Key Things To Know
Introduction to Accounting
Key Things To Know
Liability – probable future payment of assets (usually cash) or services which
1) occurs from a past transaction or event
2) is a present obligation
3) is a future payment
Current or short term –
means it will be paid within one year of the balance sheet date or the operating cycle, whichever is longer
Common Current or Short-term Liabilities:
Amounts owed to suppliers for goods or services purchased on credit, normally 30 days, no interest charged
Sales Tax Payable:
A tax levied on retail sales.
The business must charge this and collect the money and then pay it to the state or city
Each state/city sets its own %.
This is not a revenue or an expense to the business.
They collect the cash and have an obligation to pass it on to the city/state.
Journal entry for sales tax collection and payable:
Sales revenue $XXXX
Sales Tax Payable $ XX
Part of what is collected is revenue and part is owed to city/state.
Occurs when the company collects money from a customer before the company provides the goods or services
The company owes the goods or services.
This is normally current; however, can also be noncurrent.
Short Term Notes Payable:
A written promise to pay an amount borrowed, with interest
Short term means the principle will be repaid in < 1 year
Notes payable typically have monthly periodic payments
Amounts accessed to the business by the government and amounts taken out of the employee’s check that must be paid to the government for the employee:
Gross Pay – the total amount the employee earns (hrs worked x $ per hr)
Net Pay – the amount the employee receives after deductions are taken
Payroll deductions – Withholdings
Employee FICA tax – (Social Security) – 6.2% up to a set amount
Medicare tax – 1.45% of total amount earned
Income tax – depends on how much is earned & the employee’s tax rate
Voluntary Deductions – Health insurance, union dues, pension savings…
Journal entry for the employee’s paycheck:
Salary Expense *
FICA tax payable
Medicare tax payable
Federal income tax payable
Medical insurance payable
Union dues payable
Salaries payable **
* Salary expense is what the employee earns (hrs. x rate per hr.)
** Salaries payable is the check to the employee after deductions
Employer Payroll Taxes:
Employers must pay FICA/Social Security tax and Medicare tax for the same amount the employee pays – 6.2% and 1.45%
Employers are required to pay unemployment taxes so that laid off workers will be able to receive unemployment benefits.
This must be paid to the state (SUTA) and to the federal government (FUTA).
State: usually 1% to 5.4% of the first $7,000 earned, based on history
Federal: usually .8% of first $7,000 earned, considering state was paid
Journal entry for recording employer’s taxes to be paid
Payroll tax expense **
FICA/SS tax payable
Medicare tax payable
** Payroll tax expense is the total of all the other payables that are calculated based on the given % x earnings
The seller’s obligation to replace goods or provide service to defective products within a set period of time
Sometimes extra is paid for the warranty and sometimes the warranty comes with the product.
The warranty expense must be recorded in the same period as the sale.
We do not know the exact amount that will occur in the future, so we must estimate.
Sales this period
x % of warranty historically occurs
= warranty expense for this period
Record the warranty obligation for the calculated amount:
Warranty Expense $X,XXX
Warranty liability $X,XXX
An obligation that may occur, dependant on a future event to happen, in order for you to know how much will be paid to who.
Contingent liabilities may be short-term or long-term depending on when the estimated amount is expected to be paid.
Examples: Lawsuits, environmental cleanups, debt guarantees
First: Classify the obligation based on how likely it is to occur:
FASB did not give a definition of each category.
2) Reasonably Possible
Second: Determine a high low range that may be paid for the obligation, if possible. Sometimes a reasonable estimate cannot be made.
Third: Based on the classification, report the following
Record an expense and a liability for the low end of the estimated amount if you can estimate a range.
Disclose the situation in the footnotes
If you cannot reasonably estimate a range, no expense is recorded.
2) Reasonable Possible
Disclose the situation in the footnotes stating the low and high estimate that might be paid or state that you can not reasonably estimate the loss
Do nothing, do not expense or disclose