1. Janet Stan, CPP Corporate Controller Talco Enterprises, Inc. 847-480-7366 x 3116 jstan@capspayroll.com PAYROLL ACCOUNTING Chapter 6

2. Purpose of Accounting Keep track of monetary transactions such as Payroll Report financial transactions to shareholders and various taxing authorities Tax return preparation Control Expenses Monitor and safeguard company assets, detect and prevent fraud Make decisions and plan for the future Provides historical record for budgeting

3. Who uses payroll data? General Accounting – prepares journal entries for financial statements and internal reports. Cost Accounting – records hours and rates and attaches them to operational activities. Financial Analysis and Budgeting – determines future expenses and forecasts profitability of operations.

4. Examples of Transactions Taking an order for company’s product Purchasing raw materials Manufacturing products Warehousing finished products Shipping the product Billing the customers Receiving payment from customers PAYING EMPLOYEES

5. Chart of Accounts All transactions are posted to an account. All accounts are assigned a number. The Chart of Accounts is a listing of all accounts in the accounting system. Typical account numbering scheme: 1000Assets 2000Liabilities 3000Equity 4000Revenue 5000Expenses

6. Transaction Flow TransactionJournal Subsidiary Ledger General Ledger Financial Statements

7. Chart of Accounts Asset Accounts Liability Accounts Revenue Accounts Expense Accounts Equity Accounts

8. Asset Accounts Tangible and intangible items owned by a company. Computers Software Equipment Furniture Land Buildings CASH!

9. Liability Accounts Debt owed by the company. Claims against the company’s assets that will be paid in the future. Taxes withheld but not yet paid Contributions to a company benefit plan but not yet paid (401K, Union pension benefits) Leasing contracts Bank Loans

10. Equity Accounts The net worth of the company. Also known as shareholders equity or Capital. Retained Earnings - company earnings not yet distributed Contributed Capital – investments by owners Common Stock

11. Revenue Accounts Income recognized for goods sold and services rendered Gross Revenue – income from all sources Net Revenue – gross revenue minus cost of sales or cost of goods sold

12. Expense Accounts Cost of goods or services used in the process of generating revenue. Salaries and wages Employer’s portion of payroll tax 401k Match Supplies Rent Insurance

13. Every transaction is recorded twice and must have a debit and a credit. “DR” = Debit “CR” = Credit The use of equations to track financial activity. The debits and credits must balance. Double Entry Accounting

14. Debits and Credits Debits are recorded on the LEFT side and Credits are recorded on the RIGHT side. “T” Accounts – A picture to conceptualize transaction flow Debit Credit Think of the “r” in Credit on the “right” side of the “T” Account

15. Normal Balances of Accounts Asset Accounts – DEBIT Liability Accounts – CREDIT Equity Accounts – CREDIT Revenue Accounts – CREDIT Expense Accounts - DEBIT

16. Account Increases and Decreases ASSETS: Amounts increasing an asset are recorded as a DEBIT Amounts decreasing an asset are recorded as a CREDIT LIABILITES: Amounts increasing a liability are recorded as a CREDIT Amounts decreasing a liability are recorded as a DEBIT EQUITY: Amounts increasing equity are recorded as a CREDIT Amounts decreasing equity are recorded as a DEBIT

17. REVENUE: Amounts increasing revenue are recorded as a CREDIT Amounts decreasing revenue are recorded as a DEBIT EXPENSES: Amounts increasing an expense are recorded as a DEBIT Amounts decreasing an expense are recorded as a CREDIT Account Increases and Decreases

18. Asset and Expense Accounts Debit Credit Increases Decreases Liability, Revenue, Capital Accounts Debit Credit Decreases Increases

19. Journal The chronological record of daily transactions of a business. Double-entry accounting system used Every transaction entry is recorded twice: a debit and a credit

20. SUBSIDIARY LEDGERS Transactions of similar nature related to a specific functional area of the business are recorded in a subsidiary journal. Accounts Payable Cash Disbursement Accounts Receivable Sales Cash Receipts PAYROLL !

21. GENERAL LEDGER All transactions from the subsidiary ledgers are posted by account number to the General Ledger. Summarization of all transactions are used to create financial statements. Balance Sheet Income Statement or Profit and Loss Statement Cash Flow Statement

22. TRIAL BALANCE At the end of the period all the debits and credits are added up and must balance. The Trial Balance shows all debits and credits.

