Accounting

Principles

Second Canadian Edition

Weygandt Kieso Kimmel
Trenholm

Prepared by:
Carole Bowman, Sheridan College

CHAPTER

11
CURRENT LIABILITIES

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.

ACCOUNTING FOR CURRENT

LIABILITIES

Types of liabilities
1)
2)
3)

Definitely determinable
Estimated
Contingent

ACCOUNTING FOR
CURRENT LIABILITIES
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

OPERATING LINE OF CREDIT

A pre-authorized

demand loan, allowing the

company to write cheques up to a preset limit
when needed.
Disclosed by footnote and by reporting
any resulting bank overdraft
as a current liability.

NOTES PAYABLE
Notes

Payable are obligations in the form of

written promissory notes that usually require
the borrower to pay interest.
Notes payable may be used instead of accounts
payable because it supplies documentation of the
obligation in case legal remedies are needed to
collect the debt.
Notes due for payment within one year
of the balance sheet date are usually
classified as current liabilities.

SALES TAXES PAYABLE

Sales

tax is expressed as a stated percentage of

the sales price of goods sold to customers by a
retailer.
Sales tax includes the goods and service tax
(GST), provincial sales tax (PST) or harmonized
sales taxes (GST and PST combined).
The retailer (or selling company) collects the tax
from the customer when the sale occurs,
and periodically (usually monthly)
remits the collections to the government.

PAYROLL AND EMPLOYEE BENEFITS

Salaries

or wages payable represent the

amounts owed to employees for a pay period.
Payroll withholdings include federal and
provincial income taxes, Canada Pension Plan
(CPP) contributions, and employment
insurance (EI) premiums.
Employees may also voluntarily authorize
withholdings for charity, retirement, medical,
or other purposes.
Payroll withholdings are remitted to
governmental taxing authorities.

UNEARNED REVENUES
Unearned

Revenues (advances from customers) occur

when a company receives cash before a service is
rendered.
Examples are when an airline sells a ticket for future
flights or when a lawyer receives legal fees before
work is done.

CURRENT MATURITIES OF
LONG-TERM DEBT

Another item classified as a current liability is

current maturities of long-term debt.
Current maturities of long-term debt are often
identified on the balance sheet as long-term debt
due within one year.

ESTIMATED LIABILTIES
Obligation

that exists but for which the

amount and timing is uncertain.
However, the company can reasonably
estimate the liability.
Examples include property taxes and
warranty liabilities.

PROPERTY TAXES
Property

taxes are accrued monthly

based on the prior years tax bill.
When the property tax bill for the
current year is received, the company
will adjust its monthly expense for the
remainder of the year.

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 estimated warranty liability.

CONTINGENT LIABILITIES
Contingent

liabilities exist when there is

uncertainty about the outcome.
Contingencies are accrued by a debit to
an expense account and a credit to a
liability account if both of the following
conditions are met:
1. The contingency is likely, and
2. The amount of the contingency can
be reasonably estimated.

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
Accounts payable and accrued liabilities
Income and resource taxes
Long-term debt due within one year

5
230
36
30
$301

APPENDIX 11A

INTERNAL CONTROLS FOR PAYROLL

The

objectives of internal accounting control

concerning payroll are
1. to safeguard company assets from
unauthorized payrolls and
2. to assure the accuracy and reliability of the
accounting records pertaining to payrolls.
Payroll activities include:
1. hiring employees
2. timekeeping
3. preparing the payroll
4
Functions
4. paying the payroll
of Payroll
These functions should be assigned to
different departments or individuals.

HIRING EMPLOYEES
The human resources department is responsible for:
1. Posting job openings
2. Screening and interviewing applicants
3. Hiring of employees
4. Authorizing changes in pay rates during employment
5. Terminations of employment

TIMEKEEPING
Hourly

employees are usually required to

record time worked by punching a time
clock the time of arrival and departure are
automatically recorded by the employee when
he/she inserts a time card into the clock.
The employees supervisor must:
1. approve the hours shown by signing the
time card at the end of the pay period
2. authorize any overtime hours for an
employee.

PREPARING THE PAYROLL

The payroll department prepares the payroll
on the basis of two sources of input:
1. human resource department
authorizations, and
2. approved time cards.

PAYING THE PAYROLL

The comptrollers department is responsible
for the payment of the payroll.
1. Payment by direct deposit, or by
cheque, minimizes the risk of loss
from theft.
2. All direct deposit lists and cheques
must be signed by the comptroller and
their distribution protected by the
comptrollers department.

DETERMINING AND PAYING THE

PAYROLL
Determining the payroll involves calculating
1. gross earnings,
2. payroll deductions, and
3. net pay.

GROSS EARNINGS
Gross

earnings is the total compensation earned

by an employee.
There are three types of gross earnings:
1. wages
2. salaries
3. bonuses
Total wages are determined by applying the
hourly rate of pay to the hours worked.
Most companies are required to pay a minimum
of one and one-half times the regular hourly rate
for overtime work.

PAYROLL DEDUCTIONS
The difference between gross pay and the
amount actually received is attributable to
payroll deductions.
Mandatory deductions consist of Canada
Pension Plan (CPP, or QPP in Quebec),
employment insurance (EI) and personal
income tax.

PAYROLL DEDUCTIONS
Voluntary deductions pertain to
withholdings for charitable causes,
retirement, and other purposes.
All voluntary payroll deductions should be
authorized in writing by the employee.
Voluntary payroll deductions do not result
in a payroll expense to the employer.
Net pay is determined by subtracting
payroll deductions from gross earnings.

EMPLOYER PAYROLL COSTS

CPP
The employer must match each employees CPP
contribution.
EI
The employer is required to contribute 1.4 times
each employees EI deductions.
Workplace Health, Safety, and Compensation
Employers pay a specified percentage of their gross
payroll to provide supplemental benefits for
workers who are injured or disabled in the
workplace.

ADDITIONAL FRINGE BENEFITS

PAID ABSENCES
Employees

may have the right to receive

compensation for future benefits when
certain conditions of employment are met.
The compensation may pertain to:
1. Paid vacation
2. Sick pay benefits
3. Paid holidays

ADDITIONAL FRINGE BENEFITS

PAID ABSENCES
When

the payment of compensation is

probable and can reasonably be
determined, a liability should be accrued.
When the amount can not be reasonably
estimated, the potential liability should
be disclosed.

RECORDING THE PAYROLL

Many

companies use a payroll register to

accumulate the gross earnings, deductions, and
net pay by employee for each period.
In some cases, this record is a journal or book
of original entry.
The typical entry to record the employee costs
in a payroll is to debit Salaries or Wages
expense and to credit a variety of liability
accounts.
When the payroll is paid, the liability
accounts are debited and Cash is credited.

RECOGNIZING PAYROLL
EXPENSES AND LIABILITIES
DateDate
June 15

GENERAL JOURNAL
AccountTitles
titlesand
andExplanation
explanation
Account
Office Salaries Expense
Wages Expense
CPP Payable
EI Payable
Income Tax Payable
United Way Payable
Union Dues Payable
Salaries and Wages Payable
To record payroll for the week ending
June 15.

Debit Credit
Credit
Debit
5,200.00
12,010.00
654.03
387.23
5,646.90
421.50
215.00
9,885.34

Academy Company records its payroll for the week ending June 15, 2002 with
the journal entry above. Office Salaries Expense ($5,200) and Wages Payable
($12,010) are debited in total for $17,210 in gross earnings. Specific liability
accounts are credited for the deductions made during the pay period. Salaries
and Wages Payable is credited for $9,885.34 in net earnings.

RECORDING EMPLOYER
PAYROLL COSTS
GENERAL JOURNAL
Date

Account Titles and Explanation

June 15 Employee Benefits Expense

CPP Payable
EI Payable
Workers Compensation Payable
Vacation Pay Payable
To record employer payroll costs on
June 15 payroll.

Debit

Credit

2,056.65
654.03
542.12
172.10
688.40

The entry to record the payroll costs associated with the Academy Company
payroll results in a debit to Employee Benefits Expense for $2,056.65, a credit to
CPP Payable for $654.03 ($654.03 x 1) and a credit to EI Payable for $542.12
($387.23 x 1.4). Assuming a workers compensation rate of 1 percent, the compensation payable liability would be for $172.10 ($17,210 x 1%). Vacation pay
accrues at 4% and therefore the vacation payable will be 688.40 ($17,210 x 4%).

RECORDING PAYMENT
OF THE PAYROLL
GENERAL JOURNAL
Date

Account Titles and Explanation

June 15 Salaries and Wages Payable

Cash
To record payment of payroll.

Debit

Credit

9,885.34
9,885.34

The entry to record payment of the Academy

Company payroll is a debit to Salaries and
Wages Payable and a credit to Cash.

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