chapter 10. account for current liabilities of known amount

Chapter 10

Account for current liabilities of known amount

Copyright (c) 2009 Prentice Hall. All rights reserved.

Accounts PayableAmounts owed for productsand services purchased on

account

Short-Term Notes PayableCommon form of financing;

company incurs interest expense

Sales Tax PayableTax levied by state on retail

sales; company collects from customer and remits to

government

3


Accrued ExpensesExpense incurred, but not yet paid; often an

adjusting entry. Examples: salaries & interest payable

Current portion of Long-Term Notes PayablePrincipal portion of long-term debt due

in the next year

Unearned revenuesCustomers make payment before receiving

product or service

4

5

GENERAL JOURNALDATE DESCRIPTION DEBIT CREDIT

2011

3 1 Equipment 16,000

Notes payable 16,000

Purchase equipment by signing a note payable

12 31

Interest expense 1,200

Interest payable 1,200

Accrued interest on note payable

$16,000 x 9% x 10/12$16,000 x 9% x 10/12


6


2012

3 1 Interest payable 1,200

Interest expense 240

Notes payable 16,000

Cash 17,440

To record payment of note and interest

$16,000 x 9% x 2/12$16,000 x 9% x 2/12


Account for current liabilities that must be estimated


Companies guarantee products through warranty agreements

Warranty expense is estimated in same period as sale of product◦Matching principle

JOURNAL

Date Accounts Debit Credit

Warranty Expense $$$$

Estimated Warranty Payable $$$$

8

Potential liability Depends on a future event Accounting treatment depends on likelihood

that the future event will create a liability:

9Copyright (c) 2009 Prentice Hall. All rights reserved.


Likelihood of Loss

How to Report

Remote No disclosure required

Reasonably possible

Describe in notes to the financial statements

Probable Record an expense and liability based on estimated amounts

10

Calculate payroll and payroll tax amounts


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 or retirement contributions

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


15

Gross payGross pay

Required deductionsRequired

deductions

Optional deductions

Optional deductions

Net payNet pay

Income & Social

security taxes

Income & Social

security taxes

Insurance, retirement

plans, charitable

contributions

Insurance, retirement

plans, charitable

contributions


Government requires employers to deduct income tax from employees’ gross pay

Amount depends on:◦ Gross pay◦ The number of withholding allowances employee

claims on Form W-4 Each allowance lowers amount of tax withheld Number of allowances depends on marital status and

number of children and/or dependents


Two components:◦ Old age, survivors’ and disability insurance

(OASDI) 6.2% of pay up to a wage base which increases

each In 2008, wage base = $102,000

◦ Health insurance (Medicare) 1.45% of pay with no maximum wage base


In addition to employee withholdings, employers pay at least three taxes based on payroll:◦ Social Security (FICA) tax

Employer matches amount withheld from employees’ pay

◦ State unemployment compensation tax (SUTA) In many states, 5.4% of first $7,000 paid to each

employee◦ Federal unemployment compensation tax

Frequently, 0.8% of the first $7,000 paid to each employee


Journalize basic payroll transactions

21


Salary expense

Employee income tax payable

FICA tax payable

Payable to health insurance

Payable to United Way

Salary payable


22


Health insurance expense

Life insurance expense

Retirement plan expense

Employee benefits payable


23


Payroll tax expense

FICA tax payable

Federal unemployment tax payable

State unemployment tax payable


Hours

Pay rate

Total

40 $14 $560

22 $21 462

62 $1,022

24


Salary expense 1,022

Employee income tax payable 73

FICA tax payable 78

Payable to United Fund 10

Salary payable 861


Controls for efficiency

Use of two payroll bank accounts

Use of computer processing

Controls to Safeguard Payroll

Disbursements Hiring and firing

separate from accounting

Use of photo IDs & time clocks


chapter 10. account for current liabilities of known amount

Documents

prentice hall

note payable

estimated warranty payable

expense sales tax payable

pay period expense

accounts payable amounts

employees gross pay

estimated amounts