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CHAPTER # 09 REVIEW Atef Abuelaish

Section 1: Cash Receipts
Chapter 9 Chapter 09 Cash Section 1: Cash Receipts Section Objective 9-1 Account for cash short or over. Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Account for Cash Short or Over
Royal Jewelry Store, a retail business, keeps a $200 change fund in its cash register. Royal Jewelry Store started business on September 29. The cash sales as per the cash register tape on September 29 were $2,200. The cash count was $2,397. The cash register was short by $3, calculated as follows. Here is an example of how to calculate cash short at the end of the trading day. On September 29,the change fund was $200, cash sales was $2,200, and at the end of the day cash count was $2,397. So the cash short is $3. Atef Abuelaish

Journal entry to record the sales and cash shortage: This is how the journal entry to record the sales and the cash shortage should look. In this case there is a shortage, and so the cash short or over account is debited for three dollars. Atef Abuelaish

The cash sales as per the cash register tape on September 30 were $2,100. The cash count was $2,301. The cash register was over by $1, calculated as follows. Here is an example of how to calculate cash over at the end of the trading day. On September 30, the change fund was $200, cash sales was $2,100 , and at the end of the day, the cash count was $2,301. So the cash over is $1. Atef Abuelaish

Journal entry to record the sales and cash overage To record the overage computed on the previous slide, the cash short or over account is credited for one dollar. After these journal entries have been posted, the balance in the Cash Short or Over account on September 30 is a $2 debit. This will be reported as an expense on the income statement for the period ended September 30. If the Cash Short or Over account would have had a credit balance. It would have been reported as a revenue on the income statement for the period ended September 30. Atef Abuelaish

Cash Received on Account
Generally a business makes sales on account and bills customers once after a specified period (say, a month.) It sends a statement of account that shows the transactions during the month and the balance owed. Checks from credit customers are journalized and posted, and then the checks are deposited in the bank. Maxx-Out Sporting Goods makes sales on account and bills to customers once a month. It sends a statement of account that shows the transactions during the month and the balance owed. Customers are asked to pay within 30 days of receiving the statement. Checks from credit customers are journalized and posted, and then the checks are deposited in the bank. Atef Abuelaish

Promissory Note A promissory note is a written promise to pay a specified amount of money on a certain date. Promissory notes are specified interest bearing notes. They are used by businesses to extent credit. Also used to replace an accounts receivable balance when an account is overdue. A promissory note provides a more legal protection than an account receivable. The next slide shows a promissory note. Atef Abuelaish

Collection of a Promissory Note and Interest
On July 31 Maxx-Out Sporting Goods accepted a six-month promissory note from Stacee Fairley, who owed $800 on account. Sometimes promissory notes are issued on account to satisfy an overdue account. Here is a promissory note accepted from one of Maxx-Out’s customers. The note is due in six months and the customer will have to pay interest at the rate of 9% on the amount of $800. Atef Abuelaish

On July 31, Maxx-Out Sporting Goods recorded a general journal entry to increase notes receivable and to decrease accounts receivable for $800. The asset account, Notes Receivable, was debited. The Accounts Receivable account was credited. This is the journal entry in the general journal to record receipt of the note from the customer that owed $800. This is sometimes referred to as a conversion journal entry. Atef Abuelaish

Computation of Interest
Amount owed = $800 Interest rate = 9% per year Rate for six-month period = (9%) ÷ 2 = % Interest amount = $800 x 4.5% = $36 Total amount with interest = $800 + $36 = $836 At the end of the note, we will need to compute interest. The interest on the note will be $36 and so the total amount due upon maturity of the note will be $836. Atef Abuelaish

Section 2: Petty Cash and Internal Controls for Cash
Chapter 9 Cash Section 2: Petty Cash and Internal Controls for Cash Section Objectives 9-2 Demonstrate a knowledge of procedures for a petty cash fund. 9-3 Demonstrate a knowledge of internal control routines for cash. In the second section of this chapter, we will learn about the procedures for a petty cash fund and the internal control routines for cash. Atef Abuelaish

Demonstrate a knowledge of procedures for a petty cash fund.
Remember, for good internal control, all cash payments should be made by check. Petty cash funds are set up to make payments for purchases of small items like postage or COD items. A fund is established by writing a check to the order of the person who will be in charge of the fund. Usually the office manager, cashier, or assistant is in charge of the petty cash fund. A pre-numbered voucher is used for good internal control. The amount is recorded. The purpose of the funds is listed. The account which needs to be debited is written in along with its account number. Atef Abuelaish

Establishing the fund The amount of petty cash fund depends upon the need of the business. The cashier is responsible for the petty cash. The establishment of petty cash fund should be recorded as: Here is an example of the establishment of a petty cash fund by Maxx-Out Sporting Goods. Maxx-Out Sporting Goods wrote a $175 check to the cashier on February 1, using check number 160. Atef Abuelaish

