1 / 25

Payroll and Short-Term Liabilities: Accounting and Control

This chapter explores the accounting and management of current liabilities, including definite, estimated, and contingent liabilities. It also covers payroll functions, internal controls, and the calculation of gross and net earnings.

tjonathan
Download Presentation

Payroll and Short-Term Liabilities: Accounting and Control

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 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. CURRENT LIABILITIES 1. Definite 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. Date Particulars Debit Credit July 31 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 estimatedwarranty liability. ACHTUNG! Warranty Expense 1000 Estimated Warranty Payable 1000

  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 230 Income and resource taxes 36 Long-term debt due within one year 30 $301

  9. Payroll Accounting

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

  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 threefixed 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

  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 $2,163.15 ($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 $747.36 ($43,200 x 1.73%) • Max. employer contribution is $1,046.30 ($747.36 x 1.4)

  16. MANDATORY DEDUCTIONS • Your Portion • (2010) • TAX • In Ontario, the tax brackets are as follows:

  17. 29% 26% 22% 15% 0% • 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. As an example, assume this box represents an $80,000 annual salary.

  18. MANDATORY CONTRIBUTIONSEmployer’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.

  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. PAYROLLAn 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. July 31 Date Particulars Debit Credit JOURNALISING PAYROLL (2010) • Step 1: Record the Payroll expense and recognize all deductions from the employees’ pay cheques. Salaries Expense 4,166.67 Wages Expense 3,200.00 CPP Payable 324.20 EI Payable 117.64 Payroll Tax Payable 1,243.33 Union Dues Payable 147.33 Pension Contributions Payable 368.33 Salaries and Wages Payable 5,165.80 To record employee payroll deductions for the month and recognize salaries and wages expenses.

  22. July 31 Date Particulars Debit Credit JOURNALISING PAYROLL • Step 2: Record the employer’s mandatory top-up and contribution costs for CPP, EI, Worker’s Compensation and Vacation Pay. Employee Benefits Expense 930.92 CPP Payable 324.23 EI Payable 164.70 Worker’s Compensation Payable 147.33 Vacation Pay Payable 294.67 To record employer payroll costs and contributions for the month.

  23. Date Particulars Debit Credit July 31 JOURNALISING PAYROLL • Step 3: Pay your employees. Salaries and Wages Payable 5,165.80 Cash 5,165.80 To record payment of employees for the month.

  24. Aug 31 Date Particulars Debit Credit JOURNALISING PAYROLL • Step 4: When the time comes, remit the taxes and benefits to the appropriate governments and organizations. Example: CPP Payable 648.45 EI Payable 282.34 Payroll Tax Payable 1,243.33 Worker’s Compensation Payable 147.33 Cash 2,321.45 Union Dues Payable 147.33 Cash 147.33 Pension Contrib. Payable 368.33 Cash 368.33

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

More Related