Kelifa CH 3

Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
PRINCIPLES OF ACCOUNTING II
Chapter 3
Current Liabilities and Ethiopian Payroll System
3.1. ACCOUNTING FOR LIABILITIES
3.1.1. Characteristics of Liabilities
A Liability is a probable future payment of assets or services that a company is presently
obligated to make as a result of past transactions or events. This definition includes three
crucial factors: - Due to a past transaction or events, Present Obligation and Future
Payment.
3.1.2. Classifying Liabilities

Information about liabilities is more useful when the balance sheet identifies them as
either current or long term. Decision makers need to know when obligations are due so
they can plan for them and take appropriate action.
3.1.2.1. Current Liabilities (Short-Term Liabilities)

Current Liabilities are obligations (Debts) that can reasonably be expected to be paid:
(1)From existing current assets or through the creation of other current liabilities &,
(2) Within one year or the operating cycle, whichever is, longer.
Companies must carefully monitor the relationship of current liabilities to current assets.
This relationship is critical in evaluating a company’s liquidating or Short-term debt
paying ability. A company that has more current liabilities than current assets is usually
the subject of some concern because been use the company may not be able to meet it s
current obligations when they become due.
Current Liabilities include short-term notes payable, accounts payable, unearned
revenue, warranty and accrued liabilities (such as; Taxes, Salaries and Wages, and
interest payable).
3.1.2.2. Long-Term Liabilities

A Company’s obligations not expected to be paid within one year (or a longer operating
cycle) are reported as Long-Term Liabilities. Long-Term Liabilities include long-term
notes payable, warranty liabilities and bond payable.
3.1.3. Accounting for Current Liabilities

3.1.3.1. Short-Term Notes Payable
Obligations in the form of written promissory notes are recorded as notes payable.
Notes Payable are often used instead of accounts payable. Doing so gives the lender
written documentation of the obligation in case legal remedies are needed to collect the
debt. Notes payable usually require the borrower to pay interest and frequently are
issued to meet short-term financing needs.
Notes are issued for varying periods. Those due for payment within one year of the
balance sheet date are usually classified as current liabilities. Most notes are interest
bearing.
Lecture Notes on Principles of Accounting-II, Chapter III. Compiled By: Kassaye Tuji Page 1
Illustration 1
To illustrate the accounting for notes payable, assume that First National Bank agrees to
lend Br100, 000 on March 1,1996, if Cole Williams Co. signs a Br100,000, 12%, 4-
month note. With an interest-bearing promissory note, the amount of assets received
upon issuance of the note generally equals the note’s face value. Cole Williams co.
therefore will receive Br100, 000 cash and will make the following journal entry;
Mar. 1 Cash 100,000

Notes Payable 100,000
(To record issuance of 12%, 4-month note to
First National Bank)
Interest accrues over the life of the note and must be recorded periodically.
Illustration 2
If Cole Williams Co. Prepares financial statements semiannually, and adjusting entry is
required to recognize interest expense and interest payable of Br4,000 (Br100,000 X
12% X 4/12) at June 30. The adjusting entry is;
June-30 Interest Expense 4,000
Interest Payable 4,000
(To accrue interest for 4 months on First
National Bank)
In the June 30 financial statements, the current liability section of the balance sheet will
show notes payable Br100,000 and interest payable Br4,000. In addition interest
expense of Br4, 000 will be reported under Other Expenses and Losses in the income
statement. If Cole Williams Co. prepared financial statements monthly; the adjusting
entry at the end of each month would have beenBr1, 000 (Br100, 000 X 12% X 1/12).
Illustration 3
At maturity (July 1), Cole Williams Co. must pay the face value of the note (Br100, 000) plus
Br4, 000 interest (Br100, 000 X 12% X 4/12). The entry to record payment to the note and
accrued interest is as follows;
July1 Notes payable 100,000
Interest payable 4,000
Cash 104,000
(To record payment of first national bank interest bearing note and accrued interest maturity)
3.1.3.2. Accounts Payable

