred to as matching revenues and expenses. In accrual basis accounting, expenses are recognized when incurred or used, not necessarily when cash is paid.

Determine the adjustment for Merchandise Inventory.
An asset account for merchandise inventory is maintained in the general ledger. Inventory All purchases of merchandise are debited to the Purchases account. Purchases Objective 1 is to determine the adjustment for Merchandise Inventory and place it on the worksheet. The Merchandise Inventory account is an asset that appears on the Balance Sheet. The amount in the account is the beginning balance at the start of the period. However, the journal entry to record the purchase of inventory for cash (assuming a periodic inventory system) is to debit Purchases and credit Cash. At the end of the period, Merchandise Inventory still contains the beginning balance and it must be adjusted to show the ending merchandise on hand. All sales of merchandise are credited to the revenue account Sales. Sales

Merchandise Inventory
Notice that no entries are made directly to the Merchandise Inventory account during the accounting period. Consequently, when the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period. When the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period, because no entries have been made directly to the account during the year. Merchandise Inventory Purchases Sales

The adjustment is made in two steps.
Based on a physical count taken on December 31, merchandise inventory for Whiteside Antiques totaled $47,000. Whiteside Antiques needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year. The adjustment is made in two steps. Each step needs two general ledger accounts: At the end of the period, a merchandiser takes a physical inventory count to determine how much inventory is still on hand. Whiteside Antiques needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year. The adjustment is made in two steps: 1) The beginning inventory is removed from the books by transferring the account balance to the Income Summary account. This removes the beginning inventory from the books. 2) The ending inventory is placed on the books by debiting Merchandise Inventory and crediting Income Summary. This second step records the amount of ending inventory on the books. Merchandise Inventory Income Summary

What is the amount of the first
The first step is to remove beginning inventory from the books. Whiteside Antiques began the year with $52,000 in inventory. QUESTION: What is the amount of the first inventory adjustment? Beginning Inventory ANSWER: Let’s try removing the old balance of Whiteside Antiques. $52,000

Adjustment for Beginning Inventory Merchandise Inventory
Income Summary Merchandise Inventory 52,000 Bal. 52,000 52,000 To remove the old balance, we need to credit Merchandise Inventory for $52,000 and debit Income Summary for the same amount. Here is the entry in T account form.

What is the amount of the next
The next step is to place ending inventory on the books. Whiteside Antiques ended the year with $47,000 in inventory. QUESTION: What is the amount of the next inventory adjustment? Ending Inventory ANSWER: Next, we need to put the new ending inventory balance into the Merchandise Inventory account. $47,000

Adjustment for Ending Inventory Merchandise Inventory
Income Summary 47,000 47,000 Let’s debit Merchandise Inventory for $47,000 and credit Income Summary for the same amount. This is what the T accounts would look like.

Compute adjustments for accrued and prepaid expense
Objective 12-2 Compute adjustments for accrued and prepaid expense Items and enter the adjustments on the worksheet. Whiteside Antiques has other adjustments which need to be made.

Losses from Uncollectible Accounts
Under accrual accounting, the expense for uncollectible accounts is recorded in the same period as the related sale. The expense is estimated because the actual amount of uncollectible accounts is not known until later periods. The estimated expense is debited to an account named Uncollectible Accounts Expense. Credit sales are made with the expectation that the customers will pay the amount due later. Sometimes the account receivable is never collected. Losses from uncollectible accounts are classified as operating expenses. The business wants to match the expense for uncollectible accounts with the sales revenue for the same period.

Whiteside Antiques uses the percentage of net credit sales method.
Several methods exist for estimating the expense for uncollectible accounts. Whiteside Antiques uses the percentage of net credit sales method. The rate used is based on the company's past experience with uncollectible accounts and management's assessment of current business conditions. There are several ways to estimate the expense for uncollectible accounts. Whiteside Antiques uses percentage of net credit sales.

Net credit sales for the year were $100,000.
Whiteside Antiques estimates that 0.80 percent of net credit sales will be uncollectible. Net credit sales for the year were $100,000. The estimated expense for uncollectible accounts is $800 ($100,000 x ). If .8 percent of net credit sales are estimated to be uncollectible then the business needs to record $800 of expense.

Adjustment for Uncollectible Accounts
Uncollectible Accounts Expense Allowance for Doubtful Accounts 800 250 Beg Bal 800 We will debit Uncollectible Accounts Expense for $800 and credit Allowance for Doubtful Accounts for the same amount.

