Presentation Transcript

1. Payroll AccountingSection 11

   Edgar H. Rico, CPP Senior Payroll Tax Specialist / Systems Liaison Damian Services Corporation erico@edamian.com
2. AGENDA Purpose of Accounting Accounting Principles Account Classifications Financial Statements Journal Entry Process Accounting Periods Accrual and Reversal Entries Reconciliation of payroll GL accounts
3. What is the purpose of Accounting and why is it important to a business? Accounting keeps track of business financial transactions by identifying them and classifying them via GL transactions Those GL transactions are used to prepare the financial statements Financial statements identify the cash flow, profits, losses, assets, liabilities, and their net worth (equity)
4. What is the purpose of these statements ? The financial statements gauges the business financial health Provides management useful information in order for them to make successful business decisions Provides useful information for a business regarding it’s prospective future goals
5. Who uses the information on the financial statements and for what reason? Management – Assists managers to make decisions within their departments Stockholders – Provides potential investors useful information regarding the status of company Auditors – Review and verify information on financial statements using a sample of transactions to review
6. Accounting GAAP Principles GAAP – Generally Accepted Accounting Principles There are 8 generally accepted concepts and principles
7. Accounting Principals Business Entity Concept – Every organization that operates separately is treated as a business. Continuing Concern Concept – Assumes a business will continue to operate indefinitely. Assets valued at their cost; If business is for sale, then assets are valued at the fair market value. Time Period Concept – Each business must determine the accounting period, fiscal or calendar.
8. Accounting Principals Cost Principle – All goods and services purchased are recorded at the cost of acquiring. Asset is then depreciated over time. Objectivity Principle – Transactions must be recorded objectively and not based on opinion or emotion. Hence using the cost as valuation of a transaction. Matching Principal – Revenues and expenses should be recorded in the accounting period they occurred.
9. Accounting Principals Realization Principle – Revenues are recorded in the accounting period in which they are earned (goods and/or services have been provided). Consistency Principle – Recording of transactions must be consistent throughout the life of the business.
10. Account Classification There are generally five types of GL accounts used by businesses to classify transactions on two financial statements. On Balance Sheet Assets Liabilities Equity On Income Statement Revenues Expenses * (NOTE) Generally, the payroll department only makes GL entries to the Assets, Liabilities, and Expense account types.
11. Asset Account Information & SamplesAny item that provides an economic benefit or value to a business over a period of time / business owned items Cash Accounts Receivable Inventory Equipment Property Furniture Computers
12. Liability Account Information & SamplesCompany debts which must be paid at a future date Wages earned but not yet paid out Payroll taxes withheld but not yet paid Benefit contributions Union dues deducted but not yet paid Business Loans Accounts Payable
13. Equity Account Information This account represents the owner’s investment (net worth) in the company There are two components to the equity account Contributed Capital – The amount the company’s owners have contributed to the organization Retained Earnings – The amount by which revenue has exceeded expenses (If expenses exceed revenues then retained earnings/equity would decrease)
14. Revenue Account Information Identifies the amounts received for goods sold and services rendered during the accounting period It can be in the form of: Cash received Cash expected to be received (Accounts Receivable) Services received
15. Expense Account Information and Samples- Shows the company’s costs for goods and services consumed during an accounting period.- Items are generally provided by other organizations, but they also include company employee labor costs Wages paid to employees Employer paid benefit expenses Employer taxes Rent Utilities Equipment maintenance Office supplies
16. Income Statement Components(Expenses / Revenue) Debit To GL Credit To GL Expenses have a normal balance on the debit side of the GL Listed on the debit/left side of the Income Statement A “debit” entry to an Income Statement GL account will increase the company expenses. Income/Revenue/Sales are typically recorded on the credit side of the GL entry which impacts the Income statement A “credit” entry to GL will increase the company Revenue.
17. Balance Sheet ComponentsA L EAssets = Liabilities + Equity Assets Assets have a normal balance on the debit side of the GL Listed on the debit/left side of the Balance Sheet A “debit” entry to a Balance Sheet GL account will increase the company asset(s). Liabilities & Equity Liabilities and Equity have a normal balance on the credit side of the GL Listed on the credit/right side of the Balance Sheet A “credit” entry to a Balance Sheet GL will increase the company Liabilities or Equity.
