CHAPTER 3

ACCRUED LIABILITIES AND DEFERRED

REVENUES
Payroll Taxes :
The entity as an employer us required to withhold from the
salaries of each employee the following :
a. Income tax payable by the employee
b. Employee contribution to the Social Security System or SSS
c. Employee contribution for Philhealth
d. Employee contribution to the Pag-IBIG Fund

Such amount withheld from the salaries of the employees

shall be recognized as current liability until remitted by the
entity to the appropriate government authority, together
with the required employer’s share on the contribution for
the benefit of the employees.
Illustration :
An entity reported the following payroll of the employees for the month of January :
Gross Payroll 500,000
Income tax withheld ( 20,000)
SSS Contribution ( 4,000)
Pag-ibig contribution ( 2,000)
Net Payroll ( 1,000)
473,000
In relation to the payroll for the month of January, the entity is required to make the following additional
contribution :

SSS 6,000
Philhealth 3,000
Pag-IBIG 2,000
Total Contribution 11,000

The Journal entry to record the gross payroll is as follows :

Salaries 500,000
Withholding tax payable 20,000
SSS Payable 4,000
Philhealth Payable 2,000
Pag-IBIG Payable 1,000
Cash 473,000
 The journal entry to record the employer’s additional contribution is as follows :

Payroll tax expense 11,000

SSS Payable 6,000
Philhealth Payable 3,000
Pag-IBIG Payable 2,000

The journal entry to record the remittance of the amounts withheld and the payment
of the additional contribution is as follows :

Withholding tax payable 20,000

SSS Payable 10,000
Philhealth Payable 5,000
Pag-IBIG Payable 3,000
Cash38,000

VALUE ADDED TAX (VAT)

Under the National Internal Revenue Code, the entity is required to collect value added
taxes from customers on sales of tangible property and certain services. Such value
added tax collected shall be remitted monthly to the Bureau of Internal Revenue
Illustration :
During a month, an entity sold goods to customers on account for P5,600,000,
including value added taxes of P600,000. The journal entry to record the sale is :

Accounts receivable 5,600,000

Sales 5,000,000
Output VAT 600,000

In the same month, the entity purchased goods from the supplier for P2,240,000
including value added tax of P240,000. The journal entry to record the purchase
is :

Purchases 2,000,000
Input VAT 240,000
Accounts Payable 2,240,000

At the end of every month, the input VAT is offset against the output VAT in order
to determine the net liability of the entity.
 The entry to recognize the net liability at the end of the month is :

Output VAT 600,000

Input VAT 240,000
VAT Payable 360,000

Subsequently, when the net liability is paid in the succeeding month, the journal entry is :

VAT Payable 360,000

Cash 360,000

GIFT CERTIFICATES PAYABLE :

Many megamalls, department stores and supermarkets sell gift certificates which are redeemable in merchandise. The accounting
procedures are :

1. When the gift certificates are sold :

Cash xx
Gift Certificate xx

2. When the gift certificates are redeemed :

Gift Certificates Payable xx
Sales xx

3. When the gift certificates expire or when gift certificates are not redeemed :
Gift Certificates Payable xx
Forfeited Gift Certificates xx

Note : DTI ruled that gift certificates no longer have an expiration period…
Refundable Deposits :
Cash or property received from customers but which are refundable after compliance
with certain conditions.
The best example for refundable deposit is the customer deposit required for
returnable containers like bottles, drums, tanks and barrels. The container’s deposit is
usually classified as current liability.

Bonus computation :
Large entities often compensate key officers and employees by way of bonus for
superior income realized during the year, to motivate the officers and employees. The
compensation plan results in liability that must be measured and reported in the
financial statement.

FOUR VARIATIONS OF BONUS COMPUTATION :

1. Bonus is expressed as a certain percent of income before bonus and before tax.
2. Bonus is expressed as a certain percent of income after bonus but before tax.
3. Bonus is expressed as a certain percent of income after bonus and after tax.
4. Bonus is expressed as a certain percent of income after tax but before bonus
Illustration :
Income before bonus and before tax 4,400,000
Bonus 10%
Income Tax Rate 30%

Case 1 - Before Bonus and Before Tax

Income before bonus and before tax 4,400,000
Multiply by 10%
Bonus 440,000

Case 2 – After bonus but before tax

B = .10 (4,400,000 – B)
B = 440,000 - .10B
B + .10B= 440,000
1.10B = 440,000
B = 440,000 / 1.10
B = 400,000
 Case 3 - After Bonus and After Tax
B = .10 (4,400,000 – B – T)
T = .30 (4,400,000 – B)
B = .10 (4,400,000 – B - .30(4,400,00-B)
B = .10 (4,400,000 – B – 1,320,000 + .30B)
B = 440,000 - .10B – 132,000 + .03B
B+.10B+.03B = 440,000 – 132,000
1.07B = 308,000
B = 308,000 / 1.07
B = 287,850
T = .30 (4,400,000 – 287,850)
T = 1,233,645

Case 4 – After tax but before bonus

B = .10(4,400,000 – T)
T = .30(4,400,00 – B)
B =. 10(4,400,000 - .30(4,400,00-B)
B = .10(4,400,000 – 1,320,000 +.30B)
B = 440,000 – 132,000 + .03B
B - .03B = 440,000 – 132,000
.97B = 308,000
B = 308,000 / .97
` B = 317,526
Deferred Revenue
Deferred revenue or unearned revenue is income already received
but not yet earned. It may be realizable within one year or is more
than one year from the end of the reporting period. If realizable
within one year, it is a current liability.
Examples of Current deferred revenue:
- Unearned interest income
- Unearned rental income
- Unearned subscription income.

If more than one year, then it is a non-current liability.

Examples of non-current deferred revenue :
- Unearned revenue from long term service contracts
- long-term leasehold advances.
Illustration:
An entity sells equipment service contracts agreeing to service
equipment for a 2-year period. Cash receipts from contracts
are credited to unearned service revenue and service contract
costs are charged to service contract expense.
Revenue from service contracts is recognized as earned over
the service period of the contracts. The following transactions
are made in the first year:

Cash receipts from service contracts sold 1,000,000

Service contract costs paid 500,000
Service contract revenue recognized 800,000
Journal Entries for first year :

1. To record the cash receipts from service contracts sold :

Cash 1,000,000
Unearned service revenue 1,000,000

2. To record the service contract costs paid :

Service contract expense 500,000
Cash 500,000

3. To record the service contract revenue recognized:

Unearned service revenue 800,000
Service contract revenue 800,000