Janet Stan, CPPCorporate ControllerTalco Enterprises, LLC847-480-7366 x 3116jstan@capspayroll.com

PAYROLL ACCOUNTINGChapter 6

Purpose of Accounting

• Keep track of monetary transactions such as Payroll• Report financial transactions to shareholders and various

taxing authorities • Tax return preparation• Control Expenses• Monitor and safeguard company assets, detect and prevent

fraud• Make decisions and plan for the future• Provides historical record for budgeting

Who uses payroll data?

• General Accounting – prepares journal entries for financial statements and internal reports.

• Cost Accounting – records hours and rates and attaches them to operational activities.

• Financial Analysis and Budgeting – determines future expenses and forecasts profitability of operations.

Examples of Transactions

• Taking an order for company’s product• Purchasing raw materials• Manufacturing products• Warehousing finished products• Shipping the product• Billing the customers• Receiving payment from customers• PAYING EMPLOYEES

Transaction Flow

Transaction Journal

Subsidiary Ledger General Ledger

Financial Statements

Chart of Accounts

All transactions are posted to an account. All accounts are assigned a number.The Chart of Accounts is a listing of all accounts in the accounting system.Typical account numbering scheme:• 1000 Assets• 2000 Liabilities• 3000 Equity• 4000 Revenue• 5000 Expenses

Chart of Accounts

Asset Accounts Liability Accounts

Revenue Accounts

Expense Accounts

Equity Accounts

Asset AccountsTangible and intangible items owned by a company.

• Computers• Software• Equipment• Furniture • Land• Buildings

• CASH!

Liability AccountsDebt owed by the company. Claims against the company’s assets that will be paid in the future.

• Taxes withheld but not yet paid• Contributions to a company benefit plan but not yet paid (401K,

Union pension benefits)• Leasing contracts • Bank Loans

Equity AccountsThe net worth of the company. Also known as shareholders equity or Capital.

• Retained Earnings - company earnings not yet distributed• Contributed Capital – investments by owners• Common Stock

Revenue AccountsIncome recognized for goods sold and services rendered

• Gross Revenue – income from all sources

• Net Revenue – gross revenue minus cost of sales or cost of goods sold

Expense Accounts

Cost of goods or services used in the process of generating revenue.• Salaries and wages• Employer’s portion of payroll tax• 401k Match• Supplies• Rent• Insurance

Every transaction is recorded twice and must have a debit and a credit.

• “DR” = Debit• “CR” = Credit The use of equations to track financial activity. The debits and credits must balance.

Double Entry Accounting

Debits and Credits

Debits are recorded on the LEFT side and Credits are recorded on the RIGHT side.

“T” Accounts – A picture to conceptualize transaction flow

Debit Credit

Think of the “r” in Credit on the “right” side of the “T” Account

Normal Balances of AccountsAsset Accounts – DEBIT

Liability Accounts – CREDIT

Equity Accounts – CREDIT

Revenue Accounts – CREDIT

Expense Accounts - DEBIT

Account Increases and Decreases

ASSETS: Amounts increasing an asset are recorded as DEBITS Amounts decreasing an asset are recorded as CREDITS

LIABILITIES: Amounts increasing a liability are recorded as CREDITS Amounts decreasing a liability are recorded as DEBITS

EQUITY: Amounts increasing equity are recorded as CREDITS Amounts decreasing equity are recorded as DEBITS

REVENUE: Amounts increasing revenue are recorded as CREDITS Amounts decreasing revenue are recorded as DEBITS

EXPENSES: Amounts increasing an expense are recorded as DEBITS Amounts decreasing an expense are recorded as CREDITS

Account Increases and Decreases

Account Increases and Decreases

Asset and Expense AccountsDebit CreditIncreases Decreases

Liability, Revenue, Capital AccountsDebit CreditDecreases Increases

Journal

The chronological record of daily transactions of a business.

• Double-entry accounting system used

• Every transaction entry is recorded twice: a debit and a credit

SUBSIDIARY LEDGERS

Transactions of similar nature related to a specific functional area of the business are recorded in a subsidiary journal.• Accounts Payable• Cash Disbursement • Accounts Receivable• Sales• Cash Receipts

• PAYROLL !

GENERAL LEDGER

All transactions from the subsidiary ledgers are posted by account number to the General Ledger.

Summarization of all transactions are used to create financial statements.• Balance Sheet• Income Statement or Profit and Loss

Statement• Cash Flow Statement

TRIAL BALANCE

At the end of the period all the debits and credits are added up and must balance.

The Trial Balance shows all debits and credits.

INCOME STATEMENT

• Record of activity for a specific period of time, monthly, quarterly, semi annually, and/or annually

• Reports Revenue and Expenses

Revenue minus expenses = Net income

BALANCE SHEET

• A snapshot of the company’s position in a single point in time.

• Divided into 3 sections

• Reports assets, liabilities, and capital (equity)

Assets = Liabilities + CapitalOr

Assets – Liabilities = Capital

ACCRUALS AND REVERSALS

Accruals recognize transactions regardless of the transfer of cash.

• Matching Principle: Expenses are matched in the period with the revenues they produce.

• Accruals and reversals are used to record transactions in the correct period.

ACCRUAL EXAMPLE

Payroll Expense Accrual:• Biweekly payroll• Normal work week Sunday – Saturday• Pay period Dec. 23 through Jan. 5• Payday January 11, 2013• Expense 6 business days in December• Expense 4 business days in January

December 23 – 31 must be expensed in December, January 1 – 5 must be expensed in January in order to correctly report expenses of the period.

Month Sun Mon Tue Wed Thu Fri Sat

December2012

23 

24  

25  

26  

27  

28  

29 

January2013

30 

31  

1  

2  

3  

4  

5  

6 

7  

8 

9  

10  

11

PAYDAY

12  

13  

14  

15 

16 

17  

18 

19  

20  

21  

22  

23  

24  

25  

26  

27  

28 

29  

30  

31  

1 

2  

General Journal ExampleJ & R CONSULTING, INC.

GENERAL JOURNAL

AcctDR CR Type

 1/15/2013 Salaries & Wages 510,000   expense This entry records the gross payroll

Social Security Tax Payable - EE 31,000   liability for semimonthly period ending 01-15-12Medicare Tax Payable - EE 7,250   liability and taxes payable.Federal Withholding Tax Payable 61,750   liabilityState Withholding Tax Payable 10,000   liabilityNet Pay 400,000   liability

 510,000 510,000  

  

1/15/2013 Payroll Tax Expense 55,750   expense This entry records employer's portionSocial Security Tax Payable - ER 31,000   liability of payroll taxes.Medicare Tax Payable - ER 7,250   liabilityFederal Unemployment Tax Payable 4,000   liabilityState Unemployment Tax Payable 13,500   liability

 55,750 55,750  

  

1/15/2013 Net Pay 400,000   liability This entry records payment to the Cash 400,000   asset employees.

 400,000 400,000  

General Journal Example

 1/16/2013 Social Security Tax Payable - EE 31,000   liability

Medicare Tax Payable - EE 7,250   liability This entry records the payment of federalSocial Security Tax Payable - ER 31,000   liability taxes by electronic transfer.Medicare Tax Payable - ER 7,250   liability Federal tax liability is >$100K Federal Withholding Tax Payable 61,750   liability (one day deposit rule)Cash 138,250   asset

 138,250 138,250  

  

1/17/2013 Office Supplies 5,000   expense This entry records ordinary businessRent 20,000   expense expenses posted in the accountsTravel & Entertainment 30,000   expense payable system that will be paid when due.Account Payable 55,000   liability

 55,000 55,000  

  

1/18/2013 Accounts Receivable 5,000,000   asset This entry records billings to clientsRevenue 5,000,000   revenue for services rendered.

 5,000,000 5,000,000  

  

1/20/2013 Cash 3,500,000   asset This entry records cash received fromAccounts Receivable 3,500,000   asset clients.

 3,500,000 3,500,000  

General Journal Example

   

1/31/2013 Salaries & Wages 510,000   expense This entry records the gross payrollSocial Security Tax Payable - EE 31,000   liability for semimonthly period ending 01-31-12Medicare Tax Payable - EE 7,250   liability and taxes payable.Federal Withholding Tax Payable 61,750   liabilityState Withholding Tax Payable 10,000   liabilityNet Pay 400,000   liability

 510,000 510,000  

  

1/31/2013 Payroll Tax Expense 55,750   expense This entry records employer's portionSocial Security Tax Payable - ER 31,000   liability of payroll taxes.Medicare Tax Payable - ER 7,250   liabilityFederal Unemployment Tax Payable 4,000   liability (Total payroll taxes due for the payroll ofState Unemployment Tax Payable 13,500   liability 01-31-12 exceed $100K and will be paid

  02-01-12 but are not recorded here since55,750 55,750   this is only for the month of January.)

 1/31/2013 Net Pay 400,000   liability This entry records payment to the

Cash 400,000   asset employees. 

400,000 400,000     

1/31/2013 Provision for Income Taxes 50,000   expense This entry records an estimate of incomeAccrued Taxes 50,000   liability taxes that will be paid.

 50,000 50,000  

PROFIT AND LOSS STATEMENT

J & R Consulting, Inc.Statement of Operations

January 31, 2013

Net Revenue 5,000,000

ExpensesSalaries and Wages 1,020,000 Payroll Taxes 111,500 Travel & Entertainment 30,000 Rent 20,000 Office Supplies 5,000

 Total Salaries & Benefits 1,186,500

Net Income before Taxes 3,813,500 Provision for Income Taxes 50,000

NET INCOME (Loss) 3,763,500

ASSETS

CURRENTCash 3,561,750Accounts Receivable 5,560,000TOTAL CURRENT ASSESTS 9,121,750

PROPERTY AND EQUIPMENTFurniture, Fixtures, & Equipment 1,000,000Accumulated Depreciation (50,000)PROPERTY AND EQUIPMENT, NET 950,000

TOTAL ASSETS 10,071,750

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIESAccounts Payable 55,000Social Security Tax Payable 62,000Medicare Tax Payable 14,500Federal Withholding Tax Payable 61,750State Withholding Tax Payable 20,000Federal Unemployment Tax Payable 8,000State Unemployment Tax Payable 27,000Federal Income Taxes Payable 50,000TOTAL CURRENT LIABILITIES 298,250

STOCKHOLDER'S EQUITYCommon Stock 10,000Current Earnings (Loss) 3,763,500Retained Earnings 6,000,000TOTAL STOCKHOLDERS' EQUITY 9,773,500

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 10,071,750

J & R ConsultingBalance SheetJanuary 2013