1. Payroll Accounting (Accounting Basics) Presented by: Veneia M. Dunbar, CPA, CPP AVP-Payroll Manager Nuveen Investments, Inc. Chapter 6 Payroll Practice Fundamentals 2015

2. AGENDA  Accounting Basics  Recording Transactions  Accounting Principles (GAAP)  Double-Entry Accounting & Intro. to Financial Statements  Types of Accounts & Normal Balances  Accrual  Balance Sheet and Income Statement  Check Your Understanding 2

3. Accounting Basics Accounting is the basic language of business. In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons. Accounting enables an organization to keep track of all of its monetary transactions. Accounting enables an organization to control expenses (Payroll expense) Accounting enables an organization to report its financial transactions to shareholders and various federal, state and local taxing authorities. Accounting enables organization to make decisions and plan for the future. 3

4. Recording Transactions  Record each financial transaction as it happens.  Post the transaction to a journal and then to the general ledger.  Use transactional data to prepare financial statements that describe a company’s financial position (cash flow; profits; losses; assets; liabilities and net worth).  Financial Statements allow people (management; shareholders; etc.) to make decisions about a company’s future. 4

5. Generally Accepted Accounting Principles (GAAP) Since 1974, the Financial Accounting Standards Board (FASB) has set the standards for recording financial transactions in organizations. GAAP are a combination of authoritative standards, concepts and principles (set by the boards above). GAAP are the commonly accepted ways of recording and reporting accounting information. 5

6. Generally Accepted Accounting Principles (GAAP) Business entity concept – Each organization operates separately and personal transactions of EE’s, managers and owners are kept separate from the business entity. Continuing concern concept – Assumes the business entity will continue to operate indefinitely and assets are valued at cost. Time period concept – Based on the type of business, each organization must determine its own yearly accounting period (fiscal year or calendar year). Cost principle – Goods and services are recorded at cost. Over time the assets are valued at cost less any depreciation. This is in accordance with the continuing concern concept and the objectivity principle. 6

7. Generally Accepted Accounting Principles (GAAP) Objectivity principle – Recorded transactions are not to be based on personal opinions or emotions in order to ensure reliability of accounting information. Matching principle – Allows comparison between different organization’s financial statements because expenses and revenue are recorded in the accounting period where expense is incurred or revenue is earned. Realization principle – Governs the recording of revenue. Revenue is recognized (or realized) and reported when it is earned. Revenue is earned in the accounting period when the goods have been transferred or the services provided. Consistency principle – Transactions must be recorded in a consistent manner based on the accounting method, principle or period. 7

8. Double-Entry Accounting & Intro. to Financial Statements Double Entry Accounting System – One account is increased, another is decreased. Allows basic accounting equations to remain in balance. Balance Sheet Assets – Liabilities = Equity Income Statement and Statement of Retained Earnings Revenue – Expenses = Net Income Net Income – Income Distributed + Contributed Capital = Equity 8

9. Five Types of Accounts A ll L ittle C ats R each E xhaustion Assets (generally affected by payroll entries) – Something that provides an economic benefit or value to the company over a period of time. Three types of assets: Current; Tangible or Property, Plant and Equipment i.e. CASH and Inventory are current assets. Liabilities (generally affected by payroll entries) – Accounts that show the debts of the company which must be paid in the future. Two categories of liabilities: Current and Long-Term i.e. Wages Payable; Taxes Payable (current liabilities, due within the fiscal year). Capital/Equity – Accounts that represent the owner’s investment in the company (i.e. its net worth; revenue – expenses – amount distributed to owners = equity). Equity accounts are normally divided into two components: Contributed Capital and Retained Earnings. Revenue – Accounts that show amounts received for goods sold and services rendered during the accounting period. Expenses (generally affected by payroll entries ) – Accounts that show the company’s cost for goods and services consumed during the accounting period. i.e. Payroll Salary Expense; Employer Benefits Expense. 9

10. General Ledger Chart of Accounts Example General Ledger Example 10 A record of business transactions by account. All subsidiary ledgers summarize to the General Ledger.

