Chapter 3 - Current Liabilities and Ethiopian Payroll System

PRINCIPLES OF ACCOUNTING II
CHAPTER III
CURRENT LIABILITIES &

ETHIOPIAN PAYROLL SYSTEM
Lecture Note- Prepared by Kassaye Tuji- Addis Ababa University, Department of Accounting & Finance Sunday, March 24, 2024 1
3.1. ACCOUNTING FOR LIABILITIES
3.1.1. Characteristics of Liabilities

⁂ A liability is defined as a:
♦ Present obligation,
♦ Arising from a past event, &
♦ The settlement of which is expected to lead to:
└ an outflow of future economic benefits,
 from the entity.
3.1. Accounting For Liabilities …
3.1.2. Classifying Liabilities

I) Current Liabilities (Short-Term Liabilities)
╚ Current Liabilities are obligations (debts) that can
reasonably be expected to be paid:
♦ From:
└ existing current assets or
└ through the creation of other current
liabilities &
♦ Within one year or the operating cycle,
whichever is, longer.
3.1. Accounting For Liabilities …
▼Current Liabilities include:

√ Accounts Payable,
√ Short-term Notes Payable,
√ Unearned Revenue,
√ Warranty (Short T.) & Accrued Liabilities:
 Such as:
 Taxes,
 Salaries & Wages,
 Interest Payable), …
3.1. Accounting for Liabilities…
3.1.2. Classifying Liabilities…

II) Non Current Liabilities (Long-Term Liabilities)
╚ Are:
 Company’s obligations
└ Not expected to be paid within 1 year
(or a longer operating cycle)
▼Non Current Liabilities Include:

√ Notes Payable (Long T.),
√ Warranty Liabilities (Long T.),
√ Bond Payable, …
3.1.3 Accounting for Current Liabilities

3.1.3.1 Short Term Notes Payable
╚ Obligations in the form of:
written promissory notes,
╚ Require the borrower:
to pay interest (interest bearing)
╚ Due for payment:
within one year of the balance sheet date &
╚ Issued to meet:
short-term financing needs.
3.1.3 Accounting for Current Liabilities…

3.1.3.1 Short Term Notes Payable…
Illustration 1
╚ Assume that First National Bank agrees to lend
Br100, 000 on March 1,2020, if Cole Williams Co.
signs a Br100,000, 12%, 4-month note.
└ Cole Williams therefore will receive Br100, 000
cash and will make the following journal entry;
Mar. 1 Cash 100,000

Notes Payable 100,000
Illustration 2
╚ If Cole Williams Prepares financial statements Semiannually, and
adjusting entry is required to recognize interest expense and interest
payable of Br4,000 (Br100,000 x 12% x 4/12) at June 30.
 The adjusting entry is;
June-
30 Interest Expense 4,000
Interest Payable 4,000
☻If Cole Williams prepared financial statements Monthly; the
adjusting entry at the end of each month would have been
Br1,000 (Br100, 000 x 12% x 1/12).

Illustration 3
╚ At maturity (July 1), Cole Williams must pay the face
value of the note (Br100, 000) plus Br4, 000 interest
(Br100, 000 x 12% x 4/12).
▼The entry to record payment to the note and
accrued interest is as follows;
July1 Notes payable 100,000

Interest payable 4,000
Cash 104,000

3.1.3.2. Accounts Payable
╚ Account Payable or Trade Accounts Payable,
└ are amounts owed for goods, supplies,
equipment or services
 that we purchase on credit.
└ arises because of the time lag between:
 the receipts of gods or service &
 the payment for them.
 The credit period is usually indicated
using expressions like 2/10, n/30.

