1. Current Liabilities and Payroll
Chapter 11
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

2. Objectives 1. Account for current liabilities of known amount.
2. Account for current liabilities that must be estimated
3. Calculate payroll amounts
4. Record basic payroll transactions
5. Use a payroll system
6. Record current liabilities on the statement of financial position 8

3. Account for current liabilities
Objective 1
Account for current liabilities
of known amount. 8

4. Accounts Payable...
are amounts owed to suppliers for goods or services purchased on account.
Accounts payable do not bear interest expense for the debtor.

5. Accounts Payable Example
Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Woo Wholesaler.
What is the journal entry?
Inventory , Accounts Payable ,000
Purchase inventory on account

6. Short-Term Bills Payable...
are promissory notes payable due within one year.
In addition to recording the bill payable, the business must also pay interest expense.
If interest expense is accrued at the end of the period, interest payable must also be recorded.

7. Short-Term Bills Payable Example
On May 30, Woo purchased inventory for $10,000 by issuing a 90-day, 10% bill payable.
What is the journal entry?
Inventory 10,000
Bills Payable 10,000
Purchase inventory on a 90-day, 10% bill

8. Short-Term Bills Payable Example
Assume the accounting period ended June 30.
How much interest was accrued as of June 30?
$10,000 × 10% × 31/360 = $86.11
How does Woo record the payment at maturity?

9. Short-Term Bills Payable Example
August 29
Bill Payable ,000.00
Interest Payable
Interest Expense
Cash ,250.00

10. Short-Term Bills Payable Issued at a Discount
Issuing a bill at a discount means the bank subtracts the interest from the bill’s face value.
Suppose that on February 25, Sarah discounts a $10,000, 90-day bill, payable to the bank at 12%.
The business will receive $9,700.
$10,000 × 0.12 × 90/360 = $300

11. Short-Term Bills Payable Issued at a Discount
February 25
Cash ,700
Bill Payable, Short-Term 9,700
Discount a $10,000, 90-day,
10% bill payable to borrow cash

12. Short-Term Bills Payable Issued at a Discount
Sarah’s
Statement of Financial Position
Current liabilities:
Bill payable, short-term $ 9,700

13. Short-Term Bills Payable Issued at a Discount
What is the accrued interest at the end of the month?
$10,000 × 12% × 3/360 = $10
February 28
Interest Expense
Bill Payable
Accrue interest expense at month end

14. Short-Term Bill Payable Issued at a Discount
An alternative is to record the discount at the time it of issued February 25
Cash ,700
Discount on Bill Payable
Bill Payable, Short-Term ,000
Discount a $10,000, 90-day,
10% bill payable to borrow cash

15. Short-Term Bills Payable Issued at a Discount
Sarah’s
Statement of Financial Position
Current liabilities:
Bill payable, short-term $10,000
Less: Discount on bill payable
Bill payable, short-term, net $ 9,700

16. Short-Term Bills Payable Issued at a Discount
What is the accrued interest at the end of the month?
$10,000 × 12% × 3/360 = $10
February 28
Interest Expense
Discount on Bill Payable 10
Accrue interest expense at month end

17. Goods and Services Tax Payable Example
Australia has a 10% GST on most goods and services.
Suppose that a store sold $3,000 worth of inventory on a given day.
The business collected an additional 10% in GST.
How much is the GST liability?
$300

18. Accrued Expenses (Liabilities)...
are expenses that have been incurred but not recorded.
salaries
taxes withheld
interest
utilities (electricity, gas, waste disposal)

19. See exhibit 11-2 page 455 of your textbook
Payroll Liabilities
Salary Expense ,000
Employee Income Tax Payable 1,200
Employee Union Fees Payable
Salary Payable ,660
To record salary expense
See exhibit 11-2 page 455 of your textbook

20. Unearned Revenue Example
Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August.
June 1
Cash ,500
Unearned Revenue 1,500
Received cash in advance

21. Unearned Revenue Example
What entry does Dennis record on June 30?
June 30
Unearned Revenue 500
Service Revenue
Earned service revenue that was collected in advance

22. Account for current liabilities
Objective 2
Account for current liabilities
that must be estimated.

23. Estimated Warranty Payable
The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.

24. Estimated Warranty Payable Example
Woo Wholesaler made sales of $1,000,000 subject to product warranties.
In the past years, claims have averaged 2%.
Warranty Expense ,000
Estimated Warranty Payable 20,000
To accrue warranty expense

25. Estimated Warranty Payable Example
On July 28, a customer returned a defective product and was given a $300 refund (or given a new product – cost $300).
Estimated Warranty Payable 300
Cash (Inventory)
To record refund under warranty

26. Estimated Holiday Pay Liability Example
Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and holiday pay adds 8% (4 weeks of annual vacation divided by 50 workweeks each year).
How much vacation pay should be accrued?