Account payable or trade accounts payable are amounts owed for goods supplies,
equipment or services that we purchase on credit. Account Payable arises because of the
time lag between the receipts of gods or service and the payment for them. The credit
period is usually indicated using expressions like 2/10, n/30.
The Journal entry to record the accounts payable on the date it happens will be:
Debit Purchases/Equipment/Supplies (as appropriate) …xxx
Credit Accounts Payable………………………………….xxx
The Journal entry to record the payment of the obligations will be:
Debit Account Payable..… xxx
Credit Cash ………………xxx
3.1.3.3. Sales Tax Payable

As consumers, we are well aware that many of the products we purchase at retail stores
are subject to sales taxes. The tax is expressed as a stated percentage of the sales price.
The retailer (or selling company) collects the tax from the consumer when the sale
occurs, and periodically (usually monthly) remits the collections to the state’s
department of revenue.
Under most state sales tax lows, the amount of the sale and the amount of the sales tax
collected must be rung up separately on the cash register. The cash register readings are
then used to credit sales and Sales Tax Payable.
Illustration 4
╚ Assuming that the March 25 cash register readings for Cooley Grocery show Sales of
Br10,000 and Sales Taxes of Br600 (Sales Tax Rate of 6%), the entry is:
Mar. 25 Cash 10,600
Sales 10,000
Sales Taxes Payable 600
(To record daily sales and Sales Taxes)
╚ When the taxes are remitted to the taxing agency, Sales Taxes Payable is Debited and Cash is
Credited.
Sales Tax Payable …………. 600
Cash ………………… 600
The company does not report sales taxes as an expense; it simply forwards the amount
paid by the customer to the government. Thus, Cooley Grocery serves only as a
collection agent for the taxing authority. When sales taxes are not rung up separately on
the cash register, total receipts are divided by 100% plus the sales tax percentage to
determine sales.
Illustration 5
To illustrate, assume in the above example that Colley Grocery “Rings Up” Total
Receipts, which are Br 10,600. Because the amount received from the sale is equal to
the sales price 100% plus 6% of sales, or 1.06 times the sales total, w e can compute
sales as follows: Br 10,600 ÷ 1.06 =Br 10,000.
Thus, the sales tax amount of Br600 is found either by:

Subtracting sales from total receipts (Br10,600 - Br10,000 ) or
Multiplying sales by the sales tax rate (Br 10,000 X 6%)
3.1.3.4. Unearned Revenue

A magazine publisher may receive a customer’s check when magazines are ordered and
an airline company, such as Ethiopia Air-Lines, often received cash when it sells tickets
for future flights. How do these companies account for unearned revenues that are
received before goods are delivered or services are rendered?
When the advance is received, Cash is debited, and a current liability account
identifying the sources of the unearned revenue is credited.
When the revenue is earned, the unearned revenue account is debited, and an
earned revenue account is credited.
Illustration 6
➢ To illustrate, assume that St. George club sells 10,000 season football tickets at Br50
each for its five-game home schedule, the entry for the sales of season tickets is:
Aug. 6 Cash 500,000
Unearned football Ticket Revenue 500,000
(To record sale of 10,000 season tickets)
Illustration 7
▼ As each game is completed, the following entry is made:
Sept. 7 Unearned Football Ticket Revenue 100,000
Football Ticket Revenue 100,000
Unearned Football Ticket Revenue is, therefore, unearned revenue and is reported as a
current liability in the balance sheet. As revenue is earned, a transfer from unearned
revenue to earned revenue occurs. Unearned revenue is material for some companies: in
the airline industry, tickets sold for future flights represent almost 50% of total current
liabilities. Specific unearned and earned revenue accounts used in selected types of
business is shown below:
Types of Account Title
Business Unearned Revenue Earned Revenue
Airline Unearned Passenger Ticket Revenue Passenger Revenue
Magazine Publisher Unearned Subscription Revenue Subscription Revenue
Hotel Unearned Rental Revenue Rental Revenue
3.1.3.5. Current Maturities of Long-Term Debt

