ppt_11 current liablities

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AccountingAccountingPrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by:

Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel ·Trenholm



A current liability is a debt that canreasonably be expected to be paid

1. from existing current assets orin the creation of othercurrent liabilities and

2. within one year or theoperating cycle, whichever

is longer.

ACCOUNTING FORACCOUNTING FORCURRENT LIABILITIESCURRENT LIABILITIES



ACCOUNTING FOR CURRENTACCOUNTING FOR CURRENTLIABILITIESLIABILITIES

Types of liabilities1) Definitely determinable2) stimated!) "ontingent



Definitely determinable currentliabilities include #

1. $perating line of credit2. Accounts and notes payable!. %ales tax payable&. 'ayroll and employee benefits(. nearned revenues*. "urrent maturities of

long+term debt

ACCOUNTING FORACCOUNTING FORCURRENT LIABILITIESCURRENT LIABILITIES



OPERATING LINE OF CREDITOPERATING LINE OF CREDIT

A pre+authori ed demand loan, allowing thecompany to write che-ues up to a preset limitwhen needed.

Disclosed by footnote and by reportingany resulting ban overdraftas a current liability.



/otes 'ayable are obligations in the form ofwritten promissory notes that usually re-uirethe borrower to pay interest./otes payable may be used instead of accounts

payable because it supplies documentation of theobligation in case legal remedies are needed tocollect the debt./otes due for payment within one year

of the balance sheet date are usuallyclassified as current liabilities.

NOTES PAYABLENOTES PAYABLE



SALES TAXES PAYABLESALES TAXES PAYABLE

%ales tax is expressed as a stated percentage ofthe sales price of goods sold to customers by aretailer.

%ales tax includes the goods and service tax0 %T), provincial sales tax 0'%T) or harmoni edsales taxes 0 %T and '%T combined).

The retailer 0or selling company) collects the tax

from the customer when the sale occurs,and periodically 0usually monthly)remits the collections to the government.



%alaries or wages payable represent theamounts owed to employees for a pay period.

'ayroll withholdings include federal and

provincial income taxes, "anada 'ension 'lan0"'') contributions, and employmentinsurance 0 ) premiums.

mployees may also voluntarily authori ewithholdings for charity, retirement, medical,or other purposes.

'ayroll withholdings are remitted to

governmental taxing authorities.

PAYROLL AND EMPLOYEE BENEFITSPAYROLL AND EMPLOYEE BENEFITS



nearned 3evenues 0advances from customers) occurwhen a company receives cash before a service isrendered.

xamples are when an airline sells a tic et for future

flights or when a lawyer receives legal fees beforewor is done.

UNEARNED REVENUESUNEARNED REVENUES



CURRENT MATURITIES OFCURRENT MATURITIES OFLONG-TERM DEBTLONG-TERM DEBT

Another item classified as a current liability iscurrent maturities of long+term debt."urrent maturities of long+term debt are often

identified on the balance sheet as long+term debtdue within one year.



ESTIMATED LIABILTIESESTIMATED LIABILTIES

$bligation that exists but for which theamount and timing is uncertain.

4owever, the company can reasonablyestimate the liability.

xamples include property taxes andwarranty liabilities.



PROPERTY TAXESPROPERTY TAXES

'roperty taxes are accrued monthlybased on the prior year5s tax bill.

6hen the property tax bill for thecurrent year is received, the companywill ad7ust its monthly expense for the

remainder of the year.



PRODUCT WARRANTIESPRODUCT WARRANTIES

6arranty contracts may lead to futurecosts for replacement or repair ofdefective units.

sing prior experience with the product,the company estimates what the cost ofservicing the warranty will be.

stimated warranty costs are accruedwith a debit to warranty expense and acredit to estimated warranty liability .



CONTINGENT LIABILITIESCONTINGENT LIABILITIES

"ontingent liabilities exist when there isuncertainty about the outcome.

"ontingencies are accrued by a debit toan expense account and a credit to aliability account if both of the followingconditions are met#

1. The contingency is li ely, and2. The amount of the contingency canbe reasonably estimated.



FINANCIAL STATEMENTFINANCIAL STATEMENTPRESENTATIONPRESENTATION

Each major type of current liability is listedseparately.Often list bank loans, notes payable, and

accounts payable first, then other liabilities.

