CHAPTER 4
ACCRUED LIABILITIES AND DEFERRED
REVENUES
Payroll Taxes :
The entity as an employer us required to withhold from the
salaries of each employee the following :
a. Income tax payable by the employee
b. Employee contribution to the Social Security System or SSS
c. Employee contribution for Philhealth
d. Employee contribution to the Pag-IBIG Fund
Such amount withheld from the salaries of the employees
shall be recognized as current liability until remitted by the
entity to the appropriate government authority, together
with the required employer’s share on the contribution for
the benefit of the employees.
Accounting procedure for the recording and recognition of
payroll liability
To record salaries and employee’s contribution:
Salaries xxx
Withholding tax payable xxx
SSS Payable xxx
Philhealth Payable xxx
Pag-IBIG Payable xxx
Cash xxx
To record employer’s contribution:
Payroll Expense xxx
SSS Payable xxx
Philhealth Payable xxx
Pag-IBIG Payable xxx
To record the remittance of employer’s and employee’s contribution
Withholding tax payable xxx
SSS Payable xxx
Philhealth Payable xxx
Pag-IBIG Payable xxx
Cash xxx
Illustration :
An entity reported the following payroll of the employees for the month of January :
Gross Payroll 500,000
Income tax withheld ( 20,000)
SSS Contribution ( 4,000)
Philhealth contribution ( 2,000)
Pag-ibig contribution ( 1,000)
Net Payroll 473,000
In relation to the payroll for the month of January, the entity is required to make the following additional
contribution :
SSS 6,000
Philhealth 3,000
Pag-IBIG 2,000
Total Contribution 11,000
The Journal entry to record the gross payroll is as follows :
Salaries 500,000
Withholding tax payable 20,000
SSS Payable 4,000
Philhealth Payable 2,000
Pag-IBIG Payable 1,000
Cash 473,000
The journal entry to record the employer’s additional contribution is as follows :
Payroll expense 11,000
SSS Payable 6,000
Philhealth Payable 3,000
Pag-IBIG Payable 2,000
The journal entry to record the remittance of the amounts withheld and the
payment of the additional contribution is as follows :
Withholding tax payable 20,000
SSS Payable 10,000
Philhealth Payable 5,000
Pag-IBIG Payable 3,000
Cash 38,000
VALUE ADDED TAX (VAT)
Under the National Internal Revenue Code, the entity is required to collect
value added taxes from customers on sales of tangible property and
certain services. Such value added tax collected shall be remitted monthly
to the Bureau of Internal Revenue
Accounting procedure for the recording and recognition of Value Added Tax
The journal entry to record the sale
Cash/Accounts Receivable xxx
Sales xxx
Output Vat xxx
The journal entry to record the purchase
Purchases xxx
Input VAT xxx
Cash/Accounts Payable xxx
Illustration :
During a month, an entity sold goods to customers on account for P5,600,000,
including value added taxes of P600,000. The journal entry to record the sale is :
Accounts receivable 5,600,000
Sales 5,000,000
Output VAT 600,000
In the same month, the entity purchased goods from the supplier for P2,240,000
including value added tax of P240,000. The journal entry to record the purchase
is :
Purchases 2,000,000
Input VAT 240,000
Accounts Payable 2,240,000
At the end of every month, the input VAT is offset against the output VAT in order
to determine the net liability of the entity.
The entry to recognize the net liability at the end of the
month is :
Output VAT 600,000
Input VAT 240,000
VAT Payable 360,000
Subsequently, when the net liability is paid in the
succeeding month, the journal entry is :
VAT Payable 360,000
Cash 360,000
GIFT CERTIFICATES PAYABLE :
Many megamalls, department stores and supermarkets sell gift certificates
which are redeemable in merchandise. The accounting procedures are :
1. When the gift certificates are sold :
Cash xx
Gift Certificate xx
2. When the gift certificates are redeemed :
Gift Certificates Payable xx
Sales xx
3. When the gift certificates expire or when gift certificates are not redeemed :
Gift Certificates Payable xx
Forfeited Gift Certificates xx
Note : DTI ruled that gift certificates no longer have an expiration period…
Refundable Deposits :
Cash or property received from customers but which are refundable after
compliance with certain conditions.
• The best example for refundable deposit is the customer deposit required for
returnable containers like bottles, drums, tanks and barrels. The container’s
deposit is usually classified as current liability.
