Chapter Four Current Liabilities

f
Learning Objectives
f this chapter, you should be able to:
After studying

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

10-1
 Current Liabilities

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.

Current liabilities include notes payable, accounts payable, unearned

revenues, and accrued liabilities such as taxes, salaries and wages, and
interest payable.

10-2
LO 1 Explain a current liability, and identify the
major types of current liabilities.
 Current Liabilities

Question
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

10-3
LO 1 Explain a current liability, and identify the
major types of current liabilities.
 Current Liabilities

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.

10-4 LO 2 Describe the accounting for notes payable.

 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, 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, 2015).

10-5 LO 2 Describe the accounting for notes payable.

 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, 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.

Cash 100,000
Notes payable

b) Prepare100,000
the adjusting journal entry on Dec. 31.

Interest expense 4,000

Interest payable
HK$100,000 x 12% x 4/12 = HK$4,000
4,000
10-6 LO 2 Describe the accounting for notes payable.
 Current Liabilities

Illustration: Hong Kong National Bank agrees to lend

HK$100,000 on September 1, 2014, 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, 2015).

Notes payable 100,000

Interest payable 4,000
Cash

104,000

10-7 LO 2 Describe the accounting for notes payable.

 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.

10-8 LO 3 Explain the accounting for other current liabilities.

 Current Liabilities

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:

Cash 115,000
Sales revenue
Value Added Tax payable
100,000
15,000

10-9 LO 3 Explain the accounting for other current liabilities.

 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.

10-10 LO 3 Explain the accounting for other current liabilities.

 Current Liabilities

Illustration: FA ticket office sells 10,000 season football

tickets at $ 50,000 each for its five-game home schedule. The
club makes the following entry for the sale of season tickets (in
thousands of $):

Aug. 6 Cash 500,000

Unearned ticket revenue

As each game is500,000

completed, FA records the revenue earned.

Sept. 7 Unearned ticket revenue 100,000

Ticket revenue

10-11 100,000
 Current Liabilities

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.

10-12 LO 3 Explain the accounting for other current liabilities.

 Statement Presentation

Presentation
 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.

10-13 LO 3 Explain the accounting for other current liabilities.

 Statement Presentation
Illustration 10-3

10-14 LO 3 Explain the accounting for other current liabilities.

 The Payroll
system In
Ethiopian
Context

10-15
 Payroll
Payroll

Payroll is the amount paid to employees for

services provided. Payrolls are important because--
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.

10-16
 Terms

 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 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

10-17
 Terms

 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): 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.

10-18
 Terms..

 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.

10-19
 Terms…

 Gross Earnings: The total pay to an employee before deductions for

the pay period.
 Payroll Taxes: Are taxes levied against the employer on the payroll of
a firm. It is an additional payroll related expense to an employer.
 Withholding Taxes: These are taxes levied against the earnings of
employees of an organization and withheld by the employer per the
regulations of the concerned government
 Payroll Deductions: All the reductions from the gross earnings of an
employee such as withholding taxes, union dues, fines, credit
association pays, etc.
 Net Pay: The gross earnings after subtracting all the deductions. It is
sometimes known as take home pay-the amount collected by an
employee on the payday.

10-20
 Components of a Payroll Register

1. Employee number - numbers assigned to employee

for identification purpose When a relatively large
number of employees are included in the payroll
register.
2. Name of employees - list of the name of employees.
3. Earnings: money earned by an employee(s) of a
firm from various sources.
It may include:

10-21
 Payroll
Payroll Register
Register

It’s
It’s aa multicolumn
multicolumn form
form used
used toto help
help
What
What isis the
theassemble
assemble andand summarize
summarize the
the data
data
purpose
purpose of of aa needed
needed forfor each
each payroll
payroll period.
period.
payroll
payroll register?
register?

10-22
 Components of a Payroll Register…

Earnings include:
a. The basic salary or Regular Earning
b. Allowances
- position allowance
- House allowance
- Hardship allowance
- Desert allowance
- Transportation( Fuel) allowance
c. Overtime earning

10-23
 Components of a Payroll Register…

Overtime calculation
 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 overtime payment calculation is
based on the following rates
i. at a rate of one and one quarter (1 1/4) times his/her ordinary
hourly rate for overtime work performed before 10 O'clock in
the evening (10 p.m.).
ii. at the rate of one and one half (1 1/2) times his 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.)
10-24
 Components of a Payroll Register…

iii. Overtime work performed on the weekly rest days shall be

paid at a rate of two (2) times the ordinary hourly rate of
payment
iv. A worker shall be paid at a rate of two and half (2 1/2) times the
ordinary hourly rate for overtime work performed on a public
holiday.

