1. Payroll Accounting Presented by May Perkins, CPP

2. Agenda  Purpose of Accounting  Accounting Concepts – Accounting Cycle  Chart of Accounts  Balance Sheet  Income Statement  Payroll Specific Accounts  Payroll Accrual  Double Entry Accounting - Debits and Credits

3. Agenda  Preparing a Journal Entry  Accounting Elements of Payroll Transactions  Reconciliations  Budgeted Payroll Expenses  Payroll and Audit Considerations  Questions and Thoughts

4. Purpose of Accounting  To identify, measure and report financial information of a company  To provide information to different users so that they can use it to make business decisions  The Payroll department must gather accurate and timely data regarding wages paid, taxes withheld and other deductions  This data allows the Accounting department to prepare complete financial statements

5. Purpose of Accounting BusinessTransactions Managerial Accounting (internal) Financial Accounting (external)

6. Accounting Concepts Transaction Journal Ledger Trial Balance Financial Statements Basic Accounting Cycle

7. Accounting Cycle  Journal (book of original entry) – a complete record of every business transaction  Ledger – a record of business transactions kept by account and grouped by account type (e.g., assets, liabilities, etc.)  Trial Balance – a listing of the accounts in the general ledger along with each account’s balance

8. Financial Statements  Balance Sheet  A statement of the financial position at a given point in time  Assets, Liabilities and Equity  Income Statement  Operation results for a given time period at a specified date  Revenues and expenses

9. Chart of Accounts  Chart of Accounts – a listing of all the accounts and account types into which business transactions will be recorded  Account – a record in the general ledger that is used to collect and store similar information The Types of Accounts: 1.Asset4. Revenue 2.Liability5. Expense 3.Equity

10. Summarized Chart of Accounts Account TypeAccount Number Range Assets10000 – 19999 Liabilities20000 – 29999 Equity30000 – 39999 Revenue40000 – 49999 Expenses50000 – 89999

11. Account Types – Balance Sheet  Assets  An item of economic value over which the company has legal control  Liabilities  Monies owed to external entities  Company debts that have not yet been paid  Owner’s Equity  Monies owed to internal entities (the owners)  The company’s net worth

12. The Accounting Equation Assets LiabilitiesEquity Assets = Liabilities + Equity The company’s resourcesClaims against the company’s resources

13. Account Types – Income Statement  Revenue  Inflows from the delivery or manufacture of a product or from the rendering of a service  Identifies amounts received for goods sold during the accounting period  Expense  The cost for goods and services consumed by the company Net Income = Revenues - Expenses

14. Payroll Specific Accounts  Assets  Cash (payroll checking account)  Liabilities  Salaries/Wages Payable  Deductions  Employee Taxes Withheld  Expenses  Salaries/Wages Expense  Employer Taxes

15. Accounting Terms  General Ledger – that part of the accounting system that contains the balance sheet and income statement accounts  Fiscal Year – an accounting year that equals 12 consecutive months (may not = a calendar year)  Journal Entry – the entry made in a journal  Post – to enter a business transaction into a journal or ledger

16. Accounting Concepts  Cash Method  Revenues and expense are recognized when the cash is received or paid (checkbook accounting)  Accrual Method  Revenues are recognized in the period they are earned and expenses are recognized in the period they are incurred Accrual – a journal entry posted to bring the balance sheet and income statement up to date on an accrual basis

17. Payroll Accrual Example  The May portion of the 6/06/14 payroll needs to be accrued into May since the payroll system will post it to 6/06/14 Payroll pay date = 6/06/14 Pay period end date = 5/31/14 Pay period = 5/18/14 – 5/31/14

18. Payroll Accrual Example  The accrual entry would need to be reversed on 6/01/14 so that the 6/06/14 payroll posting will net to just the June portion  When possible, accrual entries need to be based on actual numbers (i.e., the actual 6/06/14 payroll posting). If that is not possible, the best available information should be used.