11. Normal Account Balances Normal Account Balances for each type of account  Debit/Credit Account Balance “T-Accounts” (when in doubt “T” it out).  Accounting Transactions are recorded by debit (DR) or credit (CR) entries on either side of a symbolic diagram of an account, it looks like a T. 11

12. Normal Account Balances The Normal Balance of an account dictates if a debit/credit entry increases or decreases the account. 12

13. Normal Account Balances 13

14. Journal Entry Process (record/post) The Journal Entry is a record of the transactions of a company during the accounting period (typically monthly). For each transaction, the journal entry shows both the debits and credits to be entered in specific accounts and a description of the transaction. Most Payroll Journal Entries are considered “Compound Entries” meaning they have more than one debit or credit. Posting Journal Entries – Posting a journal entry merely means that a transaction having financial impact to an organization is being recorded to the organization’s subsidiary or general ledger. A subsidiary ledger is basically a “subset” of the general ledger. The general ledger is an organization’s book of final entry, so entries are posted to the general ledger after they are posted to the subsidiary ledger. The subsidiary ledger breaks out the general ledger into sub groups/accounts that share common information. Example, the Payroll register may be considered a subsidiary ledger as well as Accounts Payable or Accounts Receivable. 14

15. Journal Entry Process (record/post) A transaction is posted/recorded as a debit or credit in the journal entry based on the type of account it is. The debit or credit increases or decreases the account based on the account’s normal balance. Example: A Payroll Checking Account is considered an Asset Account (CASH) so the normal balance is a DEBIT balance. Therefore, any journal entry recording a “debit” to the payroll checking account is increasing the balance of the account (i.e. depositing cash; direct deposit return). Then, the exact opposite is true, any journal entry recording a “credit” to the payroll checking account is decreasing the balance of the account (i.e. writing a check on the account; transmitting a direct deposit). 15

16. Journal Entry Process/Recording Payroll Transactions Payroll Expenses – Recorded by Functionality (i.e. Manufacturing/Sales) or Type of Pay (i.e. Regular Pay/Overtime Pay). Payroll journal entries should be recorded in the accounting period that contains the ending date of the pay period.  Expense accounts are normally titled Salary/Wages Expense and carry a normal DEBIT Balance. So, an increase to expense would be a DEBIT to the expense account.  Based on if the employer pays current or in arrears, the CREDIT side of the payroll expense entry can be to a liability account, Salary/Wages Payable, or an asset account, CASH. Payroll Deductions – Amounts that are withheld from employees' wages that must be remitted to a 3 rd party (i.e. IRS, State Revenue Agency) are a liability (payable) to the employer the date they withhold the amounts from the employee’s check, normally the pay date. 16

17. Journal Entry Process/Recording Payroll Transactions Payroll cash distribution/net pay – When employees are paid, entries must be made to show the distribution of cash. This entry occurs in the accounting period in which the employees are actually paid. Salary Expense1,500.00 Salary Wages Payable1,500.00 Salary Wages Payable1,500.00 Cash/Net Pay1,500.00 17

18. Journal Entry Process/Recording Payroll Transactions Employer Taxes – Employers are responsible for Social Security and Medicare taxes, as well as federal and state unemployment taxes. The recording of the expenses and liabilities for these taxes must also be recorded via a journal entry and posted to the general ledger in the accounting period in which the expense/liability are incurred. Payment of the Tax Liabilities must also be recorded via a journal entry and posted to the general ledger in the accounting period when payments to the 3 rd party agencies are remitted. 18

19. Journal Entry Process/Recording Payroll Transactions 19

20. Journal Entry Process/Recording Payroll Transactions 20

21. Accounting Periods Accounting Period - The time span in which certain financial events take place. An accounting period is any length of time covered by an income statement, which could be a month, a quarter, six months, or a year.  Companies must define their accounting year (fiscal year). It can be a calendar based year, or any 12 month period.  A company’s “fiscal year” can be January 1–December 31, same as calendar year. Or a company’s “fiscal year” can be July 1– June 30 (typical for non-profits); October 1– September 30 (some governmental agencies); or April 1–March 31 (UK tax year). 21

