1. Payroll Accounting

2. Payroll Accounting
Several areas within a company that uses payroll data
General Accounting
To record transactions
Prepare financial statements
Cost Accounting
Determine the cost of producing a product or providing a service
Identify areas to control costs
Budget
Project costs and revenues associated with business activities
Assist with keeping payroll costs within target limits

3. Accounting Principles
Accounting standards are set by private organizations not laws
Before 1974, a set of concepts and principles
Generally Accepted Accounting Principles (GAAP)
Since 1974, private sector
Financial Accounts Standards Board (FASB)
Since 1974, public sector
Government Accounts Standards Board (GASB)

4. Accounting Principles
Eight concepts:
Business entity
Continuing concern entity
Time period concept
Cost principle
Objectivity principle
Matching principle
Realization principle
Consistency principle

5. Account Classifications
Balance Sheet equation
Assets – Liabilities = Equity (ALE)
Income Statement and the Statement of Retained Earnings equations
Revenue – Expenses = Net Income (REN)
Net Income – Income Distributed + Contributed Capital = Equity (NICE)
For above equations to be in balance, you need a ‘double entry’ for each transaction.
One account is increased and one account is decreased

6. Account Classifications: Assets
Anything that provides an economic benefit or value to the company over a period of time
Three types of assets classifications
Current
e.g. cash, notes receivable, prepaid expenses, inventory
Tangible
e.g. land and improvements, building, automobiles, furniture
Intangible
e.g. trademarks, patents, leases, goodwill, copyrights
Classification depends on when and if the asset could be converted to cash or a cash equivalent

7. Account Classifications: Expenses
Show the company’s cost for goods and services consumed during the accounting period.
Generally provided by other organizations
Includes labor costs of company’s employees
Typical company payroll expenses
Wages paid to employees
Employer-paid benefit costs
Employer share of payroll costs
Cost to run payroll processing (hardware and software costs)

8. Account Classifications: Liabilities
Company debts that must be paid in the future
Claims against the companies assets
Two types of liability classifications
Current
Liability to be paid in accounting period or fiscal year
Long-term
Liability that can be paid after the account period or fiscal year
Examples of payroll liabilities
Wages payable
Income and employment taxes withheld but not yet paid

9. Account Classifications: Revenues
Amounts received for goods sold and services rendered during the accounting period
Income can be in various forms
Cash
Expectation of receiving cash
Services

10. Account Classifications: Equity
Owners investment in the company (i.e. it’s net worth)
Two types of equity classifications
Contributed Capital
Amount the company’s owners have contributed to the organization
Retained Earnings
Net amount of revenue less expenses less amount returned to owners

11. Account Balances
Each type of account has a ‘normal’ balance on either side of the equation
Whether the entry increases or decreases the account depends on the type of account and the normal balance
Debits (left side), credits (right side), and ‘T-accounts’
Common unit of measure in US is USD (U.S. Dollars)

12. Normal Account Balances
Account Type
Normal Balance
Debit Entry
Credit Entry
Asset
Debit + -
Liability
Credit
Equity
Revenue
Expense
Income Distributed
Contributed Capital

13. Chart of Accounts Lists each account by name and identifying number
Numbering scheme allows for distinctions between account types
Larger organizations have a numbering scheme that designates company divisions, departments and locations
Basic general scheme 1
Asset accounts 2
Liability accounts 3
Equity accounts 4
Revenue accounts 5
Expense accounts

14. Journal Entries
Record of transactions of a company during the accounting period
Compound Entry
Journal entry that has more than one debit or credit
Subsidiary Ledger
Detail of a summarized category on the balance sheet
General ledger
Record of a company’s transactions by account to which journal entries are periodically posted.
Keeps a running total of all the entries and period-to-date balances for all of the accounts
Used to prepare an organization’s financial statements

15. Recording Payroll Transactions
Payroll expenses
Recorded in one of two ways: functionally or by type of pay
Payroll deductions
Amounts deducted become a liability to the employer
Payroll cash distribution / net pay
When paid, entries must be made to debit the accrued wage liability account and credit the bank account
Employer tax liabilities
Employer’s share of FICA and unemployment taxes

16. Accounting Periods Any length of time covered by an income statement
e.g. monthly, quarterly, yearly
a/k/a the business cycle
Payroll tax year: always January 1st through December 31st
Fiscal tax year: any consecutive 12-month period
October 1, 2016 to September 30, 2017
June 1, 2017 to May 31, 2018

