Payroll Accounting Section 11

1. Payroll Accounting Section 11

2. Overview • Accounting Principles • Account Classifications • Account Balances • Journal Entries • Recording Payroll Transactions • Accounting Periods • Accruals and Reversals • Balancing and Reconciliations • Financial Statements & Audits

3. Accounting Principles • FASB vs. GASB • GAAP • Business Entity Concept • Continuing Concern Concept • Time Period Concept • Cost Principle • Objectivity Principle • Matching Principle • Realization Principle • Consistency Principle

4. Account Classifications • Double Entry Accounting *always need a debit and a credit • Equations: ACRONYMS ALE: Assets – Liabilities = Equity REN: Revenue – Expenses = Net Income NICE: Net Income – Income Distributed + Contributed Capital = Equity [Contributed Capital + Net Income – Income Distributed = Equity]

5. Account Classifications • Asset Accounts • Current • Tangible or Property, Plant and Equipment • Intangible or Deferred

6. Account Classifications • Liability Accounts • Current • Wages payable • Taxes Withheld • Contributions to Benefit Plans • Accounts Payable • Long Term • Notes Payable

7. Account Classifications • Equity • Contributed Capital • Retained Earnings • Net Income • Revenue • Amounts received for goods & services sold • Expense • Cost of goods and services consumed

8. Account Balances

9. T Accounts Payroll Checking Wages Payable Debits Credits Debits Credits $100.00 $100.00

10. Chart of Accounts • Makes distinctions between Assets, Liabilities, Expenses, and Revenues • Makes distinctions between types of Assets, Liabilities, Expenses, and Revenues • Uses cost centers or department codes

11. Types of Journal Entries • Compound Entries • General Ledger • Subsidiary Ledger • Accounts Payable • Accounts Receivable • PPE (Fixed Assets)

12. Double Entry Cash Journal Entry A wage payment of $100 would appear in a journal entry as follows: DebitCredit Salary Expense $100 Cash $100

13. Compound EntryCash Journal Entry A payroll check was issued and recorded to the general ledger. Gross wages were $500. Taxes were withheld as follows: $75 for FIT, $35 for Soc Sec, $7.25 for Medicare. DebitCredit Salary Expense $500 Federal taxes withheld $75.00 Social security taxes withheld $21.00 Medicare taxes withheld $7.25 Cash $396.75

14. Accrual TransactionsSimple Journal Entry Record Wages of $6340 due to employee but not yet paid DebitCredit Wages Expense $6340 Wages Payable $6340

15. Accrual TransactionsCompound Journal Entry Salary of $6340 and Taxes of $485 Accrued, but not yet paid DebitCredit Wages Expense $6340 Payroll Tax Expense 485 Wages Payable $6340 Payroll Taxes Payable 485

16. Accounting Periods • Monthly, Quarterly or Yearly • Fiscal Year vs. Calendar Year • Employment Tax Returns / Employee or Payee Information Statements

17. Accrual & Reversing Entries • Accruals at end of accounting period • Reversal of Accruals • Reversal of Errors

18. Accrual Journal Entries An accrual entry of $1000 was made in 2013 for a bonus to be paid in Jan. 2014. The bonus was paid in 2014 and Soc Sec & Medicare taxes were paid by the employer of $76.50. Federal, SS & MC taxes were withheld from the check of $326.50. What is the journal entry to record the accrual in 2013 and what is the entry to record the payment of the bonus in 2014? DebitCredit Wages Expense $1000 PR Taxes Expense $ 76.50 Wages Payable $1000 PR Taxes Payable $ 76.50 DebitCredit Wages Payable $1000 PR Taxes Withheld $326.50 Cash $673.50

19. Debit or Credit Quiz • Increase to Expenses • Increase to Liability • Decrease to Assets • Decrease to Revenue • Increase to Capital • Decrease to Expenses • Increase to Assets • Debit • Credit • Credit • Debit • Credit • Credit • Debit

20. Balancing and Reconciliation • Periodic Balancing • What? • Check against the payroll register • Verify checks issued by A/P • Verify the end of the month balance • When? • Every payroll period • Before filing tax returns • Before sending out W-2’s or 1099’s • Bank Accounts – dual control

21. Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows • Trial Balance • Statement of Retained Earnings • Notes to Financial Statements • Audited Financial Statements

22. Budgets and Variances • Budget vs. Actual format • Variances • Favorable Variance • Unfavorable Variance

23. Budgets and Variances Quiz Salary expense for the month of January was budgeted at $500. The actual expense incurred was $300. Is the variance favorable or unfavorable? Answer: Favorable by $200

24. Questions ?

25. Overview • Internal Controls • Sarbanes – Oxley Act • Check Fraud • Check 21 • Accounting Interfaces with Payroll • Terminology

26. Internal Controls • Blank Checks • Computer System Edits • Internal Auditor • Negative Pay deductions • Payroll Bank Account • Payroll Distribution • Phantom Employees • Rotation of job duties • Segregation of job duties • Time Reporting

27. Sarbanes-Oxley Act • Requires public companies to have a framework for identifying, documenting, and evaluating their internal controls over financial reporting. • Provides a logical way to analyze a company’s control system. • Prohibits a public accounting firm from providing both external auditing and most non-auditing services to the same client and requires audit partners to rotate every 5 years.

28. Check Fraud • Group 1 security features • Group 2 security features • Group 3 security features • Check 21 • Substitute checks used in clearing process • Impact on payroll

29. Questions ?