CHAPTER 6 ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS PAYROLL TRANSACTIONS Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS

Learning Objectives  Record payrolls in appropriate records  Understand various deductions taken from employees’ gross pay  Journalize entries to record payroll  Post to general ledger  Explain recording of payroll tax deposits  Understand need for end-of-period adjustments

Accounting for Payroll Transactions  Payroll requires entering data (in order) in the following places:  Payroll Register  Employee Earnings Records  General Journal  Journalize gross wages and withholdings  Journalize payroll taxes and workers’ compensation  Journalize period-end accruals  Post to General Ledger LO-1

Recording Gross Payroll & Withholdings  Any deduction that the employer makes from employee’s paycheck goes into a liability account (because they owe it to someone) such as:  Group life insurance premiums  Health insurance premiums  Purchase government savings bonds  Union dues  Deferred compensation (contributions to pension plan)  Child support/other garnishments LO-2

Methods of Paying Wages & Salaries  Check  Sometimes separate payroll account maintained to make bank reconciliation process easier  Electronic payment methods  EFTS (electronic funds transfer system)  Electronic records created showing bank, account # and net pay  Pay cards allow employer to deposit payroll into prepaid card  Card utilized like debit or credit card  Over 25% of employees who do not have bank accounts use these  Final pay  Many states set time limit between termination and final wage pay out (depends upon whether worker left voluntarily)  CA and MI require immediate payment if employee is fired LO-3

Journal Entries to Record Payroll  Journal Entry #1 - Record gross wages, withholdings and net pay  Journal Entry #2 - Record employer’s payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example). LO-3

Journal Entry #1  Debit Wage Expense for gross payroll  Credit each withholding account - they are all liabilities  Credit cash (or wages payable) for net payroll Journal entry #1 Wage Expense 1, FICA Taxes Payable - OASDI FICA Taxes Payable - HI Employees FIT Payable SIT Payable Group Insurance Payments W/H Cash 1, LO-3

Journal Entry #2  Debit Payroll Tax Expense for total of all payroll taxes that employer pays  Credit each account - they are all liabilities Calculate all employer taxes utilizing varying wage bases and percentages Journal entry #2 Payroll Tax Expense FUTA Taxes Payable 1.72 SUTA Taxes Payable FICA Taxes Payable - OASDI FICA Taxes Payable - HI LO-3

Recording Deposit of Payroll Taxes Look in general ledger for amounts due  Deposit 941 taxes  Deposit state income tax  Deposit SUTA LO-5

Workers’ Compensation Insurance  Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities  Laws differ by state  Premiums often calculated based on employment classification – stated in terms of $100 per payroll  Pay premiums in advance based on projected wages  Then, at year-end, report actual wages and pay additional premium or may receive credit towards next year LO-5

Journalize Period-End Accruals  Accrued wages should be recorded for wages earned by workers, but not yet paid Journal entry Wage Expense 1, Wages Payable1,  Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time Journal entry Vacation Benefits Expense Vacation Benefits Payable Note: Not necessary to accrue payroll tax expense at year-end LO-6