CHAPTER

3 Accounting for
Current Liabilities
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain a current liability, and identify the major types of current liabilities.
2. Describe the accounting for notes payable.
3. Illustrate the accounting for employee-related liabilities.
4. Explain the accounting for other current liabilities.
5. Describe the financial statement presentation of current liabilities.

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 Current Liabilities
Learning Objective
What Is a Current Liability? 1
Explain a current liability,
and identify the major
types of current
A debt that a company expects to pay liabilities.

1. from existing current assets or through the creation of

other current liabilities, and
2. within one year or the operating cycle, whichever is
longer.

Current liabilities include notes payable, accounts payable, unearned

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

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 Notes Payable
Learning Objective
2
 Written promissory note. Describe the accounting
for notes payable.
 Usually require the borrower to pay interest.
 Frequently issued to meet short-term financing needs.
 Issued for varying periods of time.
 Those due for payment within one year of the balance
sheet date are usually classified as current liabilities.

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 Notes Payable

Illustration: Awash Bank agrees to lend Br. 100,000 on

September 1, 2017, if C.W. Co. signs a Br.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, 2018).

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 Notes Payable

Illustration: Awash Bank agrees to lend Br.100,000 on

September 1, 2017, if C.W. Co. signs a Br.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
Br.100,000 x 12% x 4/12 = Br.4,000
4,000
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 Notes Payable

Illustration: Awash Bank agrees to lend Br.100,000 on

September 1, 2017, if C.W. Co. signs a Br.100,000, 12%, four-
month note maturing on January 1.
c) Prepare the journal entry at maturity (January 1, 2018).

Notes Payable 100,000

Interest Payable 4,000
Cash

104,000

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 Employee-Related Liabilities
Learning
The term “payroll” pertains to both: Objective 3
Illustrate the
accounting for
Salaries - managerial, administrative, and employee-related
liabilities.
sales personnel (monthly or yearly rate).

Wages - store clerks, factory employees, and manual

laborers (rate per hour).

Determining the payroll involves computing three amounts:

(1) gross earnings, (2) payroll deductions, and (3) net
pay.

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 Employee-Related Liabilities

 Gross earning is the total compensation earned

by an employee.
 The gross earnings may include:
 Wages/salaries
 Overtime earnings
 Is the compensation for any work performed by an employee
beyond the regular working hours or days.
 Allowances
 Is the Money paid monthly to an employee for special reason
 Bonuses… etc

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 Employee-Related Liabilities

 Ways/rules of payment for overtime work:

 For OT work done between 6AM in the morning and 10PM in the
evening, the rate of payment is 1.5 (one and half) multiplied by the
ordinary hourly rate;
 For OT work done between 10PM in the evening and 6AM in the
morning, at the rate of 1.75 (one & three fourth) multiplied by the
ordinary hourly rate;
 For OT work done on weekly rest day, at the rate of 2 multiplied by
the ordinary hourly rate;
 For OT work done on a public holiday, at the rate of 2.5 multiplied
by the ordinary hourly rate.

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 Employee-Related Liabilities
ALLOWANCES
 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 sometimes 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.
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 Employee-Related Liabilities

 Payroll Deductions
1. MANDATORY (REQUIRED) DEDUCTIONS
 These are deductions made from the earnings of employee that
is because it is required by government.
2. VOLUNTARY DEDUCTIONS
 Employees may voluntarily authorize withholding of part of their
earnings for charitable activities, additional retirement benefit
packages, and other purposes.
 The employee should authorize all voluntary deductions from
gross earnings in writing.

