1. Chapter 11 Payroll Liabilities
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

2. Dave Ludwick, P.Eng, MBA, PMP, PhD
In this chapter…
Balance Sheet
Current Assets
Cash
10000
Current Liabilities
Accounts Payable
Chapter
5000
Accounts Receivable
20000
Wages Payable 11
18500
Notes Receivable
15000
EI Payable
550
Marketable Securities
25000
CPP Payable
1400
Inventory
120000
Tax Payable
3550
Capital Assets
Other Ded. Payable
1000
Equipment
250000
Utilities Payable
2000
Buildings
500000
Long-Term Debt
620000
Goodwill
60000
Owner’s Equity
348000
Total Assets
Total Liabilities + OE
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

3. Dave Ludwick, P.Eng, MBA, PMP, PhD
Payroll Accounting
Payroll Accounting is responsible for:
Recording cash payments made to employees
Providing information about labour costs
For many companies, labour cost is their most consistent and costly expense
Accounting for amounts withheld from employee pay
Accounting for employee benefits
Providing means through which employers can comply with government regulations regarding employee compensation
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

4. Dave Ludwick, P.Eng, MBA, PMP, PhD
Payroll Deductions
Payroll deductions are amounts withheld from the wages of employees
note: amounts are withheld from wages actually paid
The amount withheld is determined by
their wage amount
The amount of personal tax credits
A look-up table is supplied by CCRA to help employers calculate the amount to be withheld based on the above
Employers remit withholdings monthly
The amount of personal tax credits is determined when the employee completes their TD1 form
A TD1 form is usually completed by an employee within the first few days of starting work with the employer.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

5. Canada Pension Plan (ignore QPP)
Every working person between ages 18 and 70 must pay CPP
The deduction is based on a percentage of wages to a maximum amount (now $50,100 , but use your books number of $42,800)
The employer matches 100% the employee contribution and remits both
Self-employed individuals must make the remittance for both the employee and employer
An easy way to calculate CPP
Determine the amount of pay (in terms of weeks or months)
Determine exemption amount
If paid in weeks, take $3500 / 52 weeks = $67.31 / week exemption
If paid in months, take $3500 / 12 months = $ / month exemption
CPP Deduction = (the weekly or monthly pay - exemption) * .0495
Employer contribution = Employee CPP deduction
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

6. Dave Ludwick, P.Eng, MBA, PMP, PhD
Employment Insurance
EI coverage is extended to all Canadians who are not self-employed
Employers must deduct and amount based on a percentage of gross income to a maximum amount (now $45,900, but use the books number of $42300).
Employers must pay an amount 1.4 times that of the employees’ amount and remit the combined amount.
An easy way to calculate EI deductions
Determine the amount of pay
EI Deduction = * amount of pay
Note the rate is currently , but use the books rate of
Employer contribution = Employee contribution * 1.4
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

7. Dave Ludwick, P.Eng, MBA, PMP, PhD
Income Tax
Income taxes vary by province due to the provincial amount
Easiest way to calculate Income Tax is to use look-up tables
Determine how the employees are paid (monthly or weekly)
Determine the individual employees’ TD1 Claim Code
Ensure you are using the right look-up tables
There are look-up tables for monthly or weekly amounts – choose the right one
Look up the federal amount for the proper TD1 Claim Code
Look up the provincial amount for the proper TD1 Claim Code
Add ‘em up,
Income Tax Deduction = Fed Amount + Prov Amount
There is no employer contribution for tax. They pay their own taxes.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

8. Dave Ludwick, P.Eng, MBA, PMP, PhD
Withholding Tables
Wage bracket withholding tables make the calculation to determine amounts to be withheld for CCP (or QPP) and EI easy for employers.
The tables can be downloaded from a government website.
These tables are also available in electronic format so payroll and accounting software applications can use them.
These tables are updated on (usually) a semi-annual basis.
Exhibit 11.3 illustrates examples of deductions tables
The tables use gross pay (regular + overtime) as the look-up amount
The income tax deduction amounts are based on gross pay less amounts deducted for CPP and EI
In effect we are not taxed on amounts paid to CPP and EI
This is done for you if you use the tax tables
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

