Accounting II Chapter four current liabilities.ppt
- 1. 10-1 Chapter Four f f Current Liabilities Learning Objectives After studying this chapter, you should be able to: 1. Explain a current liability, and identify the major types of current liabilities. 2. Describe the accounting for notes payable. 3. Explain the accounting for other current liabilities. 4. Prepare payroll
- 2. 10-2 Current liability A debt that the company expects to pay within one year or the operating cycle, whichever is longer. Most companies pay current liabilities by using current assets. LO 1 Explain a current liability, and identify the major types of current liabilities. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. Current Liabilities
- 3. 10-3 The time period for classifying a liability as current is one year or the operating cycle, whichever is: a. longer b. shorter c. probable d. possible Question LO 1 Explain a current liability, and identify the major types of current liabilities. Current Liabilities
- 4. 10-4 LO 2 Describe the accounting for notes payable. Notes Payable Recorded obligation in the form of written notes. Usually require the borrower to pay interest. Issued for varying periods of time. Those due for payment within one year of the statement of financial position date are usually classified as current liabilities. Current Liabilities
- 5. 10-5 Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2021, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. Instructions a) Prepare the journal entry on September 1. b) Prepare the adjusting journal entry on December 31, assuming monthly adjusting entries have not been made. c) Prepare the journal entry at maturity (January 1, 2012). LO 2 Describe the accounting for notes payable. Current Liabilities
- 6. 10-6 Notes payable 100,000 Cash 100,000 Interest payable 4,000 Interest expense 4,000 HK$100,000 x 12% x 4/12 = HK$4,000 b) Prepare the adjusting journal entry on Dec. 31. LO 2 Describe the accounting for notes payable. Current Liabilities Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2021, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. a) Prepare the journal entry on September 1.
- 7. 10-7 Interest payable 4,000 Notes payable 100,000 Cash 104,000 LO 2 Describe the accounting for notes payable. Current Liabilities Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2021, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. c) Prepare the journal entry at maturity (January 1, 2022).
- 8. 10-8 LO 3 Explain the accounting for other current liabilities. Value Added Tax Payable(VAT) VATs are expressed as a stated percentage of the sales price. Retailer collects tax from the customer. Retailer remits the collections to the government’s tax authority. Current Liabilities
- 9. 10-9 Example: On March 25 Zanthana PLC sales of ETB100,000 and a VAT of ETB 15,000 (VAT rate of 15%), the journal entry is: Sales revenue 100,000 Cash 115,000 Value Added Tax payable 15,000 LO 3 Explain the accounting for other current liabilities. Current Liabilities
- 10. 10-10 LO 3 Explain the accounting for other current liabilities. Unearned Revenue Revenues that are received before the company delivers goods or provides services. 1. Company debits Cash, and credits a current liability account (Unearned Revenue). 2. When the company earns the revenue, it debits the Unearned Revenue account, and credits a Revenue account. Current Liabilities
- 11. 10-11 Illustration: FA ticket office sells 10,000 season football tickets at $ 50 each for its five-game home schedule. The club makes the following entry for the sale of season tickets (in thousands of $): Unearned ticket revenue 500,000 Cash 500,000 Aug. 6 Ticket revenue 100,000 Unearned ticket revenue 100,000 Sept. 7 As each game is completed, FA records the revenue earned. Current Liabilities
- 12. 10-12 Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. Considered a current liability. No adjusting journal entry required. LO 3 Explain the accounting for other current liabilities. Current Liabilities
- 13. 10-13 Current liabilities are presented after non-current liabilities on the statement of financial position. A common method of presenting current liabilities is to list them by order of magnitude, with the largest ones first. Presentation Statement Presentation LO 3 Explain the accounting for other current liabilities.
- 14. 10-14 Statement Presentation Illustration 10-3 LO 3 Explain the accounting for other current liabilities.
- 16. 10-16 Payroll Payroll 1. Good employee relations demand that payrolls be calculated accurately and paid as scheduled. 2. Payroll expenditures are subject to a variety of federal, state, and local taxes. 3. Total payroll expense (gross payroll plus payroll taxes) has a major impact on net income. Payroll is the total amount paid by an organization to employees for services provided. Payrolls are important because:
- 17. 10-17 Terms Terms Salary and wages Salary and wages are usually used interchangeably. However, the term wages is more correctly used to refer to payments for manual labor that are paid based on the number of hours worked or the number of units produced. The Pay Period The Pay Period -The length of time covered by each payroll payment. Pay periods for wageworkers are usually made on weekly or biweekly. On the other hand, salaried employees' pay periods are monthly or semi-monthly
- 18. 10-18 Terms Terms The Pay Day - The Pay Day -The day, on which wages or salaries are paid to employees, usually the last day of the pay period, is known as the PAY DAY A Payroll Register (Sheet): A Payroll Register (Sheet): the entire list of employees of a business along with each employee’s gross earnings, deductions and net pay (or the take home pay) for a particular payroll period. The basis for the preparation of the payroll register can be the attendance sheets, punched (clock) cards or time cards.