This account appears on the balance sheet as follows.
The entry to record the expense for uncollectible accounts includes a credit to a contra asset account, Allowance for Doubtful Accounts. This account appears on the balance sheet as follows. Accounts Receivable $32,000 Allowance for Doubtful Accounts (1,050) Net Accounts Receivable $30,950 When the adjustment is made, Uncollectible Accounts Expense is debited and a contra-asset account Allowance for Doubtful Accounts is credited.

Adjustment for Depreciation
QUESTION: What is Property, Plant, and Equipment? Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation. ANSWER: Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation. We will use the straight-line method to depreciate the store’s equipment. Remember, land is not depreciated. We record a portion of the asset’s cost to a depreciation expense account each period. The offsetting entry is to accumulated depreciation. As discussed in Chapter 5, Accumulated Depreciation is a contra asset account. It has a normal credit balance, which is opposite the normal balance for an asset account. The general formula to calculate depreciation (using the straight line method) is cost less the salvage value divided by the asset’s estimated useful life.

Accrued Expenses Whiteside Antiques makes adjustments for three types of accrued expenses: Accrued salaries Accrued payroll taxes Accrued interest on notes payable Because accrued expenses involve amounts that must be paid in the future, the adjustment for each item is a debit to an expense account and a credit to a liability account. We are ready to make some more adjustments involving accrued expenses. Accrued expenses are expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records. We will be making end of period adjustments to accrue salaries expenses, payroll tax expenses and interest expense on a note payable.

Adjustment for Accrued Salaries Salaries Expense – Sales
Salaries Payable 1,200 1,200 Salaries owed to employees but not due to be paid until the following month are $1,200 for our company. This represents the amount of the payroll that occurred in the current year. We need to debit Salaries Expense for $1,200 and credit Salaries Payable for the same amount. And here are the T account postings.

Accrued Payroll Taxes The accrued employer's payroll taxes are:
Social security tax $1,200 x = $ 74.40 Medicare tax ,200 x = Total accrued payroll taxes $91.80 Businesses must match revenue and expenses in the appropriate period, and so must make adjustments to accrue the employer's payroll taxes; they are payable sometime in the next accounting period. Assuming that there is $1,200 of accrued wages, and that all of them are subject to the FICA tax, the accrual for the payroll taxes would be $74.40 of social security tax and $17.40 of Medicare tax. Both of these will be accrued in our adjusting entry.

Adjustment for Accrued Payroll Taxes
Expense Social Security Tax Payable Medicare Tax Payable 91.80 74.40 17.40 Social Security Tax Payable will be credited for $74.40 and Medicare Tax Payable will be credited for $ Payroll Tax Expense will be debited for the total amount of $ Here is how the adjustment would look in the T accounts.

Accrued Unemployment Taxes
The entire $1,200 is also subject to unemployment taxes. The accrued unemployment taxes are: Federal unemployment tax $1,200 x = $ 7.20 State unemployment tax $1,200 x = Total accrued unemployment taxes for federal and state are $74.40. Total accrued taxes $

Adjustment for Accrued Payroll Taxes
Federal Unemp. Tax Payable Payroll Taxes Expense State Unemp. Tax Payable 72.00 7.20 64.80 We would debit Payroll Tax Expense for $74.40 and credit Federal Unemployment Tax Payable for $7.20 and credit State Unemployment Tax Payable for $ Here we see the adjustment.

Accrued Interest on Notes Payable
On December 1, 2016, Whiteside Antiques issued a two-month note for $2,000, with annual interest of 12 percent. Whiteside Antiques will pay the interest when the note matures on February 1, 2017. However, the interest expense is incurred day by day and should be allocated to each fiscal period involved in order to obtain a complete and accurate picture of expenses. We need to accrue one month of interest expense on the note payable.

The accrued interest expense amount is determined by using the interest formula:
Principal x Rate x Time $2, x x 1/ = $20 The fraction 1/12 represents one month, which is 1/12 of a year. Using our interest formula, we calculate $20 of interest has accrued on the note. Date of note: December 1, 2016 Expense for 2016 = 1 month (Dec )

Adjustment for Accrued Interest on Notes Payable
Interest Expense Interest Payable 20 20 We need to debit interest expense for $20 and credit interest payable for the same amount. Here we see the adjustment.

Prepaid Expenses Whiteside Antiques makes adjustments for three types of prepaid expenses: Prepaid supplies Prepaid insurance Prepaid interest on notes payable Prepaid expenses, also called deferred expenses, are expenses that are paid for and recorded before they are used, such as rent or insurance. We will make adjustments for several prepaid expenses. We adjust for supplies used, for insurance expired, and for any interest that has expired. In all cases, we debit the expense, and credit the related asset account. The adjusting entries for supplies used and insurance expired were introduced in chapter 5. The adjusting entry for prepaid interest on notes payable is new to this chapter.

