1. ©CourseCollege.com 1 11 Payables Examples are Accounts and Notes Payable Learning Objectives 1.Describe a Voucher system for processing payables 2.Compute and record payables arising from payroll 3.Explain the recording and payment of sales and property taxes payable 4.Describe accounting for short term notes payable 5.Analysis: Calculate and explain AP payment period

2. ©CourseCollege.com 2 Objective 11.1: Describe a Voucher system for processing payables O11.1 Voucher system = control of payment process A process to properly authorize payables No checks can be issued without a voucher Reduces fraud and theft Segregates authorization, recording and custody Voucher system = control of payment process A process to properly authorize payables No checks can be issued without a voucher Reduces fraud and theft Segregates authorization, recording and custody

3. ©CourseCollege.com 3 Purchase Requisition Purchase Order Receiving Report Footwear manager requests 125 pair Western boots Purchasing manager approves and sends PO to vendor who ships product Milne O. receives product. Receiving report is prepared. Vendor, Win the West, sends invoice. Firm completes voucher process, obtains approvals, attaches process documents, schedules and completes payment. Vendor’s Invoice Voucher Milne Outfitters Documents in a Voucher system O11.1

4. ©CourseCollege.com 4 Sample Voucher O11.1 The Voucher controls the payment process by requiring specific procedures and approvals prior to the issuance of all checks

5. ©CourseCollege.com 5 Sample Voucher.Invoice items were requested properly.An approved vendor was used.Items were actually received.The invoice prices and terms were as agreed to from the original purchase order.All mathematical extensions are correct Approval of the voucher by the auditor implies: O11.1

6. ©CourseCollege.com 6 Purchase Requisition Purchase Order Receiving Report Vendor’s Invoice Voucher Milne Outfitters Win the West FOOTWEA R DEPT PURCHASING RECEIVING ACCOUNTING VENDOR Flow of Voucher documents O11.1

7. ©CourseCollege.com 7 Copies improve communication and facilitate error detection Copies create a trail that is difficult to manipulate The accounting department receives a copy of everything to recheck the entire process Accounting department records the transaction, therefore final approval of the voucher should be outside of the accounting department Copies improve communication and facilitate error detection Copies create a trail that is difficult to manipulate The accounting department receives a copy of everything to recheck the entire process Accounting department records the transaction, therefore final approval of the voucher should be outside of the accounting department Use of Voucher documents O11.1

8. ©CourseCollege.com 8 Every payroll event will involve two categories of expense, gross earnings and additional employer payroll expense (taxes & benefits). The balancing entries for these expenses will all involve payables. Objective 11.2: Compute and record payables arising from payroll O11.2

9. ©CourseCollege.com 9 Total payroll expenses include the big wheel, gross earnings plus the little wheel, additional employer payroll expenses. GROSS EARNINGS EMPLOYER PAYROLL EXPENSE TOTAL COST OF PAYROLL Two categories of expense O11.2

10. ©CourseCollege.com 10 Journal entries for payroll “Big Wheel” area & “Little Wheel” area That would be the amount of your “take home” paycheck. -Look at the total cost to the employer vs take home: $480 + $216 = $696 cost and the employee takes home $367! O11.2

11. ©CourseCollege.com 11 Payroll calculation example “Big Wheel” area & “Little Wheel” area O11.2

12. ©CourseCollege.com 12 Gross Earnings (Big Wheel) FIT –Federal Income Tax withheld FICA –Federal Insurance Contributions Act (Social Security) Two components Social Security and Medicare Medical Insurance –Employee benefit of medical insurance provided by the employer. Premiums often shared between employer and employee Wages Payable –Gross earnings minus deductions = net paycheck Employer Payroll Tax Expense (Little Wheel) FICA –Same as employees. The employer is required to match dollar for dollar FUTA –Federal Unemployment Insurance paid by the employer to provide employees with jobless benefits SUTA –State Unemployment Insurance paid by the employer to provide jobless benefits. Gross Earnings (Big Wheel) FIT –Federal Income Tax withheld FICA –Federal Insurance Contributions Act (Social Security) Two components Social Security and Medicare Medical Insurance –Employee benefit of medical insurance provided by the employer. Premiums often shared between employer and employee Wages Payable –Gross earnings minus deductions = net paycheck Employer Payroll Tax Expense (Little Wheel) FICA –Same as employees. The employer is required to match dollar for dollar FUTA –Federal Unemployment Insurance paid by the employer to provide employees with jobless benefits SUTA –State Unemployment Insurance paid by the employer to provide jobless benefits. O11.2 Definitions-Payroll Total Cost of Payroll = Gross Earnings + Employer Payroll Expense

