If misrepresented, the cash needs of the company may not be met, and the company can quickly go out of business. So you must add a Withholding tax payable account to the Liabilities group of your chart of accounts. If done this way, the transaction will be tax-free for you. The following points can be drawn from the definition above: Liabilities are classified into two: current liabilities and non-current liabilities. Examples of non-current deferred revenue : - Unearned revenue from long term service contracts - long-term leasehold advances. Assume that the customer prepaid the service on October 15, 2019, and all three treatments occur on the first day of the month of service. Here is a list of current and non-current liabilities. In the current year the debtor will pay a total of $25,000—that is, $7,000 in interest and $18,000 for the current portion of the note payable. The bakery’s outstanding note principal is $100,000. More details about the Tax Withholding Estimator and the new 2020 withholding tables can be found on the Frequently Asked Question pages: are licensed under a, Identify and Describe Current Liabilities, Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting, Identify Users of Accounting Information and How They Apply Information, Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities, Explain Why Accounting Is Important to Business Stakeholders, Describe the Varied Career Paths Open to Individuals with an Accounting Education, Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate, Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses, Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet, Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements, Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions, Define and Describe the Initial Steps in the Accounting Cycle, Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements, Use Journal Entries to Record Transactions and Post to T-Accounts, Explain the Concepts and Guidelines Affecting Adjusting Entries, Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries, Record and Post the Common Types of Adjusting Entries, Use the Ledger Balances to Prepare an Adjusted Trial Balance, Prepare Financial Statements Using the Adjusted Trial Balance, Describe and Prepare Closing Entries for a Business, Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity, Appendix: Complete a Comprehensive Accounting Cycle for a Business, Compare and Contrast Merchandising versus Service Activities and Transactions, Compare and Contrast Perpetual versus Periodic Inventory Systems, Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System, Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System, Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods, Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies, Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System, Define and Describe the Components of an Accounting Information System, Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders, Analyze and Journalize Transactions Using Special Journals, Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems, Analyze Fraud in the Accounting Workplace, Define and Explain Internal Controls and Their Purpose within an Organization, Describe Internal Controls within an Organization, Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries, Discuss Management Responsibilities for Maintaining Internal Controls within an Organization, Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries, Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements, Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions, Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches, Determine the Efficiency of Receivables Management Using Financial Ratios, Discuss the Role of Accounting for Receivables in Earnings Management, Apply Revenue Recognition Principles to Long-Term Projects, Explain How Notes Receivable and Accounts Receivable Differ, Appendix: Comprehensive Example of Bad Debt Estimation, Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions, Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method, Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method, Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet, Examine the Efficiency of Inventory Management Using Financial Ratios, Distinguish between Tangible and Intangible Assets, Analyze and Classify Capitalized Costs versus Expenses, Explain and Apply Depreciation Methods to Allocate Capitalized Costs, Describe Accounting for Intangible Assets and Record Related Transactions, Describe Some Special Issues in Accounting for Long-Term Assets, Analyze, Journalize, and Report Current Liabilities, Define and Apply Accounting Treatment for Contingent Liabilities, Prepare Journal Entries to Record Short-Term Notes Payable, Record Transactions Incurred in Preparing Payroll, Explain the Pricing of Long-Term Liabilities, Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method, Prepare Journal Entries to Reflect the Life Cycle of Bonds, Appendix: Special Topics Related to Long-Term Liabilities, Explain the Process of Securing Equity Financing through the Issuance of Stock, Analyze and Record Transactions for the Issuance and Repurchase of Stock, Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits, Compare and Contrast Owners’ Equity versus Retained Earnings, Discuss the Applicability of Earnings per Share as a Method to Measure Performance, Describe the Advantages and Disadvantages of Organizing as a Partnership, Describe How a Partnership Is Created, Including the Associated Journal Entries, Compute and Allocate Partners’ Share of Income and Loss, Prepare Journal Entries to Record the Admission and Withdrawal of a Partner, Discuss and Record Entries for the Dissolution of a Partnership, Explain the Purpose of the Statement of Cash Flows, Differentiate between Operating, Investing, and Financing Activities, Prepare the Statement of Cash Flows Using the Indirect Method, Prepare the Completed Statement of Cash Flows Using the Indirect Method, Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency, Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method. The organizations may establish an ongoing purchase agreement, which includes purchase details (such as hanger prices and quantities), credit terms (2/10, n/60), an invoice date, and shipping charges (free on board [FOB] shipping) for each order. At this point, you just need to know that in our case the amount that you owe would go from a balance due of $20,000 down to $0 after the twentieth payment and the part of your $415.17 monthly payment allocated to interest would be less each month. The customer’s advance payment for landscaping is recognized in the Unearned Service Revenue account, which is a liability. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license), Advance Ticket Sales. A note payable is a debt to a lender with specific repayment terms, which can include principal and interest. Examples of Payroll Withholding Taxes. Scenario 2: That your tax liability is N600k and you have a Withholding Tax Credit Note of N1m? This withholding is a percentage of the employee’s gross pay. See Figure 13.7 for an exhibit that demonstrates this concept. To calculate interest, the company can use the following equations. A liability is technically defined as a "present obligation of an enterprise arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits". If the landscaping company provides part of the landscaping services within the operating period, it may recognize the value of the work completed at that time. If you have employees, you might also have withholding taxes payable and payroll taxes payable accounts. The burn rate is the metric defining the monthly and annual cash needs of a company. The OpenStax name, OpenStax logo, OpenStax book Some examples of taxes payable include sales tax and income taxes. then you must include on every physical page the following attribution: If you are redistributing all or part of this book in a digital format, Assume that the previous landscaping company has a three-part plan to prepare lawns of new clients for next year. The burn rate helps indicate how quickly a company is using its cash. The focus of this chapter is on current liabilities, while Long-Term Liabilities emphasizes long-term liabilities. Income tax payable is shown as a current liability because the debt will be resolved within the next year. The amount of withholding tax on income payments other than employment income is usually a fixed percentage. Car loans, mortgages, and education loans have an amortization process to pay down debt. An increase in current liabilities over a period increases cash flow, while a decrease in current liabilities decreases cash flow. At first, start-ups typically do not create enough cash flow to sustain operations. For example, we assume the bakery has an annual interest rate on its loan of 7%. During World War II, Congress introduced payroll withholding and quarterly tax payments with the vote of the Current Tax Payment Act of 1943 : In their History of the U.S. Tax System, the U.S. Department of Treasury describes tax withholding.. Non-Current Liabilities are those liabilities which does not meet the criteria of current liabilities. Over time, more of the payment goes toward reducing the principal balance rather than interest. Otherwise, it is classified as a non-current liability. Current liabilities are reported on the classified balance sheet, listed before noncurrent liabilities. Asking a customer to pay for services before you have provided them creates a current liability transaction for your business. Textbook content produced by OpenStax is licensed under a This account may be an open credit line between the supplier and the company. The plan includes a treatment in November 2019, February 2020, and April 2020. Implication You will not pay the tax man any money because you had paid N1m in advance during the year which is N400k (N1,000,000 less N400,000) more than the amount you are liable for in the financial year.Meaning you indeed have to your credit a sum of N400k to receive from the tax man. Each of these liabilities is current because it results from a past business activity, with a disbursement or payment due within a period of less than a year. The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.In meeting this objective, IAS 12 notes the following: 1. Interest accrued is recorded in Interest Payable (a credit) and Interest Expense (a debit). Total tax expense = current income tax obligation + deferred tax expense. Your employer will transfer the funds directly to the other account without withholding any taxes. According to Business Insider, Amazon had $4.8 billion in unearned revenue recognized in their fourth quarter report (December 2016), with most of that contribution coming from Amazon Web Services.1 This is an increase from prior quarters. The monthly interest rate of 0.25% is multiplied by the outstanding principal balance of $10,000 to get an interest expense of $25. A deferred tax liability is an account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. Because part of the service will be provided in 2019 and the rest in 2020, we need to be careful to keep the recognition of revenue in its proper period. The formula to calculate interest on either an annual or partial-year basis is: The good news is that for a loan such as our car loan or even a home loan, the loan is typically what is called fully amortizing. Instead, they signify accounts where funds extracted from employee paychecks are kept until they are paid, which makes them liabilities. Solution for Diane Corporation is preparing its year-end balance sheet. Accrual Expenses as the result of expenses that occurred, but the invoices or credit notes have not been received. All tips you receive are taxable income subject to withholding. Creative Commons Attribution-NonCommercial-ShareAlike License 4.0 license. No journal entry is required for this distinction, but some companies choose to show the transfer from a noncurrent liability to a current liability. The outstanding balance note payable during the current period remains a noncurrent note payable. A company’s typical operating period (sometimes called an operating cycle) is a year, which is used to delineate current and noncurrent liabilities, and current liabilities are considered short term and are typically due within a year or less. If you are redistributing all or part of this book in a print format, The proper classification of liabilities as current assists decision-makers in determining the short-term and long-term cash needs of a company. Income tax payable. It is not a separate tax and does not confer an exemption from the filing of yearly tax returns by the company which suffered WHT. For example, if you borrowed $20,000, and made sixty equal monthly payments, your monthly payment would be $415.17, and your interest expense component of the $415.17 payment would be $150.00. Changes in current liabilities from the beginning of an accounting period to the end are reported on the statement of cash flows as part of the cash flows from operations section. Current - will be settled within the next 12 months, non-current will be settled later than 12 months. Let’s review the concept of interest. Note that this is an annual rate. Contract terms for accounts payable transactions are usually listed on an invoice. Withholding Tax Payable - includes wage taxes withheld from employees that will be remitted to the appropriate government agency. Season ticket sales are considered unearned revenue because customers pay for them in advance of any games played. Unearned revenue, also known as deferred revenue, is a customer’s advance payment for a product or service that has yet to be provided by the company. An invoice from the supplier (such as the one shown in Figure 12.2) detailing the purchase, credit terms, invoice date, and shipping arrangements will suffice for this contractual relationship. An annual interest rate is established as part of the loan terms. 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