1. Payroll Accounting Triad Chapter Spring 2016 Study Group March 5, 2016

2. ACCOUNTING Accounting is a way of keeping track of an organization’s financial transactions. This information is used to prepare the company’s financial statements. Profit, Cash flow, losses, assets, liabilities and net worth The reports are used by management, auditors, stockholders, etc. to gauge the company’s financial health and prospects for the future. Accounting standards are not set by law but by private organizations.

3. Accounting – Common Terms GAAP Generally Accepted Accounting Principles Widely used in Public Sector Companies Accrual Method of Accounting Time Period Principles Basic time periods for recording account activity. (Monthly, Quarter, or Annual) Companies can set their own accounting periods. (13 Week periods are the most common

4. Accounting Terminology General Ledger (G/L) Record all transactions for financial period Includes all Accounts Assets Liability Owner’s Equity Revenue Expense

5. The general ledger is a record of business transactions posted to each account from the journal entries. Many accounts will have a subsidiary ledger that is used to provide a detailed view of the information. For example, accounts receivable will report the total due from all customers in the general ledger, while the subsidiary ledger will provide information about the amount that each customer owes that makes up the total in the general ledger account. In today's accounting environment, subsidiary ledgers are commonly seen as systems such as payroll, accounts payable, accounts receivable, and fixed assets. The payroll register is the subsidiary ledger that supports payroll transactions. What is a General Ledger?

6. What is a Journal? A journal is a chronological record of the daily transactions of a business. For each transaction, the journal shows the debits and credits to be entered in specific general ledger accounts and a description of the account.

7. Account Classifications All of a company’s transactions are recorded and classified into various accounts using a “double entry” system based on two equations.

8. General Ledger Account Classification Asset accounts are anything that provides and economic benefit or value to the company over a period of time. Cash, Inventory, Computers, Furniture, Accounts Receivable. Owned by the company

9. General Ledger Account Classification Liability accounts are debts that must be paid in the future Unemployment taxes – Accrued and will be paid at the end of the calendar quarter Payroll processing Taxes Payable Benefits ( 401(k), FSA, Medical, Dental premiums Garnishments Payable

10. General Ledger Account Classification Expense accounts show the company’s costs for goods and services Everyday expenses related to running the business Payroll expenses Salary Expense Bonus Expense Employer paid taxes- SS, Medicare, Federal and State Unemployment.

11. General Ledger Account Classification Revenue accounts identify amounts received for goods sold and services rendered Equity accounts represents the owner’s investment in the company.

12. Chart of Account Structure Listing of all accounts used by the company Typically it will have a unique identifier number associated with each account. Assets Liabilities Equity Accounts Revenue Expenses

13. Journal Entries Debit is on the left Credit is on the right T- Accounts T-accounts are helpful in showing you how to balance transactions within the general ledger. Add up both sides of the entry on the T-Account worksheet

15. Account Balances Transactions are recorded by entering debits on the left side and credits on the right side of a “T- account”. Whether a transaction is posted as a debit or credit depends on the type of account.

16. GL Categories DebitCredit Assets Balance Sheet Liabilities Balance Sheet Expenses Income Statement Income Income Statement

17. General Ledger Assets – Liabilities = Equity This formula is the basis for the financial statement called a Balance Sheet which shows the company’s financial position at a particular point in time.

18. General Ledger Revenue – Expenses = Net Income Net Income–Income Distributed + Contributed Capital = Equity This is the basis for two financial statements: Income Statement Statement of Retained Earnings

19. Examples of GL Categories AssetsLiabilitiesIncomeExpenses CashEE PR WHSalesSalaries A/RLoansInterestER PR Taxes EquipmentA/PSale of assets ER paid Benefits InventoryAccrued Salaries Utilities Bldg & LandCommissions Payable Rent

20. Pay Check Journal Entry Salary Federal W/H Tax SS Tax Medicare Tax State W/H 401(k) W/H Section 125 WH Net Pay ER Tax Expense ER 401(k) Match $2,000.00 $ 120.00 $ 124.00 $ 29.00 $ 50.00 $ 200.00 $ 100.00 $ 1,377.00 $ 217.00 $ 100.00

