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CHAPTER 6. Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland. ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS. Developed by Lisa Swallow, CPA CMA MS. Accounting for Payroll Transactions. Payroll requires entering data (in order) in the following places: Payroll Register

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  1. CHAPTER 6 Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS Developed by Lisa Swallow, CPA CMA MS

  2. Accounting for Payroll Transactions • Payroll requires entering data (in order) in the following places: • Payroll Register • Employee Earnings Records • General Journal • Journalize gross wages and withholdings • Journalize payroll taxes and workers’ compensation • Journalize period-end accruals • Post to General Ledger

  3. Payroll Register • First – record info in payroll register • Lists employees in rows and shows following information for each • Gross wages • Taxes withheld and other deductions • Net pay • Payroll register shows (in columns) • Total of gross wages, each deduction and net • When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

  4. Employee’s Earnings Record • Second – transfer info to employees’ earnings records • Used to track cumulative totals (wages and taxes) • Enter row of data for each pay period • Important because different wage caps for FUTA, SUTA and OASDI taxes • Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports • Used to prepare payroll analyses - various internal and external reports • Might be used to settle employee grievances

  5. Recording Gross Payroll & Withholdings • Third - enter information into accounting system • Gross payroll is debited • Each withholding tax is a liability • Note: Advance EIC reduces FIT Payable • All other payroll deductions are liabilities as well

  6. Recording Gross Payroll & Withholdings (Continued) • Any deduction that the ER makes from EE’s paycheck goes into a liability account (because they owe it to someone) such as: • Group life insurance premiums • Health insurance premiums • Purchase government savings bonds • Union dues • Deferred compensation (contributions to pension plan) • Child support/other garnishments

  7. Garnishments • A creditor can, through the courts, seek repayment of his/her money by garnishment • ER is required to comply with garnishment order • ER must withhold funds from EE’s paycheck and submit it to appropriate authorities • Garnishments limited based upon Consumer Credit Protection Act (CCPA) and vary for • Child support (see next slide) • Creditors • Administrative wages • Student loans Note: state tax levies are exempt from CCPA

  8. Child Support • Family Support Act requires immediate withholding for child-support payments • Child support takes precedence over most deductions • ER can withhold a state mandated fee for administration • Some states now require electronic submission of garnished child support payments • Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 55-65% of disposable earnings

  9. Federal Tax Levy • These levies take second priority after child support • Amount of taxpayer’s standard deduction is only amount that is exempt from a federal tax levy • $5,700 for single and $11,400 for married • IRS issues Form 668-W to notify ER of a tax levy • ER required to withhold until Form 668-D (Release of Levy) received

  10. Pension & Retirement Contributions • Pension plans that involve employee contributions result in liability for the employer • Recorded in payroll entry • Pension Protection Act of 2006 gives company ability to automatically enroll employees in company’s plan and deduct contributions from pay

  11. Methods of Paying Wages & Salaries • Cash/check • Sometimes separate payroll account maintained to make bank reconciliation process easier • Electronic payment methods • EFTS (electronic funds transfer system) • Electronic records created showing bank, account # and net pay • Pay cards allow ER to deposit payroll into prepaid card • Card utilized like debit or credit card • Over 25% of employees who do not have bank accounts use these • Final pay • Many states set time limit between termination and final wage pay out (depends upon whether worker left voluntarily) • CA and MI require immediate payment if EE is fired

  12. Journal Entries to Record Payroll • Journal Entry #1- Record gross wages, withholdings and net pay • Journal Entry #2 - Record employer’s payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

  13. Journal Entry #1 • Debit Wage Expense for gross payroll • Credit each withholding account - they are all liabilities • Credit cash (or wages payable) for net payroll • Journal entry #1 • Wage Expense 1,845.00 • OASDI Payable 114.39 • HI Payable 26.75 • FIT Payable 174.00 • SIT Payable 50.00 • Insurance Payable 191.00 • Cash 1,288.86

  14. Journal Entry #2 • Debit Payroll Tax Expense for total of all payroll taxes that ER pays • Credit each account - they are all liabilities • Calculate all employer taxes utilizing varying wage bases and percentages • Journal entry #2 • Payroll Tax Expense 188.92 • FUTA Payable 1.72 • SUTA Payable 46.06 • OASDI Payable 114.39 • HI Payable 26.75

  15. Recording Deposit of Payroll Taxes Look in general ledger for amounts due • Deposit 941 taxes • Deposit state income tax • Deposit SUTA

  16. Workers’ Compensation Insurance • Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities • Laws differ by state • Premiums often calculated based on employment classification – stated in terms of $100 per payroll • Pay premiums in advance based on projected wages • Then, at year-end, report actual wages and pay additional premium or may receive credit towards next year

  17. Journal Entry for Workers’ Compensation • Debit Work Comp. Insurance Expense for premium paid • Credit Cash (if paying) or Insurance Payable (if accruing) • Journal entry • Workers’ Comp. Insurance Expense 99.67 • Cash or Workers’ Comp Insurance Payable 99.67

  18. Journalize Period-End Accruals • Accrued wages should be recorded for wages earned by workers, but not yet paid Journal entry Wage Expense 1,589.96 Wages Payable 1,589.96 • Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time Journal entry Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00 Note: Not necessary to accrue payroll tax expense at year-end

  19. Summary of Accounts Used

  20. Summary of Accounts Used

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