27. Estimated Holiday Pay Liability Example
March 31
Vacation Pay Expense
Estimated Vacation Pay Liability 800
To accrue vacation expense

28. Income Tax Payable
What is the entry a company makes to accrue $50,000 of income tax expense for a one-year period?
Income Tax Expense 50,000
Income Tax Payable ,000
To accrue income tax at year end

29. See Qantas example in your textbook page 458
Contingent Liability
A contingent liability is a potential liability
The AASB1040 requires details of a contingent liability must be disclosed in the notes to the financial statement
See Qantas example in your textbook page 458

30. Calculate payroll amounts.
Objective 3
Calculate payroll amounts.

31. Payroll
Ordinary time is the base rate paid to employees for a set number of hours.
Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the ordinary rate).

32. Gross Pay and Net Pay
Gross Pay
Deductions
Net Pay

33. Income Tax and Medicare Levy
The tax deducted from your salary has two components:
Income Tax (no tax on first $6,000 then 17% up to $20,000 ….. 47% on amounts over $60,000 – called marginal progressive)
Medicare Levy (1.5% applied to all employee earnings – if earning more than about $15,000)

34. Payroll Taxes State government tax
Paid by businesses who have annual salaries above a threshold amount ($500,000 - $1,000,000 depending on the state).
Paid by the employer in addition to gross salary.

35. Breakdown of Payroll Costs
Employer payroll tax
to state government
$110
Employer cost of
superannuation.
$90
Employer disburses $1,200
Net pay to
employee
$750
Employee income
tax & medicare to ATO
$230
Employee
union fees
$20
Employee Gross Pay – $1,000

36. Objective 4
Record basic payroll
transactions.

37. Salary Expense
Salary expense to the employer is the gross salary of all employees.
Employees pay their own income tax, Medicare levy as well as union fees.
The employer serves as a collecting agent and sends these amounts to the Australian Taxation Office and union.

38. To Record Salaries Expense:
Salary Expense
Employee Income Tax Payable
Employees Union Fees Payable
Salary Payable to Employees (take-home pay)

39. To Record Salaries Expense:
Payroll Tax Expense
Payroll Tax Payable
Health Insurance Expense for Employees
Life Insurance Expense for Employees
Superannuation Expense
Employee Benefits Payable
See exhibit 11-6 page 463 of your textbook

40. Objective 5
Use a payroll system.

41. Payroll System Components
payroll record
payroll bank account
payroll cheques
earnings record (for each employee)

42. Payroll Record... is also referred to as the payroll journal.
It lists payroll data for each employee.
It serves as a cheque register.
It provides information for recording payroll expenses and related deductions (withholdings).

43. Payroll Bank Account
When companies use a payroll bank account, the company draws one cheque for the net amount of salary payable to employees on its regular bank account.
The company deposits this cheque in the special payroll bank account.

44. Payroll Bank Account
The company writes pay-cheques to employees out of the payroll account.
When the pay-cheques clear the bank, the payroll account has a zero balance.
Disbursing pay-cheques from a separate bank account isolates net pay for analysis and control.

45. Paying the Payroll
When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash.
The liabilities to the government, unions, and other parties is also debited when cash is paid.

46. Paying the Payroll
Assume the following journal entry was made at the end of an accounting period:
Salary Expense ,000
Employee Income Tax Payable ,000
Employee Union Fees Payable ,000
Salary Payable to Employees ,000

47. Paying the Payroll
What is the journal entry when the employer pays these liabilities?
Employee Income Tax Payable 55,000
Employee Union Dues Payable ,000
Salary Payable to Employees 124,000
Cash ,000

48. Internal Control over Payrolls
controls for efficiency
controls for safeguarding payroll payments

49. Controls for Efficiency
making payroll payments from one payroll bank account in one month and from another the next (less of a problem with electronic funds transfers)
following established policies for hiring and firing employees
complying with government regulations
testing employees for their interest in the job and their skills to perform the job

50. Controls for Safeguarding Payroll Payments
Large organisations must establish controls to ensure that payroll payments are made only to legitimate employees.
Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing pay cheques.

51. Controls for Safeguarding Payroll Payments
Requiring an identification badge bearing an employee’s photograph also helps internal control (especially access control).
A formal time-keeping system helps ensure that employees have actually worked.

52. Report current liabilities
Objective 6
Report current liabilities
on the statement of
financial position

53. Report Current Liabilities
Companies report current liabilities on the statement of financial position.
current liabilities of known amount (payroll)
current liabilities that must be estimated (warranties)

54. Report Current Liabilities
At the end of the year, companies report the amount of payroll liabilities owed to all parties.
The liability at year end is the amount of the payroll expense that is still unpaid.

55. Liabilities of Known Amount
accounts payable
short-term bills payable
GST payable
current portion of long-term debt
accrued expenses (payable)
unearned revenues

56. Estimated Liabilities
warranty payable
income tax payable
holiday pay liability

57. End of Chapter 11