2. Financial Accounting, Sixth Edition
Appendix D
Payroll Accounting
Financial Accounting, Sixth Edition

3. Study Objectives
Discuss the objectives of internal control for payroll.
Compute and record the payroll for a pay period.
Describe and record employer payroll taxes.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Payroll Accounting The term “payroll” pertains to both:
Salaries - managerial, administrative, and sales personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and manual laborers (rate per hour).
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.

5. Internal Control for Payroll
As applied to payroll, the objectives of internal control are
to safeguard company assets against unauthorized payments of payrolls, and
to ensure the accuracy and reliability of the accounting records pertaining to payrolls.
SO 1 Discuss the objectives of internal control for payroll.

6. Internal Control for Payroll
Internal control feature:
Human Resources
department documents and
authorizes employment.
Fraud prevented:
Fictitious employees
being added to payroll.
SO 1 Discuss the objectives of internal control for payroll.

7. Internal Control for Payroll
Internal control feature:
Supervisors monitor hours
worked through time cards
and time reports.
Fraud prevented:
Employee paid for hours not worked.
SO 1 Discuss the objectives of internal control for payroll.

8. Internal Control for Payroll
Internal control feature:
Two (or more) employees
verify payroll amounts;
supervisor approves.
Fraud prevented:
Payroll calculation errors and inappropriate amounts being paid to an employee.
SO 1 Discuss the objectives of internal control for payroll.

9. Internal Control for Payroll
Internal control feature:
Treasurer signs and
distributes prenumbered
checks.
Fraud prevented:
Checks lost through theft; falsely endorsed used to pay for hours not worked.
SO 1 Discuss the objectives of internal control for payroll.

10. Determining the Payroll
Gross Earnings
Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions).
Illustration D-3
SO 2 Compute and record the payroll for a pay period.

11. Determining the Payroll
Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax
Voluntary:
Charity
Retirement
Union dues
Health and life insurance
Pension plans
SO 2 Compute and record the payroll for a pay period.

12. Determining the Payroll
Social Security taxes
Supplemental retirement, employment disability, and medical benefits.
In 2007, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $97,500 of gross earnings for each employee.
Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax
SO 2 Compute and record the payroll for a pay period.

13. Determining the Payroll
Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax
Employers are required to withhold income taxes from employees pay.
Withholding amounts are based on gross wages and the number of allowances claimed.
SO 2 Compute and record the payroll for a pay period.

14. Determining the Payroll
Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4).
Illustration D-5
SO 2 Compute and record the payroll for a pay period.

15. Determining the Payroll
Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax
Most states (and some cities) require employers to withhold income taxes from employees’ earnings.
SO 2 Compute and record the payroll for a pay period.

16. Determining the Payroll
Net Pay
Gross earnings minus payroll deductions.
Illustration D-7
SO 2 Compute and record the payroll for a pay period.

17. Maintaining Payroll Department Records
Recording the Payroll
Maintaining Payroll Department Records
Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year.
Illustration D-8 Employee earnings record
SO 2 Compute and record the payroll for a pay period.

18. Maintaining Payroll Department Records
Recording the Payroll
Maintaining Payroll Department Records
Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year.
Illustration D-9 Payroll register
SO 2 Compute and record the payroll for a pay period.

19. Recognizing Payroll Expenses and Liabilities
Recording the Payroll
Recognizing Payroll Expenses and Liabilities
Exercise: Joyce Kieffer’s regular hourly wage rate is $15, and she receives a wage of times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period Joyce worked 42 hours. Her gross earnings prior to the current week were $6,000. Joyce is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $25 per week.
Instructions: Record Joyce’s pay, assuming she is an office computer operator.
SO 2 Compute and record the payroll for a pay period.

20. Recording the Payroll
Exercise: Record Joyce’s pay, assuming she is an office computer operator.
Wages Expense *
FICA Taxes Payable **
Federal Income Taxes Payable
***
State Income Taxes Payable
****
Insurance Payable
Wages Payable
* (40 x $15) + (2 x $22.50) = $645
*** Table, next slide
** $645 x 8% = $51.60
**** $645 x 2% = $12.90
SO 2 Compute and record the payroll for a pay period.

21. Federal Income Tax Withholding
Recording the Payroll
Exercise: Joyce is married and claims three withholding allowances.
Illustration D-6
Federal Income Tax Withholding
SO 2 Compute and record the payroll for a pay period.

22. Recording Payment of the Payroll
Recording the Payroll
Recording Payment of the Payroll
Using the facts from the previous Exercise.
Wages Payable
Cash
SO 2 Compute and record the payroll for a pay period.

23. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
Same rate and maximum earnings as the employee’s.
In 2007, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $97,500 of gross earnings for each employee.
These taxes are:
FICA tax
Federal unemployment tax
State unemployment tax
SO 3 Describe and record employer payroll taxes.

24. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
FUTA tax rate is 6.2% of first $7,000 of taxable wages.
Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8%.
These taxes are:
FICA
Federal unemployment tax
State unemployment tax
SO 3 Describe and record employer payroll taxes.

25. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
These taxes are:
FICA
Federal unemployment tax
State unemployment tax
SUTA basic rate is usually 5.4% on the first $7,000 of wages paid.
SO 3 Describe and record employer payroll taxes.

26. Employer Payroll Taxes
Exercise: According to a payroll register summary of Ruiz Company, the amount of employees’ gross pay in December was $850,000, of which $90,000 was not subject to FICA tax and $750,000 was not subject to state and federal unemployment taxes.
Instructions:
Prepare the journal entry to record December payroll tax expense. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%.
SO 3 Describe and record employer payroll taxes.

27. Employer Payroll Taxes
Exercise: Prepare the journal entry to record December payroll tax expense. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%.
Payroll Tax Expense
FICA Taxes Payable 60,800 *
State Unemployment taxes Payable 5,400 **
Federal Unemployment Taxes Payable 800
***
* $760,000 x 8% = $60,800
*** $100,000 x .8% = $5,400
** $100,000 x 5.4% = $5,400
SO 3 Describe and record employer payroll taxes.

28. Employer Payroll Taxes
Question
Employer payroll taxes do not include:
Federal unemployment taxes.
State unemployment taxes.
Federal income taxes.
FICA taxes.
SO 3 Describe and record employer payroll taxes.

29. Filing and Remitting Payroll Taxes
Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter.
Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment taxes by the end of the month following each quarter.
Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31.
SO 3 Describe and record employer payroll taxes.

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