Companies often have a portion of long-term debt that comes due in the current year.
Illustration 8
For example, assume that Wendy Construction issues a 5-year interest bearing Br25,000
note on January 1, 1996. This note specifies that each January 1, starting January1,
1997, Br5,000 of the note should be paid.
When financial statements are prepared on December 31, 1996, Br 5,000 should be
reported as a current liability and Br20,000 as a long-term liability. Current maturities of
Long –term debt are often identified on the balance sheet as Long-Term Debt Due
Within One Year.
It is not necessary to prepare an adjusting entry to recognize the current maturity of

long-term debt. The proper statement classification of each balance sheet accounts is
recognized when the balance sheet is prepared.
3.1.3.6. Financial Statement Presentation

Current Liabilities are the first category under liabilities on the balance sheet. Each of
the principal types of current liabilities is listed separately within the category. In
addition, the terms of notes payable and other pertinent information concerning the
individual items are disclosed in the notes to the financial statements.
Current liabilities are seldom listed in the order of maturity because of the varying
maturity dates that may exist for specific obligations such as notes payable. A more
Common, and entirely satisfactory, method of presenting current liabilities is to list them
by order of magnitude, with the largest obligations first. Many companies, as a matter
of custom, show notes payable and accounts payable first, regardless of amount.
▼ The following balance sheet of XYZ Corp illustrates this practice.

XYZ CORP.
Current Liabilities (in millions)
Notes Payable Br 138
Accounts Payable 2,196
Payroll and Benefits Payable 243
Taxes Payable 415
Interest Payable 113
Long-Term debt due within one year 197
Total Current Liabilities 3,302
3.2. ACCOUNTING FOR PAYROLL

3.2.1. Meaning and Importance of Payroll
The term “Payroll” pertains to all salaries and wages paid to employees. Managerial,
administrative, and sales personnel are generally paid salaries, which are often
expressed in terms of a specified amount per month or per year. In contrast, store
clerks, factory employees, and manual laborers are normally paid wages, which are
based on a rate per hour or on a piecework basis (such as per unit of product).
Frequently, the terms “salaries” and “wages” are used interchangeably.
It does not extend to payments made for personal service by professionals such as
certified public accounts, attorneys, and architects such professionals are independent
contractors and payments to them are called fees, rather than salaries or wages. This
distinction is important because government regulations relating to the payments and
reporting of payroll taxes apply only to employees.
The term payroll often refers to the documents prepared to pay remuneration for the
service rendered in a given period of time. The payroll accountin g of a time has to be
given emphases of significance for the following reason:
1. Employees are sensitive to payroll errors and irregularities, and maintaining good
employee moral requires that the payroll be paid on a timely, accurate basis.
2. Payroll expenditures are subject to various government regulations.
3. The payment for payroll and related taxes has significant effect on the net income
of the most business enterprises.
Payroll and related fringe benefits often constitute a substantial percentage o f current
liabilities. In addition, employee compensation is often the most significant expense that
a company incurs.
Add to labor costs such fringe benefits as health insurance, life insurance, disability
insurance, and so on, and you can see why proper accounting and control of payroll are
so important. It should be emphasized that payroll accounting involves more than
paying employees’ wages. Companies are required by law to maintain payroll records
for each employee file and pay payroll taxes, and comply with numerous state and
federal tax laws applicable to employee compensation. Accounting for payroll has
become much more complex as a result of these regulations.
3.2.2. Preparing Payroll
The payroll is prepared in the payroll department on the basis of two sources of input:
✓ Personnel department authorizations and
✓ Approved time cards.
Because of the numerous calculations involved in determining gross wages and
payroll deductions, it is customary for a payroll department employee working
independently, to verify all amounts, and a payroll department supervisor then
approves the payroll.
The payroll department is also responsible for preparing (but not signing) payroll
checks, maintaining payroll records, and preparing payroll tax returns.
3.2.3. Paying the Payroll

