The journal entry to record employer payroll taxes owed affects __.
A. liabilities only
B. assets only
C. assets and liabilities
D. liabilities and stockholders’ equity
The Correct Answer and Explanation is :
The correct answer is A. liabilities only.
When an employer incurs payroll taxes, it creates an obligation to pay those taxes, which is classified as a liability on the company’s balance sheet. This is because liabilities represent the amounts owed to other parties, and payroll taxes are a legal obligation arising from employment.
Explanation
In accounting, payroll taxes consist of various taxes that employers are required to pay based on their employees’ earnings. This typically includes Social Security taxes, Medicare taxes, federal unemployment tax, and state unemployment tax. These taxes are often calculated as a percentage of employees’ gross pay.
When an employer processes payroll, the following journal entries are made:
- Recording Payroll Expenses: When wages are paid, the employer recognizes payroll expenses, which will decrease the company’s equity (specifically retained earnings). However, this does not directly affect assets or liabilities at the moment of payroll processing.
- Recording Payroll Tax Liabilities: Along with the payroll expenses, the employer must also record the payroll taxes that are owed. This is done through a journal entry that credits (increases) various payroll tax liability accounts (like Social Security Payable, Medicare Payable, etc.) and debits (increases) the corresponding expense accounts. This entry results in an increase in liabilities, representing the amounts owed to tax authorities.
- Payment of Payroll Taxes: When the employer eventually pays these payroll tax liabilities, the company will debit (decrease) the liability accounts and credit (decrease) cash or bank accounts, reflecting the outflow of resources.
In summary, the journal entry to record employer payroll taxes owed directly affects only liabilities, as it increases the obligations the company has to pay tax authorities. This does not involve assets or stockholders’ equity at this stage; thus, the correct choice is A. liabilities only.