Payroll Accounting

Michelle Clawson, CPPOctober 8, 2015

Michelle Clawson, CPP Payroll Manager Driscoll’s Strawberry Associates, Inc.

Speaker

Accounting is the basic language of business. It’s the art of measuring, communicating, and interpreting financial activity. Accounting enables your organization to do the following:

Keep track of all monetary transactions Report it’s financial transactions to shareholders and

various federal, state, and local taxing authorities. Control expenses Monitor and safeguard company assets Make decisions and plan for the future

Accounting Basics

Since salaries and employee benefits are typically the largest expenses for most companies, payroll is under close financial scrutiny from top management.

Accounting Basics

Journal Entries-First phase recording each financial transaction as it occurs

General Ledger-Second phase posting of transactions

Financial Statements- Third phase preparing financial statements that describe the companies financial position, cash flow, profits, losses, assets, liabilities, and net worth.

Recording Transactions

There are generally five types of accounts used by a business:◦ Assets – Anything that provides economic benefit◦ Liabilities – Company debts that must be paid in

the future◦ Expenses – Show the company’s costs for goods

and services consumed during current accounting period

◦ Revenue – Identify amounts received during the accounting period

◦ Equity – Represents the owners investment in the company

Types of Accounts

Payroll usually generates entries to three types of accounts.

Asset Accounts-Assets are anything of value that is owned by the company, and normally have a debit balance. Examples of assets in the payroll department include:

Computers Payroll software Calculating machines Furniture Money in a payroll checking account

Payroll Accounting

Liability Accounts-Liabilities are debits. They represent a claim against the company’s assets and normally have credit balances. Many payroll transactions represent liabilities, including the following:

Taxes withheld but not yet deposited Contributions to a company benefit plan not yet paid, for

example, section 125 or 401(k) A leasing contract for a payroll hardware/software

system Wages payable to the employees not yet paid

Payroll Accounting

Expense Accounts-Expenses are the cost of goods or services used in the process of obtaining revenue for the company and normally have a debit balances. Examples of expenses include the following:

Salaries of employees Cost of employer-paid benefit programs Lease payments for hardware/software systems Purchasing office and computer supplies Employer portion of payroll taxes

Payroll Accounting

Balance Sheet-Assets - Liabilities=Equity. This shows the companies financial position

Income Statement – Revenue – Expenses=Net Income

Financial Statements

Balance Sheet-Provides a look at the company’s financial condition at a specific point in time by listing its assets, liabilities, and equity.

Income Statement (profit and Loss)-Shows the company’s net income or loss for an accounting period. Net income or loss is the difference between revenue and expenses for the accounting period. In most cases, the income statement provides both the current year and the prior year’s information.

Balance Sheet and Income Statement

In accounting terms, a debit is the left-hand side of an account while a credit is the right-hand side. An account like this is often described as a T account because it forms the letter T.

The basic advantage to having a left (debit) side and a right (credit) side is that it provides a built-in check for the system. At the end of the accounting period, perhaps after thousands of entries, the debits and credits from the various accounts must balance. In many computerized systems the debit entry is a plus and the credit entry is a minus.

Debits and Credits

T ACCOUNT

Debit Credit

Salary Expense $100,000

Cash $100,000

PR Tax Expense $50,000

PR Tax Liability $50,000

Total $150,000 $150,000

TYPICAL PAYROLL T ACCOUNT

Debit Credit

Salary Expense $100,000.00

ER Payroll Taxes $10,000.00

ER Payroll Tax Liability $10,000.00

EE Payroll Tax Liability $20,000.00

Garnishments WH $5,000.00

125 Plan WH $1,500.00

401(k) Withheld $10,000.00

401(k) Match $1,000.00

401(k) Match Expense $1,000.00

Cash $63,500.00

Total $111,000.00 $111,000.00

Whether you record a transaction on the debit or credit side depends on the type of account. In an asset account, anything increasing assets appears as a debit, while anything decreasing assets is recorded as a credit. So depositing money into a checking account (increasing assets) is a debit. Writing a check against that account (decreasing assets) is a credit. In a liability account anything increasing the liability is a credit and decreasing the liability is a debit.

Posting Entries

The chart of accounts lists all accounts by name and number. An example of a standard numbering system is below:

Asset accounts: 100 series Liability accounts: 200 series Equity accounts: 300 series Revenue accounts: 400 series Expense accounts: 500 series General overhead: 800 series

Chart of Accounts

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 a specific ledger accounts and a description of the account. For example, the journal might contain the following entries.

Journal

Date Description Debit Credit

June 30 Deposit into Payroll Checking-Cover payroll expense

$100,000

June 30 Withdrawal from Corporate Account-payroll expense

$100,000

July 2 Purchase of Computers

$5,000

July 2 Cash $5,000

The general ledger (GL) is a record of business transactions by account. Journal entries are recorded here. The GL keeps a running total of all the entries and period-to-date balances for a company’s accounts.

General Ledger

Double-entry accounting requires entering a dollar amount twice for each transaction, one account is increased while another is decreased. For example if you wrote a check for $1000 to pay an independent contractor, the journal to record would look like:

Double-Entry Accounting

Date Description Debit Credit

7/1 Salary Expense

$1000

7/1 Asset (Cash) $1000

Accounting Period-An accounting period is a period of time covered by information on an income statement. It may be a month, a quarter, a half-year, or a year. A firm’s fiscal accounting year may not be the same as the calendar year.

Accrual-Not all transactions occur within one accounting period. For example, a pay period may be within tow accounting periods and/or fiscal years. When a transaction overlaps tow or more accounting periods, accountants must make an approximation (accrual entry) of it’s value for each period. Without such an approximation, it is impossible to accurately measure your company’s financial position.

Accrual

Expenses such as salaries, taxes, or fringe benefits should always be recorded in the accounting period in which they occurred, not necessarily when they are paid. To do this, you may be required to accrue the expense and, later, reverse it when it is actually paid.

Accruals and Reversals

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