The Petty Cash Analysis Sheet
Used to record transactions involving petty cash. Contains two major columns: Receipts and Payments. Contains special columns such as: Supplies, Delivery Expense, and Miscellaneous Expense. Other Accounts Debit column for entries that do not fit in a special column. Most businesses use a petty cash analysis sheet to record transactions involving petty cash. In addition to the main columns Receipts and Payments, the analysis sheet also contains special columns for accounts that are used frequently and an Other Accounts Debit column for entries that do not fit in a special column. Atef Abuelaish

Replenishing the Fund The total vouchers plus the cash on hand should always be equal to the amount of the fund. Replenish the petty cash fund at the end of each month or sooner if the fund is low. A check is written to restore the petty cash fund to its original balance. A journal entry is prepared to record the check. The total vouchers plus the cash on hand should be always equal to the amount of the fund. The fund should be “replenished” at the end of each month or sooner if the fund is low. Atef Abuelaish

The Petty Cash Analysis Sheet
Total Payment equal Total of individual expense accounts This slide shows an example of the Petty Cash Analysis sheet. The total payments during the month are replenished at the end of the month or when needed with the total amount of payments made. Replenish fund equals the Total Payments Atef Abuelaish

Internal Control Procedures
The following internal control procedures apply to petty cash: Use the petty cash fund only for small payments that cannot conveniently be made by check. Limit the amount set aside for petty cash to the approximate amount needed to cover one month's payments from the fund. Write petty cash fund checks to the person in charge of the fund, not to the order of "Cash." Internal controls for petty cash include using only for small payments, limiting the amount, and not writing checks to “Cash.” Atef Abuelaish

Internal Control Procedures
Assign one person to control the petty cash fund. This person has sole control of the money and is the only one authorized to make payments from the fund. Keep petty cash in a safe, a locked cash box, or a locked drawer. Obtain a petty cash voucher for each payment. The voucher should be signed by the person who receives the money and should show the payment details. This provides an audit trail for the fund. Other internal control procedures include: assigning it as one person’s responsibility, keeping cash secure, and obtaining vouchers for payment to provide an audit trail. Atef Abuelaish

Essential Cash Receipt Controls
Demonstrate a knowledge of internal control routines for cash. Essential Cash Receipt Controls Have only designated employees receive and handle cash. In some businesses employees handling cash are bonded. Keep cash receipts in a cash register, a locked cash drawer, or a safe while they are on the premises. Make a record of all cash receipts as the funds come into the business. The internal control over cash should be tailored to the needs of a business. Accountants play a vital role in designing, establishing, and monitoring the cash control system. Take a look over the above steps and see if you can understand the importance of these controls. Atef Abuelaish

Essential Cash Receipt Controls
Check the funds to be deposited against the record made when the cash was received. Deposit cash receipts in the bank promptly. Deposit the funds intact. Enter cash receipt transactions in the accounting records promptly. 7. Have the monthly bank statement sent to and reconciled by someone other than the employees who handle, record, and deposit the funds. Other controls also include depositing receipt promptly and entering receipt transactions promptly. Atef Abuelaish

Advantage of handling and recording cash receipts
Funds reach the bank sooner. Cash receipts are not kept on the premises for more than a short time. Funds are safer and are readily available for paying bills owed by the firm. One of the advantages of efficient procedures for handling and recording cash receipts is that the funds reach the bank sooner. Cash receipts are not kept on the premises for more than a short time, which means that the funds are safer and are readily available for paying bills owed by the firm. Atef Abuelaish

Essential Cash Payment Controls
Make all payments by check except for payments from special purpose cash funds such as a petty cash fund. Issue checks only with an approved bill, invoice, or other document that describes the reason for the payment. Have only designated personnel approve bills and invoices. Have checks prepared and recorded in the checkbook or check register by someone other than the person who approves the payments. There are many simple routines a business can put in place to provide better control over cash payments, including issuing checks only when an approved bill or invoice is presented… Atef Abuelaish

Essential Cash Payment Controls
Have still another person sign and mail the checks to creditors. Use prenumbered check forms. During the bank reconciliation process, compare the canceled checks to the checkbook or check register. Enter promptly in the accounting records all cash payment transactions. and comparing the canceled checks to the checkbook or check register during the bank reconciliation process. Atef Abuelaish

Section 3: Banking Procedures
Chapter Cash 9 Section 3: Banking Procedures Section Objectives 9-4 Write a check, endorse checks, prepare a bank deposit slip, and maintain a checkbook balance. 9-5 Reconcile the monthly bank statement. 9-6 Record any adjusting entries required from the bank reconciliation. 9-7 Understand how businesses use online banking to manage cash activities. This is the last section of this chapter and it addresses reconciling a bank statement and explains how businesses can use online banking to manage cash activities. Atef Abuelaish

Write a check, endorse checks, prepare a bank deposit slip, and
Objective 9-4 Write a check, endorse checks, prepare a bank deposit slip, and maintain a checkbook balance. Objective 4 discusses proper banking procedures involving checks, deposits and maintaining a checkbook. Let’s talk about checks first. A check is a written order signed by an authorized person instructing a bank to pay a specific sum of money to a designated person or business. The drawer is the person or firm issuing a check. The drawee is the bank on which a check is written. The payee is the person or firm to whom a check is payable. Atef Abuelaish

