Chapter 11: Current Liabilities and Payroll Accounting Flashcards
Employer Payroll Taxes
- FICA - employer matches employee’s contributions
- Federal (FUTA) and State (SUTA) unemployment tax
All computed based on wages
2021 Rates:
FICA: 6.2% social security (up to first $142,800 gross wages), 1.45% medicare
FUTA- 6% on first $7K of wages
SUTA (NY)- 4.025% base wage $11,800
(can get credits for paying FUTA on time)
Current Liability
Debt that:
- company expects to pay from existing current assets or the creation of other current liabilities
- company will pay debt in one yeat or one operating cycle (whichever is longer)
Includes: notes payable, accounts payable, unearned revenue, taxes payable, salaries payable, interest payable
“Fringe Benefits”
Employer Paid Taxes
Paid vacations
Pensions
etc…
Types of Pension Plans
Defined-contribution plan:
- Employer contribution is fixed
- benefits based on plan value
- Risk borne by employees
Defined-benefit plan:
- benefit fixed by plan
- Employer contribution varies
- Risk borne by employer
Actuaries estimate employer contribution- recorded by company as expense.
Post Retirement Benefits
Benefits provided to retired employees (health insurance, insurance, pensions)
- These costs are estimated and expensed during employee’s working years
However, funds are rarely set up to meet these benefits as the company does not receive a tax deduction until the medical bill is paid
Usually managed through a pension plan administratior
Internal control for payroll
- Documenting authorized employees
- Multiple people verify amounts and supervisors approves
- Treasurer signs and distributes pre-numbered checks
- Supervisors monitor hours and time cards
Filing and Remitting Payroll Tax
FICA and Federal income tax withheld: reported no later than one month following close of each quarter.
Fed unemployment = annually on or before January 31st of the following year
State Unemployment= by EOM following each quarter
W2 (Wage and tax statement) to employees by January 31st of the following year
Payroll Deductions
Mandatory: - FICA tax (SS & Medicare) - Federal Income Tax - State Income Tax (+ city and local) Income tax deductions determined by rate and allowances
Potential:
- Insurance
- Pensions
- Retirement / 401K
- Dues
- Charity
Payroll Register
A combined record of all payroll amounts
Employee Earnings Record
A cumulative record of each employee’s gross earnings, deductions and net pay in a year
Net Pay
Gross earnings less payroll deductions
Gross Earnings
Total compensation earned by employee
Wage or Salary + overtime + bonuses + commissions
Payroll
Wages and Salaries
contractor fees are not payroll, not subject to government regulations re: employees
Contingent Liabilities
A potential liability that may become an actual liability in the future
Likelihood of a future event determines recording treatment
Warranty liability is a contingent liability
Liquidity
Ability to pay maturing obligations and meet any unexpected needs for cash
Current Maturities of Long Term Debt
Any portion of long-term debt that comes due in the current year
No adjusting entry, just spot on the balance sheet is updated.
Shown as “long-term debt due within one year” in current liabilities section
Financing Cost
AKA: interest expense
Notes Payable
- Written promissory note
- Requires borrower to pay interest
- Face value of the note = assets received
- Interest is the cost for delaying payment
Sales Tax Payable
- Collected from the customer when the sale occurs and periodically remitted to the state.
- Stated as a percentage of sales price
- If calculated as part of total receipts must be separate out
Sales = cash receipts / (1+ sales tax %)
Sales tax = cash receipts - sales
Recording payroll
To Accrue:
Debit Salaries / Wages expense
Credit Deduction Payables
Credit Salaries/ Wages payables
- Use payroll register as source document
When paid:
Debit Salaries / Wages Payable
Credit Cash
Warranty Liability (Contingency)
Matching principal: must include estimated cost of honoring product warranty contracts as an expense in the same period where the sale occurs.
Debit Warranty Expense
Credit Warranty Liability
If/When warranty honored:
Debit Warranty Liability
Credit Repair Parts Inventory
(no expense because the expense has already been recognized)
Recording Contingency liabilities
3 probability levels under GAAP
Probable: likely to occur
- Record IF amount can be reasonably estimated (if they cannot, then disclose in the notes)
Reasonably Probable: could occur
- Disclose in notes
Remote: unlikely to occur
- Not required to diclose
Journaling Unearned Revenue
When cash is received:
Debit Cash
Credit Unearned Revenue
When revenue earned
Debit Unearned Revenue
Credit Revenue
Journaling Sales Tax Payable
Debit Cash (or Accounts Receivable)
Credit Sales Revenue
Credit Sales Tax Payable
Journaling Notes Payable
to accrue interest expense:
Debit Interest Expense
Credit Interest Payable
At Maturity:
Debit Notes Payable (zero out)
Debit Interest Payable (zero out)
Credit Cash (payment amount)
Paid Absences Liability
Accrued because payment is probable AND reasonably estimated
Accrual adjusting entry:
Debit Vacation Benefits Expense
Credit Vacation Benefits Liability
Benefits paid:
Debit Vacation Benefits Liability
Credit Cash
Recording payroll tax expense
Debit Payroll Tax Expense
Credit FICA Taxes payable
Credit FED unemployment Taxes payable
Credit state unemployment taxes payable
Current Liabilities on Balance Sheet
Notes Payable
Accounts Payable
Then in order of magnitude (largest to smallest)
Financial statements when long term debt matures
On the balance sheet show under current liabilities as “long-term debit due within one year”
Some notes may have portions reported as current as well as portions reported as long-term
Sales (equation to separate sales revenue from taxes)
= total proceeds / (1+tax rate)
Current Ratio
Allows the comparison of the liquidity of differently sized companies, or of a single company at different points in time
= current assets / current liabilities
Working Capital
= current assets less current liabilities
Times Interest Earned Ratio
Evaluated a businesses ability to pay interest expense
= (Net income + income tax expense + interest expense)/ Interest expense
Aka Interest coverage ratio
High = ease of payments, low = difficulty
Analyzing Current Liabilities
Current Ratio and Working Capital
IASB & FASB Work together to:
Change definitions of: liabilities, equity and assets
IFRS Contingent Liabilities
Under IFRS
“Contingent liabilities”: Only possible obligations, not recognized in financial statement (though may be disclosed under certain criteria)
Recordable contingent liabilities = “provisions”
Measurement of an uncertain obligation based on best estimate of expenditure required to settle.
IFRS liabilties on balance sheet
Order: Sometimes liabilities before assets, sometimes long-term before current
Sometimes Net Current liabilities against current assets to show working capital on the statement of financial position (balance sheets)
