Payroll Accounting

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

6. Accounting Concepts 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: • Asset 4. Revenue • Liability 5. Expense • Equity

10. Summarized Chart of Accounts

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 = Liabilities + Equity The company’s resources Claims 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

21. Debits and Credits

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

23. Preparing a Journal Entry Steps to prepare a manual journal entry: • Identify the accounts involved • Identify the account type of each account • Determine whether the transaction is increasing or decreasing each account • Apply the logic of the account type table • 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

25. Journal Entry – Hourly-Paid Wages

26. Journal Entry – Employer’s Portion

27. Journal Entry – Distribution & Remittance

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 3rd 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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