1. Payroll Accounting Section 11

2. Overview  Accounting Principles  Account Classifications  Account Balances  Journal Entries  Recording Payroll Transactions  Accounting Periods  Accruals and Reversals  Balancing and Reconciliations  Financial Statements & Audits

3. Accounting Principles  FASB vs. GASB  GAAP  Business Entity Concept  Continuing Concern Concept  Time Period Concept  Cost Principle  Objectivity Principle  Matching Principle  Realization Principle  Consistency Principle

4. Account Classifications  Double Entry Accounting * always need a debit and a credit  Equations: ACRONYMS ALE: Assets – Liabilities = Equity REN: Revenue – Expenses = Net Income NICE: Net Income – Income Distributed + Contributed Capital = Equity [Contributed Capital + Net Income – Income Distributed = Equity]

5. Account Classifications  Asset Accounts  Current  Tangible or Property, Plant and Equipment  Intangible or Deferred

6. Account Classifications  Liability Accounts  Current  Wages payable  Taxes Withheld  Contributions to Benefit Plans  Accounts Payable  Long Term  Notes Payable

7. Account Classifications  Equity  Contributed Capital  Retained Earnings  Net Income  Revenue  Amounts received for goods & services sold  Expense  Cost of goods and services consumed

8. Account Balances Type of AccountTypical Balance DebitCredit AssetDebitIncreaseDecrease LiabilityCreditDecreaseIncrease EquityCreditDecreaseIncrease RevenueCreditDecreaseIncrease ExpenseDebitIncreaseDecrease Contributed CapitalCreditDecreaseIncrease Income DistributedDebitIncreaseDecrease

9. T Accounts Payroll Checking DebitsCredits Wages Payable DebitsCredits $100.00

10. Chart of Accounts  Makes distinctions between Assets, Liabilities, Expenses, and Revenues  Makes distinctions between types of Assets, Liabilities, Expenses, and Revenues  Uses cost centers or department codes

11. Types of Journal Entries  Compound Entries  General Ledger  Subsidiary Ledger  Accounts Payable  Accounts Receivable  PPE (Fixed Assets)

12. Double Entry Cash Journal Entry A wage payment of $100 would appear in a journal entry as follows: DebitCredit Salary Expense$100 Cash$100

13. Compound Entry Cash Journal Entry A payroll check was issued and recorded to the general ledger. Gross wages were $500. Taxes were withheld as follows: $75 for FIT, $35 for Soc Sec, $7.25 for Medicare. DebitCredit Salary Expense$500 Federal taxes withheld $75.00 Social security taxes withheld $21.00 Medicare taxes withheld $7.25 Cash $396.75

14. Accrual Transactions Simple Journal Entry Record Wages of $6340 due to employee but not yet paid DebitCredit Wages Expense$6340 Wages Payable$6340

15. Accrual Transactions Compound Journal Entry Salary of $6340 and Taxes of $485 Accrued, but not yet paid DebitCredit Wages Expense$6340 Payroll Tax Expense 485 Wages Payable$6340 Payroll Taxes Payable 485

16. Accounting Periods  Monthly, Quarterly or Yearly  Fiscal Year vs. Calendar Year  Employment Tax Returns / Employee or Payee Information Statements

17. Accrual & Reversing Entries  Accruals at end of accounting period  Reversal of Accruals  Reversal of Errors

18. Accrual Journal Entries An accrual entry of $1000 was made in 2013 for a bonus to be paid in Jan. 2014. The bonus was paid in 2014 and Soc Sec & Medicare taxes were paid by the employer of $76.50. Federal, SS & MC taxes were withheld from the check of $326.50. What is the journal entry to record the accrual in 2013 and what is the entry to record the payment of the bonus in 2014? DebitCredit Wages Expense$1000 PR Taxes Expense$ 76.50 Wages Payable$1000 PR Taxes Payable$ 76.50 DebitCredit Wages Payable$1000 PR Taxes Withheld$326.50 Cash$673.50

19. Debit or Credit Quiz  Increase to Expenses  Increase to Liability  Decrease to Assets  Decrease to Revenue  Increase to Capital  Decrease to Expenses  Increase to Assets ═ Debit ═ Credit ═ Debit ═ Credit ═ Debit

20. Balancing and Reconciliation  Periodic Balancing  What?  Check against the payroll register  Verify checks issued by A/P  Verify the end of the month balance  When?  Every payroll period  Before filing tax returns  Before sending out W-2’s or 1099’s  Bank Accounts – dual control

21. Financial Statements  Balance Sheet  Income Statement  Statement of Cash Flows  Trial Balance  Statement of Retained Earnings  Notes to Financial Statements  Audited Financial Statements

22. Budgets and Variances  Budget vs. Actual format  Variances  Favorable Variance  Unfavorable Variance

23. Budgets and Variances Quiz Salary expense for the month of January was budgeted at $500. The actual expense incurred was $300. Is the variance favorable or unfavorable? Answer: Favorable by $200

24. Questions ?

25. Overview  Internal Controls  Sarbanes – Oxley Act  Check Fraud  Check 21  Accounting Interfaces with Payroll  Terminology

26. Internal Controls Blank Checks Computer System Edits Internal Auditor Negative Pay deductions Payroll Bank Account Payroll Distribution Phantom Employees Rotation of job duties Segregation of job duties Time Reporting

27. Sarbanes-Oxley Act  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 and requires audit partners to rotate every 5 years.

28. Check Fraud Group 1 security features Group 2 security features Group 3 security features Check 21 Substitute checks used in clearing process Impact on payroll

29. Questions ?