3.1.3.3. Sales Tax Payable
Illustration 4
╚ Assuming that the March 25 cash register readings for Cooley
Grocery show Sales of Br10,000 and Sales Taxes of Br600
(Sales Tax Rate of 6%),
 the entry is:
Mar. 25 Cash 10,600
Sales 10,000
Sales Taxes Payable 600
╚ When the taxes are remitted to the taxing agency:
Sales Tax Payable …………. 600
Cash ………………… 600

3.1.3.3. Sales Tax Payable…
Illustration 5
╚ Assume in the above example that Colley Grocery “Rings
Up” Total Receipts, which are Br 10,600.
└ If Sales Tax Rae is 6% of sales,
└ we can compute:
‫ ﺤ‬Sales: Br 10,600 ÷ 1.06 =Br 10,000
‫ ﺤ‬Sales Tax : Br10,600 - Br10,000 = Br. 600
or Br 10,000 X 6% = Br. 600

3.1.3.4. Unearned Revenue
Illustration 6
╚ Assume that St. George Club sells 10,000 season football
tickets at Br50 each for its five-game home schedule,
└ the entry for the sales of season tickets is:
Aug.
6 Cash 500,000
Unearned football Ticket Revenue 500,000

3.1.3.4. Unearned Revenue…
Illustration 7
▼As each game is completed, the following entry is made:
Sept. 7 Unearned Football Ticket Revenue 100,000
Football Ticket Revenue 100,000
▼ Specific Unearned and Earned Revenue Accounts used in

selected types of business is shown below:
Types of Account Title
Business Unearned Revenue Earned Revenue
Airline Unearned Passenger Ticket Revenue Passenger Revenue
Magazine Publisher Unearned Subscription Revenue Subscription Revenue
Hotel Unearned Rental Revenue Rental Revenue
3.1.3.5. Current Maturities of Long-Term Debt
Illustration 8
╚ Assume that Wendy Construction issues:
└ a 5-year interest bearing Br25,000 note on Jan. 1, 2020.
 This note specifies that:
└ each Jan. 1, starting Jan.1, 2021, Br5,000 of the note should be paid.
How we report the amount due at the end of year 2020, when financial
statements are prepared on Dec. 31?
►Br 5,000 should be reported as a current liability (as long-term debt
due within one year) &
►Br20,000 as a long-term liability.
▲Note that, it is not necessary to prepare an adjusting entry,
└Rather, the proper statement classification of each
B/S accounts is recognized when the B/S is prepared.
3.1.3.6. Financial Statement Presentation
XYZ CORP.
Current Liabilities (in millions)
Notes Payable Br 138
Accounts Payable 2,196
Payroll and Benefits Payable 243
Taxes Payable 415
Interest Payable 113
Long-Term debt due within one year 197
Total Current Liabilities 3,302
3.2. ACCOUNTING FOR PAYROLL
3.2.1. Meaning and Importance of Payroll
♦ Payroll is:
 the list of all the people that the company employee &
 the money that each of them earns.
♦ Salary is a fixed amount of money:
 paid for permanent employees
 on monthly or yearly basis.
♦ Wages is an amount of money:
 paid for the non-permanent workers
 based on a rate per hour or on a piece-work basis
 for a period less than a month.
♦ Fee/s is:
 money that paid to a professional person or institutions
 for their professional work.
3.2. ACCOUNTING FOR PAYROLL
3.2.2. Preparing Payroll

▼ Sources of Input for payroll preparation:
1. Personnel department authorizations &
2. Approved:
 attendance sheets,
 time cards or
 punched cards.
▼ The payroll department is responsible for:

‫ ﺤ‬Maintaining payroll records,
‫ ﺤ‬Preparing (but not signing) payroll checks,
‫ ﺤ‬Preparing payroll tax returns &
‫ ﺤ‬Verifying all amounts
3.2. Accounting for Payroll…
3.2.3. Paying the Payroll
▼ Stages
1. Maintain Payroll Records
2. Comply with the Laws applicable for Employee Benefits & Obligations
3. File and Pay Payroll Taxes
▼ Payment
♦ Pay directly through Bank Account (if that is not possible by check). Because,
└It minimizes the risk of loss from theft &
└The bank account or the endorsed check provides proof of payment.
♦ If the payroll is paid in currency:

└It is customary to have a second person count of the cash in each pay envelope &
└For the paymaster to obtain a signed receipt from the employee upon payment.
3.2.4. Calculating Employees Earnings
▼ Determining the payroll involves, computing:
1. Gross Earnings,
2. Payroll Deductions, &
3. Net Pay.
3.2.4.1. Gross Earning

