Accounting for Current Liabilities

Flashcards reviewing key concepts related to current liabilities, payroll, and related accounting procedures.

What are current liabilities?

Obligations due within one year or the company’s operating cycle if longer.

What are long-term liabilities?

Obligations due after one year or the company’s operating cycle if longer.

Give examples of known current liabilities.

Accounts Payable, Sales Taxes, Unearned Revenues, Notes Payable, Payroll Obligations

How do you calculate sales taxes payable?

Multiply the sales amount by the sales tax percentage (e.g., $6,000 x 5% = $300).

How are unearned revenues recognized?

Recognize revenue as it is earned (e.g., $900,000 in tickets sold for three concerts, recognize $300,000 per concert).

What is a short-term note payable?

A written promise to pay a specified amount on a stated future date within one year, usually bearing interest.

What journal entry is made when a company borrows cash from the bank using a short-term note payable?

Debit Cash, Credit Notes Payable

What are payroll liabilities related to?

Salaries and wages, employee benefits, and payroll taxes levied on the employer.

What are common employee payroll deductions?

FICA Taxes (Social Security and Medicare), Federal Income Tax, State and Local Income Taxes, Voluntary Deductions.

What do FICA taxes consist of?

Social Security and Medicare taxes.

What are employer payroll taxes?

FICA–Social Security Taxes, FICA–Medicare Taxes, Federal and State Unemployment Taxes.

What are Federal Unemployment Tax (FUTA) rates?

6.0% on the first $7,000 of wages paid to each employee, with a credit up to 5.4% given for SUTA paid, therefore the net rate is 0.6%.

What are State Unemployment Tax (SUTA) rates?

5.4% on the first $7,000 of wages paid to each employee; merit ratings may lower SUTA rates.

What is an estimated liability?

A known obligation of an uncertain amount that can be reasonably estimated, such as pensions, health care, vacation pay, and warranties.

What are warranty liabilities?

Seller’s obligation to replace or fix a product (or service) that fails to perform as expected within a specified period.

What is a contingent liability?

A potential obligation depending on a future event arising from a past transaction.

What is the accounting treatment for probable contingent liabilities that can be reasonably estimated?

Record a liability.

What is the accounting treatment for reasonably possible contingent liabilities and for probable contingent liabilities that cannot be reasonably estimated?

Disclose in notes to the financial statements.

What is the accounting treatment for remote contingent liabilities?

No disclosure is required.

What is the times interest earned ratio?

Income before interest and taxes divided by interest expense. It assesses the risk that an owner will not earn a positive return and be unable to pay interest charges.

What are some components of payroll reports?

IRS form 941, IRS form 940, and W2.

What are some components of payroll records?

Payroll register, payroll checks, and employee earnings report.

If a corporation has income taxes that are currently due and deferred, what journal entry is made?

Debit Income Taxes Expense, Credit Income Taxes Payable, Credit Deferred Income Tax Liability