CHAPTER 11 Payroll and Short-Term Liabilities A current liability is a debt that can reasonably be expected to be paid 1. from existing current assets.

CHAPTERCHAPTER

1111

Payroll and Short-Term Payroll and Short-Term LiabilitiesLiabilities

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.

ACCOUNTING FOR ACCOUNTING FOR CURRENT LIABILITIESCURRENT LIABILITIES

ACCOUNTING FOR CURRENT ACCOUNTING FOR CURRENT LIABILITIESLIABILITIES

Types of liabilities1) Definite

2) Estimated

3) Contingent

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

CURRENT LIABILITIESCURRENT LIABILITIES

1. Definite1. Definite


1. Definite1. Definite

Obligation that exists but the amount and timing is uncertain.

The company can reasonably estimate the value of the liability.

Example: warranty liabilities.


2. Estimated2. Estimated


2. Estimated2. Estimated

PRODUCT WARRANTIESPRODUCT WARRANTIESPRODUCT WARRANTIESPRODUCT 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.

Date Particulars Debit CreditJuly 31 Warranty Expense 1000

Estimated Warranty Payable 1000

ACHTUNG!

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:

1. The contingency is likely, and

2. The amount of the contingency can be reasonably estimated.


3. Contingent3. Contingent


3. Contingent3. Contingent

ACHTUNG!

FINANCIAL STATEMENT FINANCIAL STATEMENT PRESENTATIONPRESENTATION

FINANCIAL STATEMENT FINANCIAL STATEMENT PRESENTATIONPRESENTATION

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 $ 5Accounts payable and accrued liabilities 230Income and resource taxes 36Long-term debt due within one year 30

$301

INTERNAL CONTROLS FOR PAYROLLINTERNAL CONTROLS FOR PAYROLLINTERNAL CONTROLS FOR PAYROLLINTERNAL CONTROLS FOR PAYROLL The primary objective of internal accounting

control concerning payroll is – To safeguard company assets from

unauthorized payrolls.

Payroll activities include:1. Hiring employees2. Timekeeping3. Preparing the payroll4. Paying the payroll

To prevent fraud, these functions should be assigned to different departments/people.

4 Functionsof Payroll

DETERMINING AND PAYING DETERMINING AND PAYING THE PAYROLLTHE PAYROLL

DETERMINING AND PAYING DETERMINING AND PAYING THE PAYROLLTHE PAYROLL

Determining the payroll involves calculating

1. gross earnings,

2. payroll deductions, and

3. net pay.

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.

GROSS & NET EARNINGSGROSS & NET EARNINGSGROSS & NET EARNINGSGROSS & NET EARNINGS

DEDUCTIONSDEDUCTIONSDEDUCTIONSDEDUCTIONS

There are two kinds:1. Mandatory deductions, consisting of:

– Your share (deductions from your paycheque), and

– Employer’s share (additional contributions and thus additional cost to company)

2. Voluntary Deductions

1. MANDATORY DEDUCTIONS1. MANDATORY DEDUCTIONS

Mandatory deductions consist of:– Canada Pension Plan (CPP, or QPP in

Quebec),– Employment insurance (EI) and – Personal Income tax.

MANDATORY DEDUCTIONSMANDATORY DEDUCTIONSYour PortionYour Portion

(2010)(2010)


(2010)(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)

TAX– In Ontario, the tax brackets are as follows:

INCOME ONT. TAX

$0 - $8,943 0%

$8,943 - $37,106 5.05%

$37,107 - $74,214 9.15%

$74,214 + 11.16%


(2010)(2010)


(2010)(2010)

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%

Federal Tax (as an example) is calculated based on a specific rate for each segment of your income. They’re called tax brackets.


(2006)(2006)


(2006)(2006)

0

20000

40000

60000

80000

100000

120000

$80,000 Salary

$118,285 +

$72,756 - $118,285

$36,378 - $72,756

$9,039 - $36,378

$0 - $9,039

As an example, assume this box represents an $80,000 annual salary.

0%

15%

22%

26%

29%

MANDATORY CONTRIBUTIONSMANDATORY CONTRIBUTIONSEmployerEmployer’’s Shares Share

MANDATORY CONTRIBUTIONSMANDATORY CONTRIBUTIONSEmployerEmployer’’s Shares 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.

2. VOLUNTARY DEDUCTIONS2. VOLUNTARY DEDUCTIONS2. VOLUNTARY DEDUCTIONS2. 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.

PAYROLLPAYROLLAn ExerciseAn 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.

JOURNALISING PAYROLLJOURNALISING PAYROLL(2010)(2010)

JOURNALISING PAYROLLJOURNALISING PAYROLL(2010)(2010)

Date Particulars Debit CreditJuly 31 Salaries Expense 4,166.67

Payroll Tax Payable 1,243.33

Wages Expense 3,200.00CPP Payable 324.20EI Payable 117.64

Union Dues Payable 147.33

Salaries and Wages Payable 5,165.80Pension Contributions Payable 368.33

To record employee payroll deductions for the month and recognize salaries and wages expenses.

• Step 1: Record the Payroll expense and recognize all deductions from the employees’ pay cheques.

Date Particulars Debit CreditJuly 31 Employee Benefits Expense 930.92

Worker’s Compensation Payable 147.33

CPP Payable 324.23EI Payable 164.70

Vacation Pay Payable 294.67

To record employer payroll costs and contributions for the month.

• Step 2: Record the employer’s mandatory top-up and contribution costs for CPP, EI, Worker’s Compensation and Vacation Pay.

JOURNALISING PAYROLLJOURNALISING PAYROLLJOURNALISING PAYROLLJOURNALISING PAYROLL

Date Particulars Debit CreditJuly 31 Salaries and Wages Payable 5,165.80

Cash 5,165.80

To record payment of employees for the month.

• Step 3: Pay your employees.



• Step 4: When the time comes, remit the taxes and benefits to the appropriate governments and organizations. Example:

Date Particulars Debit CreditAug 31 CPP Payable 648.45

EI Payable 282.34

Cash 2,321.45

Union Dues Payable 147.33

Payroll Tax Payable 1,243.33Worker’s Compensation Payable 147.33

Pension Contrib. Payable 368.33

Cash 147.33

Cash 368.33

Do Problems:

P11-1A

P11-7A

P11-8A

CHAPTER 11 Payroll and Short-Term Liabilities A current liability is a debt that can reasonably be expected to be paid 1. from existing current assets.

Documents

warranty liabilities

contingent current liabilities

definite current liabilities

estimated slide

contingent liabilities

accrued liabilities

contingent slide

functions of payroll