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CHAPTER 11

CHAPTER 11. Payroll. CHAPTER 11. Payroll Accounting.

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CHAPTER 11

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  1. CHAPTER 11 Payroll

  2. CHAPTER 11

  3. Payroll Accounting Payroll refers to the amount paid to employees for the services they provide during a period of time. The total earnings of an employee for a payroll period, including bonuses and overtime pay, are called gross pay. Deductions are taken from gross pay, and results in net pay. Net pay is the amount the employer must pay the employee. Deductions are remitted by the company to the respective Governments or sources. Employee Net Pay Payroll Accounting

  4. Payroll Accounting Deductions • Canada Pension Plan • Federal and Provincial Income Taxes • Employment Insurance • Other voluntary deductions

  5. Payroll Accounting Before discussing how to calculate gross pay, which deductions to take, and the resulting net pay, it is important to determine the pay frequency when dealing with payroll.

  6. What is the amount of cash that an employer pays an employee called? Deductions Taxes Gross pay Net pay Self Study Question

  7. If an employee is paid bi-weekly, how many times will she be paid in a year? 12 24 26 52 Self Study Question

  8. CHAPTER 11

  9. Gross Pay Gross pay is the total amount of remuneration paid to an employee. It is paid out through the payroll system. When an employee is paid, employers generally pay either with a salary or an hourly rate. A salary is a set annual amount that is then divided by the number of pay periods to determine the gross pay for each period. For an hourly rate, employees track the hours that they work over a period of time. They multiply the hours by their hourly wage rate. Gross pay can be calculated as shown below. Regular Pay 40 hours x $15/hour = $600 Overtime Pay 8 hours x ($15 x 1.5) = $180 Gross Pay $780

  10. An employee's regular pay is $20 per hour. Any hours over 40 are paid at 1.5 times the regular hourly rate. if the employee works 45 hours in a week, what would be her gross pay? $900 $950 $1,200 $1,350 Self Study Question

  11. CHAPTER 11

  12. Employee Payroll Deductions • Statutory Deductions • Statutory deductions are paid to the appropriate tax authority in the country. Statutory deductions in Canada are: • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) in Quebec • Employment Insurance (EI) • Quebec Parental Insurance Plan (QPIP) in Quebec only • Federal and Provincial income tax

  13. Employee Payroll Deductions • Canada Pension Plan (CPP) • All employees between the ages of 18 and 70 are subject to CPP deductions. • The deduction rate and the annual maximum contributions are established by Canada Revenue Agency (CRA) and vary yearly. • If an employee is in receipt of a Canada Pension Benefit, they are exempt from CPP deductions. Proof must be presented in Payroll Services before this change can be made.

  14. Employee Payroll Deductions Employment Insurance (EI) Every business is required to withhold EI from an employee’s gross pay. The business is also required to pay an amount equal to 140% of the amount withheld from the employee’s pay. Unlike CPP, there is no age limit restricting employees from paying EI. Income Taxes Income tax is deducted in two parts: there is the federal income tax and the provincial income tax component. In Quebec, the federal income tax portion is sent to the CRA and the provincial income tax portion is sent to Revenue Quebec. In the rest of the country, businesses must send both federal and provincial income taxes to the CRA.

  15. Employee Payroll Deductions Voluntary Deductions Voluntary payroll deductions are the ones you control and choose. This could include items such as union dues, health plan contributions, charitable donations or saving plans. Employees must sign up for these plans; they cannot be taken from an employee’s paycheque without permission. Employer Payroll Contributions In addition to the CPP and EI contributions, employers usually contribute to their provincial workers’ compensation board. Like the employer portions of CPP and EI, the employer is responsible for these payments and cannot deduct these amounts from the employee’s pay.

  16. Which of the following is not a statutory deduction? Income tax Union dues Pension plan Employment Insurance Self Study Question

  17. Which of the following is an employer required to pay an amount equal to 140% of the amount withheld from the employee's pay? Federal income tax Provincial income tax Pension plan Employment Insurance Self Study Question

  18. CHAPTER 11

  19. Payroll Example • Glen Booth is a salaried employee who earns $54,000 per year and is paid on a monthly basis. This means his monthly gross pay is $4,500 ($54,000 ÷ 12 months). He has the following deductions: • Canada Pension Plan deduction is $208.31 • Employment Insurance is $84.60 • Federal and Provincial income tax is $802.90 • He is a member of a union and has $50 deducted per month for his union dues. • His employer provides a health insurance plan which costs $30 per month, however the employer pays for half of this amount. • The calculation of Glen’s net pay for the month of January 2015 is: Example

  20. Payroll Example There are three categories that payroll transactions fall into: The net pay owed to an employee Amounts deducted from employee paycheques and owed to others Employer payroll expense

  21. Payroll Example On January 31, 2015, the journal entry to record payroll expense and deductions is: Example

  22. Payroll Example Assume the business must pay 4% of the gross pay as vacation pay and the business accrues the vacation pay for its employees. This means $180 ($4,500 x 4%) will be accrued for Glen Booth. The journal entry for this accrual is: Example

  23. Payroll Example • The employer will pay the following: • Match the employees' CPP deduction of $208.31 • Pay 1.4 times the amount of the employees' EI deduction of $118.44 • The health insurance plan costs $30 per month, however the employer pays for half of it • Workers’ compensation is assumed to be 0.5% of gross pay Example

  24. Payroll Example On January 31, 2015, the journal entry to record the employer contributions is: Example

  25. Payroll Example Paying the Payroll liabilities Amounts deducted from payroll are owed to the government and other institutions. After recording the journal entries for the employee payroll and the employer contributions, the employer has a number of liability accounts that must be paid. Example

