1. Payroll and Short-Term Liabilities
CHAPTER 11
Payroll and Short-Term Liabilities

2. ACCOUNTING FOR CURRENT 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.

3. ACCOUNTING FOR CURRENT LIABILITIES
Types of liabilities
Definite
Estimated
Contingent

4. 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

5. CURRENT LIABILITIES 2. Estimated
Obligation that exists but the amount and timing is uncertain.
The company can reasonably estimate the value of the liability.
Example: warranty liabilities.

6. 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.
ACHTUNG!
Date
Particulars
Debit
Credit
July 31
Warranty Expense
Estimated Warranty Payable

7. CURRENT LIABILITIES 3. Contingent
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.
ACHTUNG!

8. 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
Income and resource taxes
Long-term debt due within one year
$301

9. Payroll Accounting

10. INTERNAL CONTROLS FOR PAYROLL
The primary objective of internal accounting control concerning payroll is
To safeguard company assets from unauthorized payrolls.
Payroll activities include:
Hiring employees
Timekeeping
Preparing the payroll
Paying the payroll
To prevent fraud, these functions should be assigned to different departments/people. 4
Functions
of Payroll

11. DETERMINING AND PAYING THE PAYROLL
Determining the payroll involves calculating
1. gross earnings,
2. payroll deductions, and
3. net pay.

12. GROSS & NET EARNINGS
Gross earnings is the total compensation earned by an employee.
There are three fixed types of gross earnings:
1. Wages (rate x hours worked)
2. Salaries (set amount)
3. Bonuses (discretionary)
Net pay (actually received) = Gross Pay – All deductions.

13. DEDUCTIONS There are two kinds: Mandatory deductions, consisting of:
Your share (deductions from your paycheque), and
Employer’s share (additional contributions and thus additional cost to company)
Voluntary Deductions 20

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

15. MANDATORY DEDUCTIONS Your Portion
(2010)
This is what you pay; it’s deducted from your paycheque by your employer.
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, ($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 $ ($43,200 x 1.73%)
Max. employer contribution is $1, ($ x 1.4)

16. MANDATORY DEDUCTIONS Your Portion
(2010)
TAX
In Ontario, the tax brackets are as follows:
INCOME
FED. TAX
$0 - $10,382 0%
$10,382- $40,970
15%
$40,971 - $81,941
22%
$81,941 – 127,021
26%
$127,022+
29%
INCOME
ONT. TAX
$0 - $8,943 0%
$8,943 - $37,106
5.05%
$37,107 - $74,214
9.15%
$74,214 +
11.16%

17. As an example, assume this box represents an $80,000 annual salary.
MANDATORY DEDUCTIONS
Your Portion
(2006)
Federal Tax (as an example) is calculated based on a specific rate for each segment of your income. They’re called tax brackets. 0%
15%
22%
26%
29%
As an example, assume this box represents an $80,000 annual salary.

18. 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. 21

19. 2. VOLUNTARY DEDUCTIONS Voluntary deductions concern:
Charitable donations,
Savings for retirement, and
Other purposes such as union dues etc.
The employee must authorize all payroll deductions
They do not result in an expense to the employer. 20

20. Calculate the payroll for this month for the following two employees:
PAYROLL An Exercise
Calculate the payroll for this month for the following two employees:
Employee #1 Annual Salary: $50,000
Employee #2 Hours worked: 160
Hourly rate: $20
Assume worker’s compensation is 2%, union dues is 2%, and pension deductions (RRSP) are 5% of gross pay.

21. JOURNALISING PAYROLL
(2010)
Step 1: Record the Payroll expense and recognize all deductions from the employees’ pay cheques.
Date
Particulars
Debit
Credit
July 31
Salaries Expense ,166.67
Wages Expense ,200.00
CPP Payable
EI Payable
Payroll Tax Payable ,243.33
Union Dues Payable
Pension Contributions Payable
Salaries and Wages Payable ,165.80
To record employee payroll deductions for the month and recognize salaries and wages expenses.

22. JOURNALISING PAYROLL
Step 2: Record the employer’s mandatory top-up and contribution costs for CPP, EI, Worker’s Compensation and Vacation Pay.
Date
Particulars
Debit
Credit
July 31
Employee Benefits Expense
CPP Payable
EI Payable
Worker’s Compensation Payable
Vacation Pay Payable
To record employer payroll costs and contributions for the month.

23. JOURNALISING PAYROLL Step 3: Pay your employees.
Date
Particulars
Debit
Credit
July 31
Salaries and Wages Payable ,165.80
Cash ,165.80
To record payment of employees for the month.

24. JOURNALISING PAYROLL
Step 4: When the time comes, remit the taxes and benefits to the appropriate governments and organizations. Example:
Date
Particulars
Debit
Credit
Aug 31
CPP Payable
EI Payable
Payroll Tax Payable ,243.33
Worker’s Compensation Payable
Cash ,321.45
Union Dues Payable
Cash
Pension Contrib. Payable
Cash

25. Do Problems:
P11-1A
P11-7A
P11-8A