Determinable certain current liabilities Operating line of credit and bank overdraft Shortterm notes payable Sales and property taxes Current maturities of longterm debt Uncertain liabilities ID: 627572
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Current Liabilities & Payroll
Determinable (certain) current liabilitiesOperating line of credit and bank overdraftShort-term notes payableSales and property taxesCurrent maturities of long-term debtUncertain liabilitiesEstimated liabilitiesContingenciesPayrollEmployer and employee payroll costsRecording payrollFinancial statement presentation
Copyright John Wiley & Sons Canada, Ltd.
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CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Determinable (Certain)
Current LiabilitiesObligations that are expected to be settled:Within one year of the balance sheet date, orWithin normal operating cycleRequires existence of a present obligationDeterminable liabilities have known amount, payee, due dateCopyright John Wiley & Sons Canada, Ltd.4Slide5
Operating Line of Credit
Pre-authorized borrowingAllows the company to borrow up to a preset limit when neededMay require collateral (security)Such as current assets, investments, or property, plant and equipmentUsed on a short-term basisNegative (overdrawn) cash balance is called bank indebtedness, bank overdraft or bank advancesCopyright John Wiley & Sons Canada, Ltd.
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Short-Term Notes Payable
Obligations in the form of written promissory notesUsually require the borrower to pay interestUsed instead of accounts payableGives lender proof of obligation in case legal action is needed to collectIssued for varying periodsIf due within one year of the balance sheet date, classified as current liabilitiesCopyright John Wiley & Sons Canada, Ltd.
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Short-Term Notes Payable 2
Interest is recorded in the period the loan is outstanding:At maturity, the face value of the note plus interest must be repaid:Copyright John Wiley & Sons Canada, Ltd.7Slide8
Sales Taxes
Expressed as a percentage of the sales price of goods sold to customersIncludes goods and service tax (GST), provincial sales tax (PST) and harmonized sales taxes (GST and PST combined into the HST)Remitted to government monthly, quarterly or annuallyAmounts paid by customers for sales tax are not considered revenue, but are credited to Sales Tax PayableCopyright John Wiley & Sons Canada, Ltd.
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Property Taxes
Paid for a calendar yearUpon receipt of the property tax bill, an expense is recorded for the months that have passed:When paid, expense is recorded for additional months that have passed, and prepaid is set up for remaining monthsPrepaid is cleared to expense at the end of yearCopyright John Wiley & Sons Canada, Ltd.
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Current Maturities of Long-Term Debt
The portion of long-term debt that is due within the current yearAmount not due within current year is disclosed as a long-term liabilityNo adjusting entry is required to recognize the current portion of long-term debtThe proper classification is made when the balance sheet is preparedCopyright John Wiley & Sons Canada, Ltd.10Slide11
CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Estimated Liabilities
Obligation exists but the amount and timing is uncertainWe owe someone, but not sure how much, when or even whoLiability is recognized when:Settlement of the liability is likely, andAmount of the liability can be reasonable estimatedCopyright John Wiley & Sons Canada, Ltd.12Slide13
Product Warranties
Promises made by seller to buyer to repair or replace a product if it is defective or does not perform as intendedWarranties will lead to future costs for replacement or repair of defective unitsCost of warranty is estimated and accrued based on prior experienceCopyright John Wiley & Sons Canada, Ltd.13Slide14
Result in an estimated liability:
Not known if or when rewards will be redeemedIf redemptions are likely, and can be estimated based on past experience:Record estimated liability as a reduction in revenue (not an expense)Sales discount is a contra revenue accountCustomer Loyalty Programsand Gift CardsCopyright John Wiley & Sons Canada, Ltd.
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CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Contingent Liabilities (or Provisions)
Record liability if both conditions are met:It is likely (or probable (“more likely than not”) under IFRS) that an obligation exists, andAmount can be reasonably estimatedIf contingent loss is likely, but cannot be reasonably estimated:No liability is recordedDisclosed in the notes to the statementsIf contingency is unlikely:Still disclosed if event is substantial, otherwise not disclosed
Copyright John Wiley & Sons Canada, Ltd.