22. Accruals and Reversals Two basic methods of accounting can be adopted by companies: 1) Cash Accounting Method 2) Accrual Accounting Method The IRS accepts either method depending on the circumstances however, under GAAP only the Accrual Accounting Method is acceptable. The Accrual Method is used to satisfy the “Matching Principle” Matching principle – Allows comparison between different organization’s financial statements because expenses and revenue are recorded in the accounting period where expense is incurred or revenue is earned. Paydays, pay period end dates, and accounting period end dates normally do not occur on the same day, so most companies must accrue to account for all payroll expenses through the end of each accounting period. The Accrual Method of accounting also allows managers, auditors, and other users of a company’s financial information able to determine its financial condition and compare it to previous years and other similar organizations. 22

23. Accruals and Reversals Accruals made by payroll entries are to estimate the payroll expenses and liabilities to be incurred between the last payroll period ending dates and the end of the accounting period. Accruals are booked to the general ledger via a payroll journal entry and are “reversed” out during the next accounting period when the actual expenses and liabilities are recorded. Common accrual journal entries seen in payroll are bonus and vacation accruals. 23

24. Accruals and Reversals 24

25. Accruals and Reversals 25

26. Accruals and Reversals 26

27. Financial Statement Financial Statements are published annually for most companies after they have been audited by independent certified public accountants. Financial Statements are significantly impacted by information and records gathered and recorded by the payroll department. Poor payroll processing and reporting practices can lead to financial statements that materially misrepresent a company’s financial condition. Balance Sheet is the financial statement that consists of Assets, Liabilities and Capital/Equity: Assets – CASH is impacted by Payroll as it generates the payment of employees’ wages and the remittance of deductions from those wages. These transactions generate entries crediting (reducing) the cash account. In companies that produce inventory for sale, the account for that inventory (asset) may have entries for salary expense, since the cost of goods sold should include the employees’ wages. 27

28. Financial Statement Balance Sheet consists of Assets, Liabilities and Capital/Equity: Plant, property and equipment-Payroll will affect this part of the balance sheet if the company builds its own plant, property and equipment. The labor that goes into constructing the plant facilities will be capitalized, with the amount being the portion of the employees’ wages, benefits and taxes identified as a cost of producing the asset. Deferred Assets-Payroll will affect this part of the balance sheet normally if the organization has funded a nonqualified deferred compensation plan. Current Liabilities-Very commonly affected by Payroll journal entries (i.e. Wages Payable; Taxes Payable; Garnishments; Accrued Vacation; Accrued Bonuses). Long-term Liabilities-Impacted by Payroll if the accrued vacation policy carries over past one year; continuation of health benefits for retirees; pension for retirees (common for employers to lump out this plan). Shareholders’ Equity (net worth)-Represents the owner’s share of the business after all debts have been paid. 28

29. 29 Financial Statements – Balance Sheet

30. 30 Financial Statements – Balance Sheet

31. Financial Statement Income Statement is the financial statement that summarizes the organization’s revenues and expenses and consists of: Gross margin on sales – Net sales (gross sales – discounts) minus COGS (supplies, raw material, labor). Operating income (profit). Nonoperating revenue. Expenses (operating and nonoperating). Net earnings (net income/loss) – “The Bottom Line.” Earnings per share. Payroll journal entries generally affect the Income Statement with operating expenses (i.e. salaries), and possibly some nonoperating revenue (interest received from overpaid taxes). 31

32. 32 Financial Statements – Income Statement

33. 33 Check Your Understanding

34. 34 Check Your Understanding

35. CONGRATS FUTURE FPC’s CONTINUED SUCCESS Veneia M. Dunbar CPA, CPP Nuveen Investments, LLC AVP-Payroll Manager Veneia.Dunbar@Nuveen.com