The payroll is paid by the treasurer’s department. Payment directly through bank
account, if that is not possible by check is advisable. It minimizes the risk of loss from
theft, and the endorsed check provides proof of payment. For Good internal control,
payroll checks should be pre-numbered, and all checks should be accounted for. All
checks must be signed by the treasurer (or designated agent), and their distribution to
employees should be controlled by the treasurer’s department. Checks may be
distributed by the treasurer or paymaster.
If the payroll is paid in currency, it is customary to have a second person count the cash
in each pay envelope and for the paymaster to obtain a signed receipt from the employee
upon payment. Thus, if alleged discrepancies arise, adequate safeguards have been
established to protect each party involved.
3.2.4. Calculating Employees Earnings

Determining the payroll involves computing:
1. Gross earnings.
2. payroll deductions, and
3. Net pay.
3.2.4.1. Gross Earning
Gross earning is the total compensation earned by an employee. The gross earnings of
an employee may include wages, salaries, bonuses, overtime earnings and allowances.
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 produces, So they are
usually paid when a particular piece of work is completed or for a period less than a
month. The salary for an employee is generally based on a monthly or yearly rate rather
than on an hourly basis. These rates are then applied ratably to the payroll periods used
by the company. Most executive and administrative positions are salaried.
Many companies have bonus agreements for management personnel and other
employees. Bonus arrangements may be based on such factors as increased sales or net
income. Bonus may be paid in cash and /or granting executives and employees the
opportunity to acquire shares of stock in the company at favorable prices (called stock
option plans). It must be clear that when we say an employee, we refer to an individual
who works primarily to an organization and whose activities are under the direction and
supervision of the employer. Hence, an employee is different from an independent
contractor, a self-employed individual who works on a fee basis to a firm, such as
architects, attorneys.
3.2.4.2. Overtime Earnings

Overtime Work – Is the work performed by an employee beyond the regular working
hours or days.
Overtime Earning – Is the amount payable to an employee for overtime work done. In
Ethiopia, in this respect, according to Article 33 of proclamation No.64/1975, the
following is discussed about payment for overtime work.
 Ways/rules of payment for overtime work:

1. A worker shall be entitled to be paid at a rate of One and one quarter (11/4) times
his or her ordinary hourly rate for overtime work performed up to 10 o’clock in
the evening (10 P.M.) beyond his/her regular working hour.
2. A Worker shall be paid at the rate of One and one half (11/2) times his or her
ordinary hourly rate for overtime work performed between 10 o’clock in the
evening (10 p.m.) and six o’clock in the morning (6 a.m.)
3. Overtime work performed on the weekly rest days shall be paid at a rate of two
(2) times the ordinary hourly rate of payment.
4. A worker shall be paid at a rate of two and half (21/2) times the ordinary hourly
rate for overtime work performed on a public holidays.
3.2.4.3. Allowances
Allowance: Money paid monthly to an employee for special reason, which may include:
✓ Position Allowance: - a monthly sum paid to an employee for bearing a particular

office responsibility, e.g. Head of a particular department or division.
✓ House allowance: - a monthly allowance given to cover housing costs of the
individual employee when the employment contract required the employer to
provide housing but fails to do so.
✓ Hardship Allowance: - a sum of money given to an employee to compensate for
an inconvenient circumstance caused by the employer. For instance, unexpected
transfer to different and distant work area or location. It is som etimes known as
disturbance allowance.
✓ Desert Allowance:- a monthly allowance given to an employee because of
assignment to a relatively hot region.
✓ Transportation (fuel) allowance: - a monthly allowance to an employee to cover
cost of transportation up to the work place if the employer has committed itself to
provide transportation service.
3.2.5. Payroll Deductions
As anyone who has received a paycheck knows, gross earnings are usually very
different from the amount actual received. The difference is attributable to payroll
deduction. Payroll deductions do not result in payroll tax expense to the employer. The
employer serves only as a collection agency, and it subsequently transfers the
deductions to the government and designated recipients.
3.2.5.1. Mandatory (Required) Deductions

These are deductions made from the earnings of employee that is because it is required
by government and/or owed by the employee for some reason.
3.2.5.2. Voluntary Deductions

