CIMA - C2 Fundamentals of Financial Accounting

Подождите немного. Документ загружается.

220 14: Accounting for sales tax ⏐ Part B Accounting systems and accounts preparation

Chapter roundup

• Sales tax is an indirect tax levied on the sale of goods and services. It is administered by the tax authorities.

• If output sales tax exceeds input sales tax, the business pays the difference in tax to the authorities. If output sales tax is

less than input sales tax in a period, the tax authorities will refund the difference to the business.

• Where sales tax is not recoverable, for any of the reasons described above, it must be regarded as part of the cost of the

items purchased and included in the I/S charge or in the statement of financial position as appropriate.

• Registered businesses charge output sales tax on sales and suffer input sales tax on purchases. Sales tax does not affect

the income statement, but is simply being collected on behalf of the tax authorities to whom a quarterly payment is

made.

• An outstanding payable for sales tax will appear as a current liability in the statement of financial position.

Quick quiz

1 Sales tax is:

A A direct tax levied on sales of goods and services

B An indirect tax levied on the sales of goods and services

C Administered by the Treasury

D Charged by businesses on taxable supplies

2 What are the two rates of sales tax which may be applicable to taxable outputs?

(1) _________________________

(2) _________________________

3 When sales tax is not recoverable on the cost of a motor car, it should be treated in which of the following ways?

A Deducted from the cost of the asset capitalised

B Included in the cost of the asset capitalised

C Deducted from output tax for the period

D Written off to I/S as an expense

4 Purchases of goods costing $500 subject to sales tax at 17.5% occur. Which of the following correctly records the credit

purchase?

A Dr Purchases $500.00

Dr Sales tax $87.50

Cr Payables $587.50

B Dr Purchases $587.50

Cr Payables $587.50

C Dr Purchases $412.50

Dr Sales tax $87.50

Cr Payables $500.00

D Dr Purchases $500.00

Cr Sales tax $87.50

Cr Payables $412.50

241465 www.ebooks2000.blogspot.com

Part B Accounting systems and accounts preparation ⏐ 14: Accounting for sales tax 221

5 A business purchases goods valued at $400. Sales tax is charged at 17.5%. The double entry to record the purchase is:

DEBIT _________________________ $_________

DEBIT _________________________ $__________

CREDIT _________________________ $__________

6 Fill in the blanks.

Input sales tax is ____________________________________________________________________, output sales tax

is ______________________________________________________________.

7 When a cash sale is made for $117.50 (including sales tax) the entries made are:

DEBIT ___________________ account $_________

CREDIT ___________________ account $__________

8 When a cash purchase of $117.50 is made (including sales tax) the entries are:

DEBIT ___________________ account $_________

DEBIT ___________________ account $__________

CREDIT ___________________ account $__________

9 The sales tax paid to the tax authorities each quarter is the difference between _________________________________

______________________________________ and _________________________________________

__________________________.

242465 www.ebooks2000.blogspot.com

222 14: Accounting for sales tax ⏐ Part B Accounting systems and accounts preparation

Answers to quick quiz

1 B Correct

A Incorrect, the consumer has a choice as to whether or not to consume so sales tax is only chargeable when this

choice is exercised.

C Incorrect, sales tax is administrated by the tax authorities.

D Only sales tax registered traders can charge sales tax.

2 Zero-rate and standard-rate (17.5%).

3 B Correct, the statement of financial position value will therefore include sales tax and the depreciation charge will

rise accordingly

A Incorrect, it must be added.

C Incorrect.

D Incorrect, the motor car is a non-current asset not an expense, sales tax will form part of the depreciable amount

of the asset.

4 A Correct, recoverable input tax is debited to the sales tax a/c and the purchases account is debited net of sales tax.

B Incorrect, the sales tax has not been reclaimed.

C Incorrect, the $500 is subject to sales tax.

D Incorrect, reversal of the sales tax transaction has occurred.

5 DEBIT: PURCHASES $400

Sales tax $70

CREDIT: CASH or PAYABLES $470

6 Input sales tax is sales tax suffered on goods and services brought by a business, output sales tax is the sales tax

collected on sales.

7 DEBIT Cash account $117.50

CREDIT Sales account $100.00

CREDIT Sales tax account $17.50

8 DEBIT Purchases account $100.00

DEBIT Sales tax account $17.50

CREDIT Cash account $117.50

9 The sales tax paid to the tax authorities each quarter is the difference between output sales tax collected on sales and

input sales tax suffered on purchases and expenses.