13. ©CourseCollege.com 13 Caps are maximum earning levels that a particular tax applies to. For example The Social Security tax paid by employees was 6.2% (also matched by employer) of earnings up to $76,200. After reaching that total, no additional tax is paid. For Medicare however, there is no cap and the 1.45% Medicare tax (also employer matched) would continue to apply to all earnings regardless of total. When dealing with a cap, you should ask... Caps are maximum earning levels that a particular tax applies to. For example The Social Security tax paid by employees was 6.2% (also matched by employer) of earnings up to $76,200. After reaching that total, no additional tax is paid. For Medicare however, there is no cap and the 1.45% Medicare tax (also employer matched) would continue to apply to all earnings regardless of total. When dealing with a cap, you should ask... O11.2 Payroll Caps

14. ©CourseCollege.com 14 For this payroll calculation: Are total YTD earnings already above the cap? For this payroll calculation: Are total YTD earnings already above the cap? Yes No This tax no longer applies to this employee this year. Will this payroll bring total YTD earning over the cap? This tax applies to all of the earnings for this payroll period for this employee. Subtract the previous YTD earnings from the cap. This remainder is the portion of the current payroll that the tax applies to. Yes No Payroll Caps O11.2

15. ©CourseCollege.com 15 O11.3 Objective 11.3: Explain the recording and payment of sales and property taxes payable

16. ©CourseCollege.com 16 Sales taxes are levied against retail sales The “ultimate consumer”, the retail purchaser pays the tax.Sales taxes are not an expense of the business collecting them The business is acting as an agent of the taxing authority in the collection and payment of sales tax. The business remains fully liable and must pay amounts based on total sales subject to the tax Sales taxes are levied against retail sales The “ultimate consumer”, the retail purchaser pays the tax.Sales taxes are not an expense of the business collecting them The business is acting as an agent of the taxing authority in the collection and payment of sales tax. The business remains fully liable and must pay amounts based on total sales subject to the tax Sales Tax O11.3

17. ©CourseCollege.com 17 That’ll be $2.75 for a double tall latte PLUS $.22 for the governor! OK $2.97 total cash. Just remember the $.22 sales tax isn’t an expense, just a liability until paid... Sales Tax O11.3

18. ©CourseCollege.com 18 Sales Tax Sales tax payable is recorded as collected with sales activity Sales tax is computed and paid by the retail customer at the time of the sale. Sales of $12,500 x 8% sales tax = $1,000 Sales Tax Payable O11.3

19. ©CourseCollege.com 19 The firm pays sales tax payable on a schedule required by the taxing authority Sales Tax Pay the accumulated sales tax payable O11.3

20. ©CourseCollege.com 20 Taxing authorities are usually cities, counties and other local taxing districts Can apply to both real estate and personal property* Real estate includes all land and improvements which are permanently attached to the land Personal property includes all equipment, furniture and non real estate fixtures Taxes levied are based on assessments (valuations) Property taxes are an expense of the business operations * The term personal property does not refer to non business property but to business property that is not real estate Taxing authorities are usually cities, counties and other local taxing districts Can apply to both real estate and personal property* Real estate includes all land and improvements which are permanently attached to the land Personal property includes all equipment, furniture and non real estate fixtures Taxes levied are based on assessments (valuations) Property taxes are an expense of the business operations * The term personal property does not refer to non business property but to business property that is not real estate Property Tax O11.3

21. ©CourseCollege.com 21 Property Tax Following the Matching concept, each month gets an accrual adjustment of the estimated property tax expense. O11.3

22. ©CourseCollege.com 22 Property Tax Property taxes are usually billed annually The monthly adjustments are based on an estimate of the final tax bill Depending on timing, firms will often have some level of property tax expense accrued when the tax bill arrives Property taxes are usually billed annually The monthly adjustments are based on an estimate of the final tax bill Depending on timing, firms will often have some level of property tax expense accrued when the tax bill arrives In the following example, the firm has been accruing estimated property tax expense of $1,450 per month for 11 months. The final tax bill arrives with a total of $18,200 due. The final property tax expense entry brings the total payable up to the actual amount due. O11.3

23. ©CourseCollege.com 23 $18,200 — $15,950 to date = $2,250. Example Pay the accumulated property tax payable O11.3