9. Dave Ludwick, P.Eng, MBA, PMP, PhD
T4 Form
The T4 Statement is the report that employers provide to CCRA and to employees that summarizes their gross wages and source deductions
It usually includes
Total Gross Wages
Taxable benefits received from employers
Income taxes withheld
Deductions for a registered pension
CPP contributions
EI deductions
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

10. Dave Ludwick, P.Eng, MBA, PMP, PhD
The Payroll Register
Payroll Register is a simple table that summarizes the pay given to the employees each pay
Exhibit 11.2 provides an example
It contains the following by employee name:
Hours worked (or salary earned)
Overtime (OT) hours if applicable
Calculates gross pay based on regular time and over time
Outlines amounts deducted for CPP, EI, and Tax
Shows net pay
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

11. Recording the Journal Entries
EI Payable, Income Tax Payable, CPP Payable and EI Payable are current liabilities the employer is responsible for
Salaries Payable is what is owed to employees on the next pay
Other deductions might be employee contributions to a health plan
Date
Account Titles and explanation PR
Debit
Credit
July 31
Salaries Expense
25000
EI Payable
550
Employees’ Income Tax Payable
3550
CPP Payable
1400
Wages Payable
18500
Other deductions Payable
1000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

12. Recording the Journal Entries
When actually paying the employees, the journal entry becomes
When paying out EI, CPP and Taxes, the journal entry is:
Date
Account Titles and explanation PR
Debit
Credit
July 31
Wages Payable
18500
Cash
Date
Account Titles and explanation PR
Debit
Credit
July 31
EI Payable
550
Employees’ Income Tax Payable
3550
CPP Payable
1400
Cash
5500
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

13. Mid-chapter Demo Problem
Lets try the Mid-chapter demo problem
Prepare a Payroll Register that summarizes 3 employees’ pay for the week
Determine the EI, CPP and Tax to be deducted
Illustrate how the other deductions are considered in the calculation of net pay
Show the journal entry for the 3 employees
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

14. Dave Ludwick, P.Eng, MBA, PMP, PhD
The Employer Side
For both CPP and EI, employers must supplement the amount paid by employees.
The amounts contributed by employers are remitted at the same time as those for employees and so are usually held in the same payables and expense accounts
These amounts are considered payroll related expenses and are recorded as EI or CPP Expenses (refer to page 561 for an example)
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

15. Dave Ludwick, P.Eng, MBA, PMP, PhD
Employee Benefits
Workers Compensation
Employers are required to insure their employees against injury or disability resulting from employment
Employer Contributions to Employee Insurance or Retirement
Sometimes employers will pay or will match employee contributions to a benefit. (Refer to bottom of p 563)
The amount may be calculated in a number of ways (% of income, set amount, etc), but the journal entry would be:
Date
Account Titles and explanation PR
Debit
Credit
May 30
Benefit Expense
550
Retirement Plan Payable
200
Eye Benefit Payable
350
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

16. Dave Ludwick, P.Eng, MBA, PMP, PhD
Vacation
Vacation Pay
Employers must allow vacation time.
Full time regular employees use the vacation allotment as time.
Contractors may be paid vacation allotment in advance
Some companies set up a vacation pay liability drawn on when employees go on vacation. Others just pay it as regular income when the employee is on vacation
Vacation pay is calculated as a % of gross earnings. Example:
If 2 weeks of vacation are offered per year, the percent of gross income allocated per pay period for vacation is
2/(52-2) = .04 or 4%
If 3 weeks are allowed
3/(52-3) = 6.12%
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

17. Journal Entries for Vacation
The employer assigns a vacation amount to a liability:
When employees take vacation, they draw on the liability and pay EI, CPP and Taxes:
Date
Account Titles and explanation PR
Debit
Credit
Oct 31
Benefits (or Wages) Expense
2500
Vacation Payable
Date
Account Titles and explanation PR
Debit
Credit
Dec 31
Vacation Payable
500
EI Payable
xxx
Employees’ Income Tax Payable
CPP Payable
Salaries Payable
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

18. Demonstration Problem
Check out the End of Chapter Demo problem
This is a good comprehensive problem
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD

19. Dave Ludwick, P.Eng, MBA, PMP, PhD
Exercises
Try Exercises
11-4
11-6
Try Problems
11-1A
11-3A
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD