ACTG 2110

1. ACTG 2110 Chapter 11 Current Liabilities and Payroll

2. Liabilities • Probable future sacrifices of economic benefits • Arising from present obligations of a particular entity • To transfer assets or provide services to other entities in the future • As a result of past transactions or events

3. Current Liabilities • Obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities • Must be paid off or settled in ONE YEAR OR THE OPERATING CYCLE, WHICHEVER IS LESS

4. Types of Current Liabilities • Accounts Payable • Current Portion of Long-term Debt • Portion of principal due in the next year is reclassified from long-term • Notes payable • Bears interest • Principal and interest are separate • Journal entries • Discounted note payable

5. Accounting for Payroll • Gross pay • Payroll before deductions • Net pay • Payroll after deductions • Amount of cash taken home (take-home pay) • Two types of liabilities • 1 Payroll deductions (taken from paycheck) • 2 Employer payroll taxes (employer must pay for all of these expenses)

6. Accounting for Payroll • Payroll deductions • Federal income taxes withheld • Social security taxes (FICA) • Paid by both the employee and the employer • 7.65% on wages up to $106,800 currently and 1.45% on wages in excess of this amount • Withholding for other items (insurance, united way, union dues) • All of these deductions are liabilities to the company, THEY MUST BE PAID TO SOMEONE!!!!!! • Employer Payroll taxes • Social security taxes (FICA) – same amount as withheld from employees • Unemployment taxes -Paid by employer ONLY • FUTA is 0.8% on the first $7,000 of each employee • SUTA is 5.4% on the first $7,000 of each employee • These are expenses to the company in addition to salaries and wages expense

7. Internal Control over Payroll • Separate duties of hiring, filling out paperwork, filling out time cards, and receipt of checks • Someone should verify that employees are real • Check social security numbers • Make sure deductions are being taken on each employee • Make employees show identification cards to collect paychecks

8. Fringe Benefits • Vacation Pay • Pensions • Defined Contribution Plan • Defined Benefit Plan • Postretirement Benefits other than Pensions

9. Contingencies • An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur • Gain contingencies • Not recorded • Only disclosed when the probability is high that it will become a reality

10. Loss Contingencies • Result in recognition of a contingent liability • Condition had to exist at the balance sheet date • Information has to be available prior to issuing financial statements • Likelihood that the future event or events will confirm the incurrence of a liability can be classified as • Probable- likely to occur • Possible – more than remote but less than probable • Remote – slight

11. Loss Contingencies • Must be accrued if • Probable AND • Amount can be reasonably estimated • Common loss contingencies • Litigation, claims, and assessments • Guarantee and warranty costs

12. Contingent Liabilities • Estimated Warranty Payable • Don’t know how much we will have to pay but we can assume that we will have to pay something • We must estimate an expense and a payable in the period the sale occurs (Matching principle) • Journal entry: • Warranty Expense 2,000 • Warranty Payable 2,000 • (100,000 sales x .02 claims = 2,000)

13. Financial Analysis and Interpretation • Quick Ratio • Quick Assets/Current Liabilities • Quick Assets • Assets that can be liquidated VERY soon • Cash, receivables, marketable securities • Show quick liquidity • Higher ratio, the more liquid