24. ©CourseCollege.com 24 11.4 Short term notes are current liabilities, typically due in one year or less Two types: Interest bearing Face amount includes interest Short term notes are current liabilities, typically due in one year or less Two types: Interest bearing Face amount includes interest ST notes can be secured and unsecured Objective 11.4: Describe accounting for Short Term Notes Payable

25. ©CourseCollege.com 25 Examples are: 1.Cash for operations borrowed from a lender 2.Inventory purchased and directly financed with a note 3.Financing for nonoperating assets purchased such as equipment 4.Conversion of accounts payable to note payable Examples are: 1.Cash for operations borrowed from a lender 2.Inventory purchased and directly financed with a note 3.Financing for nonoperating assets purchased such as equipment 4.Conversion of accounts payable to note payable Short Term Notes Payable 11.4

26. ©CourseCollege.com 26 For interest bearing notes, calculate interest accrued using the following formula: With year end Dec 31, 2007, a 90 day note is signed Dec 1 for $60,000 at 8%: Interest expense and interest payable at year end: $60,000 x.08 x 30/360 = $400 Interest expense and additional interest payable at maturity: $60,000 x.08 x 60/360 = $800 With year end Dec 31, 2007, a 90 day note is signed Dec 1 for $60,000 at 8%: Interest expense and interest payable at year end: $60,000 x.08 x 30/360 = $400 Interest expense and additional interest payable at maturity: $60,000 x.08 x 60/360 = $800 Principal amount Annual Interest rate Time Period in years Interest XX = Short Term Notes Payable –Interest Bearing 2007 2008 11.4

27. ©CourseCollege.com 27 Interest bearing note -Example 11.4

28. ©CourseCollege.com 28 Short Term Notes Payable –Interest Bearing When the note is signed Adjusting entry at year end 11.4

29. ©CourseCollege.com 29 Short Term Notes Payable –Interest Bearing Interest expense for the first 30 days Journal entry at maturity and payoff 11.4

30. ©CourseCollege.com 30 At payoff, the note and interest payable are extinguished Interest expense for the last 60 days Short Term Notes Payable – Interest Bearing 11.4

31. ©CourseCollege.com 31 No stated interest rate Face amount of the note includes the interest that will be due at maturity Contra liability account used to record the difference No stated interest rate Face amount of the note includes the interest that will be due at maturity Contra liability account used to record the difference Short Term Notes Payable –Face amount includes interest 11.4

32. ©CourseCollege.com 32 Discount on Short Term Notes Payable (10) Carrying value 100 The net effect or “weight” on the balance sheet is called the carrying value Short Term Notes Payable 110 Short Term Notes Payable –Face amount includes interest 11.4

33. ©CourseCollege.com 33 Discount on Short Term Notes Payable (10) Carrying value 100 In this example, this amount will become the interest due at maturity Short Term Notes Payable 110 Short Term Notes Payable –Face amount includes interest 11.4

34. ©CourseCollege.com 34 Face amount includes interest -Example 11.4 Journal entry at inception

35. ©CourseCollege.com 35 Carrying value on April 1 is $1,050 —$50 = $1,000. Face amount includes interest -Example 11.4 At maturity

36. ©CourseCollege.com 36 Interest expense for the term of the note Face amount includes interest -Example The discount & note payable return to zero 11.4

37. ©CourseCollege.com 37 O11.5 Objective 11.5: Calculate & explain the AP payment period Accounts Payable Payment Period –The % of COGS represented by the Accounts Payable balance (expressed in the # days of the entire year). The fewer the number of days, the more diligent the firm is in making AP payments. 365 x (AP / Cost of Goods Sold for the year) = Accounts Payable Payment Period Accounts Payable Payment Period –The % of COGS represented by the Accounts Payable balance (expressed in the # days of the entire year). The fewer the number of days, the more diligent the firm is in making AP payments. 365 x (AP / Cost of Goods Sold for the year) = Accounts Payable Payment Period

38. ©CourseCollege.com 38 The AP payment period answers the following question: How many days is the firm expected to take to pay the present balance of Accounts Payable? AP payment period COGS AP AP payment period O11.5 The AP balance is the end of year total. COGS is for the year. X 365

39. ©CourseCollege.com 39 Example –AP payment period 186,000 / 478,800 x 365 = 142 O11.5

40. ©CourseCollege.com 40 End Unit 11