The accounting procedures are :
1. When the deposits are received :
Cash xx
Container’s/Customer’s Deposit xx
2. When the customer returns the container:
Container’s/Customer’s Deposit xx
Cash xx
3. When the customer FAILS to returns the container
Container’s/Customer’s Deposit xx
Containers xx
Gain on Sale of Containers xx
• Illustration :
A deposit of Php10,000 is required from the customer for
refundable containers. The containers cost Php8,000
Cash 10,000
Container’s/Customer’s Deposit 10,000
When the customer returns the container:
Container’s/Customer’s Deposit 10,000
Cash 10,000
When the customer FAILS to returns the container
Container’s/Customer’s Deposit 10,000
Containers 8,000
Gain on Sale of Containers 2,000
Deferred Revenue
Deferred revenue or unearned revenue is income already received
but not yet earned. It may be realizable within one year or is more
than one year from the end of the reporting period. If realizable
within one year, it is a current liability.
Examples of Current deferred revenue:
- Unearned interest income
- Unearned rental income
- Unearned subscription income.
If more than one year, then it is a non-current liability.
Examples of non-current deferred revenue :
- Unearned revenue from long term service contracts
- long-term leasehold advances.
Accounting procedure for the recording and
recognition of Deferred Revenue
1. To record the advance collection of cash receipts :
Cash xxx
Unearned revenue xxx
2. To record any related expenses paid:
expense xxx
Cash xxx
3. To record the revenue recognized:
Unearned revenue xxx
revenuexxx
Illustration:
An entity sells equipment service contracts agreeing to service
equipment for a 2-year period. Cash receipts from contracts
are credited to unearned service revenue and service contract
costs are charged to service contract expense.
Revenue from service contracts is recognized as earned over
the service period of the contracts. The following transactions
are made in the first year:
Cash receipts from service contracts sold 1,000,000
Service contract costs paid 500,000
Service contract revenue recognized 800,000
Journal Entries for first year :
1. To record the cash receipts from service contracts sold :
Cash 1,000,000
Unearned service revenue 1,000,000
2. To record the service contract costs paid :
Service contract expense 500,000
Cash 500,000
3. To record the service contract revenue recognized:
Unearned service revenue 800,000
Service contract revenue 800,000
Bonus computation :
Large entities often compensate key officers and
employees by way of bonus for superior income
realized during the year, to motivate the officers and
employees. The compensation plan results in liability
that must be measured and reported in the financial
statement.
FOUR VARIATIONS OF BONUS COMPUTATION :
1. income before bonus and before tax.
2. income after bonus but before tax.
3. income after bonus and after tax.
4. income after tax but before bonus
• Formula:
1. income before bonus and before tax.
income before bonus and before tax multiply
by percentage = bonus
2. income after bonus but before tax.
income before bonus and before tax divided
by (1+ percentage) x percentage = bonus
• Formula:
3. income after bonus and after tax.
income before bonus and before tax multiply
by (1- tax rate) then divided by (1+ percentage
net of tax) x percentage = bonus
4. income after tax but before bonus
{income before bonus and before tax multiply by
(1- tax rate) then multiply by percentage}
divided by (1- percentage x tax)
Illustration :
Income before bonus and before tax 4,400,000
Bonus 10%
Income Tax Rate 30%
Case 1 – Before bonus and before tax
Income before bonus and before tax 4,400,000
Multiply by 10%
Bonus 440,000
Illustration :
Income before bonus and before tax 4,400,000
Bonus 10%
Income Tax Rate 30%
Case 2 – After bonus but before tax
(4,400,000/1.1) x 10% = 400,000
Income before bonus and before tax 4,400,000
divided by 1.10
Income after bonus but before tax 4,000,000
Multiply by 10%
Bonus 400,000
Illustration :
Income before bonus and before tax 4,400,000
Bonus 10%
Income Tax Rate 30%
Case 3 - After Bonus and After Tax
{(4,400,000 x 70%) / 1.07} x 10% = 287,850
Income before bonus and before tax 4,400,000
Multiply by (1-tax rate) 70%
Income after tax 3,080,000
divided by (1+ bonus net of tax) 1.07
Income After Bonus and After Tax 2,878,504
Multiply by 10%
Bonus 287,850
Illustration :
Income before bonus and before tax 4,400,000
Bonus 10%
Income Tax Rate 30%
Case 4 – After tax but before bonus
{(4,400,000 x 70%) x 10%} / .97 = 317,525
Income before bonus and before tax 4,400,000
Multiply by (1-tax rate) 70%
Income after tax 3,080,000
Multiply by 10% Bonus, net of tax
308,000
divided by(1- bonus x tax rate) 97%
Bonus 317,525
