copyright © 2007 prentice-hall. all rights reserved 1 current liabilities and payroll chapter 11
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Copyright © 2007 Prentice-Hall. All rights reserved 1
Current LiabilitiesCurrent Liabilitiesand Payroll and Payroll
Current LiabilitiesCurrent Liabilitiesand Payroll and Payroll
Chapter 11
Copyright © 2007 Prentice-Hall. All rights reserved 2
Objective 1Objective 1Objective 1Objective 1
Account for current liabilities
of known amount
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Accounts PayableAccounts PayableAccounts PayableAccounts Payable
• Amounts owed for products or services purchased on account
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Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
• Promissory notes payable due within one year
• Interest expense is recognized
• If interest expense is accrued at the end of the period, interest payable must also be recorded
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E11-14E11-14E11-14E11-14GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
2002
May 1 Equipment 15,000Note Payable 15,000
Dec 31 Interest Expense 800Interest Payable 800
(15,000 x .08 x 8/12)
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E11-14E11-14E11-14E11-14GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
2003
May 1 Note Payable 15,000Interest Expense 400Interest Payable 800
Cash 16,200
Interest expense for 2003 = 15,000 x .08 x 4/12
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Sales Tax PayableSales Tax PayableE11-14E11-14
Sales Tax PayableSales Tax PayableE11-14E11-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Mar 31 Cash 216,000Sales Revenue 200,000Sales Tax Payable 16,000
Apr 6 Sales Tax Payable 16,000Cash 16,000
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Other Current LiabilitiesOther Current LiabilitiesOther Current LiabilitiesOther Current Liabilities
• Current portion of long-term note payable
• Accrued Expenses (Liabilities)– Expenses that have been incurred but not yet
paid– Salaries Payable– Interest Payable– Utilities Payable
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Unearned RevenueUnearned RevenueE11-15E11-15
Unearned RevenueUnearned RevenueE11-15E11-15
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Mar 31 Cash 218Unearned SubscriptionRevenue 200Sales Tax Payable 18
Nov 15 Sales Tax Payable 18Cash 18
Dec 31 Unearned Subscription Revenue 150
Subscription Revenue 150
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Objective 2Objective 2Objective 2Objective 2
Account for current liabilities that must be estimated
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Estimated Warranty PayableEstimated Warranty PayableEstimated Warranty PayableEstimated Warranty Payable
• Record warranty expense in same period as the revenue– Warranty expense– Estimated warranty payable
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E11-16E11-16E11-16E11-16GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
2006
Warranty Expense 6,000Estimated Warranty Payable 6,000
Estimated Warranty Payable 7,000Cash 7,000
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E11-16E11-16E11-16E11-16
Estimated Warranty Payable
Balance 3,000
6,0007,000
Balance 2,000
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Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities
• Potential liability• Depends on a future event• Accounting treatment depends on
likelihood that the future event will create a liability– Remote – ignore– Reasonably possible – in notes to financial
statements– Probable – estimate and record expense and
liability
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Objective 3Objective 3Objective 3Objective 3
Compute payroll amounts
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PayrollPayrollPayrollPayroll
• Salary – pay stated at annual, monthly, or weekly rate
• Wages – pay stated at an hourly rate• Commission – pay stated as percentage of
sales amount• Bonus – pay over and above base salary• Benefits – extra compensation not paid in
cash, such as health insurance, retirement contributions
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PayrollPayrollPayrollPayroll
• Straight time - base rate paid for a set number of hours
• Overtime - additional time worked for which employees receive a higher rate (usually 1.5 times the straight time rate)
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Gross Pay and Net PayGross Pay and Net PayGross Pay and Net PayGross Pay and Net Pay
Employee Income Tax
FICA OASD
FICAMedicare
OptionalDeductions
Gross Pay
Net Pay
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FICA TaxFICA Tax
• The FICA tax has two components:
1 Old age, survivors’, and disability insurance (6.2% applied to the first $90,000 of employee earnings in a calendar year)
2 Health insurance (1.45% applied to all employee earnings)
Note: Your text instructs you to assume an 8% tax on income earned up to $90,000 for FICA. That’s just to simplify things for the course
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Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
• Social Security (FICA) tax
• State unemployment compensation tax
• Federal unemployment compensation tax
Employers match the FICA tax withheld from employees
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Unemployment Compensation Unemployment Compensation TaxesTaxes
Unemployment Compensation Unemployment Compensation TaxesTaxes
• Employers pay 5.4% to the state and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings
• Provides for workmen’s compensation for people laid off from work
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Objective 4Objective 4Objective 4Objective 4
Record basic payroll transactions
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Salary ExpenseSalary ExpenseSalary ExpenseSalary Expense
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Sep 30 Salary ExpenseEmployee Income Tax PayableFICA Tax PayableUnited Fund PayableSalary Payable
Gross amountGross amount
Take home payTake home pay
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Payroll Tax ExpensePayroll Tax ExpensePayroll Tax ExpensePayroll Tax Expense
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Sep 30 Payroll Tax ExpenseFICA Tax PayableState Unemployment Tax PayableFederal Unemployment Tax Payable
Remember, the employer pay the unemployment taxes, not the employees
Remember, the employer pay the unemployment taxes, not the employees
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Benefits ExpenseBenefits ExpenseBenefits ExpenseBenefits Expense
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Sep 30 Health Insurance ExpenseLife Insurance ExpenseRetirement Plan Expense
Employee Benefits Payable
Fringe benefits are an expense to the employer
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E11-17E11-17E11-17E11-17
Base salary $750Commission 8,000Gross pay for December $8,750Charitable contribution (25)Income taxes (875)Health insurance (50)FICA (on $3,000) (240) (1,190)
$7,560
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E11-18E11-18E11-18E11-18
Gross pay:
Regular hours (40 x $10) $400.00
Overtime (10 x $10 x 1.5) 150.00
Gross pay $550.00
Deductions:
Income tax (49.50)
FICA (44.00)
Charitable contribution (5.00) (98.50)
Net pay $451.50
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E11-18E11-18E11-18E11-18
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Salary Expense 550.00Employee Income Tax Payable
49.50FICA Tax Payable
44.00United Fund Contribution Payable
5.00Salary Payable
451.50
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E11-19E11-19E11-19E11-19GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Payroll Tax Expense 6,068FICA Tax Payable 5,200State Unemployment Tax Payable 756Federal Unemployment Tax Payable 112
FICA – 65,000 x .08State Unemployment Tax – 14,000 x .054Federal Unemployment Tax – 14,000 x .008
Copyright © 2007 Prentice-Hall. All rights reserved 30
E11-19E11-19E11-19E11-19
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Health Insurance Expense 2,060Life Insurance Expense 350Pension Expense 3,900 Employee Benefits Payable 6,310
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Objective 5Objective 5Objective 5Objective 5
Use a payroll system
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ComponentsComponentsComponentsComponents
• Payroll Record
• Payroll Check
• Earnings Reports
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GROSS PAY
EMPLOYEENAME HRS.
STRAIGHT-TIME OVERTIME TOTAL
Sara Canne 42 400 22 422
Jim Lake 40 480 0 480
Kyle Metz 48 800 160 960
Total 1,680 182 1,862
Payroll RecordPayroll RecordPayroll RecordPayroll Record
DEDUCTIONS NET PAY
FED.INCOME
TAX FICAHEALTH
INS. TOTAL AMOUNTCHECK
NO.
63 37 15 115 307 166
72 38 22 132 348 167
144 77 40 261 699 168
279 152 77 508 1,354
Payroll Record
GROSS PAY DEDUCTIONS NET PAY
EMPLOYEENAME
HRS.
STRAIGHT TIME OVERTIME TOTAL
FED.INCOME
TAX FICAHEALTH
INS. TOTAL AMOUNTCHECK
NO.
Sara Canne 42 400 22 422 63 37 15 115 307 166
Jim Lake 40 480 0 480 72 38 22 132 348 167
Kyle Metz 48 800 160 960 144 77 40 261 699 168
Total 1,680 182 1,862 279 152 77 508 1,354
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Payroll ChecksPayroll ChecksPayroll ChecksPayroll ChecksStile's 166Payroll Account
Baltimore, MD Sep. 30, 2007
Pay to theOrder of
Sara Canne $307.00
Three hundred seven & 00/100's Dollars
First Bank
Baltimore
Maryland 21244 James Carn
A1119000031A 0787C50000454C Treasurer
Pay Deductions
Net Pay
Check No.
STRAIGHT TIME OVERTIME TOTAL
INCOME TAX FICA
HEALTHINS. TOTAL
400 22 422 63 37 15 115 307 166
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Earnings ReportEarnings ReportEarnings ReportEarnings Report
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Earnings ReportEarnings ReportEarnings ReportEarnings Report
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Internal Control over PayrollInternal Control over PayrollInternal Control over PayrollInternal Control over Payroll
• Efficiency controls– Keep two payroll accounts– Computerize
• Controls to safeguard payroll disbursements– Separate hiring and firing function from
accounting and from passing out paychecks– Photo ID’s for employees– Employees clock in and out
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Objective 6Objective 6Objective 6Objective 6
Report current liabilities on the balance sheet
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E11-22E11-22E11-22E11-22
Oriental Rug CompanyBalance Sheet (partial)
December 31, 2004Current liabilities:Estimated warranty payable $6,000Unearned sales revenue 15,000Employee withheld income tax payable 8,100FICA tax payable 14,400State unemployment tax payable 4,860Federal unemployment tax payable 720 Total current liabilities $49,080
Warranties payable (200,000 x .03)Employee income tax (90,000 x .09)FICA (90,000 x .08 x 2)State unemployment (90,000 x .054)
Federal unemployment (90,000 x .008)
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