10-25
 Components of a Payroll Register…

4. Deductions
- are subtractions made from the earnings of
employees that is because it is required by
government or permitted by the employee himself
a. Employee Income Tax- In Ethiopia every citizen is
required to pay something in the form of income tax
from his/her earning of employment

10-26
 Employment income tax calculation

 According to the proclamation 979/2016, employee income tax

has to be computed based on the following schedule.
Taxable Monthly Income Rates of tax (%) on
(In Birr) 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 10,470 30%

10-27
6. over 10,900 35%
 Components of a Payroll Register…

b. Pension Contribution
- Employee working in government organizations
contribute 7% of their salary
- Government contributes 11% of each employee's
salary in each month
That means 18% of one’s salary is accumulated for
each employee for his /her retirement payment

10-28
 Components of a Payroll Register…

c. Other Deductions
- loan repayment
- saving in a credit association
- donation for charitable organizations
5. The Net Pay. the excess of gross earnings over the
total deductions of an employee( take home pay).
6. Signature

10-29
 Calculations
Gross earning, and payroll Deductions
Example: Mr.Zelalem is an employee in one of the government in
Ethiopia. His monthly salary is Birr 12,000. During Mazia 2011
he working on Easter for 8 hours. He has a position allowance
of Birr 2500. He has also transportation allowance of Birr 2000(
non taxable). Zelelam is a member of the saving and credit
association of his organization which demands to save 10% of
his salary. He is expected to work 160 hours per month. He
worked accordingly
Required: Compute
a. Gross Earning
b. Employment Income Tax
c. Pension contribution
d. Net pay for the month of Mazia 2011

10-30
 Solution

a. Gross Earning
GE = Basic salary + Allowances + Overtime
OT earning = OT rate x OT hours worked X basic salary per hour
Basic salary per hour = basic salary/ total normal hour working hours
per
month
= 12,000/160
= Bir 75/hr
OT earnings = 2. 5 x 8 x 75
Birr 1500
GE = 12,000 + 2500+ 2000+ 1500
Birr 18000
Taxable income = 12,000 + 2500 + 1500 as transpiration allowance is not
taxable
10-31
 Solution..

b. Employment Income Tax ( long Method)

Taxable Tax rate Tax
Income

0-600 0 0 0

601-1650 1050 10% 105

1651-3200 1550 15% 232.5

3201-5250 2050 20% 410

52510- 7800 2550 25% 637.5

7801-10,900 3100 30% 930

10,901-16000 5100 35% 1785

10-32
Total Income tax 4,100
 Solution..

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% 1500.00 TI X 35% – 1500

10-33
 Solution..

Using deduction method the Employment income tax

can be computed
Income tax = 16000 x3 35% - 1500
4,100
Note; we can also use the excel sheet

c. Pension contribution = 7% x basic salary

= 7% x 12000
= 840

10-34
 Solution..

d. Net pay(NP) = Gross earnings – total deductions

GE = 18,000
Total Deduction(TD) = EIT + PC + Saving
saving = 10% x 12000
= 1200

TD = 4100 + 840 +1200 = 6,140

NP = 18000 – 6,140
= 11,860

10-35
 Accounting for payroll

The following transaction payroll related

transaction
1. Payment of salary for employees
2. Paying withholding taxes to ERCA
3. Pay other deductions to the responsible
body

10-36
 Recording
Recording salary
salary payment
payment
Mazia. 302011 Salaries Expense 18000 00
Employment Income tax payable
4100 0 payable
Pension contribution
Saving and Credit840 00
association payable
1 200 00

Cash in bank 11,860

10-37
 Recording
Recording Employer’s
Employer’s Payroll
Payroll Taxes
Taxes

Maz.. 30 Payroll Tax Expense 1320

Pension contribution Payable
1320 00

10-38
 Recroding
Recroding Payment
Payment EIT
EIT to
to ERCA
ERCA

Ginbot. Employment Income tax payable 4,100

Cash in bank ( CPO) 4,100

10-39
 Recording
RecordingPayment
PaymentPension
Pensioncontribution
contributionto
toERCA
ERCA

Ginbot. Pension contribution payable 2,160.00

Cash in bank ( CPO) 2,160.00

10-40
 Payment
Payment of
of saving
saving to
to Saving
Saving &
& credit
credit
association
association
Ginbot. Saving & Credit Association payable 1,200.00
Cash in bank ( CPO) 1,200.00

10-41
 Employees’
Employees’ Fringe
Fringe Benefits
Benefits

10-42
 Other
Other Employee
EmployeeBenefit
Benefit in
inEthiopia
Ethiopia

Bonus
Maternity and
paternity leave
Sick leave

annual leave
and severance
Medical
pay

10-43
 End
End of
of the
the chapter
chapter

10-44