- 19. 10-19 Terms.. Terms.. Employee Earnings Record Employee Earnings Record: : It is a summary of each employee's earnings, deductions, and net pay for each payroll period and of cumulative gross earnings during the year. It is a separate record kept for each employee. The individual employees' earnings record helps the employer organization to properly summaries and file tax returns. .
- 20. 10-20 Terms… Terms… Gross Earnings Gross Earnings: The total pay to an employee before deductions for : The total pay to an employee before deductions for the pay period. the pay period. Payroll Taxes Payroll Taxes: Are taxes levied against the employer on the payroll of : Are taxes levied against the employer on the payroll of a firm. It is an additional payroll related expense to an employer. a firm. It is an additional payroll related expense to an employer. Withholding Taxes Withholding Taxes: These are taxes levied against the earnings of : These are taxes levied against the earnings of employees of an organization and withheld by the employer per the employees of an organization and withheld by the employer per the regulations of the concerned government regulations of the concerned government Payroll Deductions Payroll Deductions: All the reductions from the gross earnings of an : All the reductions from the gross earnings of an employee such as withholding taxes, union dues, fines, credit employee such as withholding taxes, union dues, fines, credit association pays, etc. association pays, etc. Net Pay Net Pay: The gross earnings after subtracting all the deductions. It is : The gross earnings after subtracting all the deductions. It is sometimes known as sometimes known as take home pay take home pay-the amount collected by an -the amount collected by an employee on the payday. employee on the payday.
- 21. 10-21 Payroll Register Payroll Register What is the purpose of a payroll register? It’s a multicolumn form used to help assemble and summarize the data needed for each payroll period.
- 22. 10-22 Components of a Payroll Register Components of a Payroll Register 1. 1. Employee number Employee number - - numbers assigned to employees for identification purpose when a relatively large number of employees are included in the payroll. 2. 2. Name of employees Name of employees - - list of the name of employees. 3. 3. Earnings Earnings: : money earned by an employee of a firm from various sources. 4. 4. Deductions Deductions: : legal and contractual deductions from the earnings of the employee. 5. 5. Net Pay Net Pay: : the difference between total earnings and total deductions.
- 23. 10-23 Earnings Earnings Earnings include: a. The basic salary or Regular Earning b. Allowances - position allowance - House allowance - Hardship allowance - Desert allowance - Transportation( Fuel) allowance c. Overtime earnings
- 24. 10-24 Overtime Earning Overtime Earning Over time earning is an amount earned for work performed in excess of the normal daily hours of work. As per Article 68 of proclamation No.1156/2019, overtime payment is calculated based on the following rates: i. at 1.5 times the ordinary hourly rate for work done between 6:00 a.m. in the morning and l0:00 p.m. in the evening; ii. at 1.75 times the ordinary hourly rate for work performed between 10 pm in the evening and six am in the morning. iii. At 2.00 times the normal hourly rate for work performed on weekly rest days. iv. At 2.5 times the normal hourly rate for work performed on public holidays.
- 25. 10-25 Payroll Deductions Payroll Deductions Typical payroll deductions are: a. Employee Income Tax b. Pension c. Others like credit union deductions, contribution to edir, contribution to a call made by government (for the purchase of Abay Dam bonds, etc)
- 26. 10-26 Employment income tax calculation Employment income tax calculation According to proclamation 979/2016, employee income tax is calculated at the rates specified in the following table: Taxable Monthly Income (In Birr) Rates of tax (%) on Every Additional Income 1. Over 600 but not exceeding 1650 10% 2. Over 1650 not exceeding 3200 15% 3. Over 3.200 but not exceeding 5,250 20% 4. Over 5,250 but not exceeding 7,800 25% 5. Over 7,800 but not 10,900 30% 6. Over 10,900 35%
- 27. 10-27 Pension Contribution Pension Contribution Employees contribute 7% of their monthly salary to the pension fund in their name. The employer contributes 11% of the employee’s monthly salary to the pension fund in the name of the employee. This represents an additional expense (Pension expense) to the employer. Total pension contribution is, therefore, 18% of the basic salary.
