Financial Accounting, Sixth Edition Appendix D Payroll Accounting Financial Accounting, Sixth Edition

Study Objectives Discuss the objectives of internal control for payroll. Compute and record the payroll for a pay period. Describe and record employer payroll taxes. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Payroll Accounting The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.

Internal Control for Payroll As applied to payroll, the objectives of internal control are to safeguard company assets against unauthorized payments of payrolls, and to ensure the accuracy and reliability of the accounting records pertaining to payrolls. SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll Internal control feature: Human Resources department documents and authorizes employment. Fraud prevented: Fictitious employees being added to payroll. SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll Internal control feature: Supervisors monitor hours worked through time cards and time reports. Fraud prevented: Employee paid for hours not worked. SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll Internal control feature: Two (or more) employees verify payroll amounts; supervisor approves. Fraud prevented: Payroll calculation errors and inappropriate amounts being paid to an employee. SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll Internal control feature: Treasurer signs and distributes prenumbered checks. Fraud prevented: Checks lost through theft; falsely endorsed used to pay for hours not worked. SO 1 Discuss the objectives of internal control for payroll.

Determining the Payroll Gross Earnings Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions). Illustration D-3 SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Payroll Deductions Mandatory: FICA tax Federal income tax State income tax Voluntary: Charity Retirement Union dues Health and life insurance Pension plans SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Social Security taxes Supplemental retirement, employment disability, and medical benefits. In 2007, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $97,500 of gross earnings for each employee. Payroll Deductions Mandatory: FICA tax Federal income tax State income tax SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Payroll Deductions Mandatory: FICA tax Federal income tax State income tax Employers are required to withhold income taxes from employees pay. Withholding amounts are based on gross wages and the number of allowances claimed. SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4). Illustration D-5 SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Payroll Deductions Mandatory: FICA tax Federal income tax State income tax Most states (and some cities) require employers to withhold income taxes from employees’ earnings. SO 2 Compute and record the payroll for a pay period.

Determining the Payroll Net Pay Gross earnings minus payroll deductions. Illustration D-7 SO 2 Compute and record the payroll for a pay period.

Maintaining Payroll Department Records Recording the Payroll Maintaining Payroll Department Records Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Illustration D-8 Employee earnings record SO 2 Compute and record the payroll for a pay period.

Maintaining Payroll Department Records Recording the Payroll Maintaining Payroll Department Records Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Illustration D-9 Payroll register SO 2 Compute and record the payroll for a pay period.

Recognizing Payroll Expenses and Liabilities Recording the Payroll Recognizing Payroll Expenses and Liabilities Exercise: Joyce Kieffer’s regular hourly wage rate is $15, and she receives a wage of times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period Joyce worked 42 hours. Her gross earnings prior to the current week were $6,000. Joyce is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $25 per week. Instructions: Record Joyce’s pay, assuming she is an office computer operator. SO 2 Compute and record the payroll for a pay period.

Recording the Payroll Exercise: Record Joyce’s pay, assuming she is an office computer operator. Wages Expense 645.00 * FICA Taxes Payable 51.60 ** Federal Income Taxes Payable 55.00 *** State Income Taxes Payable 12.90 **** Insurance Payable 25.00 Wages Payable 500.50 * (40 x $15) + (2 x $22.50) = $645 *** Table, next slide ** $645 x 8% = $51.60 **** $645 x 2% = $12.90 SO 2 Compute and record the payroll for a pay period.

Federal Income Tax Withholding Recording the Payroll Exercise: Joyce is married and claims three withholding allowances. Illustration D-6 Federal Income Tax Withholding SO 2 Compute and record the payroll for a pay period.

Recording Payment of the Payroll Recording the Payroll Recording Payment of the Payroll Using the facts from the previous Exercise. Wages Payable 500.50 Cash 500.50 SO 2 Compute and record the payroll for a pay period.

Employer Payroll Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers. Same rate and maximum earnings as the employee’s. In 2007, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $97,500 of gross earnings for each employee. These taxes are: FICA tax Federal unemployment tax State unemployment tax SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers. FUTA tax rate is 6.2% of first $7,000 of taxable wages. Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8%. These taxes are: FICA Federal unemployment tax State unemployment tax SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are: FICA Federal unemployment tax State unemployment tax SUTA basic rate is usually 5.4% on the first $7,000 of wages paid. SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes Exercise: According to a payroll register summary of Ruiz Company, the amount of employees’ gross pay in December was $850,000, of which $90,000 was not subject to FICA tax and $750,000 was not subject to state and federal unemployment taxes. Instructions: Prepare the journal entry to record December payroll tax expense. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%. SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes Exercise: Prepare the journal entry to record December payroll tax expense. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%. Payroll Tax Expense 645.00 FICA Taxes Payable 60,800 * State Unemployment taxes Payable 5,400 ** Federal Unemployment Taxes Payable 800 *** * $760,000 x 8% = $60,800 *** $100,000 x .8% = $5,400 ** $100,000 x 5.4% = $5,400 SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes Question Employer payroll taxes do not include: Federal unemployment taxes. State unemployment taxes. Federal income taxes. FICA taxes. SO 3 Describe and record employer payroll taxes.

Filing and Remitting Payroll Taxes Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter. Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment taxes by the end of the month following each quarter. Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31. SO 3 Describe and record employer payroll taxes.

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