Page 383 - Accounting Principles (A Business Perspective)

9. Receivables and payables

Employers normally record payroll taxes at the same time as the payroll to which they relate. Assume the payroll
taxes an employer pays for April are FICA taxes, USD 2,678; state unemployment taxes, USD 1,890; and federal
unemployment taxes, USD 280. The entry to record these payroll taxes would be:

2010
April 30 Payroll Taxes Expense (-SE) 4,848 2,678
FICA Taxes Payable (+L) 1,890
State Unemployment Taxes Payable (+L) 280
Federal Unemployment Taxes Payable (+L)
To record employer's payroll taxes.
These amounts are in addition to the amounts withheld from employees' paychecks. The credit to FICA Taxes
Payable is equal to the amount withheld from the employees' paychecks. The company can credit both its own and
the employees' FICA taxes to the same liability account, since both are payable at the same time to the same agency.
When these liabilities are paid, the employer debits each of the liability accounts and credits Cash.

An accounting perspective:

Uses of technology

One of the basic components in accounting software packages is the payroll module. As long as
companies update this module each time rates, bases, or laws change, they can calculate
withholdings, print payroll checks, and complete reporting forms for taxing agencies. In addition

to calculating the employer's payroll taxes, this software maintains all accounting payroll records.

Managers of companies that have estimated liabilities know these liabilities exist but can only estimate the
amount. The primary accounting problem is to estimate a reasonable liability as of the balance sheet date. An
example of an estimated liability is product warranty payable.
Estimated product warranty payable When companies sell products such as computers, often they must
guarantee against defects by placing a warranty on their products. When defects occur, the company is obligated to
reimburse the customer or repair the product. For many products, companies can predict the number of defects
based on experience. To provide for a proper matching of revenues and expenses, the accountant estimates the

warranty expense resulting from an accounting period's sales. The debit is to Product Warranty Expense and the
credit to Estimated Product Warranty Payable.
To illustrate, assume that a company sells personal computers and warrants all parts for one year. The average
price per computer is USD 1,500, and the company sells 1,000 computers in 2010. The company expects 10 per
cent of the computers to develop defective parts within one year. By the end of 2010, customers have returned 40
computers sold that year for repairs, and the repairs on those 40 computers have been recorded. The estimated
average cost of warranty repairs per defective computer is USD 150. To arrive at a reasonable estimate of product
warranty expense, the accountant makes the following calculation:

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