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 Employee-Related Liabilities
INCOME TAX
 Schedule of tax collection/deduction as per Ethiopian Tax Law
Rate of tax (%) on
Taxable Monthly Income (In Birr) Every Additional Income
1 0-600,the first 600 0%
2 Over 600 but not exceeding 1,650 on the next 1,050 10%
3 Over 1,651 not exceeding 3,200on the next 1,550 15%
4 3201 - 5250 on the next 2,050 20%
5 Over 5251 - 7800 on the next 2,550 25%
6 7801- 10,900 on the next 3,100 30%
7 Over 10,900 35%
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 Employee-Related Liabilities
Short cut to Income Tax Calculation
Employment Income (per month) Income Tax Payable

Over Birr To Birr

0 600 No tax
601 1,650
(10% X EI) – 60
1,651 3,200
(15% X EI) – 142.5
3,201 5,250
(20% X EI) – 302.5
5251 7,800
(25% X EI) – 565
7801 10,900
(30% X EI) – 955
Over 10,900
(35% X EI) – 1,500
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 Employee-Related Liabilities
Exemptions (None Taxable Income)
 Medical costs incurred by employer for treatment of employees.
 Transportation allowances paid by employer to its employees (not
exceeding Birr 600).
 Reimbursement by employer of traveling expense incurred on duty
by employees.
 Traveling expenses paid to transport employees from else where to
place of employment and to return them upon completion of
employment.
 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.
 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.
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 Employee-Related Liabilities
Post Employment Benefits- Pension
 The Employee:
 Ethiopian law obliges employees working both in private and public
organizations to pay or contribute 7% of their basic (monthly) salary to the
government managed 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.
 The Employer
 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.
 The payment of pension contributions
 These amounts 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 together with the employer’s contribution.
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 Employee-Related Liabilities

 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.

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 Employee-Related Liabilities
Illustrative Example
 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, 2014

OT Duration of Basic
Ser. Name of Basic Monthly Hours OT Salary
No. Employee Salary Allowance Worked Work Per Hour
01 Senait Bahiru 2,080 100 106a.m up to 10 p.m. 13
02 Petros Ephrem 640 - 810p.m. up to 6a.m 4
03 Abdu Mohammed 1,280 - 6Weekly Rest Days 8
04 Leilla Jemal 960 50 -- 6
05 Guya Boru 10,000 50 5Public Holiday 62.5

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 Employee-Related Liabilities

Additional Information
1. The management of the agency usually expects a worker
to work 40-hours in a week and during Hidar 2014 all
workers have done as they have been expected.
2. All workers of this agency are permanent employees
except Petros Ephrem.
3. The monthly allowance of Guya Boru is not taxable.
4. Abdu Mohammed agreed to have a monthly Birr 200 be
deducted and paid to the credit Association of the agency
as a monthly saving.

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 Employee-Related Liabilities
INSTURCTIONS
 Based on the above information;
1. Prepare a payroll register (or sheet) for the agency for the month
of Hidar, 2014.
2. Record the payment of salary as of Hidar 30, 2014 – using CK.
No 41 as a source document.
3. Record the payroll taxes expense for the month of Hidar; 2014
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, 2014.
5. Assuming that the withholding taxes and payroll taxes for the
month of Hidar, 2014 have been paid on Tahisas 5, 2014 Via Ck.
No. 50 recorded the required journal entry.

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 Employee-Related Liabilities
Illustrative Example…ctd

OVER TIME EARNINGS:

Over Time Earnings = OT hours worked X OT rate

Senait 10 hrs x (Br. 13 x 1.5) = Br. 195.00

Petros 8 hrs x (Br. 4 x 1.75) = Br. 56.00
Abdu 6 hrs x (Br. 8 x 2) = Br. 96.00
(Br. 62.5 x
Guya 5 hrs x 2.5) = Br. 781.25

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 Employee-Related Liabilities
Illustrative Example…ctd

GROSS EARNINGS:
Gross Earnings = Basic Salary + Allowance + OT Earning
Ser
. OT Gross
No. Employee Name Basic Salary Allowance Earning Earnings
1. Senait Bahiru Br2080 + 100 + 195.00 = 2,375.00
2. Petros Ephrem Br640 + 0 + 56.00 = 696.00
3. Abdu Mohammed Br1280 + 0 + 96.00 = 1,376.00
4. Leilla Jemal Br 960 + 50 + 0.00 = 1,010.00
5. Guya Boru Br 10,000 + 50 + 781.25 = 10,831.25