A. Checks and Check Stubs
Here are two checks. The firsts check to The Maxx-Out Sporting Goods was written for two months rent equaling $1,500. See if you can identify the parties on a check as previously described. Keep in mind that a check is a negotiable instrument. A financial instrument is negotiable if ownership can be transferred to another person or business. This check is a negotiable financial instrument. Atef Abuelaish

Check Stubs Before writing the check, complete the check stub. The check stub shows: The check stub will show the balance before the check was written and then the balance in the checking account, after the check is subtracted. To be valid, checks need an authorized signature. For Maxx-Out Sporting Goods only Max Ferraro, the owner is authorized to sign checks. Debit cards (also called check cards) look like credit cards or ATM (automated teller machine) cards, but operate like cash or a personal check. Balance brought forward: $12,025.50 Check amount: $1,500 Balance: $10,525.50 Atef Abuelaish

B. Endorsements Maxx Ferraro 38-14-98867 Full Endorsement
PAY TO THE ORDER OF FIRST TEXAS NATIONAL BANK Maxx-Out Sporting Goods Blank Endorsement Restrictive Endorsement An endorsement is a written authorization that transfers ownership of a check. There are three types of endorsements: Blank endorsement Full endorsement Restrictive endorsement Make sure you know the difference between the three. Here are examples of all three endorsements. Maxx Ferraro PAY TO THE ORDER OF FIRST TEXAS NATIONAL BANK FOR DEPOSIT ONLY Maxx-Out Sporting Goods Atef Abuelaish

C. Preparing the Deposit Slip
The deposit slip for Maxx-Out Sporting Goods shows the date, January 8. Currency is the paper money, $1, Coin is the amount in coins, $ The checks and money orders are individually listed. Some banks ask that the American Bankers Association (ABA) transit number for each check be entered on the deposit slip. The transit number appears on the top part of the fraction that appears in the upper right corner of the check. The transit number is Occasionally a business will receive a postdated check. A postdated check is dated some time in the future. If the business receives a postdated check, it should not deposit it before the date on the check. Otherwise, the check could be refused by the drawer’s bank. Atef Abuelaish

D. Reconcile the monthly bank statement.
The difference between the bank balance and the book balance is due to errors. Errors made by banks Errors made by businesses Arithmetic errors Arithmetic errors Giving credit to the wrong depositor Not recording a check or deposit Charging a check against the wrong account Recording a check or deposit for the wrong amount Objective 5 is to prepare a bank reconciliation. This is done by comparing the bank statement to the accounting records maintained by the company. The bank reconciliation reconciles the two balances. Sometimes the difference between the bank balance and the book balance is due to errors. Sometimes it is due to timing errors. It is important to understand the basic types of reconciling items. Many banks require that errors in the bank statement be reported within a short period of time, usually 10 days. Atef Abuelaish

Why balances may not equal
Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank statement. 1. Outstanding checks. 2. Deposit in transit. 3. Service charges and other deductions not recorded in the business records. 4. Deposits, such as the collection of promissory notes, not recorded in the business records. Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank statement. It is important that you know the definition of each of these and how they would be recorded on a typical bank reconciliation. Outstanding checks are checks that have been recorded in the cash payments journal but have not yet been paid by the bank. Deposit in transit is a deposit that is recorded in the cash receipts journal but that reaches the bank too late to be shown on the monthly bank statement. Atef Abuelaish

Bank statement balance
Format of a bank reconciliation statement First Section Second Section = Bank statement balance Book balance + deposits in transit + deposits not recorded – outstanding checks – deductions + or – bank errors Here is the format of a typical bank reconciliation. + or – errors in books Adjusted bank balance = Adjusted book balance Atef Abuelaish

The Bank Side of the Bank Reconciliation
Steps to prepare the bank reconciliation statement: First Section Enter the balance on the bank statement. Compare the deposits in the checkbook with the deposits on the bank statement. List the outstanding checks. List any bank errors. Compute the adjusted bank balance. Let’s prepare the first section. First, enter the end of month bank statement balance listed on the bank statement, then compare the deposits in the checkbook with the deposits on the bank statement. Next, list the outstanding checks. If the bank has incorrectly debited an account or made any other errors, list those. Finally, compute the adjusted bank balance. Atef Abuelaish

The Book Side of the Bank Reconciliation
Steps to prepare the bank reconciliation statement: Second Section Enter the balance in books from the Cash account. Record any deposits made by the bank that have not been recorded in the accounting records. Record deductions made by the bank. Record any errors in the accounting records that were discovered during the reconciliation process. Compute the adjusted book balance. Now it is time to prepare the second section of the bank reconciliation. First, enter the balance in books from the Cash account. Second, total and record any deposits made by the bank have not been recorded in the accounting records. Next, record deductions made by the bank, for example, a service charge. Fourth, record any errors uncovered during the reconciliation process. Finally, compute the adjust book balance. The adjusted bank balance and the adjusted book balance should agree. Atef Abuelaish