Employees may voluntarily authorize withholding for charitable, retirement, and other
purposes. The employee should authorize all voluntary deductions from gross earnings
in writing. The authorization(s) may be made individually or as part of a group plan.
Voluntary deductions are such as donations to charitable organization, credit
association, repayment of loan, union dues, health and life insurance.
3.2.5.3. Income Tax

Employee Income Tax – In Ethiopia every citizen is required to pay income tax from
his/her earnings of employment. In this case, a progressive income tax system that
charges higher rates for higher earnings is applied on the gross earnings of each
employee. According to the Ethiopian Parliament, Proclamation No. 102/2008, July 19,
2008 E.C; the first Birr 600 of the earnings of an employee is exempted from income
tax. The money on which person does not have to pay income tax is an exemption. The
Tax on income from employment OVER Six Hundred Birr (Birr 600) shall be charged,
levied and collected monthly according to the following schedule: -
Schedule of Tax Collection/Deduction as per Ethiopian Tax Law
Salary Range (ETB) Tax Rate Deduction (ETB)
Generally, taxable income from employment includes salaries, wages, allowances,

director’s fees and other personal emoluments, all payments in cash and benefits in kind.
However, the following categories of payments in cash or benefits in kind are exempted
from taxation.
3.2.5.4. Exemptions (None Taxable Income)
1. Medical costs incurred by employer for treatment of employees.
2. Transportation allowances paid by employer to its employees (not exceeding Birr 300).
3. Reimbursement by employer of traveling expense incurred on duty by employees.
4. Traveling expenses paid to transport employees from elsewhere to place of employment
and to return them upon completion of employment.
5. Pension contribution, provident fund and all forms of retirement benefits contributed by
employers in an amount that does not exceed 15% of the monthly salary of the
employee.
6. Income from employment received by casual employees who are not regularly
employed provided that they do not work for more than one month for one employer.
3.2.5.5. Pension
Pension contributions – Permanent employees of an organization the employees of
which are governed by the existing regulations of the Ethiopian Public Servants are
expected to pay or contribute 7% of their basic (monthly) salary to the government
Pension Trust Fund.
This amount should be withheld by the employer from the basic salary of each employee
on every payroll and later be paid to the respective government body.
On the other hand, the employer is also expected to contribute towards the same fund
11% of the basic salary of every permanent employee of it. It is this amount often called
as Payroll Taxes Expense to the employer organization. (I.e,. 11% of the total basic
salary of all permanent employees).
Consequently, the total contribution to the Pension Trust Fund of the Ethiopian
Government is equal to 18% of the total basic salary of all permanent employees of an
organization. (I.e. 7% comes from the employees and the 11% comes from the
employer). This enables a permanent employee of an organization to be entitled to the
pension pay given that the employee has satisfied the minimum requirement to enjoy
this benefit when retired.
Non-government organizations are also using this kind of scheme to benefit their
employees with some modifications. This is made in some NGO’s and businesses by
keeping a fund known as Provident Fund. Both the employees and the employer
contribute towards this fund monthly.
3.2.5.6. Net Pays

Net pay is determined by subtracting payroll deductions from gross earnings. It is
sometimes known as take home pay, the amount collected by an employee on the
payday. This amount is held in one column of the payroll register representing the
excess of gross earnings over the total deductions of an employee. The column “Net
Pay” total tells the excess of grand total earnings over grand total deduction made from
the earnings of employees.
3.2.6. Summary of Salary Income Tax, Pension, Basic Salary & Net Salary
Calculation in Ethiopia
Employee Pension = 7%
Company Pension = 11%
 Salary Income Tax = (Basic Salary x Tax Rate) - Deductions
 Employee Pension = Basic Salary x 7%
 Net Pay/Income = Gross Salary - Salary Income Tax - Employee Pension – Other
Deductions (If applicable).
Additional Example
❖ If Basic Salary of a person (an employee) is 3,145, how much is the net pay?
 3,145 is in the 4thraw of the table; which is between 1,651 & 3,200. So Tax Rate is
15% and Deduction is 142.50.
 Salary or Employment Income Tax = (Basic Salary x Tax Rate) – Deduction
Income Tax = (3,145 x 15%) - 142.50 = 329.25
 Employee Pension = Basic Salary x 7%
Pension = 3,145 x 7% = 220.15
 Employee’s Net Income = Gross (Basic) Salary - Salary Income Tax – Pension -
Other Deductions
 Net Income = 3,145 - 329.25 - 220.15 – 0 = 2,595.60
3.2.6.1. Recording the Payroll