19. Accounting Concepts  Double Entry Accounting keeps the basic accounting equation balanced.  Every business transaction involves an exchange between at least two accounts  This exchange takes the form of debits and credits to those accounts  For each debit, there is an equal and opposite credit to another account

20. Debits and Credits  Whether a debit or credit increases or decreases an account depends on the type of account to which is being posted Debit BalanceCredit Balance AssetLiability ExpenseEquity Revenue

21. Debits and Credits Account Type Normal Balance What a debit does What a credit does AssetDebitIncreasesDecreases LiabilityCreditDecreasesIncreases EquityCreditDecreasesIncreases RevenueCreditDecreasesIncreases ExpenseDebitIncreasesDecreases

22. Accounting Terms  “T” Account – a visual aid used by accountants to illustrate a journal entry’s effect on general ledger accounts Salary & Wage Expense Accrued Wages

23. Preparing a Journal Entry Steps to prepare a manual journal entry: 1)Identify the accounts involved 2)Identify the account type of each account 3)Determine whether the transaction is increasing or decreasing each account 4)Apply the logic of the account type table 5)Make sure that the total $ amount of the debits equal the total $ amount of the credits

24. Journal Entry Example  Journal entries are normally written in a columnar format to help distinguish the debits from the credit DateAccount DescriptionDebitCredit 5/31/14Salary & Wage Expense$50,000.00 Accrued Salaries & Wages $50,000.00 Accrue the May portion of the 6/06/14 payroll

25. Journal Entry – Hourly-Paid Wages DateAccount NameDebitCredit 8/08/14Wages Expense – Delivery Dept.1,000.00 Wages Expense – Warehouse Dept.1,300.00 FICA Tax Payable175.95 Federal Inc. Tax Withholdings Payable300.00 State Inc. Tax Withholdings Payable110.00 401(k) Payable70.00 Health Ins. Expense – Delivery Dept.90.00 Health Ins. Expense – Warehouse Dept.80.00 United Way Payable30.00 Garnishment Payable50.00 Net Payroll Payable1,394.05 Record hourly-paid employee’s wages and withholdings for the workweek 7/27/14 – 8/02/14 that will be paid on 8/08/14

26. Journal Entry – Employer’s Portion DateAccount NameDebitCredit 8/08/14FICA Expense - Delivery76.50 FICA Expense – Warehouse99.45 Unemployment Tax Expense – Warehouse4.00 Worker’s Compensation Ins. Expense46.00 Holiday, Vac. Sick Days Exp. – Delivery100.00 Holiday, Vac. Sick Days Exp. – Warehouse130.00 401(k) Expense – Delivery10.00 401(k) Expense – Warehouse25.00 FICA Tax Payable175.95 Unemployment Tax Payable4.00 Worker’s Compensation Ins. Payable46.00 Holiday, Vacation, Sick Days Payable230.00 401(k) Payable35.00 Record the company’s payroll related expenses for the 8/08/14 payroll

27. Journal Entry – Distribution & Remittance DateAccount NameDebitCredit 8/08/14Net Payroll Payable1,394.05 Cash1,394.05 Record the distribution of the hourly-paid payroll of 8/08/14 DateAccount NameDebitCredit 8/11/14FICA Tax Payable351.90 Federal Inc. Tax Withholdings Payable300.00 State Inc. Tax Withholdings Payable110.00 401(k) Payable105.00 Cash866.90 Record the remittance of the 8/08/14 hourly-paid payroll withholdings

28. Accounting Elements of Payroll Transactions  Expenses  Wages paid  Benefits paid  Employer taxes  Employer deductions (offsets to expense)

29. Accounting Elements of Payroll Transactions  Assets  Net payroll check amount  Payment of employee tax withholdings  Payment of employee deductions  Payment of employer taxes  Liabilities  Tax withholdings  Employee deductions (paid to 3 rd parties)

30. Reconciliations  Should be performed at month-end or as soon as possible  Confirm that all entries have been posted  Confirm that payments are on schedule  Verify that expenses are accurately booked and balance with payroll  Verify that liability accounts are accurate

31. Budgeted Payroll Expenses  Salary  Regular  Overtime  Vacation  Bonuses  Employer Taxes  Employer Paid Benefits

32. Payroll Expenses to Budget Reasons actual to budget variances need to be identified  Potential errors can be discovered  Future expenditures can be adjusted to meet company objectives

33. Payroll Expenses to Budget  Reasons you might not tie to budget  Headcount  Vacancy rate  Working more hours than budgeted  Error in a general ledger posting  Error in the budget

34. Payroll and Audit Considerations  Separation of duties  Check stock security  Check signers  Reconciliation approvals  Ghost payrolls / Buddy punching  Checks and balances  System audits

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