21. Payroll Check Journal Entry DescriptionDebitCreditEffect (+/-) Salary Expense$2,000.00 + Expense Federal Income Tax Payable $120.00 + Liability Medicare Tax Liability 58.00 + Liability SS Tax Payable 248.00 + Liability State Income Tax Payable 50.00 + Liability 401(k) Payable 300.00 + Liability Medical Premiums Payable 100.00 + Liability Payroll Cash 1,377.00-Asset FUTA Tax Payable 16.00 + Liability SUI Tax Payable 48.00 + Liability ER Tax Expense217.00 + Expense Employer 401(k) Match Expense100.00 + Expense Totals2,317.00

22. Accrual Method Accounting Most organizations use the accrual method of accounting which is: Revenue is recognized when it is earned. Expenses are recognized when it is incurred.

23. What is one example of an accrual? When the accounting period and the pay ending period do not match at the end of the month, quarter or year, the accounting department needs to make an adjustment for wages earned but not paid as of the last day of the accounting period.

24. Payroll Accrual Accrued Payroll Entry DescriptionDebitCreditEffect Payroll Expense$25,000.00 Expense + Accrued Payroll Payable $25,000.00Liability + Employer Tax Expense$2,212.00 Expense + Medicare Tax Liability $362.50Liability + Social Security Tax Liability $1,550.00Liability + FUTA Tax Payable $200.00Liability + SUI Tax Payable $100.00Liability + Totals$27,212.00$27,212.50

25. Why are accruals reversed? Accruals are reversed because the actual wages will be recorded in the following accounting period when paid. If it wasn’t reversed, the wage expenses and liabilities associated with the payroll would be overstated.

26. Reversing Payroll Accruals Accrued Payroll Entry DescriptionDebitCreditEffect Payroll Expense $25,000.00Expense + Accrued Payroll Payable$25,000.00 Liability + Employer Tax Expense $2,212.50Expense + Medicare Tax Liability$362.50 Liability + Social Security Tax Liability$1,550.00 Liability + FUTA Tax Payable$200.00 Liability + SUI Tax Payable$100.00 Liability + Totals$27,212.50

27. Calendar or Fiscal Year Payroll is processed on a calendar year Many companies run on a fiscal year A fiscal year is a period of 12 consecutive months that ends on a day other than December 31 st. Example of a fiscal year: July 1 st – June 30th

28. Financial Statements and Audits Most organizations publish annual financial statements after they have been audited by independent certified public accountants. These statements generally include: Balance Sheet Income Statement Statement of cash flows Notes to financial statements Report of the independent auditors

29. Financial Statements and Audits Balance Sheet: Assets, Liabilities and Net Worth Income Statement: Revenues and Expenses Notes to Financial Statements: Generally includes notes explaining various elements of the financial statements, how they were constructed and a summary of the company’s accounting policies.

30. Financial Statements and Audits Other than the auditor’s report, all the financial statements are significantly impacted by the information and records received from the payroll department.

31. Financial Statements and Audits Trial Balance Typically runs after all journal information for the current accounting period has been completed Lists the balances in all accounts in general ledger Review the trial balance to ensure that all debits and credits are equal

32. Financial Statements and Audits Balance Sheet Will show the companies current Assets, Liabilities and Owner Equity at a specific point in time

33. Financial Statements and Audits Income Statement Lists the companies revenues, expenses and profits over a specific period of time Lists Net Sales Cost of Goods Sold Selling and Administrative expenses Income from operations Other income, expenses, income before taxes, income after taxes and net income

34. Financial Statements and Audits Equations for Financial Statements Net Income = Operating profit + Non- operating income – non-operating expenses Net Income = Net income before taxes – Taxes Net Income = Revenue – Expenses Equity = Net Income – Income Distributed + Contributed Capital Net Income is referred to as the “Bottom Line”

35. Payroll Bank Account Reconciliation Internal and external auditors will advise employers that employees who issue or control checks on a account should not be responsible for the reconciliation of that account. An employee outside the payroll department should be responsible for the payroll bank account reconciliation.

