PAYROLL ACCOUNTING Chapter 6

PAYROLL ACCOUNTINGChapter 6 Janet Stan, CPP Corporate Controller Talco Enterprises, LLC 847-480-7366 x 3116 jstan@capspayroll.com

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

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.

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

Transaction Flow Transaction Journal Subsidiary Ledger General Ledger Financial Statements

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: 1000 Assets 2000 Liabilities 3000 Equity 4000 Revenue 5000 Expenses

Chart of Accounts • Asset Accounts • Liability Accounts • Revenue Accounts • Expense Accounts • Equity Accounts

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

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

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

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

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

Double Entry Accounting 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.

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

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

Account Increases and Decreases ASSETS: • Amounts increasing an asset are recorded as DEBITS • Amounts decreasing an asset are recorded as CREDITS LIABILITIES: • Amounts increasing a liability are recorded as CREDITS • Amounts decreasing a liability are recorded as DEBITS EQUITY: • Amounts increasing equity are recorded as CREDITS • Amounts decreasing equity are recorded as DEBITS

Account Increases and Decreases REVENUE: • Amounts increasing revenue are recorded as CREDITS • Amounts decreasing revenue are recorded as DEBITS EXPENSES: • Amounts increasing an expense are recorded as DEBITS • Amounts decreasing an expense are recorded as CREDITS

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

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

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 !

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

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.

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

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

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.

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

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.

General Journal Example

PROFIT AND LOSS STATEMENT

PAYROLL ACCOUNTING Chapter 6