Financial Accounting Chapter 9

UNEARNED REVENUES

(deferred revenues, collections in advance, prepayments) are amounts received in ADVANCE from customers for future products or services EX: Rihana concert tickets --> pay before then see the show Dr Cash Cr Unearned Ticket Revenue Then the concert it played --> Dr Unearned Ticket Revenue Cr Ticket Revenue

NET PAY

(or take home pay) Gross Pay less ALL DEDUCTIONS

ACCOUNTS PAYABLE

(trade accounts payable) are amounts owed to suppliers, or vendors, for products or services purchased on credit

PAYROLL DEDUCTIONS What are the steps of PAYROLL DEDUCTIONS?

(withholdings) are amounts withheld from an employee's gross pay, either required or voluntary GROSS PAY --> federal income tax + state and local income taxes + voluntary deductions + FICA taxes (medicare) + FICA taxes (social security) + NET PAY --> NET PAY = Gross pay - Deductions

SHORT-TERM NOTE PAYABLE

A WRITTEN PROMISE to pay a specified amount on a stated future date within ONE YEAR or the company's operating cycle

Employee earnings report

A cumulative record of an employee's hours worked, gross earnings, deductions, and net pay

SALES TAXES PAYABLE

A percent of selling prices Dr Cash Cr Sales Cr Sales taxes payable

What is a LIABILITY? What are the 3 crucial elements?

A probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events 1. A PAST transaction or event 2. A PRESENT obligation 3. A FUTURE payment of assets or services

WARRANTY

A seller's OBLIGATION to replace or correct a product (or service) that fails to perform as expected within a specified period

STATE UNEMPLOYMENT TAX ACT (SUTA) MERIT RATING

All states support their unemployment insurance programs by placing a payroll tax on EMPLOYERS MERIT RATING: assigned by the state that reflects a company's stability or instability in employing workers

KNOWN LIABILITIES

Arise from agreements, contract, or laws and they are MEASURABLE

CONTINGENT LIABILITY? What are the steps?

Contingent liability --> A potential obligation that depends on a future event arising from a past transaction or event 1. probable [likely and reasonably estimated] --> a. estimable = RECORD liability (journal entry) b. non-estimable [could occur] = DISCLOSE in notes (disclose: to accurately & fully write down) 2. possible [unlikely] = DISCLOSE in notes 3. remote = no disclosure

Which principle is being recognized? DR employee bonus expense CR bonus payable DR bonus payable CR cash

EXPENSE RECOGNITION principle

Form W-4

Each employee records the number of withholding allowances claimed on a withholding allowance certificate (W-4)

EMPLOYEE PAYROLL RECORDING

Employers accrue payroll expenses and liabilities at the end of each pay period

FEDERAL UNEMPLOYMENT TAX ACT (FUTA)

Employers are subject to a federal unemployment tax on wages and salaries paid to their EMPLOYEES

Wage bracket withholding table

Employers compute the federal income taxes withheld

TIMES INTEREST EARNED What is the formula?

It reveals that the amount of fixed interest expense affects a company's risk of its ability to pay interest --> reflected in the times interest earned Times interest earned = (Income before interest expense + Incomes taxes) / Interest expense

A retailer sells merchandise for $500 cash on June 30 (cost of merchandise is $300). The sales tax law requires the retailer to collect 7% sales tax. Record the entry for the $500 sale and its applicable sales tax. Also record the entry that shows the remittance of the 7% tax on this sale to the state government on July 15.

June 30 Dr Cash $535 Cr Sales $500 Cr Sales Taxes Payable $35 June 30 Dr COGS $300 Cr Merchandise Inventory $300 July 15 Dr Sales Taxes Payable $35 Cr Cash $35

Federal Insurance Contributions Act (FICA) taxes What are the 2 groups?

Laws require employers to withhold FICA taxes from employees' pay to cover costs of the system 1. retirement, disability, and survivorship (social security) 2. medical (medicare)

ESTIMATED LIABILITY

OBLIGATION that is of an UNCERTAIN amount but that can be reasonably ESTIMATED

LONG-TERM LIABILITIES

Obligations due AFTER ONE YEAR or the company's operating cycle, whichever is LONGER They include: long-term notes payable, warranty liabilities, lease liabilities, and bonds payable

CURRENT LIABILITIES

Obligations due WITHIN ONE YEAR or the company's operating cycle... whichever is LONGER They include: AP, short-term notes payable, wages payable, warranty liabilities, lease liabilities, taxes payable, and unearned revenues

Payroll Check

Payment of payroll is usually done by check or electronic funds transfer

Form 941

Reporting FICA taxes and income taxes

Form 940

Reporting FUTA taxes and SUTA taxes

Form W-2

Reporting Wages and Salaries

Payroll Register

Shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period

GROSS PAY

The TOTAL COMPENSATION an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes

Deferred income tax liability

The difference that separates the income taxes expense reported in the income statement that is often different from the amount of income taxes payable to the government

PAYROLL LIABILITIES

They are an important part of KNOWN LIABILITIES and arise from salaries and wages earned, from employee benefits, and from payroll taxes levied

EMPLOYEE VOLUNTARY DEDUCTIONS

Voluntary deduction withholdings arise from employee requests, contracts, unions, or other agreements

Accounting for liabilities involve what 3 important questions?

WHOM to pay? WHEN to pay? HOW MUCH to pay? --> these questions are often decided when a liability is incurred

DEBT GUARANTEE?

When a company guarantees the payment of debt owed by a supplier, customer, or another company --> guarantor usually discloses the guarantee in its financial statement notes as a contingent liability

What happens when a note extends over TWO PERIODS?

When a note is issued in one period but paid in the next, interest expense is recorded in each period based on the number of days the note extends over each period

EMPLOYEE BENEFITS

When an employer often pays all or part of medical, dental, life, and disability insurance & sometimes pension plans

MULTI-PERIOD KNOWN LIABILITIES CURRENT PORTION OF LONG-TERM DEBT

When known liabilities extend over multiple periods --> often include unearned revenues and notes payable Refers to that part of long term debt due within ONE YEAR or the operating cycle

VACATION BENEFITS

paid absences or compensated absences