╚ Is the total compensation earned by an employee.
╚ It include Wages, Salaries, Bonuses, Overtime Earnings & Allowances.
☻ Bonus is the benefit,
‫ ﺤ‬Given to the employee as an encouragement benefit package,
└ based on such factors as increased sales or net income of the organization.
3.2.4.2. Overtime Earnings

⁍ Overtime Work – Is the work performed by an employee beyond the regular working hours or days.
⁍ Overtime Earning – Is the amount payable to an employee for overtime work done.
3.2.4. Calculating Employees Earnings…
3.2.4.2. Overtime Earnings…
Ethiopian Overtime Payment Rules

1. A worker shall be entitled to be paid at a rate of One & one quarter (11/4) times
his or her ordinary hourly rate for overtime work performed up to 10 o’clock in
the evening (10 P.M.) beyond his/her regular working hour.
2. A Worker shall be paid at the rate of One & one half (11/2) times his or her
ordinary hourly rate for overtime work performed between 10 o’clock in the
evening (10 p.m.) and 6 o’clock in the morning (6 a.m.)
3. Overtime work performed on the weekly rest days shall be paid at a rate of two
(2) times the ordinary hourly rate of payment.
4. A worker shall be paid at a rate of two & half (21/2) times the ordinary hourly
rate for overtime work performed on a public holidays.
3.2.4. Calculating Employees Earnings…
3.2.4.3. Allowances
╚ Allowance is : money paid monthly to an employee for special reason, which may include:
 Position Allowance: - a monthly sum paid to an employee for bearing a particular office
responsibility,
 House Allowance: - a monthly allowance given to cover housing costs of the individual
employee when the employment contract required the employer to provide housing but
fails to do so.
 Hardship/Disturbance Allowance: - a sum of money given to an employee to
compensate for an inconvenient circumstance caused by the employer.
 Desert Allowance:- a monthly allowance given to an employee because of assignment to
a relatively hot region.
 Transportation (Fuel) Allowance: - a monthly allowance to an employee to cover cost
of transportation up to the work place if the employer has committed itself to provide
transportation service.
3.2.5. Payroll Deductions
╚ Payroll deductions do not result in payroll tax expense to the employer.
└ The employer serves only as a collection agency, and
└ It subsequently transfers the deductions to the government or other designated recipients.
3.2.5.1. Mandatory (Required) Deductions
╚ Deductions made from the earnings of employee that is because:
└ It is required by government and/or
└ Owed by the employee for some reason.
3.2.5.2. Voluntary Deductions
╚Deductions made from the earnings of employee by his/here own will.
└ The employee should authorize all voluntary deductions from gross earnings in writing.
└ Voluntary deductions are such as:
⁍ Donations to charitable organization,
⁍ Repayment of loan, or credit association,
⁍ Health and life insurance, or union dues,…
3.2.5. Payroll Deductions… ▼The Tax on income from employment over 600 Birr shall be
Charged, Levied and Collected monthly according to the
3.2.5.3. Income Tax/Employee Inc. Tax following schedule: -
╚In Ethiopia: ▼Schedule of Tax Collection as per Ethiopian Tax Law
└ every citizen is required to pay Salary Range (ETB) Tax Rate Deduction (ETB)
income tax from his/her earnings of
employment.
└ a progressive income tax system
that charges higher rates for higher
earnings is applied on the gross
earnings of each employee.
└ The money on which person does
not have to pay income tax is called
an exemption.
3.2.5. Payroll Deductions…

3.2.5.4. Exemptions (None Taxable Income)
1. Medical Costs incurred by employer for treatment of employees.
2. Transportation Allowances paid by employer to its employees (not exceeding Birr 300).
3. Traveling Expenses paid to transport employees from elsewhere to place of employment
and to return them upon completion of employment.
4. Reimbursement by employer of traveling expense incurred on duty by employees.
5. Pension Contribution, provident fund & all forms of retirement benefits contributed by
employers in an amount that does not exceed 15% of the monthly salary of the
employee.
6. Income from employment received by Casual Employees who are not regularly
employed provided that they do not work for more than one month for one employer.
3.2.5. Payroll Deductions…