Record any adjusting entries required from the bank reconciliation.
For Maxx-Out Sporting Goods, two entries must be made. GENERAL JOURNAL PAGE 17 DATE DESCRIPTION POST DEBIT CREDIT REF. Jan Accts. Rec./David Newhouse Bank Fees Expense Cash To record NSF check and service charge In the bank reconciliation process, steps 2 and 3 in section 2 involve recording additions or deductions made by the bank that are not yet included in the accounting records. Journal entries must be prepared to account for these items. For Maxx-Out Sporting Goods, two entries must be made: Debit Accounts Receivable for the NSF check from David Newhouse and credit the Cash account. Debit Bank Fees Expense for the monthly bank charges and credit Cash for the same $25. In the above entry, the two charges are entered as one adjusting entry. The first entry is for the NSF check from David Newhouse, a credit customer. The second entry is for the bank service charge. The effect of the two items is a decrease in the Cash account balance. Atef Abuelaish

Many businesses now manage many transactions online:
Understand how businesses can use online banking to manage cash activities. Using On-line Banking Many businesses now manage many transactions online: Electronic Funds Transfers – EFT’s Payments to government agencies Payments from customers Payments to vendors More and more businesses are managing a significant portion of their cash transactions online. Online banking offers efficient features including electronic fund transfers, payments for taxes to government agencies, receipt of EFT payments from customers and payments to vendors. There are usually no source documents for the transactions listed above. Careful attention must be paid to insure all EFT and other transactions initiated electronically are recorded in the accounting records. Atef Abuelaish

Chapter 10 Payroll Computations, 10 Chapter
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over. Atef Abuelaish

Chapter 10 Payroll Computations, Records, and 10 Chapter

Chapter 10 Payroll Computations, Records, and Payment 10 Chapter

Section 1: Payroll Laws and Taxes
Chapter 10 Payroll Computations, Records, and Payment Section 1: Payroll Laws and Taxes Section Objectives 10-1 Explain the major federal laws relating to employee earnings and withholding. Chapter 9 discussed several aspects of business accounting, including special journals, the petty cash fund, and bank reconciliations. Chapter 10 continues the study of business accounting by discussing payroll accounting. Section 1 explains the major federal laws relating to employee earnings and withholdings. The first objective of the chapter explains the major federal laws relating to employee earnings and withholding. Atef Abuelaish

Characteristics of an Employee
Works under the control and direction of the employer Uses tools or equipment provided by the employer Works certain hours that are set by the employer An employee is a person who is hired by and works under the control and direction of the employer. There are several common characteristics of an employee. In most situations, an “employee” works in the employer’s facility, using the employer’s tools, under the employer’s direct supervision. An independent contractor works unsupervised, usually away from the employer’s facility. This chapter discusses the withholding for an employee, not an independent contractor. (An independent contractor is responsible for paying all payroll related taxes related to income.) Atef Abuelaish

Legal Aspects of Employee Payroll
Someone whose work is under the direction of the employer Withhold taxes Independent Contractor Performs a job for the employer but decides how to do the work Do not withhold taxes Part I An employee is someone whose work is under the direction of the employer, such as a bookkeeper or secretary. The employer controls what work the employee is to do and how it should be done. For example, employees are typically trained to perform tasks in a certain way. The employer does withhold money for taxes for employees. Part II An independent contractor performs a job for the employer, but decides how to do the work. Independent contractors typically do not receive training from the employer. The employer does not withhold any money for taxes for independent contractors.

Explain the major federal laws relating to employee
Objective 10-1 Explain the major federal laws relating to employee earnings and withholding. What are the major laws relating to employee earnings and withholding? Atef Abuelaish

The Fair Labor Standards Act of 1938
Also referred to as the Wage and Hour Law. Applies only to firms engaged directly or indirectly in interstate commerce. Sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay. Employees who work beyond 40 hours a week are entitled to “time and a half” times the regular rate of pay for the extra hours. The most significant law is the Fair Labor Standards Act. This is sometimes referred to as the Wage and Hour Law. The law applies to firms engaged directly or indirectly in interstate commerce. The Fair Labor Standards Act fixes minimum wage and the maximum number of hours or work per week to be performed at the regular rate of pay. Hours worked in excess of 40 must be paid at one and one-half times the regular rate of pay. Atef Abuelaish

Fair Labor Standards Act
Applies to businesses operating across state lines Sets minimum wage Sets 1½ times the normal hourly rate as the minimum overtime pay rate Sets a 40 hour work week at the normal pay rate The Fair Labor Standards Act applies to firms engaged in business across states. It sets a minimum wage and sets 40 hours as the most an employee can be required to work in a week at the normal pay rate. Employees that work more than 40 hours in a work week receive overtime pay. This pay is at least one and one half times their normal pay rate for those overtime hours. 9-49

Federal Insurance Contributions Act (FICA)
Social Security Benefits Retirement, disability, and survivors 2016 Rate 6.2% on first $118,500 Medicare Benefits Medical 2016 Rate 1.45% on all earnings Part I The federal Social Security system pays benefits to qualified workers. The law requires employers to withhold FICA taxes from employees. Employers usually separate FICA taxes into two groups. The first group is called Social Security benefits and includes payments for retirement and disability and to survivors. This group is paid for with Social Security taxes. In 2009, the Social Security tax rate was 6.2% of the first $106,800 the employee earns during the year. Employers must also pay the Social Security tax in an amount equal to what the employee contributes. This is sometimes referred to as matching because the employer must match what the employee pays in for this tax. Part II The second group is Medicare benefits and includes all payments for medical purposes. This group is paid for with Medicare taxes. There is no upper limit on the amount of Medicare tax an employee could pay. Employers must also match the Medicare tax payments made by their employees. 9-50

1) Social Security Tax The amount of social security tax is determined by: As of 2016 rate 6.2% earnings up to a calendar year earnings base $ 118,500 The rate (6.2%) has remained constant in recent years. The earnings base has increased each year. The tax provides for retirement, disability, and death benefits. It also provides survivor benefits for the worker’s minor dependent children and spouse if the worker dies or is disabled. Social security tax is a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits. The Social Security’s Old-Age, Survivor’s and Disability Insurance (OASDI) provides benefits for employees and their families, including: retirement benefits when a worker reaches the eligible retirement age, benefits for the dependents of a retired worker and benefits for the worker and the worker’s dependents when a worker is disabled. The Social Security act also provides benefits for a worker’s surviving minor dependent children and spouse if the worker dies. The tax is subject to maximums which often change. As of 2010l the social security rate was still 6.2%; the earnings base was $106,800. Atef Abuelaish

2) Medicare Tax The amount of Medicare tax is determined by:
rate 1.45% earnings total earnings The rate (1.45%) has remained constant in recent years. Medicare tax is a tax levied on employees and employers to provide medical care for the employee and the employee’s spouse after each has reached age 65. The current Medicare tax rate is 2.9% % is withheld from the employee’s paycheck and the other 1.45% of the employee’s tax is paid by the employer. So, out of an employees gross wages, Medicare is withheld at the rate of 1.45% and social security is withheld at the rate of 6.2%. The employer pays a matching portion. The Medicare tax does not have an earnings limit, so the tax applies to all earnings paid during the year. The Medicare tax does not have an earnings base limit. Atef Abuelaish

3) State and Local Taxes Most states, and many local governments, may require employers to withhold income taxes from employees’ earnings to prepay the employees’ state and local income taxes. The rules are generally almost identical to those governing federal income tax withholding. Employers are required to withhold income taxes from the employee’s earnings. Federal income tax is an additional withholding tax which comes out of an employee’s gross wages. Employees subject to federal income tax withholding may also be subject to state and/or local income tax withholding in most states. There are a few states which don’t require employees to pay state income taxes (Alaska, Washington, and Texas are examples.) Atef Abuelaish

4) Employer’s Payroll Taxes and Insurance Costs
Employers withhold social security and Medicare taxes from employees’ earnings. In addition, employers pay social security and Medicare taxes on their employees’ earnings. Employers are also required to pay: Federal unemployment tax (FUTA) State unemployment tax (SUTA) Workers’ compensation insurance in some states. (Not a tax) Employers must pay the following payroll taxes: State Unemployment Tax (SUTA), Federal Unemployment Tax (FUTA), Social Security Tax (1/2 of employee’s), Medicare Tax (1/2 of employee’s). Only employers pay Federal Unemployment tax. Sometimes this tax is referred to as FUTA. The employee does not pay this tax. State unemployment taxes (SUTA) are taxes levied by the state government against employers to benefit unemployed workers. Sometimes this tax is referred to as SUTA. The FUTA and SUTA tax rates are applied to a taxable earnings base. We will assume that $7,000 is the wage base maximum. Employers get a credit for State unemployment taxes paid, applied against their Federal Unemployment tax liability. The “net” federal unemployment tax rate in that case is .6% (.006). The FUTA and SUTA tax rates are applied to a taxable earnings base. This text assumes that the taxable earnings base is $7000. Atef Abuelaish

5) Worker’s Compensation Insurance
QUESTION: What is workers’ compensation insurance? Workers’ compensation insurance is the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment. ANSWER: In states where it is required, employers pay for insurance that will reimburse employees for losses resulting from job-related injuries or will compensate their families in the event of death in the course of their employment. Atef Abuelaish

Employee Records Required by Law
Federal laws require that certain payroll records be maintained. For each employee the employer must keep a record of: Employee’s name, address, social security number, and date of birth. Hours worked each day and week, and wages paid at the regular and overtime rates (certain exceptions exist for employees who earn salaries.) Cumulative wages paid during the year. Amount of income tax, social security tax, and Medicare tax withheld for each pay period. Proof that the employee is a United States citizen or has a valid work permit. The employer must keep a record of: Employee’s name, address, social security number, and date of birth, hours worked each day and week, wages paid at the regular and overtime rates, cumulative wages paid during the year, amount of income tax, social security tax, and Medicare tax withheld for each pay period, proof that the employee is a United States citizen or has a valid work permit. Failure to keep proper payroll records can result in hefty penalties for businesses. Atef Abuelaish