"$8 /"$ 9TD .

"urrent liabilities 08illions ):an loans and notes payable ; (Accounts payable and accrued liabilities 2!<

ncome and resource taxes !*9ong+term debt due within one year !<

;!<1



APPENDIX 11A



INTERNAL CONTROLS FOR PAYROLLINTERNAL CONTROLS FOR PAYROLLThe ob7ectives of internal accounting controlconcerning payroll are1. to safeguard company assets fromunauthori ed payrolls and2. to assure the accuracy and reliability of the

accounting records pertaining to payrolls.'ayroll activities include#1. hiring employees2. time eeping

!. preparing the payroll&. paying the payrollThese functions should be assigned todifferent departments or individuals.

4Functi n!

" P#$% &&



HIRING EMPLOYEESHIRING EMPLOYEESThe human resources department is responsible for#

1. 'osting 7ob openings2. %creening and interviewing applicants!. 4iring of employees&. Authori ing changes in pay rates during employment(. Terminations of employment



TIME'EEPINGTIME'EEPING

4ourly employees are usually re-uired torecord time wor ed by =punching> a timecloc ? the time of arrival and departure areautomatically recorded by the employee whenhe@she inserts a time card into the cloc .The employee5s supervisor must#

1. approve the hours shown by signing thetime card at the end of the pay period

2. authori e any overtime hours for anemployee .



PREPARING THE PAYROLLPREPARING THE PAYROLL

The payroll department prepares the payrollon the basis of two sources of input#

1. human resource departmentauthori ations , and

2. approved time cards .



PAYING THE PAYROLLPAYING THE PAYROLL

The comptroller5s department is responsiblefor the payment of the payroll.

1. 'ayment by direct deposit, or byche-ue, minimi es the ris of lossfrom theft.

2. All direct deposit lists and che-ues

must be signed by the comptroller andtheir distribution protected by thecomptroller5s department.



DETERMINING AND PAYING THEDETERMINING AND PAYING THEPAYROLLPAYROLL

Determining the payroll involves calculating

1. gross earnings ,

2. payroll deductions , and

!. net pay .



ross earnings is the total compensation earnedby an employee.There are three types of gross earnings#1. wages

2. salaries!. bonusesTotal wages are determined by applying thehourly rate of pay to the hours wor ed .8ost companies are re-uired to pay a minimumof one and one+half times the regular hourly ratefor overtime wor .

GROSS EARNINGSGROSS EARNINGS



PAYROLL DEDUCTIONSPAYROLL DEDUCTIONS

Boluntary deductions pertain towithholdings for charitable causes,retirement, and other purposes.

All voluntary payroll deductions should beauthori ed in writing by the employee.

Boluntary payroll deductions do not resultin a payroll expense to the employer.

/et pay is determined by subtracting

payroll deductions from gross earnings.



EMPLOYER PAYROLL COSTSEMPLOYER PAYROLL COSTS

"''• The employer must match each employee5s "''contribution.

• The employer is re-uired to contribute 1.& timeseach employee5s deductions.

6or place 4ealth, %afety, and "ompensation• mployers pay a specified percentage of their gross

payroll to provide supplemental benefits for

wor ers who are in7ured or disabled in thewor place.



ADDITIONAL FRINGE BENEFITSADDITIONAL FRINGE BENEFITSPAID ABSENCESPAID ABSENCES

mployees may have the right to receivecompensation for future benefits when

certain conditions of employment are met.The compensation may pertain to#

1. 'aid vacation

2. %ic pay benefits!. 'aid holidays



ADDITIONAL FRINGE BENEFITSADDITIONAL FRINGE BENEFITSPAID ABSENCESPAID ABSENCES

6hen the payment of compensation isprobable and can reasonably be

determined, a liability should be accrued .6hen the amount can not be reasonablyestimated, the potential liability should

be disclosed.



8any companies use a payroll register toaccumulate the gross earnings, deductions, andnet pay by employee for each period.

n some cases, this record is a 7ournal or boo

of original entry.The typical entry to record the employee costsin a payroll is to debit %alaries or 6agesexpense and to credit a variety of liability

accounts.6hen the payroll is paid, the liabilityaccounts are debited and "ash is credited.