Recording the payroll involves maintaining payroll department records, recognizing
payroll expenses and liabilities, and recording payment of the payroll.
Maintaining of a Payroll Record
Basic Records of a Payroll Accounting System Includes:
1. A payroll register (or payroll Sheet).
2. Individual employees’ earnings records and,
3. Usually, Pay Check.
These records are generated from a payroll system that is operated manually or using
computer.
A payroll register (sheet): the entire list of employees of a business along with each
employee’s gross earning, deductions and net pay for particular payroll period. The
basis for the preparation of the payroll register can be the attendance sheets, time cards
or punched cards.
Employee Earnings Record: It is 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 employee’s
earnings record helps the employer organization to properly summaries and file tax
returns.
Pay Check
An instrument for paying salary if the firm makes payment via writing a check in the
name of each employee for the net pay or a check for the total net pay.
3.2.6.2. Recognizing the Payroll Exp., Liabilities & Recording Payment of the Payroll
Payment by check is made either from the employer’s regular bank account or a payroll
bank account. Each check is usually accompanied by a detachable statement of
earnings document that shows the employee’s gross earnings, payroll deductions, and
net pay.
To illustrate, Ethio Relief Agency pays the salary of its employees according to the
Ethiopian Calendar month. The forth-coming date relates to the month of Hidar, 2009.
Ser. Name of Basic Monthly OT Hours Duration of Basic Salary

No. Employee Salary Allowance Worked OT Work Per Hour
01 Senait Bahiru 2,080 100 10 Up to 10 p.m. 13
02 Petros Challa 640 ----- 8 10p.m. to 6a.m 4
03 Abdu Mohammed 1,280 ----- 6 Weekly Rest Days 8
04 Leilla Jemal 960 50 ----- ----- 6
05 Baheru Wolde 480 50 10 Public Holiday 3
N.B. Note that management of the agency usually expects a worker to work 40-hours in
a week and during Hidar 2009 all workers have done as they have been expected.
Besides, all workers of this agency are permanent employees except Petros Challa.
The monthly allowance of Baheru Wolde is not taxable. Abdu Mohammed agreed to
have a monthly Birr 200 be deducted and paid to the credit Association of the agency as
a monthly saving.
INSTURCTIONS: Based on the above information;
1. Prepare a payroll register (or sheet) for the agency for the month of Hidar, 2009.
2. Record the payment of salary as of Hidar 30, 2009 – using CK. No 41 as a source
document.
3. Record the payroll taxes expense for the month of Hidar; 2009 Memorandum No. 10
4. Record the payment of the claim of the credit association of the agency that arose from
Hidar’s Payroll assuming that the payment was made on Tahisas 3, 2009.
5. Assuming that the withholding taxes and payroll taxes for the month of Hidar, 2009 have
been paid on Tahisas 5, 2009 Via Ck. No. 50 recorded the required journal entry.
3.2.6.3. Computations of Earnings, Deductions and Net Pay

 Over Time Earnings:
Over Time Earnings = OT Hrs Worked (Ordinary Hourly Rate x OT Rate)
Senait : 10 hrs x ( Br. 13 x 1.25 ) = Br 162.50
Petros : 8 hrs x ( Br. 4 x 1.5 ) = Br 48.00
Abdu : 6 hrs x ( Br. 8 x 2 ) = Br 96.00
BAheru : 10 hrs x ( Br. 3 x 2.5 ) = Br 75.00
 GROSS EARNINGS:
Gross Earnings = Basic Salary + Allowance + OT Earning
1. Senait : Br 2080 + 100 + 162.50 = Br 2,342.50
2. Petros : Br 640 + 0 + 48.00 = Br 688.00
3. Abdu : Br 1280 + 0 + 96.00 = Br 1,376.00
4. Leila : Br 960 + 50 + 0 = Br 1,010.00
5. Baheru : Br 480 + 50 + 75.00 = Br 605.00
 1. Deductions & Net Pays:

1. Senayit
Gross Taxable Income = Br 2,342.50 Pension Contribution:
Employee Income Tax Deduction Basic Salary x 7%
Earning x ITR% Tax Rate - Deduction = IT Br 2080 x 7% = 145.60
208.87
+ 145.60
2,342.50 x 15% = 351.37 - 142.50 = 208.87 Total Deductions = 354.47
2,342.50
-354.47
Net Pay. Br. 1,988.03
2. Petros
Gross Taxable Income = Br 688.00 Pension Contribution:
Tax Pension Contribution is ZERO b/c
Earning x ITR% Rate - Deduction = IT Petros is a contractual worker
8.80
+ 0.00
688.00 x 10% = 68.80 - 60.00 = 8.80 Total Deductions = 8.80
688.00
-8.80
Net Pay. Br. 679.20
3. Abdu
Employee Income Tax Deduction Br 1,280 x 7% = 89.60
Credit Ass. Pay. 200.00
Tax
Earning x ITR% Rate - Deduction = IT Sub Total 289.60
77.60
+ 289.60
1,376.00
367.20
Net Pay. Br. 1,008.80
4. Leila
41.00
+ 67.20
1,010.00
108.20
Net Pay. Br. 901.80
5. Bahru
Gross Taxable Income = Br 605 Pension Contribution:
00.50
+ 33.60
605.00 x 10% = 60.50 - 60.00 = 0.50 Total Deductions = 34.10
605.00
34.10
Net Pay. Br. 570.90
ETHIO RELIEF AGENCY

A PAYROLL SHEET FOR THE MONTH OF HIDAR, 2009
Gross Earning Deduction Net Earning

Name of the Basic Over Total Income Total Net
No Employee Salary Allowance Time Earning Tax Pension Others Deduction Payment Sig.
1 Senait Bahiru 2080.00 100.00 162.50 2342.50 208.87 145.60 - 354.47 1988.03
2 Petros Challa 640.00 - 48.00 688.00 8.80 - - 8.80 679.20
3 Abdu Mohammed 1280.00 - 96.00 1376.00 77.60 89.60 200.00 367.20 1008.80
4 Leilla Jemal 960.00 50.00 - 1010.00 41.00 67.20 - 108.20 901.80
5 Baheru Wolde 480.00 50.00 75.00 605.00 00.50 33.60 - 34.10 570.90
Total . . . 5440.00 200.00 381.50 6021.50 336.77 336.00 200.00 872.77 5,148.73
Prepared By: Verified By: Approved By:
Proving the Payroll:

Total Earnings:
Basic Salary . . . . . . . . . . . . Br. 5,440.00
Allowance ............ 200.00
Over Time ............ 381.50
Grand Total Earnings . . . . . . . Br.6,021.50
Deductions:
Employee Income Tax . . . . . . . . . . . Br. 336.77
Pension Contribution . . . . . . . . . . . . 336.00
Other ............ ....... 200.00
Total Deduction. . . . . . . . . . . . . . . . . . . 872.77
Net Pays Total . . . . . . . . . . . . . . . . . . 5,148.73
Total Deduction, & Net Pay ........... Br.6,021.50
Thus, it is proved!
Lecture Notes on Principles of Accounting-II, Chapter III. Compiled by: Kassaye Tuji 1
 2. Recording the Payment of Salary.
Hidar 30, 2009. Salary Expense . . . . . . . . . . 6,021.50
Employee Income Tax Payable . . . . . . . . . 336.77
Pension Contribution Payable . . . . . . . 336.00
Credit Association . . . . . . . . . . . 200.00
Cash . . . . . . . . . . . . . ………… …… . 5,148.73 (Ck. No. 41)
 3. Recording the Payroll Taxes Expense for Hidar, 2009
Ethio. – Relief Agency incurred Payroll Tax Expense of Br. 528 during Hidar, 2009.
This is determined as the product of the basic salary o f all permanent employees and 11%.
This is because the agency has to contribute 11% of the basic salary of every Permanent
Employee to the Government Pension Trust Fund. Thus:
Payroll Taxes Expense = Total Basic Salary of all permanent Employees x 11%
= (2,080 + 1,280 + 960 +480) x11% = Br = 528
By the amount of Br. 528 the agency’s expense, Payroll Taxes Expense, and Pension Contributions Payable
increases. Therefore, the following Journal entry is made as of Hidar 30, 2009.
Payroll Taxes Expense 528
Pension Cont. Payable 528
(M10)
The source document is an internal office memorandum that indicates the incurrence of this expense.
 4. Recording The Payment of Deduction from Abdu’s earnings
To the Credit Association on Tahsas 3,2009.
Tahsas 3, 2009 Credit Association 200
Cash 200
 5. Recording The Payment of Withholding and Payroll Taxes

To Inland Revenue Authority on Tahissas 5,2009
Look at the account balance before payment:
Employee Income Tax Payable Pension Contribution Payable
336.00(2)
336.77 (2) 528.00(3)
864.00
From the above accounts you can see that the agency has a total liability of Br. 672.77 That is:-
Employee Income Tax Br 336.77
Pension Contribution 336.00
Total . . . . . . . . . . . . . . . . . . . . Br 672.77
Note also that the total pension contribution payable is equal to 18%of the basic salary of all
permanent employees. That is: Br 4,800 x 18%= Br. 864.00
▼ Then, the payment is recorded as follows:
Employees Income Tax Pay 336.77
Pension Contribution Payable 864.00
Cash 1,200.77
Ck. No. 50
After the payment of these liabilities have been posted, the above two accounts will have Zero Balances.
Lecture Notes on Principles of Accounting-II, Chapter III. Compiled by: Kassaye Tuji 2

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Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

3.1.2. Classifying Liabilities

3.1.2.1. Current Liabilities (Short-Term Liabilities)

3.1.2.2. Long-Term Liabilities

3.1.3. Accounting for Current Liabilities

Mar. 1 Cash 100,000

3.1.3.2. Accounts Payable

3.1.3.3. Sales Tax Payable

Thus, the sales tax amount of Br600 is found either by:

3.1.3.4. Unearned Revenue

3.1.3.5. Current Maturities of Long-Term Debt

It is not necessary to prepare an adjusting entry to recognize the current maturity of

3.1.3.6. Financial Statement Presentation

▼ The following balance sheet of XYZ Corp illustrates this practice.

3.2. ACCOUNTING FOR PAYROLL

3.2.3. Paying the Payroll

3.2.4. Calculating Employees Earnings

3.2.4.2. Overtime Earnings

 Ways/rules of payment for overtime work:

✓ Position Allowance: - a monthly sum paid to an employee for bearing a particular

3.2.5.1. Mandatory (Required) Deductions

3.2.5.2. Voluntary Deductions

3.2.5.3. Income Tax

Schedule of Tax Collection/Deduction as per Ethiopian Tax Law

Salary Range (ETB) Tax Rate Deduction (ETB)

Generally, taxable income from employment includes salaries, wages, allowances,

3.2.5.6. Net Pays

3.2.6.1. Recording the Payroll

Employee Earnings Record: It is summary of each employee’s earnings,

Ser. Name of Basic Monthly OT Hours Duration of Basic Salary

3.2.6.3. Computations of Earnings, Deductions and Net Pay

 1. Deductions & Net Pays:

ETHIO RELIEF AGENCY

Gross Earning Deduction Net Earning

Prepared By: Verified By: Approved By:

Proving the Payroll:

 5. Recording The Payment of Withholding and Payroll Taxes

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