Payroll Computations, Records, and Payment
Chapter 10 Payroll Computations, Records, and Payment Section 2: Calculating Earnings and Taxes Section Objectives 10-2 Compute gross earnings of employees. 10-3 Determine employee deductions for social security tax. 10-4 Determine employee deductions for Medicare tax. 10-5 Determine employee deductions for income tax. 10-6 Enter gross earnings, deductions, and net pay in the payroll register. Section 2 of the chapter deals with the actual withholding calculations and recording those calculations in the payroll register. The second objective of the chapter explains how to compute gross earnings of employees. Atef Abuelaish

1) Compute Gross Earnings of Employees.
The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. Hourly rate basis Salary basis Commission basis Piece-rate basis Objective two of this chapter is to compute the gross earnings of employees. The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. You should practice computing these wages and salaries for each type of employee. Atef Abuelaish

Computing Gross Pay The gross pay for hourly employees for the week ended January 6 is determined as follows: Total hours Rate of pay Gross pay Alicia Martinez 40 hours X $ = $400.00 Jorge Rodriguez 40 hours X $ = $380.00 Gross pay is calculated by multiplying the number of hours times the rate of pay (unless there is overtime involved). Atef Abuelaish

Overtime George Dunlap earns $9.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half. Therefore, Dunlap’s gross pay adds up to: Regular earnings: hours X $ $360.00 = Overtime earnings: 5 hours X $ $ = Gross Pay $427.50 If overtime exists because the employee worked over 40 hours, the employee would be paid at the rate of one and one half times the normal hourly rate for the time over 40 hours. Atef Abuelaish

Withholdings Required by Law
Recall that federal law requires employers to make three deductions from employees’ gross pay: FICA (Social Security and Medicare) tax Federal income tax withholding Employers will withhold social security, Medicare and federal income tax from an employees wages. (State income tax, if applicable, would also be withheld.) Atef Abuelaish

2) Determine employee deductions for Social security tax.
Tax-exempt Wages Earnings in excess of the base amount ($118,500 as of 2016) are not subject to Social Security withholding. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes. Objective 3 has us calculating social security deductions. Any wages in excess of $113,700 (as of 2013) are not subject to social security tax. If an employee works for more than one employer, FICA taxes are deducted and matched by each employer. When the employee files a federal income tax return, any excess tax is refunded. (The employer, however would not receive any refund.) To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent. Remember that anything above the maximum wages is not subject to the tax. Atef Abuelaish

Medicare Tax 3) Determine employee deduction for Medicare tax.
To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent. Alicia Martinez $ X 1.45% = $ 5.80 Jorge Rodriguez X = $ 5.51 George Dunlap X = $ 6.20 Cecilia Wu X = $ 8.12 Employee Gross pay Tax rate Tax Total Medicare tax $25.63 Remember that there is no limit on the wages subject to Medicare tax. In this pay period, $25.63 was withheld from all employees wages for Medicare tax. Atef Abuelaish

4) Determine employee deductions for income tax.
The amount of federal income tax to withhold from an employee’s earnings depends on the: earnings during the pay period. frequency of the pay period (weekly, bi-weekly, semi-monthly etc.) marital status. number of withholding allowances. A substantial portion of the federal government’s revenue comes from the income tax on individuals. Withholding depends on earnings, frequency of the pay period, marital status, and number of allowances. Atef Abuelaish

Withholding Allowances
In the simplest circumstances, a taxpayer claims a withholding allowance for: the taxpayer. a spouse who does not also claim an allowance. each dependent for whom the taxpayer provides more than half the support during the year. As the number of withholding allowances increases, the amount of federal income tax withheld decreases. An allowance generally refers to the number of exemptions the person is going to claim at the end of the year on their income tax return (Form 1040). Atef Abuelaish

Employer’s Annual Withholding Reporting
Form W-2 Form W-2 is a wage and tax statement. You have probably received one from your employer. Employer’s are required to furnish this form to each employee by January 31st after the calendar year ends. The form reports total earnings and deductions from the year just ended. The 2009 Form W-2 is on your screen now. 10-66

Employer’s Annual Withholding Reporting
Form W-3 Form W-3, is the Transmittal of Wage and Tax Statement and is sent along with Form W-2 to the Social Security Administration. Form W-3 reports the total wages and withholding information for all the company’s employees. The form is due the last day of February after each calendar year. 10-67

What is the Employee’s Withholding Allowance Certificate, Form W-4?
QUESTION: What is the Employee’s Withholding Allowance Certificate, Form W-4? The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemptions (withholding allowances). ANSWER: To claim withholding allowances, each employee completes an Employee’s Withholding Allowance Certificate, Form W-4. Atef Abuelaish

