Presented by
May Perkins, CPP

Agenda
 Purpose of Accounting
 Accounting Concepts – Accounting Cycle
 Chart of Accounts
 Balance Sheet
 Income Statement
 Payroll Specific Accounts
 Payroll Accrual
 Double Entry Accounting - Debits and Credits

Agenda
 Preparing a Journal Entry
 Accounting Elements of Payroll Transactions
 Reconciliations
 Budgeted Payroll Expenses
 Payroll and Audit Considerations
 Questions and Thoughts

Purpose of Accounting
 To identify, measure and report financial information of a company
 To provide information to different users so that they can use it to make business decisions
 The Payroll department must gather accurate and timely data regarding wages paid, taxes withheld and other deductions
 This data allows the Accounting department to prepare complete financial statements

Purpose of Accounting
Business
Transactions
Financial
Accounting
(external)
Managerial
Accounting
(internal)

Accounting Concepts
Basic Accounting Cycle
Ledger
Trial
Balance
Financial
Statements
Journal
Transaction

Accounting Cycle
 Journal (book of original entry) – a complete record of every business transaction
 Ledger – a record of business transactions kept by account and grouped by account type (e.g., assets, liabilities, etc.)
 Trial Balance – a listing of the accounts in the general ledger along with each account’s balance

Financial Statements
 Balance Sheet
 A statement of the financial position at a given point in time
 Assets, Liabilities and Equity
 Income Statement
 Operation results for a given time period at a specified date
 Revenues and expenses

Chart of Accounts
 Chart of Accounts – a listing of all the accounts and account types into which business transactions will be recorded
 Account – a record in the general ledger that is used to collect and store similar information
The Types of Accounts:
1. Asset
2. Liability
3. Equity
4. Revenue
5. Expense

Summarized Chart of Accounts
Account Type Account Number Range
Assets
Liabilities
Equity
Revenue
Expenses
10000 – 19999
20000 – 29999
30000 – 39999
40000 – 49999
50000 – 89999

Account Types – Balance Sheet
 Assets
 An item of economic value over which the company has legal control
 Liabilities
 Monies owed to external entities
 Company debts that have not yet been paid
 Owner’s Equity
 Monies owed to internal entities (the owners)
 The company’s net worth

The Accounting Equation
=
+
The company’s resources Claims against the company’s resources

Account Types – Income Statement
 Revenue
 Inflows from the delivery or manufacture of a product or from the rendering of a service
 Identifies amounts received for goods sold during the accounting period
 Expense
 The cost for goods and services consumed by the company
Net Income = Revenues - Expenses

Payroll Specific Accounts
 Assets
 Cash (payroll checking account)
 Liabilities
 Salaries/Wages Payable
 Deductions
 Employee Taxes Withheld
 Expenses
 Salaries/Wages Expense
 Employer Taxes

Accounting Terms
 General Ledger – that part of the accounting system that contains the balance sheet and income statement accounts
 Fiscal Year – an accounting year that equals 12 consecutive months (may not = a calendar year)
 Journal Entry – the entry made in a journal
 Post – to enter a business transaction into a journal or ledger

Accounting Concepts
 Cash Method
 Revenues and expense are recognized when the cash is received or paid (checkbook accounting)
 Accrual Method
 Revenues are recognized in the period they are earned and expenses are recognized in the period they are incurred
Accrual – a journal entry posted to bring the balance sheet and income statement up to date on an accrual basis

Payroll Accrual Example
Payroll pay date = 6/06/14
Pay period end date = 5/31/14
Pay period = 5/18/14 – 5/31/14
 The May portion of the 6/06/14 payroll needs to be accrued into May since the payroll system will post it to 6/06/14

Payroll Accrual Example
 The accrual entry would need to be reversed on
6/01/14 so that the 6/06/14 payroll posting will net to just the June portion
 When possible, accrual entries need to be based on actual numbers (i.e., the actual 6/06/14 payroll posting). If that is not possible, the best available information should be used.