Compute adjustments for accrued and deferred income items.
QUESTION: What is accrued income? Accrued income is income that has been earned but not yet received and recorded. ANSWER: Accrued income is income that has been earned, but not yet received and recorded. We need to record interest earned on the note receivable

Accrued Interest on Notes Receivable
On November 1, 2016, Whiteside Antiques accepted from a customer a four-month, 15 percent note for $1,200. The interest income is recorded when it is received, which is normally when the note matures. However, interest income is earned day by day. At the end of the period, an adjustment is made to recognize interest income earned but not yet received or recorded. Whiteside will record 2 months of interest earned on the note receivable. The collection of the note is recorded when the proceeds are received, which is normally when the note matures. The adjustment for accrued interest income records the income in the proper period.

The amount of earned interest income is determined by using the interest formula:
Principal x Rate x Time $1, x x 2/ = $30 The fraction 1/12 represents one month, which is 1/12 of a year. 2/12 is used for two months. Two months of interest is $30. Date of note: November 1, 2016 Income for 2016 = 2 months (Nov.1 – Dec. 31)

Adjustment for Accrued Interest on Notes Receivable
Which account is debited? Which account is credited? For what amount? For what amount? Whiteside will debit Interest Receivable for $30 and credit Interest Income for $30.

Adjustment for Accrued Interest on Notes Receivable
Interest Receivable Interest Income 30 Bal 30 Whiteside will debit Interest Receivable for $30 and credit Interest Income for $30. Here is the adjustment in the T accounts.

Adjustment for unearned or deferred income
Unearned or deferred income exists when cash is received before income is earned and would include such items as : Subscription income Management fees Rental income Legal fees Architectural fees Construction fees Advertising income These are examples of unearned income items which may exist in a firm. Unearned or deferred income exists when cash is received before income is earned. Our firm has no unearned income items.

Chapter 12 Accruals, Deferrals, and the Worksheet Section 2: Completing the Worksheet Section 1 taught us why and how to make an adjusting entry. Section 2 and Objective 4 of the chapter involve completing a ten-column worksheet. Section Objectives 12-4 Complete a 10-column worksheet.

Complete a ten-column worksheet.
The Adjusted Trial Balance section of the worksheet is completed as follows. 1. Combine the amount in the Trial Balance section and the Adjustments section for each account. 2. Enter the results in the Adjusted Trial Balance section. (The accounts that do not have adjustments are simply extended from the Trial Balance section to the Adjusted Trial Balance section.) 3. The accounts that are affected by adjustments are recomputed. Follow these rules to combine amounts on the worksheet. It is now time to enter our adjustments on the worksheet. Let’s review how to prepare the adjusted trial balance on the worksheet. After entering the Trial balance on the worksheet, the adjustments are entered in the adjustments columns, then it is time to carry over the balances to the adjusted trial balance columns.

Partial Worksheet Notice that the debit and credit amounts in Income Summary are not combined in the Adjusted Trial Balance section. Refer to page in your text for a larger view. Both the beginning and ending balances in the Merchandise Inventory accounts need to be seen in the Income Summary account on the adjusted trial balance. Do not combine the two numbers. They will both be needed when we prepare the income statement. On all of the other accounts, extend the proper balance across to the adjusted trial balance columns.

Also include the owner’s drawing account in the Balance Sheet section.
Balance Sheet Columns Identify the accounts that appear on the balance sheet (assets, liability, owner’s capital). Also include the owner’s drawing account in the Balance Sheet section. Assets, liability, owner’s capital and the owner’s drawing account are carried to the balance sheet section.

Income Statement Columns
For accounts that appear on the income statement, Sales through Interest Expense, enter the amounts in the appropriate Debit or Credit column of the Income Statement section. Extend all revenues and expense accounts to the income statement section. Also, extend BOTH the debit and credit adjustment to Income Summary across to the Income Statement columns.

Happiness is having all homework up to date
Homework assignment Using Connect – 4 Questions for 50 Points for Chapter 12. Quiz # 4 in CH 12, available 11/23 and due on 11/24 before 11:59 PM. Last day of the Homework for Chapters 7, 8, 9, , 12, and 13 is 12/06 at 11:59 PM. Prepare chapter 13 “Financial Statements and Closing Procedures.” Happiness is having all homework up to date Atef Abuelaish

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