- 28. 10-28 Calculations Calculations Gross earning, and payroll Deductions Gross earning, and payroll Deductions Example Example: Ato Zelalem is an employee in Alpha Company. His monthly salary is Birr 12,000. During Miazia 2014, he worked overtime for 8 hours all on a public holiday. He has a position allowance of Birr 2500. He has also transportation allowance of Birr 2000 (non taxable). Zelalem is a member of the saving and credit association of his organization which to which he saves 10% of his monthly salary. He is expected to work 160 hours per month. He worked accordingly. Required: Compute the following for Ato Zelalem: a. The Gross Earning b. Employment Income Tax c. Total Pension contribution d. Net pay for the month of Miazia 2014
- 29. 10-29 Solution Solution a. Gross Earning a. Gross Earning GE = Basic salary + Allowances + Overtime GE = Basic salary + Allowances + Overtime OT earning = OT earning = OT rate x OT hours worked X basic salary per hour OT rate x OT hours worked X basic salary per hour Basic salary per hour = basic salary / Normal hours per month Basic salary per hour = basic salary / Normal hours per month = 12,000/160 = 12,000/160 = Birr 75/hr = Birr 75/hr OT earnings = 2. 5 x 8 x 75 = Birr 1,500 OT earnings = 2. 5 x 8 x 75 = Birr 1,500 GE = 12,000 + 2,500+ 2,000+ 1,500 = Birr 18,000 GE = 12,000 + 2,500+ 2,000+ 1,500 = Birr 18,000
- 30. 10-30 Taxable Income Tax rate Tax 0-600 0 0 0 601-1650 1050 10% 105 1651-3200 1550 15% 232.5 3201-5250 2050 20% 410 5251- 7800 2550 25% 637.5 7801-10,900 3100 30% 930 10,901-16000 5100 35% 1785 Total Income tax 4,100 b. Employment Income Tax ( long Method) Taxable income = 12,000 + 2,500 + 1,500 = 16,000 (N.B. Transpiration allowance is not taxable)
- 31. 10-31 Deduction method Deduction method Rate Deductions Tax 0 – 600 0% 0.00 0 601 – 1,650 10% 60.00 TI X 10% – 60 6151– 3,200 15% 142.50 TI X 15% – 142.50 3,201 – 5,250 20% 302.50 TI X 20% – 302.50 5,251 –7,800 25% 565.00 TI X 25% – 565 7,801- 10,900 30% 955.00 TI X 30% – 955 Over 10,9000 35% 1,500.00 TI X 35% – 1,500
- 32. 10-32 Solution.. Solution.. Using deduction method the Employment income tax Using deduction method the Employment income tax can be computed can be computed Income tax = 16000 x35% - 1500 Income tax = 16000 x35% - 1500 = = 4,100 4,100 Note; we can also use the excel sheet Note; we can also use the excel sheet c. Pension contribution = 7% x basic salary c. Pension contribution = 7% x basic salary = 7% x 12,000 = 7% x 12,000 = 840 = 840
- 33. 10-33 Solution.. Solution.. d. Net pay(NP) = Gross earnings – total deductions d. Net pay(NP) = Gross earnings – total deductions GE = 18,000 GE = 18,000 Total Deduction(TD) = EIT + PC + Saving Total Deduction(TD) = EIT + PC + Saving saving = 10% x 12,000 saving = 10% x 12,000 = = 1,200 1,200 TD = 4,100 + 840 +1,200 = 6,140 TD = 4,100 + 840 +1,200 = 6,140 NP = 18,000 – 6,140 NP = 18,000 – 6,140 = = 11,860 11,860
- 34. 10-34 Accounting for payroll Accounting for payroll The following transactions relate to payroll: 1. Payment of salary for employees 2. Paying withholding taxes to tax authority 3. Pay other deductions to the responsible body
- 35. 10-35 Recording salary payment Recording salary payment Employment Income tax payable 4100 00 Pension contribution payable 840 00 Saving and Credit association payable 1200 00 Miazia 30 Salary Expense 18 000 00 Cash At Bank 11,860 00 (To record salary expenses) Pension Expense 1 320 00 Pension Payable 1 320 00 (To record 11% pension contribution)
- 36. 10-36 Payroll records Payroll records Credit Association Payable 1 200 00 Cash at Bank 1 200 00 (To record credit association payable) Pension Payable 2 160 00 Employee Income Tax Payable 4 100 00 Cash at Bank 6 260 00 (To record payment of pension and income tax to the authorities)
- 37. 10-37 Employees’ Fringe Benefits Employees’ Fringe Benefits
- 38. 10-38 Other Employee Benefit in Ethiopia Sick leave Medical Bonus Maternity and paternity leave annual leave and severance pay
- 39. 10-39 End of the chapter