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 Employee-Related Liabilities
Illustrative Example…ctd
•Deductions & Net Pays:
1. Senayit:

Gross Taxable Income = Br 2,375.00 Pension contribution:

Employee Income Tax: Basic Salary x 7%
Earning x ITR = IT Br 2080 x 7% = 145.6
213.75+ 145.6
600.00 0% 0.00 Total Deductions = = 359.35
2,375 - 359.35
1,050.00 10 % 105.00 Net Pay. Br. 2,015.65
725.00 15 % 108.75
Total 2,375.00 213.75

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 Employee-Related Liabilities
Illustrative Example…ctd
•Deductions & Net Pays:
2. Petros

Gross Taxable Income = Br

696.00
Pension contribution is zero b/c Petros
Employee Income Tax: Is a contractual worker

Total Deductions 9.60 +0.00= 9.60

Earning x ITR = IT =
600.00 0% 0.00 Net Pay. 696.00-9.60= 686.40

96.00 10% 9.60

Total 696.00 9.60

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 Employee-Related Liabilities
Illustrative Example…ctd
•Deductions & Net Pays:
3. Abdu:
Gross Taxable Income = Br Pension
1,376.00 contribution:

Employee Income Tax: Basic Salary x 7% 0.00

Earning x TIR = IT Br 1,280 x 7% = 89.6

600.00 0% 0.00 Credit Ass. Pay. = 200.00

77.60 +89.6
Total Deductions = +200.00 = 367.2
1,376.0 - 367.2=
776.00 10 % 77.60 Net Pay = 1,008.8

Total 1,376.00 77.60

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 Employee-Related Liabilities
Illustrative Example…ctd
•Deductions & Net Pays:
4. Leila:
Gross Taxable Income = Br Pension
1,010.00 contribution:
Basic Salary x
Employee Income Tax: 7%

Earning x TIR = IT Br 960 x 7% = 67.2

600.00 0% 0.00 Total Deductions = 41 +67.2=108.20

10 1,010.00-108.20=
410.00 % 41.00 Net Pay = 901.80

Total 1,010.00 41.00

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 Employee-Related Liabilities
Illustrative Example…ctd
•Deductions & Net Pays:
5. Guya:
Gross Taxable Income =Br Pension
10,831.25- 50 = 10,781.25 contribution:
Basic Salary x 7%
Employee Income
Tax: Br 10,000 x 7% = 700.00
2279.38
+700
Earning x TIR = IT Total Deductions = 2,979.38
600.00 0% 0.00 10,831.25 -
1050.00 10 % 105.00 2,979.38
1550.00 15% 232.5 Net Pay = 7,851.87
2,050.00 20% 410.00
2550.00 25% 637.5
2,981.25 30% 894.38
3-26 Total 10,781.25 2279.38 LO 3
 Employee-Related Liabilities
ETHIO RELIEF AGENCY

A PAYROLL SHEET FOR THE MONTH OF Hidar, 2014

Gross Earning Deduction Net Earning

Total
Basic Over Total Income Net
Name of the Allowa Deductio Sig
No Employee Salary nce Time Earning Tax Pension Others n Payment .
1 Senait Bahiru 2080.00 100.00 195.00 2,375.00 213.75 145.6 - 359.35 2,015.65
2 Petros Ephrem 640.00 - 56.00 696.00 9.60 - - 9.60 686.40
Abdu
3 Mohammed 1280.00 - 96.00 1376.00 77.60 89.60 200.00 367.2 1008.8

4 Leilla Jemal 960.00 50.00 - 1010.00 41.00 67.2 - 108.2 901.8

10,000.00
5 Guya Boru 50.00 781.25 10,831.25 2,279.38 700.00 - 2,979.38 7,851.87
Total . . . 14960.00 200.00 1,128.25 16,288.25 2,621.33 1,002.4 200.00 3,823.73 12,464.52

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 Payroll-related Journal Entries

Recording the Payment of Salary for the month of Hidar 30,

2014

Salary Expense 16,288.25

Employee Income Tax Payable
Pension Contribution Payable
2,621.33
Payable to Credit Association
1,002.40
Cash
200.00
12,464.52