  26. Payroll Example Paying the Payroll liabilities All the liability accounts are debited by their balance to clear them, and the total amount is paid or remitted to the CRA. The journal entry to make the payment is: Example

  27. Payroll Example Paying the Payroll liabilities Lastly, any amount owing to other institutions must be paid. Each of these liabilities will be cleared out and payment will be sent to the union, the health insurance company and the workers’ compensation board. These transactions are: Example

  28. An employee has weekly gross pay and deductions of $1,000 and $275 respectively. In the journal entry to accrue the employee's payroll, the employer would credit salaries payable at the amount of: $275 $725 $1,000 $1,275 Self Study Question

  29. In the journal entry to record the payroll expenses that are contributed by employer such as CPP and EI, which account is debited? Salaries Expense Income Taxes Expense Employee Benefit Expense Insurance Expense Self Study Question

  30. CHAPTER 11

  31. Payroll Register Since businesses usually have multiple employees, a payroll register is often used rather than preparing individual entries. A payroll register will list every employee along with their gross pay, deductions and net pay. Example

  32. Payroll Register The journal entry to be prepared from the payroll register is: Example

  33. Payroll Register Vacation pay is accrued on the total gross pay for all the employees at 4%. The journal entry is: Example

  34. Payroll Register The business also must pay its own payroll contributions relating to the employees. Recall that the business will match 100% of the CPP deductions and pay 140% of the EI deductions. The business also pays $15 per employee for health insurance and must pay 0.5% of gross pay for workers’ compensation. Example

  35. Payroll Register Payroll records The business must keep a record of gross pay, deductions, hours worked, and a variety of other information about every employee. A computerized system will update the payroll record automatically after every pay. Example

  36. Which of the following is not included in a payroll register? Employee’s performance evaluation score Employee’s name Employee’s gross pay Employee’s net pay Self Study Question

  37. The payroll register shows total gross earnings of $20,000 and total deductions of $5,300 for all employees. The journal entry prepared from the payroll register will include a debit to salaries expense of: $5,300 $14,700 $20,000 $25,300 Self Study Question

  38. CHAPTER 11

  39. Payroll Controls • When you pay employees with cheques, several controls are needed to mitigate the risks of fraud and various errors. There must be rules established by the business to ensure that an employee actually exists and is getting paid properly. • Ensure the person hiring employees is not the same person paying employees. • Monitor the hours worked by employees. • There should be proper authorization for pay increases or employee termination. • If manual cheques are being created, the person creating the cheques should not be the same person who signs the cheques. • An imprest bank account could be set up for payroll.

  40. which of the following is not a good payroll control? Employees’ working hours are monitored. Employee termination is properly authorized. An imprest account is set up for payroll. The same person hires and pays employees. Self Study Question

  41. CHAPTER 11

  42. In Summary • Describe payroll accounting • Employment standards include minimum guidelines for items such as pay rate, vacation time allowed, and how much time must be given or paid out to terminate the employment. • Calculate gross pay and net pay • Gross pay is the amount earned by the employee and can be calculated as a salary amount or an hourly amount. • Deductions are subtracted from the gross pay, which leaves the net pay that the employee actually receives in cash. Net Pay = Gross Pay – Deductions • Describe payroll liabilities, employer's contributions and payroll payments • Statutory payroll liabilities include the Canada Pension Plan (CPP), Employment Insurance (EI) and income taxes. In Quebec, employers have the Quebec Pension Plan (QPP) instead of the CPP, plus an additional deduction for the Quebec Parental Insurance Plan (QPIP). • Voluntary deductions can include items such as union dues, health plans, savings plan and charitable donations.

  43. In Summary • Record payroll liabilities, employer's contributions and payroll payments • A payroll journal entry includes a debit to increase salaries expense by the gross pay amount. All deductions are recorded as credits to liability accounts to increase the amounts owed. • The employer must match the employee’s deduction for CPP and pay 140% of employees' EI. • Employers may also pay for other benefits for the employee, such as all or some of a health plan. • Payments of payroll deductions to the government must be made on a regular schedule. Payments to other institutions, such as unions or insurance companies, must also be made on a regular schedule. • Prepare payroll registers • A payroll register is used to record gross pay, deductions and net pay when a business has more than one employee. The totals from the register are used to create the payroll entries. • The business must keep records of gross pay, deductions, hours worked, and a variety of other information about every employee. • The information is used for hiring, creating tax forms and employment termination. • Describe payroll controls • Payroll controls can protect the company’s payroll from theft. Controls can include start packages, tracking hours worked, authorization for pay increase and terminations or an imprest bank account.

  44. CHAPTER 11

  45. Exercise Calculate the employee’s net pay on January 15, 2015. Solution Net Pay = Gross Pay – DeductionsNet Pay = $1,500 – 250 – 74 – 28 Net Pay = $1,148

  46. Exercise Create the journal entry for the employee’s pay on January 15, 2015. Assume that it is paid out immediately to the employee.

  47. Exercise If the employer contributes 100% to CPP and 140% for EI, determine the employer’s total expense. Solution: Employer’s Total Expense= Gross Pay + (CPP x 100%) + (EI x 140%)= $1,500 + (74 x100%) + (28 x 140%)= $1,500 + 74 + 39 = $1,613

  48. Exercise Create the journal entry for the employer’s expense on January 15, 2015.

  49. CHAPTER 11

  50. Appendix 11A: Payroll Deduction Calculations CPP Calculation Canadian Pension Plan deduction amounts can be easily calculated manually if software or tax tables provided by the CRA are not used. There are three basic values that must be known. Maximum pensionable earnings is $53,600 Basic personal income tax exemption is $3,500 CPP rate is 4.95%

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