Federal and State Income Tax Withholding
Form W-4 Employee’s Withholding Allowance Certificate Marital Status Number of Withholding Allowances An employee fills out an Employee’s Withholding Allowance Certificate (Form W-4). Form W-4 provides information that the employer will use to determine how much federal taxes to withhold from the employees paycheck. The amount withheld depends on the employee’s marital status, his or her gross pay, and the number of withholding allowances the employee claims. Gross pay is the total amount an employee earns before deductions, such as taxes. A withholding allowance lowers the amount of an employee’s gross pay that is taxed. Each employee gets one personal allowance, one for a spouse if they are married, and one for each child or dependent. The more allowances an employee claims, the less tax the employer withholds. Gross pay is the total amount an employee earns before deductions. 9-69

Employee’s Withholding Allowance Certificate (Form W-4)
Here is an example of an Employee’s Withholding Allowance Certificate (Form W-4). Notice the information requested on marital status and number of withholding allowances. 9-70

Computing Federal Income Tax Withholding
The wage-bracket table method is the most common way to compute the federal income tax withholding. The wage-bracket tables are in the Federal Publication 15, Circular E. The wage-bracket table method is the most common way to compute the federal income tax withholding. Employers choose the proper table based on pay period and employee’s marital status. Atef Abuelaish

Federal Income Tax Withholding
The employer uses a withholding table (called Circular E) from the IRS to compute the amount of federal taxes to withhold. The employer uses a withholding table (called Circular E) from the IRS to compute the amount of federal taxes to withhold. Separate withholding tables are provided for single or married persons, and for different pay periods (for example weekly or monthly). 9-72

Withholding Table Example—Single Persons Paid Weekly
Here is an example of a withholding table for a single person paid weekly. The employer would find the weekly wage amount in the left two columns and then locate the amount of income tax to be withheld based on the number of withholding allowances claimed by the employee on his or her W-4. 9-73

Withholding Table Example—Married Persons Paid Monthly
Here is an example of a withholding table for a married person paid monthly. Notice that the withholding amounts are different than those we saw for a single employee paid weekly. There are also special withholding tables for employees paid biweekly. 9-74

Cecilia Wu is married, claims two withholding allowances, and earned $560 for the week.
The tax to withhold is $30; this is where the row and column intersect. For Cecilia Wu, $30 is withheld from her paycheck for federal income tax. Go to the table for married persons paid weekly. Find the line covering wages between $560 and $570. 3. Find the column for two withholding allowances. Atef Abuelaish

5) Other Deductions Required by Law
Most states and some local governments require employers to withhold state and local income taxes from earnings. In some states employers are also required to withhold unemployment tax or disability taxes. The procedures are similar to those for federal income tax withholding. Apply the tax rate to the earnings, or use withholding tables. Most states and some local governments require employees to withhold state and local income taxes as well. Atef Abuelaish

Voluntary Deductions There are many payroll deductions not required by law but made by agreement between the employee and the employer. Some examples are: Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans or loan repayments United States savings bonds purchase plans Stocks and other investment purchase plans Employer loan repayments Union dues Can you think of any other types of deductions which you could voluntarily have withheld from your paycheck? Atef Abuelaish

Enter gross earnings, deductions, and net pay in the payroll register.
PAYROLL REGISTER WEEK BEGINNING January 1, 2016 NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW STATUS EARNINGS HRS. Martinez, Alicia M Rodriguez, Jorge S Dunlap, George S Wu, Cecil M Booker, Cynthia S (A) (B) (C) (D) (E) Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E). Objective 6 is to enter gross earnings, deductions, and net pay in the payroll register. A payroll register is a record of payroll information for each employee for the pay period. Alicia Martinez has one withholding allowance and she is married. She worked 40 hours this week and is paid $10 per hour. Atef Abuelaish

Completing the Payroll Register
PAYROLL REGISTER WEEK BEGINNING January 1, 2016 NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW STATUS EARNINGS HRS. Martinez, Alicia M Rodriguez, Jorge S Dunlap, George S Wu, Cecil M Booker, Cynthia S (A) (B) (C) (D) (E) The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. This figure is needed to determine whether the employee has exceeded the earnings limit for the FICA (the Social Security portion) as well as FUTA and SUTA taxes. In later payrolls, this column will accumulate the year to date earnings. Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 TAXABLE WAGES DEDUCTIONS NAME SOCIAL MEDICARE FUTA SOCIAL MEDICARE SECURITY SECURITY Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia 2, , , (A) (J) (K) (L) (M) (N) The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns. Alicia Martinez’s social security taxable wages are $400 and her wages subject to Medicare are also $400. Her wages subject to FUTA tax is $400. The amount withheld from her paycheck for social security is $24.80 and Medicare withheld is $5.80. Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P) The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P). Income tax withheld for Alicia is $ She had no health insurance withheld. Atef Abuelaish

AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , ,767.50 (A) (O) (P) (Q) (R) (S) (T) Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee. After all of the deductions, Alicia Martinez’ net pay check is $ After the payroll register is completed, the columns are totaled and the register is proven. Atef Abuelaish