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 Payroll-related Journal Entries
Recording the Payroll Taxes Expense for Hidar, 2014
• Total Basic Salary of all permanent Employees x 11% =
Payroll Taxes Expense
• (2,080 + 1,280 + 960 +10,000) x11% =14,320.00 x11% =
1,575.20
Payroll Taxes Expense 1,575.20

Employee Income Tax Payable

1,575.20

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 Payroll-related Journal Entries

Recording The Payment of Deduction from

Abdu’s earnings to the credit association on
Tahsas 3,2014
Payable to Credit Association 200

Cash

200

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 Payroll-related Journal Entries

Recording The Payment of Withholding and

Payroll Taxes to Ministry of Revenue on
Tahissas 30, 2014.
• Total Pension Contribution Payable (1,002.40+
1,575.20=2,577.60)
Employment Income Tax Payable
2,621.83
Pension Contribution Payable 2,577.60
Cash

5,199.43
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 Value Added Taxes (VAT) Payable
Learning Objective
4
Explain the accounting
for other current
liabilities.
 Value added taxes are expressed as a
stated percentage of the sales price.
 Selling company
► collects tax from the customer.
► remits the collections to the government’s
Ministry of revenue.

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 Value Added Tax Payable

Illustration: The March 25 cash register reading for Cooley

Grocery shows sales of Br.10,000 and Value Added Tax of Br.
1,500 (VAT rate of 15%), the journal entry is:

Cash 11,500
Sales Revenue
VAT Payable
10,000
1,500

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 Unearned Revenues

Revenues that are received before goods are delivered or

services are performed.
1. Company increases (debits) Cash
and increases (credits) a current
liability account, Unearned
Revenue.
2. When the company recognizes
revenue, it decreases (debits) the
unearned revenue account and
increases (credits) a revenue
account.
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 Unearned Revenues

Illustration: Sidama Buna sells 10,000 season football tickets

at Br. 50 each for its five-game home schedule. The club makes
the following entry for the sale of season tickets:

Aug. 6 Cash 500,000

Unearned Ticket Revenue

As each game is500,000

completed, Busan IPark records the revenue
earned.

Sept. 7 Unearned Ticket Revenue 100,000

Ticket Revenue

3-35 100,000 LO 4
 Financial Statement Presentation of Current
Liabilities Learning Objective
PRESENTATION 5
Describe the financial
statement presentation of
 Current liabilities are presented after non-current
current liabilities.

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.

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 Current Maturities of Long-term Debt

 Portion of long-term debt that comes due in the current

year shall be presented as current liability on the
statement of financial position.
 No adjusting entry required for the reclassification.

Illustration: Wendy Construction issues a five-year, interest-bearing

Br.25,000 note on January 1, 2017. This note specifies that each
January 1, starting January 1, 2018, Wendy should pay Br.5,000 of
the note. When the company prepares financial statements on
December 31, 2017, Br.5,000
1. What amount should be reported as a current liability? Br.20,00
__________ 0
2. What amount should be reported as a long-term liability?
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 Financial Statement Presentation of CL…
ctdBelow is the Statement of Financial Position presentation of current
liabilities (in thousands)

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 > DO IT!

You and several classmates are studying for the next accounting
examination. They ask you to answer the following questions.
1. If cash is borrowed on a Br.50,000, 6-month, 12% note on
September 1, how much interest expense would be incurred by
December 31? Br.50,000 × 12% × 4/12 =
Br.2,000
2. The cash register total including Value Added Tax is Br.25,300,
and the VAT rate is 15%. What is the Value Added Tax payable?
Br.25,300 ÷ 1.15 = Br.22,000; Br.25,300 − Br.22,000 =
Br.1,320
3. If Br.15,000 is collected in advance on November 1 for 3 months’
rent, what amount of rent revenue should be recognized by
Br.15,000 × 2/3 =
December 31?
Br.10,000
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 End of Chapter 3

THANK YOU!

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