36. Steps to Reconcile the Payroll Checking Account Step 1 Add deposits, interest, or miscellaneous items that appear on the bank statement but not in the ledger. Step 2 Check off in the ledger each check withdrawal, EFT Transactions or deposit that is listed on the bank statement. Step 3 Total all outstanding checks. Step 4 Subtract the outstanding checks (step 3) from the closing balance on the bank statement. Step 5 Compare the general ledger balance for the period with that of the bank. If the amount in step 5 does not agree with the ledger, repeat steps 1 through 5

37. What is SOX? Sarbanes-Oxley Act (SOX) was enacted in 2002 in response to corporate finance scandals SOX requires public companies to have a plan for identifying, documenting and evaluating their internal controls over financial reporting SOX provides a logical way to analyze a company’s control system SOX prohibits a public accounting firm from providing both external auditing and non- auditing services to the same client

38. What is Payroll’s role in SOX compliance? Develop process and workflow maps Create & update written documentation for each step in the payroll process Audit recordkeeping & retention procedures Identify gaps and risks & report to management Prepare an action to correct the gaps & risks Develop a way to measure progress Document & design testing of internal controls

39. What is SSAE 16? The new service organization reporting standard, Statement on Standards for Attestation Engagements (SSAE) No. 16, is now effective as of June 15, 2011. SSAE 16 supersedes Statement on Auditing Standards (SAS) No. 70 with the professional guidance on performing the service auditor's examination

40. Two Types of SSAE 16 Reports Type I – independent auditor expresses an opinion on whether the service provider’s description of its control procedures presents fairly the control objectives. Type II – the auditor expresses an opinion on the same items in a Type I report and whether the controls tested were operating effectively enough to provide reasonable assurance that the control objectives were met during at least a 6 month period. Type II is preferred

41. List important internal controls necessary in a payroll department. Segregation of job duties Rotation of job duties Payroll distribution Phantom employees Negative pay deductions Reconciliation of payroll bank account Blank checks Time reporting Computer system edits Internal audit

42. Check Fraud 3 types of security features  Security features are manufactured into the paper  Security features are printed onto the paper  Positive Pay – Bank sponsored electronic data checking Examples: WatermarksWarning bands FibersPrismatic printing Toner BondHolograms Security lock iconsSpecial ink Positive PayChemical reactants

43. Accounting The following charts and slides are taken from our previous Chapter Study Groups that you may find to be very helpful during your reviews

44. Debits Normally a Debit IncreaseDecrease CashDebitCredit EE ReceivablesDebitCredit Salaries/Wages (Gross amount) DebitCredit Employer paid taxes (SS/Med/SUI/ FUTA) DebitCredit Employer paid benefits (WC, Health, AD&D, LTD, 401K match, etc) DebitCredit

45. Normally a Credit IncreaseDecrease EE taxes withheldCreditDebit EE portion of benefits withheld CreditDebit 401K withheldCreditDebit Garnishments/ Child Support Withheld CreditDebit ER taxes (SS, Med, Sui, Futa) CreditDebit EE taxes withheldCreditDebit Credits

46. Helpful Hint – Normal Balances DebitCredit AssetsLiability DistributionsOwner’s Equity ExpensesRevenue

47. Helpful Acronym All Little Cats Assets Liabilities=Balance Sheet Capital Reach Exhaustion Revenue=Income Statement Expense

48. CPP Exam Good Luck on the Spring Exam Study, Study, then Study some More Remain Positive no matter what the results. Most people in the payroll profession never attempt to pass the exam.

49. Contact Info Kathy Fearrington, CPP Krispy Kreme Doughnut Corporation 336-726-8913 or Maurnita Jones, CPP Lincoln Financial Group 336-691-3769