17. Methods of Accounting Cash accounting method Accrual accounting method
Record transaction only when cash or equivalent actually changes hands
Accrual accounting method
Recognize revenue when earned
Recognize expenses when incurrent
IRS accepts both accounting methods
GAAP only accepts accrual accounting method

18. Accruals and Reversals
Designed to satisfy the Matching Principle
Any revenue, expense, and liability must be matched to the accounting period in which they were earned or incurred
Payroll entries made at the end of an accounting period to estimate the payroll expenses and liabilities incurred between the last payroll period and the end of the accounting period
Reversals
Reversing the accrual entries of estimated payroll expense from the last accounting period

19. Balancing and Reconciling
General ledger accounts are compared to records for taxes withheld and paid
Check against the payroll register
Verify checks issued by accounts payable
Verify the end-of-the-month balance
Periodic balancing and reconciliation is a must
Every payroll period
Before filing Form 941 and Form 940
Before sending employees their Form W-2
Remember Section 8: Payroll Reconciliations???

20. Payroll Bank Account Reconciliation
Special bank account just for payroll
Employee outside the payroll department should be responsible for the reconciliation
Uncashed or unclaimed paychecks become unclaimed wages subject to state escheat laws
Remember Section 5?

21. Financial Statements Balance Sheet
Provides a look at the company’s financial condition at a specific point in time by listing the company’s assets, liabilities, and equity
Income Statement (i.e. profit and loss)
Shows the company’s net income or loss for an accounting period
Statement of Retained Earnings
Shows the amount of income remaining and available for investment after any distributions to stockholders or other owners
Statement of Cash Flow
Shows the sources and uses of cash during the accounting period

22. Balance Sheet Current assets Plant, property, and equipment
Converted into cash within one year
Plant, property, and equipment
Expected to be held for more than one year
Deferred assets
Intangible assets
Current liabilities
To be paid within the next year
Long-term liabilities
To be paid longer than one year out
Shareholders equity (i.e. net worth)
Owner’s share of the business after all debits have been paid

23. Income Statement Gross margin on sales
Net sales less the cost of goods sold, excluding cost of overhead, taxes, etc.
Operating income (i.e. operating profit)
Provides a good look at how profitable the operations are in terms of goods sold and services produced and sold
Nonoperating revenue / Nonoperating expenses
Income and expenses not related to the sale of goods or services
Net earnings (i.e. net income / loss)
Shows how much profit or loss the company has after paying its taxes
Earnings per share
Amount of net earnings divided by the average number of outstanding shares of stock during the accounting period

24. Internal Controls
System of checks and balances applied within an organization to ensure the accuracy of its financial records and the security of its assets
Basic components address the following areas
Segregation of job duties
Payroll bank account
Rotation of job duties
Blank checks
Payroll distribution
Time reporting
Phantom employees
Computer system edits
Negative pay balances
Using an internal auditor

25. Sarbanes-Oxley Act (SOX)
Public Company Accounting Reform and Investor Protection Act of 2002
Requires public companies to have a framework for identifying, documenting, and evaluating their internal controls over financial reporting
Provides a logical way to analyze a company’s control system
Prohibits a public accounting firm from providing both external auditing and most non-auditing services to the same client
Requires audit partners to be rotated every 5 years

26. Sarbanes-Oxley Act (SOX)
Certification of financial reports
Complaint procedures must be established
No loans to officers or directors
Internal control assessments and reports
Impact on payroll
Payroll’s role in SOX compliance
What about third-party vendors?
SSAE 16 reports

27. Controlling Check Fraud
Various levels of check security features
Group 1 security
Security features are manufactures into the check paper
Group 2 security
Security features are printed onto the paper either when the paper is converted from raw material to check stock or when the check MICR or OCR lines, payee, and amount information is completed
Group 3 security
Positive pay (i.e. bank-sponsored electronic data checking)

28. Check Clearing for 21st Century Act
Effective October 28, 2004
a/k/a Check 21
Designed to promote innovation in the U.S. payments system while updating and eliminating some of the legal barriers governing how banks process paper checks.
Permits the use of a substitute check
Reproduction of an original check that contains the image of the front and bank of the original check
Allows financial institutions to truncate original checks

29. DO YOU KNOW??? What are subsidiary ledgers?
Name the five types of accounts that are generally used by businesses to classify transactions
What is a balance sheet?
What is the purpose of the journal?
Explain accrual accounting as it applies to payroll
What are reversals, and how do they affect accounting?