Michelle Clawson, CPP October 8, 2015

 Michelle Clawson, CPP Payroll Manager Driscoll’s Strawberry Associates, Inc.

 Accounting is the basic language of business. It’s the art of measuring, communicating, and interpreting financial activity. Accounting enables your organization to do the following:  Keep track of all monetary transactions  Report it’s financial transactions to shareholders and various federal, state, and local taxing authorities.  Control expenses  Monitor and safeguard company assets  Make decisions and plan for the future

 Since salaries and employee benefits are typically the largest expenses for most companies, payroll is under close financial scrutiny from top management.

 Journal Entries-First phase recording each financial transaction as it occurs  General Ledger-Second phase posting of transactions  Financial Statements- Third phase preparing financial statements that describe the companies financial position, cash flow, profits, losses, assets, liabilities, and net worth.

 There are generally five types of accounts used by a business: ◦ Assets – Anything that provides economic benefit ◦ Liabilities – Company debts that must be paid in the future ◦ Expenses – Show the company’s costs for goods and services consumed during current accounting period ◦ Revenue – Identify amounts received during the accounting period ◦ Equity – Represents the owners investment in the company

 Payroll usually generates entries to three types of accounts.  Asset Accounts-Assets are anything of value that is owned by the company, and normally have a debit balance. Examples of assets in the payroll department include:  Computers  Payroll software  Calculating machines  Furniture  Money in a payroll checking account

 Liability Accounts-Liabilities are debits. They represent a claim against the company’s assets and normally have credit balances. Many payroll transactions represent liabilities, including the following:  Taxes withheld but not yet deposited  Contributions to a company benefit plan not yet paid, for example, section 125 or 401(k)  A leasing contract for a payroll hardware/software system  Wages payable to the employees not yet paid

 Expense Accounts-Expenses are the cost of goods or services used in the process of obtaining revenue for the company and normally have a debit balances. Examples of expenses include the following:  Salaries of employees  Cost of employer-paid benefit programs  Lease payments for hardware/software systems  Purchasing office and computer supplies  Employer portion of payroll taxes

 Balance Sheet-Assets - Liabilities=Equity. This shows the companies financial position  Income Statement – Revenue – Expenses=Net Income

 Balance Sheet-Provides a look at the company’s financial condition at a specific point in time by listing its assets, liabilities, and equity.  Income Statement (profit and Loss)-Shows the company’s net income or loss for an accounting period. Net income or loss is the difference between revenue and expenses for the accounting period. In most cases, the income statement provides both the current year and the prior year’s information.

 In accounting terms, a debit is the left-hand side of an account while a credit is the right-hand side. An account like this is often described as a T account because it forms the letter T.  The basic advantage to having a left (debit) side and a right (credit) side is that it provides a built-in check for the system. At the end of the accounting period, perhaps after thousands of entries, the debits and credits from the various accounts must balance. In many computerized systems the debit entry is a plus and the credit entry is a minus.

T ACCOUNT DebitCredit Salary Expense$100,000 Cash$100,000 PR Tax Expense$50,000 PR Tax Liability$50,000 Total$150,000

TYPICAL PAYROLL T ACCOUNT DebitCredit Salary Expense$100, ER Payroll Taxes$10, ER Payroll Tax Liability$10, EE Payroll Tax Liability$20, Garnishments WH$5, Plan WH$1, (k) Withheld$10, (k) Match$1, (k) Match Expense$1, Cash$63, Total$111,000.00

 Whether you record a transaction on the debit or credit side depends on the type of account. In an asset account, anything increasing assets appears as a debit, while anything decreasing assets is recorded as a credit. So depositing money into a checking account (increasing assets) is a debit. Writing a check against that account (decreasing assets) is a credit. In a liability account anything increasing the liability is a credit and decreasing the liability is a debit.

 The chart of accounts lists all accounts by name and number. An example of a standard numbering system is below:  Asset accounts: 100 series  Liability accounts:200 series  Equity accounts: 300 series  Revenue accounts: 400 series  Expense accounts: 500 series  General overhead:800 series

 A journal is a chronological record of the daily transactions of a business. For each transaction, the journal shows the debits and credits to be entered in a specific ledger accounts and a description of the account. For example, the journal might contain the following entries. DateDescriptionDebitCredit June 30Deposit into Payroll Checking-Cover payroll expense $100,00 0 June 30Withdrawal from Corporate Account- payroll expense $100,000 July 2Purchase of Computers $5,000 July 2Cash$5,000

 The general ledger (GL) is a record of business transactions by account. Journal entries are recorded here. The GL keeps a running total of all the entries and period-to- date balances for a company’s accounts.

 Double-entry accounting requires entering a dollar amount twice for each transaction, one account is increased while another is decreased. For example if you wrote a check for $1000 to pay an independent contractor, the journal to record would look like: DateDescriptionDebitCredit 7/1Salary Expense $1000 7/1Asset (Cash)$1000

 Accounting Period-An accounting period is a period of time covered by information on an income statement. It may be a month, a quarter, a half-year, or a year. A firm’s fiscal accounting year may not be the same as the calendar year.  Accrual-Not all transactions occur within one accounting period. For example, a pay period may be within tow accounting periods and/or fiscal years. When a transaction overlaps tow or more accounting periods, accountants must make an approximation (accrual entry) of it’s value for each period. Without such an approximation, it is impossible to accurately measure your company’s financial position.

 Expenses such as salaries, taxes, or fringe benefits should always be recorded in the accounting period in which they occurred, not necessarily when they are paid. To do this, you may be required to accrue the expense and, later, reverse it when it is actually paid.

 What did we miss?