chapter 9 blue print

chapter 9 blue print

Liabilities related to payroll

In most businesses, payroll costs are a major category of expenses, and there are many liabilities related to employee earnings. When employees earn wages and salaries, those amounts are subject to taxes and other deductions that the employer must withhold. The taxes and other deductions that the employer withholds become

liabilities

for the employer.

The employer is also required by law to pay employer taxes on employee earnings. Since these amounts must be paid to government agencies, they are

liabilities

for the employer.

Most employers must pay FUTA, FICA and SUTA taxes. Employer FICA taxes are levied on employers at the

same rates

and on the

same earnings bases

as the employee FICA taxes. FUTA (Federal Unemployment Tax Act) tax is levied only on

employers

and it is not deducted from

employees’

earnings. The SUTA (state unemployment tax) tax is also levied only on employers in most states and the purpose of this tax is to raise funds to pay

unemployment benefits

Feedback

Review the defined terms in this section. Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.

APPLY THE CONCEPTS: Record payroll entries

The payroll clerk at Diego, Inc., has used a spreadsheet program to produce a printout of the salaries for April 15.

Employees’ total earnings $50,000
Deductions from earnings:
Federal income tax $8,000
State income tax 2,000
Social Security tax 3,100
Medicare tax 725
Health insurance premiums 1,000
Total deductions 14,825
Net pay $35,175
Use the data in the spreadsheet for the following entries. If an amount box does not require an entry, leave it blank or enter “0”.
1. Prepare the journal entry for the payment of the weekly salaries. The salaries will not be paid until April 20.
2. Prepare the journal entry to record the employer’s payroll taxes. In addition to the data for Social Security and Medicare in the table, which the employer must also pay, assume a 6.0% federal unemployment tax rate and a 5.4% state unemployment tax rate. Also assume that all wages are subject to these two taxes.
Not sure about the account title?

Assets

Cash
Notes Receivable
Accounts Receivable
Allowance for Doubtful Accounts
Interest Receivable
Prepaid Insurance
Prepaid Rent
Petty Cash
Supplies
Office Equipment
Accumulated Depreciation—Office Equipment

Liabilities

Accounts Payable
Notes Payable
Employee Federal Income Tax Payable
State Income Tax Payable
Social Security Tax Payable
Medicare Tax Payable
Health Insurance Premiums Payable
FUTA Tax Payable
SUTA Tax Payable
Interest Payable
Salaries Payable
Utilities Payable

Owner’s Equity

Income Summary
Peggy Diego, Capital
Peggy Diego, Drawing

Revenues/Gains

Sales
Interest Revenue
Sales Discounts
Fees Earned
Rent Revenue

Expenses/Losses

Cost of Merchandise Sold
Interest Expense
Salaries Expense
Bad Debt Expense
Miscellaneous Expense
Supplies Expense
Delivery Expense
Postage Expense
Utilities Expense
Rent Expense
Payroll Taxes Expense
Insurance Expense
Repairs and Maintenance Expense
Depreciation Expense

Page:
1
DATE DESCRIPTION DOC.
NO.
POST.
REF.
DEBIT CREDIT
1 1.

Salaries Expense









1
2

Employee Fed. Inc. Tax Payable









2
3

State Income Tax Payable









3
4

Social Security Tax Payable









4
5

Medicare Tax Payable









5
6

Health Insurance Premiums Payable









6
7

Net Pay









7
8 8
9 2.

Payroll Taxes Expense









9
10

Social Security Tax Payable









10
11

Medicare Tax Payable









11
12

FUTA Tax Payable









12
13

SUTA Tax Payable









13

Feedback

Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.

Note that both the employer and the employee normally pay equal amounts for Social Security and Medicare.

Indicate the effect of the journal entries above on the accounting equation. Each row in the table corresponds to the row in the journal.

Accounting Equation
Row Assets = Liabilities + Owner’s Equity
1.
no effect


no effect




2.
no effect


+


no effect

3.
no effect


+


no effect

4.
no effect


+


no effect

5.
no effect


+


no effect

6.
no effect


+


no effect

7.
no effect


+


no effect

9.
no effect


no effect




10.
no effect


+


no effect

11.
no effect


+


no effect

12.
no effect


+


no effect

13.
no effect


+


no effect

Feedback

Review the chart of accounts in the previous step to determine the effect of each line in the journal entry.

The total payroll cost of the employees for Diego, Inc., for this period is $



In the future, as each of the payroll liabilities is paid, the liability will be

debited

and Cash will be

credited

Feedback

Add up both the total direct employee cost and the taxes paid by the company.

Recall that the entries above recognize payroll tax expenses before the cash is actually paid. When the cash finally is paid (at different points in the future for each deduction), what happens to the liabilities created in the entries above?

Feedback

Correct

 
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