Now try the questions below from the Question Bank

Question numbers Page

60–63 403

243465 www.ebooks2000.blogspot.com

223

Topic list Syllabus references

1 Gross pay and deductions B (9)

2 Accounting for wages and salaries B (9)

Accounting for

payroll

Introduction

The salary paid to the bank or the jangle of coins in the wages packet is the final result of a

long process of recording and calculation. This is often referred to as payroll processing and

payroll accounting, a payroll being simply a list of employees and what they are to be paid.

Being on the payroll of an organisation means that you are selling your labour to it for an

agreed price.

From an employer's point of view, too, the wages and salaries bill is of great importance. It is

often one of the largest items of expenditure an employer has to incur.

Most people have to pay some of what they earn to the government as taxation (Income Tax)

which pays for general social benefits, eg the Health Service. In addition, people pay National

Insurance Contributions (NIC), which, in practice, is similar to a tax. The tax and NIC is

collected by the employer when the employee is paid. The system is called PAYE (Pay As You

Earn). This system is the subject of Section 1.

While you might think that the employer is doing the government a favour by acting as a tax

collector, the legal apparatus surrounding PAYE is quite strict. It is vital therefore, that proper

accounting records are kept. This is covered in Section 2 of the chapter.

244465 www.ebooks2000.blogspot.com

224 15: Accounting for payroll ⏐ Part B Accounting systems and accounts preparation

1 Gross pay and deductions

Gross pay is the full amount that an employee earns.

Deductions are the amounts taken from gross pay for income tax, National Insurance contributions and any other

reasons agreed by employer and employee such as pension contributions.

Net pay is gross pay less deductions, ie the amount actually received by the employee.

A business must deduct PAYE income tax and employees' NIC from employees' gross pay. Only the net amount is then

paid to employees. The amounts deducted are paid over every month by the employer to HM Revenue and Customs

(HMRC).

1.1 How are deductions collected?

The government requires that businesses should act as collecting agents on behalf of HMRC. When a business makes a

wages or salary payment to an employee, it calculates the amount of tax and NIC due. These amounts are deducted from

the employee

's gross remuneration and paid by the business to HMRC. The employee receives only the net amount

remaining after these deductions.

An employee effectively pays his income tax liability in instalments each time he receives a wages payment. This system

of income tax collection is called PAYE or pay-as-you-earn.

Apart from these compulsory deductions, which all businesses must operate, there may be other voluntary deductions

from an employee

's pay.

(a) Savings schemes. An employee agrees to save $5 a week. Each week the $5 is deducted from his gross

pay and held for him by his employer until he decides to withdraw it.

(b) Contributions to charity. An employee might agree to a weekly deduction of 50c as a contribution to

Oxfam. The employer deducts the agreed amount each week and at suitable intervals hands over the

money collected to the charity.

1.2 Example: accounting for deductions from gross pay

Mr Little's gross pay for the week ending 31 October 20X6 is $140. His employer, Mr Big, calculates that income tax of

$20 and NIC of $13 are due on that level of earnings. In addition, Little received a loan from the business in June 20X6

which he is repaying by weekly deductions of $5. He also voluntarily contributes 20p per week to a local charity, again by

deduction from his gross wages.

How should these amounts be accounted for?

Solution

The cost to Mr Big is the gross pay of $140 and this is charged in his income statement. The amount actually paid to

Little is only $101.80 ($140 – $20 – $13 – $5 – 20c).

The deductions should be accounted for as follows.

Key terms

T F

RWAR

245465 www.ebooks2000.blogspot.com

Part B Accounting systems and accounts preparation ⏐ 15: Accounting for payroll 225

(a) PAYE of $20 and NIC of $13 are paid over to HMRC. In practice, this payment would not be made every

week. Mr Big would accumulate the amounts due in respect of all his employees and would make a single

payment to HMRC once a month.

(b) The $5 deduction is applied to reduce the amount of the loan outstanding from Little.

accumulate these amounts for a number of weeks before payment.

1.3 Employer's National Insurance contributions and pension contributions

The cost to a business of employing its workforce is gross pay plus employer's NIC and any employer's pension

contributions.