18. Impact of asset, liability, equity, and expense accounts on financials
19. Chart of Normal Account Balances * If your Account GL type has an ending balance opposite of what the normal account balance is for that GL will be a good indication of a GL entry posted in error at some point.
20. Journal Entry To GL Process Company Transactions are recorded and classified using a “double entry” system For each transaction a GL account is debited, and another GL account is credited Total amounts of debit GL entries should always equal the total amount of credit GL entries DEBIT CREDIT
21. Journal Entry To GL ProcessSteps in recording and posting journal entries and their flow to financial statements A business transaction occurs A journal entry is recorded where the sum of debits equal the sum of credits to the GL accounts based on the business transaction which occurred The balanced entry is posted to the GL Trial Balance Report (TBR = a listing of all company GL accounts) The entry flows to the financial statements that each GL account is classified under (balance sheet / income statement)
22. Recording Payroll Journal Entries A business has a weekly gross payroll of $60,000 with the following total deductions below - Enter the appropriate GL entries (including employer tax liabilities) Federal Income Tax - $10,000 Social Security Tax - $3,720 Medicare Tax - $870 State Income Tax - $3000 Health Insurance Premiums - $600 401k Deductions - $1,000 Child Support Deductions - $200
23. Recording Payroll Journal EntriesEmployee gross payroll
24. Recording Payroll Journal EntriesEmployer payroll tax expenses
25. Recording Payroll Journal EntriesPayment of wages, taxes, and other deductions respectively
26. Recording Payroll Journal EntriesPayment of wages, taxes, and other deductions respectively
27. Accounting Periods An accounting period is any length of time covered by the income statement (month, quarter, half-year, year) Not required to use the Jan 1st – Dec 31st calendar Calendar Period – Business uses the calendar dates of January 1st – December 31st Fiscal Period – Business decides to have their fiscal year to end in a different month. June 1st – May 31st
28. Accrual and Reversal Entries Accrual method of Accounting required businesses to recognize revenue when it is earned and expenses when they are incurred Unfortunately, paydays, the last day of the pay periods, and the last day of accounting periods do not all occur on the same day For this reason, business must accrue (account for) the payroll expenses through the end of the each accounting period
29. Accrual and Reversal Entries The accrual entry is necessary to satisfy the Matching Principle discussed earlier Matching Principle - Revenues and expenses should be recorded in the accounting period they occurred It’s purpose is to make it easier for managers, auditors, and others to determine the financial condition of the business and compare it to prior years or similar organizations
30. Accrual and Reversal Entries Estimated payroll expense and liability entries are made at the end of accounting periods The accrued amounts are for the period between the last payroll period ending date and the end of the accounting period Generally the estimated accrual entries are based on daily payroll expenses and liabilities Because the accrual entries are estimates, they must be reversed during the next accounting period when the actual expenses and liabilities are recorded
31. Accrual and Reversal Entries(Example) You are working on March 2014 financials and find that March 31st falls on a Monday Payroll is not recorded for that day until April 2014 so you must accrue/take into account for that one day in March financial statements by processing an accrual entry
32. Accrual and Reversal Entries(Example) Using the previous example of a $60,000 gross payroll expense for the week Get a daily expense amount by dividing the expense by number of business work days (5 in this example) $60,000 / 5 days = $12,000 daily payroll expense The $12,000 is reversed in the following accounting period and the actual payroll expense is recorded
33. Reconciling The General Ledger Accounts The double entry method of accounting provides a ready-made way to check the recording accuracy of payroll transactions The recorded debits and credits for each transaction, each journal, and the general ledger should balance That is due to the fact that the total of debits should equal the total of credits after each business transaction Balancing should be done at several points along the way, certainly before and after journal entries are posted to the general ledger
34. Reconciling The General Ledger Accounts Periodically you verify that your tax liabilities equal the tax payments made for the appropriate period Per our previous example the total amount of each tax/deduction that was credited as a payable was eventually paid and that account was debited to zero out the payable balance An outage would be identified if the amount due (payable) is not equal to the payment amount (reduction to payable) for that time frame