23. INCOME STATEMENT Record of activity for a specific period of time, monthly, quarterly, semi annually, and/or annually Reports Revenue and Expenses Revenue minus expenses = Net income

24. BALANCE SHEET A snapshot of the company’s position in a single point in time. Divided into 3 sections Reports assets, liabilities, and capital (equity) Assets = Liabilities + Capital Or Assets – Liabilities = Capital

25. ACCRUALS AND REVERSALS Accruals recognize transactions regardless of the transfer of cash. Matching Principle: Expenses are matched in the period with the revenues they produce. Accruals and reversals are used to record transactions in the correct period.

26. ACCRUAL EXAMPLE Payroll Expense Accrual: Biweekly payroll Normal work week Monday – Friday Pay period Dec. 27 through Jan. 7 Payday January 14 Expense 5 business days in December Expense 5 business days in January

27. Last week of December must be expensed in December, first week of January must be expensed in January in order to correctly report expenses of the period. MonthSunMonTueWedThuFriSat December 2010 26 27 28 29 30 31 1 January 2011 2 3 4 5 6 7 8 9 10 11 12 13 14 PAYDAY 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 3 4 5

28. General Journal Example J & R CONSULTING, INC. GENERAL JOURNAL Jan-11 Acct DRCRType 1/15/2011Salaries & Wages510,000 expenseThis entry records the gross payroll Social Security Tax Payable - EE31,000 liabilityfor semimonthly period ending 01-15-11 Medicare Tax Payable - EE7,250 liabilityand taxes payable. Federal Withholding Tax Payable61,750 liability State Withholding Tax Payable10,000 liability Net Pay400,000 liability 510,000 1/15/2011Payroll Tax Expense55,750 expenseThis entry records employer's portion Social Security Tax Payable - ER31,000 liabilityof payroll taxes. Medicare Tax Payable - ER7,250 liability Federal Unemployment Tax Payable4,000 liability State Unemployment Tax Payable13,500 liability 55,750 1/15/2011Net Pay400,000 liabilityThis entry records payment to the Cash400,000 assetemployees. 400,000

29. General Journal Example 1/16/2011Social Security Tax Payable - EE31,000 liability Medicare Tax Payable - EE7,250 liabilityThis entry records the payment of federal Social Security Tax Payable - ER31,000 liabilitytaxes by electronic transfer. Medicare Tax Payable - ER7,250 liabilityFederal tax liability is >$100K Federal Withholding Tax Payable61,750 liability(one day deposit rule) Cash138,250 asset 138,250 1/17/2011Office Supplies5,000 expenseThis entry records ordinary business Rent 20,000 expenseexpenses posted in the accounts Travel & Entertainment 30,000 expensepayable system that will be paid when due. Account Payable55,000 liability 55,000 1/18/2011Accounts Receivable 5,000,000 assetThis entry records billings to clients Revenue 5,000,000 revenuefor services rendered. 5,000,000 1/20/2011Cash3,500,000 assetThis entry records cash received from Accounts Receivable3,500,000 assetclients. 3,500,000

30. General Journal Example 1/31/2011Salaries & Wages510,000 expenseThis entry records the gross payroll Social Security Tax Payable - EE31,000 liabilityfor semimonthly period ending 01-31-11 Medicare Tax Payable - EE7,250 liabilityand taxes payable. Federal Withholding Tax Payable61,750 liability State Withholding Tax Payable10,000 liability Net Pay400,000 liability 510,000 1/31/2011Payroll Tax Expense55,750 expenseThis entry records employer's portion Social Security Tax Payable - ER31,000 liabilityof payroll taxes. Medicare Tax Payable - ER7,250 liability Federal Unemployment Tax Payable4,000 liability(Total payroll taxes due for the payroll of State Unemployment Tax Payable13,500 liability01-31-11 exceed $100K and will be paid 02-01-11 but are not recorded here since 55,750 this is only for the month of January.) 1/31/2011Net Pay400,000 liabilityThis entry records payment to the Cash400,000 assetemployees. 400,000 1/31/2011Provision for Income Taxes50,000 expenseThis entry records an estimate of income Accrued Taxes50,000 liabilitytaxes that will be paid. 50,000

31. PROFIT AND LOSS STATEMENT J & R Consulting, Inc. Statement of Operations January 31, 2011 Net Revenue5,000,000 Expenses Salaries and Wages1,020,000 Payroll Taxes111,500 Travel & Entertainment30,000 Rent20,000 Office Supplies5,000 Total Salaries & Benefits1,186,500 Net Income before Taxes3,813,500 Provision for Income Taxes50,000 NET INCOME (Loss)3,763,500