Accounting Concepts
 Double Entry Accounting keeps the basic accounting equation balanced.
 Every business transaction involves an exchange between at least two accounts
 This exchange takes the form of debits and credits to those accounts
 For each debit, there is an equal and opposite credit to another account

Debits and Credits
 Whether a debit or credit increases or decreases an account depends on the type of account to which is being posted
Debit Balance Credit Balance
Asset
Expense
Liability
Equity
Revenue

Debits and Credits
Account
Type
Asset
Liability
Equity
Normal
Balance
Debit
Credit
Credit
What a debit does
Increases
Decreases
Decreases
What a credit does
Decreases
Increases
Increases
Revenue Credit
Expense Debit
Decreases
Increases
Increases
Decreases

Accounting Terms
 “T” Account – a visual aid used by accountants to illustrate a journal entry’s effect on general ledger accounts
Salary & Wage Expense Accrued Wages

Preparing a Journal Entry
Steps to prepare a manual journal entry:
1) Identify the accounts involved
2) Identify the account type of each account
3) Determine whether the transaction is increasing or decreasing each account
4) Apply the logic of the account type table
5) Make sure that the total $ amount of the debits equal the total $ amount of the credits

Journal Entry Example
 Journal entries are normally written in a columnar format to help distinguish the debits from the credit
Date Account Description Debit
5/31/14 Salary & Wage Expense $50,000.00
Accrued Salaries &
Wages
Accrue the May portion of the 6/06/14 payroll
Credit
$50,000.00

Journal Entry – Hourly-Paid Wages
Date Account Name
8/08/14 Wages Expense – Delivery Dept.
Wages Expense – Warehouse Dept.
FICA Tax Payable
Federal Inc. Tax Withholdings Payable
State Inc. Tax Withholdings Payable
401(k) Payable
Health Ins. Expense
Health Ins. Expense
United Way Payable
Garnishment Payable
– Delivery Dept.
– Warehouse Dept.
Debit
1,000.00
1,300.00
Credit
175.95
300.00
110.00
70.00
90.00
80.00
30.00
50.00
Net Payroll Payable 1,394.05
Record hourlypaid employee’s wages and withholdings for the workweek
7/27/14 – 8/02/14 that will be paid on 8/08/14

Journal Entry – Employer’s Portion
Date Account Name
8/08/14 FICA Expense - Delivery
FICA Expense – Warehouse
Unemployment Tax Expense – Warehouse
Worker’s Compensation Ins. Expense
Holiday, Vac. Sick Days Exp. – Delivery
Holiday, Vac. Sick Days Exp.
– Warehouse
401(k) Expense – Delivery
401(k) Expense – Warehouse
FICA Tax Payable
Unemployment Tax Payable
Worker’s Compensation Ins. Payable
Holiday, Vacation, Sick Days Payable
Debit
76.50
99.45
4.00
46.00
100.00
130.00
10.00
25.00
401(k) Payable
Record the company’s payroll related expenses for the 8/08/14 payroll
Credit
175.95
4.00
46.00
230.00
35.00

Journal Entry – Distribution &
Remittance
Date Account Name
8/08/14 Net Payroll Payable
Cash
Record the distribution of the hourly-paid payroll of 8/08/14
Debit
1,394.05
Credit
1,394.05
Date Account Name
8/11/14 FICA Tax Payable
Federal Inc. Tax Withholdings Payable
State Inc. Tax Withholdings Payable
Debit
351.90
300.00
110.00
401(k) Payable
Cash
105.00
Record the remittance of the 8/08/14 hourly-paid payroll withholdings
Credit
866.90

Accounting Elements of Payroll
Transactions
 Expenses
 Wages paid
 Benefits paid
 Employer taxes
 Employer deductions (offsets to expense)

Accounting Elements of Payroll Transactions
 Assets
 Net payroll check amount
 Payment of employee tax withholdings
 Payment of employee deductions
 Payment of employer taxes
 Liabilities
 Tax withholdings
 Employee deductions (paid to 3 rd parties)

Reconciliations
 Should be performed at month-end or as soon as possible
 Confirm that all entries have been posted
 Confirm that payments are on schedule
 Verify that expenses are accurately booked and balance with payroll
 Verify that liability accounts are accurate

Budgeted Payroll Expenses
 Salary
 Regular
 Overtime
 Vacation
 Bonuses
 Employer Taxes
 Employer Paid Benefits

Payroll Expenses to Budget
Reasons actual to budget variances need to be identified
 Potential errors can be discovered
 Future expenditures can be adjusted to meet company objectives

Payroll Expenses to Budget
 Reasons you might not tie to budget
 Headcount
 Vacancy rate
 Working more hours than budgeted
 Error in a general ledger posting
 Error in the budget

Payroll and Audit Considerations
 Separation of duties
 Check stock security
 Check signers
 Reconciliation approvals
 Ghost payrolls / Buddy punching
 Checks and balances
 System audits

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