Payroll Register Payroll Register Continued……
A payroll register is often used to keep a record of pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period. On this slide is an illustration of the payroll register for Phoenix Sales and Services as of January 7, For each employee, the register includes whether they are single (S) or married (M) and the number of withholding allowances they chose on their Form W-4. This information is used with each employee’s gross pay, and the withholding from Circular E, to determine the correct amount of tax to withhold for federal income taxes. The state tax rate for this example is 8% of the federal taxes withheld. The payroll register also reports the gross pay used to compute Social Security, Medicare and the employer’s unemployment taxes. These amounts may be different. For example, once an employee has earned at least $7,000 during a year, the employer stops paying unemployment tax for that employee. (We discuss employer payroll taxes, including unemployment, in the next chapter.) The employer also stops withholding Social Security tax for any employee who has earned at least $106,800 during the year. 9-83

Payroll Computations, Records, and Payment
Chapter 10 Payroll Computations, Records, and Payment Section 3: Recording Payroll Information Section Objectives The third section of the chapter demonstrates how to record payroll information for the pay period. The seventh objective of the chapter explains how to journalize payroll transactions in the general journal. 10-7 Journalize payroll transactions in the general journal. 10-8 Maintain an earnings record for each employee. Atef Abuelaish

Recording Payroll Recording Payroll
Journalize payroll transactions in the general journal. Recording Payroll Recording Payroll Recording payroll information involves two separate entries: Record the payroll expense. Pay the employees. It is now time for us to journalize the payroll and the withholdings. We will journalize the payroll transactions in the general journal, although they could be journalized in the cash payments journal instead. We use the totals in the payroll register columns as the basis for our general journal entry to record the payroll. We will make two separate journal entries. Atef Abuelaish

AND ENDING January 6, 2013 PAID January 8, 2013
DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO SALARIES WAGES Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia , ,767.50 (A) (O) (P) (Q) (R) (S) (T) The information in the register is used for recording the payroll expense GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST DEBIT CREDIT REF. 20-- Jan Office Salaries Expense The information in the payroll register is used to create the journal entry to record the payroll. Take a moment to review where the debits to the various salaries and wages expense come from. Shipping Wages Expense ,767.50 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable ,840.56 Atef Abuelaish Payroll for week ending Jan. 6

A separate liability account is set up for each deduction
AND ENDING January 6, PAID January 8, 2016 DEDUCTIONS NAME SOCIAL MEDICARE INCOME HEALTH SECURITY TAX INSURANCE Martinez, Alicia Rodriguez, Jorge Dunlap, George Wu, Cecil Booker, Cynthia (A) (M) (N) (O) (P) Each type of deduction is credited to a separate liability account. A separate liability account is set up for each deduction GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST DEBIT CREDIT REF. 20-- Jan Office Salaries Expense Each Deduction is recorded as a credit to the appropriate liability account. Shipping Wages Expense ,767.50 Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Health Insurance Premiums Payable Salaries and Wages Payable ,840.57 Atef Abuelaish Payroll for week ending Jan. 6

Paying Employees Most businesses pay their employees by check or by direct deposit. By using these methods, the business avoids the inconvenience and risk involved in dealing with currency. Almost all businesses pay salaries/wages of employees by check or by direct deposit. Atef Abuelaish

Paying by Check Paychecks may be written on
the firm’s regular checking account, or a payroll bank account. Our next journal entry records the actual disbursement of paychecks to the employees. Some businesses set up a separate payroll account to further protect their Cash account. Cash is credited for the net take-home pay. Atef Abuelaish

Checks Written on a Separate Payroll Account
Many businesses write payroll checks from a separate payroll bank account. This is a two-step process. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account. Individual payroll checks are issued from the payroll bank account. If a business uses a separate payroll checking account, then the payment process has two steps. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account. Individual payroll checks are issued from the payroll bank account. Atef Abuelaish

Paying by Direct Deposit
A popular method of paying employees is the direct deposit method. The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday the employee receives a statement showing gross earnings, deductions, and net pay. The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday, the employee receives a statement showing earnings, deductions, net pay, and the date of deposit. Atef Abuelaish

Maintain an earnings record for each employee.
QUESTION: What is an individual earnings record? An individual earnings record (also called a compensation report) is a record that contains information needed to compute earnings and complete tax reports. ANSWER: Employers must maintain individual earnings information in an individual earnings record. An individual earnings record is a record that contains information needed to compute earnings and complete tax reports. This information includes the employee’s name, address, social security number, date of birth, number of withholding allowances claimed, rate of pay, and any other information necessary to compute earnings and complete the required tax reports. Atef Abuelaish

Totaled monthly earnings
The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns. By the end of the month, Alicia Martinez had earned gross wages of $1,600. The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns. Totaled monthly earnings Atef Abuelaish

Happiness is having all homework up to date
Homework assignment Using Connect – 7 Questions for 50 Points for Chapter 10. Prepare chapter 11 “Payroll Taxes, Deposits, and Reports.” Prepare for Exam # 2 for CH 6 – 8 for 50 Points on 11/10/2016 in class. Please Log-in HCC website and complete EGLS3 Survey, available from 11/5 till 11/20, for this semester, for 10 Points; with proof !!!!! Happiness is having all homework up to date Atef Abuelaish

Thank you and See You On Thursday at the Same Time, Take Care
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