Chapter 8 Study Notes - Completing the Operating Cycle

Chapter 8 Study Notes - Completing the Operating Cycle -...

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1 CHAPTER 8 STUDY NOTES Chapter 8 is an overview of a collection of various other accounting issues relating to the operating cycle. Payroll Taxes --Payroll relates to the salaries/wages earned by employees in the current period. Frequency of payment ranges from weekly to monthly, depending on the company. In simplest form, accounting for payroll involves debiting Salaries Expense and crediting Salaries Payable when the employees work and debiting Salaries Payable and crediting Cash when the wages are paid. However, the accounting for salaries and related payroll taxes is typically not this simple. The complexity arises because companies are legally required to withhold certain taxes from employees' salaries and wages. Very few people receive their full salary as take-home pay. Most employees are required to have certain items withheld from their pay. These withholdings include: 1. Federal and state income taxes. 2. Social security and Medicare (FICA) taxes. 3. Voluntary or contractual withholdings (union dues, medical insurance premiums, and charitable contributions). Salary Expense is debited for the full amount of the employees’ gross wages. The amounts withheld are credited to various liabilities since the employer must pay these amounts to the federal/state governments. The net wage amount is credited to Salaries Payable. The withholdings are not an expense to the employer, since the employee pays them (the employer merely serves as an agent for the government for collecting and paying the withheld amounts). In addition to withholding and remitting the employees’ taxes, companies must also pay certain payroll-related taxes: 1. Employer's portion of FICA tax (equal to employee's portion). 2. State and federal unemployment taxes. These payroll-related taxes are expenses to the company and are included in operating expenses on the income statement. When the payroll time period does not coincide with the last day of the period for financial reporting, the company will record an end-of-period adjusting entry to record accrued salaries/wages. Stock Options
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This note was uploaded on 04/10/2008 for the course MGA 201 taught by Professor Anderson during the Fall '08 term at SUNY Buffalo.

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Chapter 8 Study Notes - Completing the Operating Cycle -...

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