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CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Payroll Accounting
More than paying employee salaries and wagesCompanies are required by law:To have payroll records for each employeeTo report and remit payroll deductionsTo respect federal and provincial lawsTwo types of payroll costs:Employee costs: amounts paid to employees (gross pay) & amounts paid by employees (payroll deductions)Employer costs: amounts paid by employer on behalf of the employee (
employee benefits)
Copyright John Wiley & Sons Canada, Ltd.
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Gross Pay (or Gross Earnings)
The total compensation earned by an employeeConsists of:Wages = hours worked x hourly rate of pay, orSalaries: based on a weekly, biweekly, monthly or annual rateBonusesCommissionsCopyright John Wiley & Sons Canada, Ltd.19Slide20
Payroll Deductions
The difference between gross pay and the amount actually received (net pay)Mandatory payroll deductions:Required by lawPersonal income tax, Canada Pension Plan (CPP) and Employment Insurance (EI)Determined from payroll deduction tablesVoluntary payroll deductions:For charitable causes, retirement, and other purposesShould be authorized in writing by the employeeDo not result in a payroll expense to the employerCopyright John Wiley & Sons Canada, Ltd.
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Employer Payroll Costs
Amounts an employer is required to payRequired by governments:CPP (matching the employee contribution)EI (1.4 x the employee contribution)Workplace safety and healthAdditional employee benefits:Paid absences: sick days, vacation, holidaysPost-employment benefits: to retired employeesThese benefits give rise to liabilities that must be accruedCopyright John Wiley & Sons Canada, Ltd.
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Recording the Payroll
Involves:Maintaining payroll recordsRecording payroll expenses and liabilitiesPaying the payroll, and Filing and remitting payroll deductionsPayroll RecordsA separate earnings record is kept for each employeePayroll register may be used to accumulate gross earnings, deductions & net pay by employee for each periodCopyright John Wiley & Sons Canada, Ltd.22Slide23
Recording Payroll Expenses
and LiabilitiesEmployee payroll costs:Entry for the employee portion of a payrollThe company’s expense is equal to total gross payEmployee payroll deductions become current liabilities of the company until remittedCopyright John Wiley & Sons Canada, Ltd.23Slide24
Recording Payroll Expenses
and Liabilities 2Employer payroll costs:Recorded when the payroll is journalized Become current liabilities of the company until remittedCopyright John Wiley & Sons Canada, Ltd.24Slide25
Recording Payment of the Payroll
Payment of payroll is either by cheque or electronic funds transfer (EFT)Entry to record payment of payroll deductions:Copyright John Wiley & Sons Canada, Ltd.25Slide26
CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Financial Statement Presentation
Current liabilities are the first category reported in the liabilities section of the balance sheetEach type of current liability is listed separatelyListed in order of liquidity, usually by maturity dateAlso common to show bank loans, notes payable and accounts payable first regardless of sizeTerms of operating lines of credit, notes payable and other information are disclosed in the notesCopyright John Wiley & Sons Canada, Ltd.27Slide28
CHAPTER 10:
Current Liabilities and PayrollAccount for determinable or certain current liabilities.Account for estimated liabilities.Account for contingencies.Determine payroll costs and record payroll transactions.Prepare the current liabilities section of the balance sheet.Calculate mandatory payroll deductions (Appendix 10A).Copyright John Wiley & Sons Canada, Ltd.
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Appendix 10A: Mandatory
Payroll DeductionsCanada Pension Plan (CPP) contributions:Calculated as a percentage of earnings (contribution rate) over a set minimum (basic exemption) to a maximum amount of earnings (maximum pensionable earnings)Pro-rated per pay periodEmployment Insurance (EI) contributions:Calculated as a percentage of earnings to a maximum amount (maximum insurable earnings)No basic exemptionNot pro-rated: deducted from pay until reach maximum
Copyright John Wiley & Sons Canada, Ltd.
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Appendix 10A: Mandatory
Payroll Deductions 2Personal income tax deductions:Based on tax rates set by federal and provincial governmentsProgressive rates: higher percentage rates for higher income levelsComplicated calculations:Best done using deduction tables or automated tools provided by the Canada Revenue AgencyCopyright John Wiley & Sons Canada, Ltd.30Slide31
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Prepared by:
A. Davis,
MSc
,
BComm
, CA, CFE
Copyright
Copyright
John Wiley & Sons Canada, Ltd.