Employees are normally obliged to pay NIC which is deducted from their gross pay and paid over by their employer on

their behalf. But employers also have to make a contribution themselves in respect of each of their employees. This is

not a deduction from the employee

's gross pay, it is an extra cost borne by the employer. Also, the employer is likely to

make contributions to pension schemes. The employer

's income statement must show the total cost of employing staff

and this includes not only the gross pay, but also the employer

's NIC and any employer's pension contributions.

An employer

's monthly payment to HMRC therefore includes the following.

• PAYE income tax for each employee (deducted from the employees

' gross pay)

• Employees

' NIC (deducted from the employees' gross pay)

• Employer

's NIC, paid from the employer's own funds

Question

Gross pay

An employee earns $10 an hour gross and has worked 48 hours this week. His income tax liability is $58 and his NIC is

$12. Voluntary deductions are $5 sports club subscription and pension contributions of $40. The employer's NIC is $25

and pension contribution is $20.

The employee's net pay is $_____________.

The gross payroll cost to the employer is $____________.

Answer

The employee's net pay is $365. (($10 × 48) = $480 – $58 – $12 – $5 – $40 = $365)

The gross payroll cost to the employer is $525. ($480 + $25 + $20 = $525)

Amounts owed to HMRC and pension funds are current payables in the statement of financial position.

1.4 National Insurance contributions

Calculating NIC is easy. An employee pays a fixed percentage of his gross income, the percentage depending on the level

of his income. For the employer

's contribution, again a fixed percentage is applied to the employee's gross pay, but the

percentage may differ from that used in calculating the employee

's contribution.

T F

RWAR

Assessment

focus point

246465 www.ebooks2000.blogspot.com

226 15: Accounting for payroll ⏐ Part B Accounting systems and accounts preparation

Employees' NIC is subject to a maximum amount. Thereafter, a rate of 1% applies. There is no limit on the amount of an

employer

's contributions.

The government publishes tables detailing the amount of NIC payable at all levels of income. Therefore employers simply

extract the amounts due from the tables.

1.5 Calculating PAYE deductions

PAYE contributions are more complicated, but again the use of HMRC tables simplifies matters in practice.

First add the amount of the employee

's gross pay for the current period to the previous total of gross pay. This gives his

gross pay for the tax year to date. (Tax years run from 6 April to 5 April.) Next calculate the amount of tax due for the

year to date. This will depend on the employee

's tax code, which reflects the amount of tax free pay he can earn.

The tax due for the year to date is then compared with the tax actually paid by the employee up to and including the

previous week/month. The difference is the amount of tax due from the employee in the current week/month, and is the

amount deducted from his gross pay.

Sometimes the tax due for the year to date is less than the tax already paid by the employee. In that case the employee

will be entitled to a tax refund as an addition to his gross pay.

2 Accounting for wages and salaries

At any time, a business may have on hand tax and insurance amounts which have not yet been paid over to HMRC.

These will appear in the accounts under payables.

2.1 Ledger entries

Three accounts are needed.

• Wages control account

• PAYE control account

• NIC control account

First calculate the total costs of employment to be borne by the business. These consist of employees

' gross pay plus

employer

's NIC. The following accounting entries are made.

DEBIT I/S account – wages/salaries (gross pay + employer

's NIC)

CREDIT Wages control account (gross pay)

CREDIT NIC control account (employer

's NIC)

Then the amount of deductions are calculated for PAYE and employee

's NIC.

DEBIT Wages control account (total deductions)

CREDIT PAYE control account (PAYE)

CREDIT NIC control account (employee's NIC)

Then pay employees their net pay.

DEBIT Wages control account

CREDIT Cash account

In due course, the credit balances on PAYE control and NIC control are eliminated by making payments to HMRC.

Any voluntary deductions permitted by employees must be debited to wages control account and credited to a liability

account until they are eventually paid over by the employer as appropriate.

T F

RWAR

247465 www.ebooks2000.blogspot.com

Part B Accounting systems and accounts preparation ⏐ 15: Accounting for payroll 227

2.2 Example: ledger accounts for wages and salaries

At 1 November 20X5 Netpay had the following credit balances on ledger accounts.

PAYE control account 4,782

NIC control account 2,594

Employee savings account 1,373

The company

's wages records for the month of November 20X5 showed the following.