3.2.5.5. Pension
╚ Pension Contribution,
‫ ﺤ‬Is only for permanent employees of an organization.
‫ ﺤ‬The employee is expected to contribute 7% of his/here basic (monthly) salary.
‫ ﺤ‬The employer: 11% of the basic salary of every permanent employee of it.
 This amount (11%) is called Payroll Taxes Expense to the employer
organization.
⁕ The total contribution to the Pension Trust Fund of the Ethiopian

Government is equal to 18%.
♦ The same is made in some NGO’s and Businesses by keeping a fund
known as Provident Fund.
3.2.5.6. Net Pays
╚ Net pay:
└Is determined by subtracting payroll deductions from gross earnings; or
└It represent the excess of grand total earnings over grand total deduction of employees
└It is sometimes known as take home pay!
3.2.6. Summary of Salary Income Tax, Pension, Basic Salary & Net Salary
Calculation in Ethiopia:
Employee Pension = 7%
Company Pension = 11%
 Salary Income Tax = (Basic Salary x Tax Rate) - Deductions
 Employee Pension = Basic Salary x 7%
 Net Pay/Income = Gross Salary - Salary Income Tax
- Employee Pension
- Other Deductions (If applicable).
3.2.6. Summary of Net Salary Calculation in Ethiopia…
3.2.6. Summary of Net Salary Calculation in Ethiopia…

⁂ Additional Example
☻If Basic Salary of a person (an employee) is 3,145, how much is the net pay?
♦ 3,145 is in the 4thraw of the table; which is between 1,651 & 3,200.
└ So Tax Rate is 15% and Deduction is 142.50.
♦ Employment Income Tax = (Basic Salary x Tax Rate) – Deduction
Income Tax = (3,145 x 15%) - 142.50 = 329.25
 Employee Pension = Basic Salary x 7%
Pension = 3,145 x 7% = 220.15
♦ Employee’s Net Income = Gross (Basic) Salary - Salary Income Tax –
Pension - Other Deductions
♦ Net Income = 3,145 - 329.25 - 220.15 – 0 = 2,595.60
3.2.6.1. Recording the Payroll

╚ Recording the payroll involves:
‫ ﺤ‬Maintaining payroll department records,
‫ ﺤ‬Recognizing payroll expenses and liabilities &
‫ ﺤ‬Recording payment of the payroll.
Maintaining of a Payroll Records

Basic Records of a Payroll Accounting System Includes:
1. A Payroll Register (or Payroll Sheet).
2. Individual Employees’ Earnings Records &
3. Usually, Pay Check.
3.2.6.1. Recording the Payroll …
A Payroll Register (Sheet):
╚The entire list of:
└ Employees of a business, along with,
└ Each employee’s gross earning, deductions & net pay for particular payroll period.
Employee Earnings Record:
╚It is summary of:
└ each employee’s earnings,
└ deductions,
└ net pay for each payroll period &
└ of cumulative gross earnings during the year.
♦ Employee Earnings Record is a separate record kept for each employee!
♦ The individual employee’s earnings record helps the employer organization
to properly summarize and file tax returns.
Pay Check
╚An instrument for paying salary:
└ if the firm makes payment via writing a check
→in the name of each employee for the net pay, or
→a check for the total net. pay.
╚Each check is usually accompanied by:

└ A detachable statement of earnings,
‫ ﺤ‬a document that shows:
√ The employee’s gross earnings,
√ Payroll deductions &
√ Net pay.
Illustration
⁂ Assume that, Ethio Relief Agency pays the salary of its employees according to the Ethiopian
Calendar Month. The forth-coming date relates to the month of Hidar, 2023.
Ser. Name of Basic Monthly OT Hours Duration of Basic Salary
No. Employee Salary Allowance Worked OT Work Per Hour
01 Senait Bahiru 2,080 100 10 Up to 10 p.m. 13
02 Petros Challa 640 ----- 8 10p.m. to 6a.m 4
03 Abdu Mohammed 1,280 ----- 6 Weekly Rest Days 8
04 Leilla Jemal 960 50 ----- ----- 6
▼Note 05 Baheru Wolde 480 50 10 Public Holiday 3
‫ﺤ‬ The management of the agency usually expects a worker to work 40-hours in a week.
‫ﺤ‬ During Hidar 2023 all workers have done as they have been expected.
‫ﺤ‬ All workers of this agency are permanent employees except Petros Challa.
‫ﺤ‬ Abdu Mohammed agreed to have a monthly Birr 200 be deducted & paid to the credit
Association of the agency as a monthly saving.
Illustration….
3.2.6.3. Computations of Earnings, Deductions & Net Pay
 Over Time Earnings:
Over Time Earnings = OT Hrs Worked (Ordinary Hourly Rate x OT Rate)
Senait : 10 hrs x ( Br. 13 x 1.25 ) = Br 162.50
Petros : 8 hrs x ( Br. 4 x 1.5 ) = Br 48.00
Abdu : 6 hrs x ( Br. 8 x 2 ) = Br 96.00
BAheru : 10 hrs x ( Br. 3 x 2.5 ) = Br 75.00
 GROSS EARNINGS:
Gross Earnings = Basic Salary + Allowance + OT Earning
1. Senait : Br 2080 + 100 + 162.50 = Br 2,342.50
2. Petros : Br 640 + 0 + 48.00 = Br 688.00
3. Abdu : Br 1280 + 0 + 96.00 = Br 1,376.00
4. Leila : Br 960 + 50 + 0 = Br 1,010.00
5. Baheru : Br 480 + 50 + 75.00 = Br 605.00
Illustration…. 3.2.6.3. Computations of Earnings, Deductions & Net Pay…
 1. Deductions & Net Pays:
1. Senayit
Gross Taxable Income = Br 2,342.50 Pension Contribution:
Employee Income Tax Deduction Basic Salary x 7%
Earning x ITR% Tax Rate - Deduction = IT Br 2080 x 7% = 145.60
208.87
+ 145.60
2,342.50 x 15% = 351.37 - 142.50 = 208.87 Total Deductions = 354.47
2,342.50
-354.47
Net Pay. Br. 1,988.03
2. Petros
Gross Taxable Income = Br 688.00 Pension Contribution:
Tax Pension contribution is ZERO b/c
Earning x ITR% Rate - Deduction = IT Petros is a contractual worker
8.80
+ 0.00
688.00 x 10% = 68.80 - 60.00 = 8.80 Total Deductions = 8.80
688.00
-8.80
Net Pay. Br. 679.20
 Deductions & Net Pays:
3. Abdu
Employee Income Tax Deduction Br 1,280 x 7% = 89.60
Credit Ass. Pay. 200.00
Tax
Earning x ITR% Rate - Deduction = IT Sub Total 289.60
77.60
+ 289.60
1,376.00
367.20
Net Pay. Br. 1,008.80
4. Leila
41.00
+ 67.20
1,010.00
108.20
Net Pay. Br. 901.80
 Deductions & Net Pays:
5. Bahru
00.50
+ 33.60
605.00 x 10% = 60.50 - 60.00 = 0.50 Total Deductions = 34.10
605.00
34.10
Net Pay. Br. 570.90
ETHIO RELIEF AGENCY - A PAYROLL SHEET FOR THE MONTH OF HIDAR, 2023
Gross Earning Deduction Net Earning

Name of the Basic Over Total Income Total Net
o Employee Salary Allowance Time Earning Tax Pension Others Deduction Payment Sig.
Senait Bahiru 2080.00 100.00 162.50 2342.50 208.87 145.60 - 354.47 1988.03
Petros Challa 640.00 - 48.00 688.00 8.80 - - 8.80 679.20
Abdu Mohammed 1280.00 - 96.00 1376.00 77.60 89.60 200.00 367.20 1008.80
Leilla Jemal 960.00 50.00 - 1010.00 41.00 67.20 - 108.20 901.80
Baheru Wolde 480.00 50.00 75.00 605.00 00.50 33.60 - 34.10 570.90
Total . . . 5440.00 200.00 381.50 6021.50 336.77 336.00 200.00 872.77 5,148.73
repared By: Verified By: Approved By:

Illustration….
Proving the Payroll:
Total Earnings:
Basic Salary ............ Br. 5,440.00
Allowance ............ 200.00
Over Time ............ 381.50
Grand Total Earnings . . . . . . . Br.6,021.50
Deductions:
Employee Income Tax . . . . . . . . . . . Br. 336.77
Pension Contribution . . . . . . . . . . . . 336.00
Other ............ ....... 200.00
Total Deduction. . . . . . . . . . . . . . . . . . . 872.77
Net Pays Total . . . . . . . . . . . . . . . . . . 5,148.73
Total Deduction, & Net Pay ........... Br.6,021.50
Thus, it is proved!
 2. Recording the Payment of Salary.
 Hidar 30, 2023
Salary Expense . . . . . . . . . . 6,021.50
Employee Income Tax Payable . . . . . .. .336.77
Pension Contribution Payable . . . . . 336.00
Credit Association . . . . . . . . 200.00
Cash . . . . . . . . . . . . . ………… ……5,148.73
 3. Recording the Payroll Taxes Expense for Hidar, 2009
Payroll Taxes Expense = Total Basic Salary of all Permanent Employees x 11%
= (2,080 + 1,280 + 960 + 480) x 11% = Br = 528
▼ Entry
Payroll Taxes Expense 528
Pension Contribution Payable 528
To the Credit Association on Tahsas 3,2023.

Credit Association 200
Cash 200
 5. Recording The Payment of Withholding and Payroll Taxes
To Inland Revenue Authority on Tahisas 5,2023
♦ Look at the account balance before payment:
Employee Income Tax Payable Pension Contribution Payable
336.00(2)
336.77 (2) 528.00(3)
864.00
♦Note that the agency has a Total Liability of Br. 672.77 That is:-
Employee Income Tax Br 336.77
Pension Contribution 336.00
Total . . . . . . . . . . . . . . . . . . . . Br 672.77
♦Note also that the total pension contribution payable is equal to 18% of the
basic salary of all permanent employees. That is: Br 4,800x18%=Br.864.00
 (5440 Total Salary-640 Petros’s Salary = 4,800)
▼ Then, the payment is recorded as follows:
Employees Income Tax Pay 336.77
Pension Contribution Payable 864.00
Cash 1,200.77
THE END
Thank You!!!
Sunday, March 24, 2024 Kassaye Tuji 43

Chapter 3 - Current Liabilities and Ethiopian Payroll System

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Chapter 3 - Current Liabilities and Ethiopian Payroll System

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PRINCIPLES OF ACCOUNTING II

CURRENT LIABILITIES &

3.1.1. Characteristics of Liabilities

3.1.2. Classifying Liabilities

▼Current Liabilities include:

3.1.2. Classifying Liabilities…

▼Non Current Liabilities Include:

3.1.3 Accounting for Current Liabilities

3.1.3 Accounting for Current Liabilities…

Mar. 1 Cash 100,000

3.1.3 Accounting for Current Liabilities…

July1 Notes payable 100,000

3.1.3 Accounting for Current Liabilities…

3.1.3 Accounting for Current Liabilities…

3.1.3 Accounting for Current Liabilities…

3.1.3 Accounting for Current Liabilities…

Unearned football Ticket Revenue 500,000

3.1.3 Accounting for Current Liabilities…

▼ Specific Unearned and Earned Revenue Accounts used in

3.2.2. Preparing Payroll

▼ The payroll department is responsible for:

♦ If the payroll is paid in currency:

3.2.4.1. Gross Earning

3.2.4.2. Overtime Earnings

Ethiopian Overtime Payment Rules

3.2.5. Payroll Deductions…

3.2.5. Payroll Deductions…

⁕ The total contribution to the Pension Trust Fund of the Ethiopian

3.2.6. Summary of Net Salary Calculation in Ethiopia…

3.2.6.1. Recording the Payroll

Maintaining of a Payroll Records

╚Each check is usually accompanied by:

Gross Earning Deduction Net Earning

repared By: Verified By: Approved By:

To the Credit Association on Tahsas 3,2023.

Sunday, March 24, 2024 Kassaye Tuji 43

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