RECORDING THE PAYROLLRECORDING THE PAYROLL



RECOGNI(ING PAYROLLRECOGNI(ING PAYROLLEXPENSES AND LIABILITIESEXPENSES AND LIABILITIES

Academy "ompany records its payroll for the wee ending Cune 1(, 2<<2 withthe 7ournal entry above. $ffice %alaries xpense 0;(,2<<) and 6ages 'ayable0;12,<1<) are debited in total for ;1 ,21< in gross earnings. %pecific liability

accounts are credited for the deductions made during the pay period. %alaries

Academy "ompany records its payroll for the wee ending Cune 1(, 2<<2 withthe 7ournal entry above. $ffice %alaries xpense 0;(,2<< ) and 6ages 'ayable 0;12,<1< ) are debited in total for ;1 ,21< in gross earnings . %pecific liability

accounts are credited for the deductions made during the pay period. %alariesand 6a es 'a able is credited for ;E FF(.!& in net earnin s .

Cune 1( $ffice %alaries xpense 6ages xpense

"'' 'ayable 'ayable

ncome Tax 'ayablenited 6ay 'ayablenion Dues 'ayable

%alaries and 6ages 'ayable To record payroll for the wee ending Cune 1(.

(,2<<.<<12,<1<.<<

*(&.<! !F .2! (,*&*.E< &21.(< 21(.<< E,FF(.!&

/ 3A9 C$ 3/A9Date Account titles and explanation Debit "reditDate Account Titles and Explanation Debit redit



RECORDING EMPLOYERRECORDING EMPLOYERPAYROLL COSTSPAYROLL COSTS

The entry to record the payroll costs associated with the Academy "ompanypayroll results in a debit to mployee :enefits xpense for ;2,<(*.*(, a credit to"'' 'ayable for ;*(&.<! 0;*(&.<! x 1) and a credit to 'ayable for ;(&2.120;!F .2! x 1.&). Assuming a wor er5s compensation rate of 1 percent, the comp+

ensation payable liability would be for ;1 2.1< 0;1 ,21< x 1G). Bacation payaccrues at &G and therefore the vacation payable will be *FF.&< 0;1 ,21< x &G).

The entry to record the payroll costs associated with the Academy "ompanypayroll results in a debit to mployee :enefits xpense for ;2,<(*.*( , a credit to"'' 'ayable for ;*(&.<! 0;*(&.<! x 1 ) and a credit to 'ayable for ;(&2.12 0;!F .2! x 1.& ). Assuming a wor er5s compensation rate of 1 percent, the comp+

ensation payable liability would be for ;1 2.1< 0;1 ,21< x 1G ). Bacation payaccrues at &G and therefore the vacation payable will be *FF.&< 0;1 ,21< x &G ).

/ 3A9 C$ 3/A9

Date Account Titles and xplanation Debit "redit

Cune 1( mployee :enefits xpense "'' 'ayable 'ayable 6or ers5 "ompensation 'ayable Bacation 'ay 'ayable

To record employer payroll costs on Cune 1( payroll.

2,<(*.*( *(&.<! (&2.12 1 2.1< *FF.&<



The entry to record payment of the Academy"ompany payroll is a debit to %alaries and6ages 'ayable and a credit to "ash.

The entry to record payment of the Academy"ompany payroll is a debit to %alaries and6ages 'ayable and a credit to "ash .

RECORDING PAYMENTRECORDING PAYMENTOF THE PAYROLLOF THE PAYROLL

/ 3A9 C$ 3/A9

Date Account Titles and xplanation Debit "redit

Cune 1( %alaries and 6ages 'ayable "ashTo record payment of payroll.

E,FF(.!& E,FF(.!&



COPYRIGHTCOPYRIGHT

Copyright © 2002 John Wiley Sons Canada! "td# All rightsreser$ed# %eproduction or translation o& this 'or( )eyondthat permitted )y CA*C+P, -Canadian %eprographyCollecti$e. is unla'&ul# %e/uest &or &urther in&ormationshould )e addressed to the Permissions epartment! JohnWiley Sons Canada! "td# The purchaser may ma(e )ac(1upcopies &or his her o'n use only and not &or distri)ution orresale# The author and the pu)lisher assume no

i)ilit & ! i i ! d g ! d )

ppt_11 current liablities

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