Total gross pay 27,294

PAYE 6,101

Employer's NIC 2,612

Employees' NIC 2,240

Employees' savings deductions 875

Net amounts paid to employees 18,078

The company paid $9,340 to HMRC during the month, being $4,750 PAYE and $4,590 NIC.

Show the ledger accounts recording these transactions.

Solution

WAGES CONTROL ACCOUNT

PAYE control

6,101

Wages expense a/c – gross pay

27,294

NIC control – employees'

contributions

2,240

Employee savings a/c

875

Bank – net pay

18,078

27,294

PAYE CONTROL ACCOUNT

Bank

4,750

Balance b/f

4,782

Balance c/d

6,133

Wages control

6,101

10,883

Balance b/d

6,133

NIC CONTROL ACCOUNT

$ $

Bank 4,590 Balance b/f 2,594

Balance c/d 2,856 Wages control – employees' NIC 2,240

Wages expense a/c – employer's

NIC

2,612

7,446

Balance b/d 2,856

248465 www.ebooks2000.blogspot.com

228 15: Accounting for payroll ⏐ Part B Accounting systems and accounts preparation

EMPLOYEE SAVINGS ACCOUNT

Balance c/d

2,248

Balance b/f

1,373

Wages control

875

2,248

Balance

2,248

Note. This account shows the company

's liability to employees, who may wish to withdraw their savings at any time.

Question

Accounting for salaries

At 1 March 20X3 Brubeck had the following credit balances on ledger accounts.

PAYE control account 23,000

NIC control account 12,500

Employee savings account 26,250

The company's wages records for the month of March 20X3 showed the following.

PAYE 30,505

Employer's NIC 13,060

Employees' NIC 11,200

Employees' savings deductions 4,375

Net amounts paid to employees 90,390

The company paid $46,700 to the HMRC during the month, being $23,750 PAYE and $22,950 NIC.

(a) How much was gross pay for the month?

(b) What is the balance c/d on the PAYE control account, if any?

(d) What is the balance c/d on the Employee Savings account, if any?

Answer

(a) $136,470 ($90,390 + $30,505 + $11,200 + $4,375)

(b) $29,755 credit ($23,000 + $30,505 – $23,750)

(d) $30,625 credit ($26,250 + $4,375)

As long as you understand the principles of control accounts and logically follow through the double entry, you should

not experience too many difficulties. Do not be put off by the 'tax' content. PAYE is just another payable.

Assessment

focus point

249465 www.ebooks2000.blogspot.com

Part B Accounting systems and accounts preparation ⏐ 15: Accounting for payroll 229

Chapter roundup

• A business must deduct PAYE income tax and employees' NIC from employees' gross pay. Only the net amount is then

paid to employees. The amounts deducted are paid over every month by the employer to HM Revenue and Customs

(HMRC).

• The cost to a business of employing its workforce is gross pay plus employer's NIC and any employer's pension

contributions.

• At any time, a business may have on hand tax and insurance amounts which have not yet been paid over to HMRC.

These will appear in the accounts under payables.

Quick quiz

1 PAYE stands for? (In relation to income tax issues.)

A Payroll and your earnings

B Pay as you earn

C Pay after you earn

D Payroll accounting year end

2 Three voluntary deductions that an employee might permit from his gross pay are:

(1) _______________________ (2) _______________________

(3) _______________________

3 The total cost of employing staff shown in an employer's income statement is _________________

____________________________________________________.

4 At 31.12.20X0 a company had the following balance in its records: PAYE control a/c $15,800. NIC control a/c $7,600.

Deductions from pay in January 20X1 were: income tax $8,600, NIC $3,400. Employer's NIC were $2,800. PAYE

payments were $6,800. NI payments were $3,400. Calculate the PAYE and NI control account balances as at 31.1.20X1.

A PAYE $19,400 (cr) NIC $13,200 (cr)

B PAYE $17,600 (cr) NIC $7,600 (cr)

C PAYE $17,600 (dr) NIC $10,400 (dr)

D PAYE $17,600 (cr) NIC $10,400 (cr)

5 An employee has a gross pay of $150, a bonus of $25, income tax and NIC amount to $30 and pension contributions are

made totalling $15. The employers NIC and pension contributions amount to $55. The gross payroll cost to the employer

is?

A $230

B $175

C $130

D $185

6 What ledger accounting entries are made in respect of voluntary deductions permitted by employees?

DEBIT _______________________

CREDIT _______________________

250465 www.ebooks2000.blogspot.com