CHAPTER

11

Payroll and Short-Term Liabilities

A current liability is a debt that can reasonably be expected to be paid

1. from existing current assets or in the creation of other current liabilities and

2. within one year or the operating cycle, whichever is longer.

ACCOUNTING FOR CURRENT LIABILITIES

ACCOUNTING FOR CURRENT LIABILITIES

• Types of liabilities
1. Definite
2. Estimated
3. Contingent

Definitely determinable current liabilities include:

1. Operating line of credit

2. Accounts and notes payable

3. Sales tax payable

4. Payroll and employee benefits

5. Unearned revenues

6. Current maturities of long-term debt

CURRENT LIABILITIES

1. Definite

• Obligation that exists but the amount and timing is uncertain.
• The company can reasonably estimate the value of the liability.
• Example: warranty liabilities.

CURRENT LIABILITIES

2. Estimated

PRODUCT WARRANTIES

• Warranty contracts may lead to future costs for replacement or repair of defective units.
• Using prior experience with the product, the company estimates what the cost of servicing the warranty will be.
• Estimated warranty costs are accrued with a debit to warranty expense and a credit to estimated warranty liability.

Warranty Expense 1000

Estimated Warranty Payable 1000

ACHTUNG!

• Contingent liabilities exist when there is uncertainty about the outcome.
• Example: a law suit settled against us
• Contingencies are accrued by a debit to an expense account and a credit to a liability account if and only if:
• The contingency is likely, and
• The amount of the contingency can be reasonably estimated.

CURRENT LIABILITIES

3. Contingent

ACHTUNG!

FINANCIAL STATEMENT PRESENTATION

• Each major type of current liability is listed separately.
• Often list bank loans, notes payable, and accounts payable first, then other liabilities.

COMINCO LTD.

Current liabilities (Millions)

Bank loans and notes payable $ 5

Accounts payable and accrued liabilities 230

Income and resource taxes 36

Long-term debt due within one year 30

$301

Payroll Accounting

INTERNAL CONTROLS FOR PAYROLL

• The primary objective of internal accounting control concerning payroll is
• To safeguard company assets from unauthorized payrolls.

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• Payroll activities include:
• Hiring employees
• Timekeeping
• Preparing the payroll
• Paying the payroll

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• To prevent fraud, these functions should be assigned to different departments/people.

DETERMINING AND PAYING THE PAYROLL

Determining the payroll involves calculating

1. gross earnings,

2. payroll deductions, and

3. net pay.

• Gross earnings is the total compensation earned by an employee.

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• There are three fixed types of gross earnings:

1. Wages (rate x hours worked)

2. Salaries (set amount)

3. Bonuses (discretionary)

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• Net pay (actually received) = Gross Pay – All deductions.

GROSS & NET EARNINGS

DEDUCTIONS

There are two kinds:

1. Mandatory deductions, consisting of:
• Your share (deductions from your paycheque), and
• Employer’s share (additional contributions and thus additional cost to company)

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• Voluntary Deductions

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1. MANDATORY DEDUCTIONS

• Mandatory deductions consist of:
• Canada Pension Plan (CPP, or QPP in Quebec),
• Employment insurance (EI) and
• Personal Income tax.

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MANDATORY DEDUCTIONS

Your Portion

(2010)

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This is what you pay; it’s deducted from your paycheque by your employer.

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• CPP [(Earnings – 3,500) x 4.95%]
• 4.95% of pensionable earnings
• Max. pensionable earnings are $47,200
• Basic exemption is $3,500
• So max contribution is $2,163.15 ($47,200 – 3,500) x 4.95%
• EI (Earnings x 1.73%)
• 1.73% of gross pay
• Max insurable earnings is $43,200
• Max. employee contribution $747.36 ($43,200 x 1.73%)
• Max. employer contribution is $1,046.30 ($747.36 x 1.4)

• TAX
• In Ontario, the tax brackets are as follows:

MANDATORY DEDUCTIONS

Your Portion

(2010)

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• Federal Tax (as an example) is calculated based on a specific rate for each segment of your income. They’re called tax brackets.

MANDATORY DEDUCTIONS

Your Portion

(2006)

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As an example, assume this box represents an $80,000 annual salary.

MANDATORY CONTRIBUTIONS�Employer’s Share

• CPP
• The employer must match each employee’s CPP contribution.
• EI
• The employer is required to contribute 1.4 times the employee’s EI deductions.
• Vacation Pay
• Accrues at 4% of gross pay
• Workplace Health, Safety, and Compensation
• Employers pay a percentage of their gross payroll for benefits for workers who are injured or disabled in the workplace.

2. VOLUNTARY DEDUCTIONS

• Voluntary deductions concern:
• Charitable donations,
• Savings for retirement, and
• Other purposes such as union dues etc.

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• The employee must authorize all payroll deductions

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• They do not result in an expense to the employer.

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PAYROLL�An Exercise

Calculate the payroll for this month for the following two employees:

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Employee #1 Annual Salary: $50,000

Employee #2 Hours worked: 160

Hourly rate: $20

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Assume worker’s compensation is 2%, union dues is 2%, and pension deductions (RRSP) are 5% of gross pay.

JOURNALISING PAYROLL

(2010)

Salaries Expense 4,166.67

Payroll Tax Payable 1,243.33

Wages Expense 3,200.00

CPP Payable 324.20

EI Payable 117.64

Union Dues Payable 147.33

Salaries and Wages Payable 5,165.80

Pension Contributions Payable 368.33

To record employee payroll deductions for the month and recognize salaries and wages expenses.

• Step 1: Record the Payroll expense and recognize all deductions from the employees’ pay cheques.

Employee Benefits Expense 930.92

Worker’s Compensation Payable 147.33

CPP Payable 324.23

EI Payable 164.70

Vacation Pay Payable 294.67

To record employer payroll costs and contributions for the month.

• Step 2: Record the employer’s mandatory top-up and contribution costs for CPP, EI, Worker’s Compensation and Vacation Pay.

JOURNALISING PAYROLL

Salaries and Wages Payable 5,165.80

Cash 5,165.80

To record payment of employees for the month.

• Step 3: Pay your employees.

JOURNALISING PAYROLL

JOURNALISING PAYROLL

• Step 4: When the time comes, remit the taxes and benefits to the appropriate governments and organizations. Example:

CPP Payable 648.45

EI Payable 282.34

Cash 2,321.45

Union Dues Payable 147.33

Payroll Tax Payable 1,243.33

Worker’s Compensation Payable 147.33

Pension Contrib. Payable 368.33

Cash 147.33

Cash 368.33

Do Problems:

P11-1A

P11-7A

P11-8A