Unit 7:Analyzing & Journalizing Payroll

Transactions

Chapter 6

Accounting for Payroll Transactions

• Payroll requires entering data (in order) in the following places: – Payroll Register – Employee Earnings Records – General Journal

• Journalize gross wages and withholdings • Journalize payroll taxes and worker’s

compensation • Journalize period-end accruals

– Post to General Ledger

Payroll Register

• Payroll register lists employees in rows and shows following information for each – Gross wages – Taxes withheld and other deductions – Net pay

• Payroll register shows (in columns) – Total of gross wages, each deduction and net

• When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number

*Use payroll register to journalize*

Employee’s Earnings Record

• Employee Earnings Record used to track cumulative totals (wages and taxes)

• Enter row of data each pay period – Important because different wage caps for

FUTA, SUTA and OASDI taxes – Need to track cumulative totals in order to

issue W-2s and do quarterly SUTA reports – Prepare payroll analyses- various internal and

external reports

Recording Gross Payroll and Withholdings

• Next screens shows how to enter information into accounting system

• Gross payroll is debited

• Each withholding tax is liability

• Each withholding tax is a liability – Advanced EIC reduces FIT payable

• All other payroll deductions are liabilities as well

Other Deductions from Payroll

• Any deduction that the ER makes from EE paycheck goes into a liability account (because they owe it to someone) such as: – Group life insurance premiums – Health insurance premiums – Purchase government savings bonds – Union dues – Deferred compensation (contributions to pensions

plan) – Child support/other garnishments

Garnishments

• A creditor can, through the courts, seek repayment of his/her money by garnishment – Employer is required to comply with garnishment

order

• ER must withhold funds from EE’s paycheck and submit it to appropriate authorities – Child support (see next slide) – Creditor garnishments limited depending upon state – Administrative wage and student loan garnishments

to 15% of disposable earnings

Child Support

• Family Support Act of 1988 required immediate withholding for child-support payments – ER can withhold a state mandated fee for

administration – Some states now require electronic submission of

garnished child support payments

• Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high 50-65% of disposable earnings

Pension & Retirement Contributions

• Pension plans that involve employee contributions result in liability for the employer

• Recorded in payroll entry

• Pension Protection Act of 2006 gives company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

Methods of Paying Wages/Salaries

• Cash/Check • Electronic payment methods

– EFTS (Electronic funds transfer system)• Distribute electronic pay stub

– Pay Cards • Cards that allow ER to deposit payroll into prepaid card; card

then utilize like debit or credit card • As of 2006, 30 states allow their use

• Final Pay – Many states set time limit between termination and

final wage pay out – CA and MI require immediate payment if EE is fired

Journal Entries to Record Payroll

• Journal Entry #1 - Record gross wages, withholdings and net pay

• Journal Entry #2 - Record Employer payroll tax expense

These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

Journal Entry #1

Gross OASD HI FIT SIT Insurance Net

1000.00 62.00 14.50 83.00 21.00 103.00 716.00

845.00 52.39 12.25 91.00 29.00 88.00 572.36

$1845.00 $114.39 $26.75 $174.00 $50.00 $191.00 $1,288.86

Journal Entry #1

• Debit Wage Expense for gross payroll • Credit each withholding account- they are all liabilities • Credit cash (or wages payable) for net payroll

Journal Entry #1Wage Expense 1845.00

OASDI Payable 114.39

HI Payable 26.75FIT Payable 174.00SIT Payable 50.00 Insurance Payable 191.00Cash

1,288.86

Journal Entry #2

Payroll for Period Ended 5/15/2008

EE Gross FUTA Wages SUTA Wages OASDI Wages HI Wages

A 1,000.00 ---- 800.00 1,000.00 1,000.00

B 845.00 215.00 845.00 845.00 845.00

Total $1845.00 $215.00 $1645.00 $1845.00 $1845.00

Tax $1.72 $46.06 $114.39 $26.75

Journal Entry #2

• Debit Payroll Tax Expense for total of all payroll taxes that ER pays

• Credit each account- they are all liabilities Calculate all employer taxes utilizing wage bases and

percentages

Journal Entry #2 Payroll Tax expense 188.92

FUTA Payable 1.72SUTA Payable 46.06OASDI Payable 114.89HI Payable 26.75

Recording Deposit of Payroll Taxes

• Look in general ledger, in each applicable liability account, for amount due

• Deposit 941 Taxes– Note: Don’t forget to double OASDI Payable 228.78

OASDI and HI HI Payable 53.50FIT Payable 174.00

Cash 456.28

• Deposit State income taxSit Payable 50.00

Cash 50.00

• Deposit SUTA SUTA Payable

46.06Cash

46.06

Workers’ Compensation

• Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities – Laws differ by state – Premium are calculated based on employment

classification– per $100 of payroll – Pay premium in advance based on projected wages – Then, at year-end, report actual wages and pay

additional premium • Or may receive credit toward next year

Journal Entry for Workers Compensation

• Debit Work Comp. Insurance Expense for premium paid

• Credit Cash (if paying) or insurance Payable (if accruing)

Payroll for Period Ended 5/15/2008 Per $100 of payroll

EE Gross Position Workers Comp. Rate Premium A 1000.00 Fabricator 9.08 90.80B 845.00 Administrator 1.85 8.87 Total $1845.00 $99.67

Journal Entry Workers’ Comp. Insurance Expense 99.67

Cash or Insurance Payable 99.67

Journalize Period-End Accruals

• Accrued wages should be recorded for wages earned by workers but not yet paid;

• To record unpaid wages Wage Expense 1589.96

Wages Payable 1589.96

• Accrued vacation pay should be recorded for amount of vacation pay owed employees – Many ER’s now merging sick time and vacation time

Vacation Benefits Expense 520.00

Vacation Benefits Payable 520.00

Summary of Accounts Used

Account Title Normal Balance Type of Account

FIT Payable Credit Liability

SIT Payable Credit Liability

Insurance Payable Credit Liability

Union Dues Payable

Credit Liability

Wages Payable Credit Liability

Vacation Benefits Payable

Credit Liability

Summary of Accounts Used

Account Title Normal Balance Types of AccountWage expense Debit Expense

Payroll Tax Expense Debit Expense

Workers’ Compensation Insurance Expense

Debit Expense

Vacation Expense Debit Expense

OASDI Payable Credit Liability

HI Payable Credit Liability

FUTA Payable Credit Liability

SUTA Payable Credit Liability