CHAPTER 6 – PAYROLL ACCOUNTING AND OTHER SELECTED TRANSACTIONS
Payroll – represents compensation paid to employees and workers.
Salaries – compensation paid to employees based on a monthly or semi-monthly rate
Wages – compensation paid to workers based on a daily, hourly or piece rate
Firms are required by the law to act as the government’s collection agent requiring them to file and pay taxes and
premium contributions for and in behalf of their employees and workers.
Bureau of Internal Revenue – government agency tasked to collect different taxes from all earners
Other Government Agencies Where Contributions Are Required to be Paid:
1. Social Security System (SSS)
2. Philippine Health Insurance Corporation (PhilHealth)
3. Home Development Mutual Fund (HDMF) or Pag-ibig
Payroll sheet – a tabular form prepared by the Accounting Department to determine take home pay of employees and
workers.
– consists of five columns listing the following: 1) Employee’s or worker’s name 2) Gross pay representing
compensation earned for a certain period of time 3) Deductions for payroll liabilities 4) Net pay or take home
pay 5) Signature signifying receipt of compensation by employee/worker
Net pay or take home pay – gross pay minus payroll liabilities
Deductions from Gross Pay:
1. Income Tax – the amount withheld from the compensation that is based on the taxable income, it is computed using a
tax table and a list of exemptions provided by the BIR.
2. Social Security – monthly contribution to the SSS as a member who enjoys benefits such as education loan, salary loan,
disability benefit, maternity benefit, calamity loan, pension and retirement pay. The current SS contribution rate is 12%
of the monthly salary credit not exceeding P16,000 and this being shared by the employer (8%) and the employee (4%)
3. Health Insurance – monthly contribution to the PhilHealth as a member who enjoys sickness and hospitalization benefits.
Monthly contribution is 2.75% of the monthly basic salary with floor of P10,000 and ceiling of P40,000. PhilHealth monthly
premium is to be equally shared by the employee and employer computed as follows:
2.75%
Premium
Employer Share
Monthly Salary x Monthly
Personal Share
P10,000.00 and below Fixed at P275 P137.5 P137.5
P10,000. 01 to P275.02 P137.51 P137.51
P39,999.99 P1,099.99 P549.99 P549.99
P40,000.00 and above Fixed at P1,100 P550.00 P550.00
4. Home Development Mutual Fund – RA 9679 also known as the HDMF Law 2009 requires mandatory coverage of all
employees. Effective January 1, 2018, the contributions are computed as follows:
Monthly
Compensation
Employer
contribute
s
Employee
contribute
s
P1,500 or less 1% 2%
over P1,500 to P5,000 2% 2%
5. Union Dues – contribution if an employee or worker is a member of a labor union and the employer is requested to
make deductions from the pay of the employee or worker.
6. Advances – cash advance drawn by the employee or worker due to emergency or necessity
Page 1 of 10
above
Schedule of Contributions – SOCIAL SECURITY SYSTEM
RANGE OF TAXABLE
INCOME TAX DUE = a + (b x c)
BASIC
ADDITIONAL
RATE (b)
OVER NOT OVER AMOUNT (a)
-
OF EXCESS OVER
(c)
250,000.00
250,000.00
8,000,000.00
400,000.00
800,000.00
2,000,000.00
Income Tax Table
400,000.00
800,000.00
2,000,000.00
8,000,000.00
- 20%
30,000.00 25%
130,000.00 30%
490,000.00 32%
2,410,000.00 35%
250,000.00
400,000.00
800,000.00
2,000,000.00
8,000,000.00
Page 2 of 10
Payroll Sheet Illustrated
To illustrate, assume that the following are employees of Speedy Delivery Service owned and operated by Apple Joy:
Employees Position Monthly
Danilo Cruz Driver/Messenger P12,400
Enrica Fajardo Delivery Clerk 14,600
Stephanie Perez Delivery Manager 23,000
Danilo Cruz:
Monthly salary credit P12,500.00
Total SS Contribution 1,500.00
SS Employer share 1,000.00
SS Employee share 500.00 / 2 = 250 (semi-monthly contribution)
Total PhilHealth Contribution 341.00 (P12,400 x 2.75%)
PhilHealth Employer share 170.50
PhilHealth Employee share 170.50 / 2 = 85.25 (semi-monthly contribution)
HDMF Contribution 200.00
HDMF Employer share 100.00 / 2 = 50.00 (semi-monthly contribution)
HDMF Employee share 100.00
Enrica Fajardo:
Monthly salary credit P14,500.00
Total SS Contribution 1,740.00
SS Employer share 1,160.00
SS Employee share 580.00 / 2 = 290 (semi-monthly contribution)
Total PhilHealth Contribution 401.50 (P14,600 x 2.75%)
PhilHealth Employer share 200.75
PhilHealth Employee share 200.75 / 2 = 100.38 (semi-monthly contribution)
HDMF Contribution 200.00
HDMF Employer share 100.00 / 2 = 50.00 (semi-monthly contribution)
HDMF Employee share 100.00
Stephanie Perez:
Monthly salary credit P16,000.00
Total SS Contribution 1,920.00
SS Employer share 1,280.00
SS Employee share 640.00 / 2 = 320 (semi-monthly contribution)
Total PhilHealth Contribution 632.50 (P23,000 x 2.75%)
PhilHealth Employer share 316.25
PhilHealth Employee share 316.25 / 2 = 158.13 (semi-monthly contribution)
HDMF Contribution 200.00
HDMF Employer share 100.00 / 2 = 50.00 (semi-monthly contribution)
HDMF Employee share 100.00
Taxable Net Income
13th month pay, holiday pay, overtime pay, night shift differential pay, hazard pay and other benefits as enumerated by law are
tax exempt.
Monthly taxable earnings multiply by 12 months will give the annual taxable income.
To arrive at the taxable income, the above contributions should be deducted from gross salary.
Page 3 of 10
Monthly Semi-monthly
Gross Pay ₱ 12,400.00 ₱ 6,200.00
Danilo Cruz Less: SS ₱ 500.00 ₱ 250.00 PhilHealth 170.50 85.25
Pag-ibig 100.00 770.50 50.00 385.25
Net taxable income ₱ 11,629.50 ₱ 5,814.75
Gross Pay ₱ 14,600.00 ₱ 7,300.00
Enrica Fajardo Less: SS ₱ 580.00 ₱ 290.00 PhilHealth 200.75 100.38
Pag-ibig 100.00 880.75 50.00 440.38
Net taxable income ₱ 13,719.25 ₱ 6,859.62
Gross Pay ₱ 23,000.00 ₱ 11,500.00
Stephanie Perez Less: SS ₱ 640.00 ₱ 320.00 PhilHealth 316.25 158.13
Pag-ibig 100.00 1,056.25 50.00 528.13
Net taxable income ₱ 21,943.75 ₱ 10,971.87
The annual taxable income of Danilo Cruz and Enrica Fajardo are P139,554 and P164,631, respectively. Since these are below
P250,000, these are tax exempt. Since Stephanie’s annual taxable earnings is P263,325 which is higher than P250,000, she is
liable to pay tax on the excess of P13,325 x 20% = P2,665 or 222.08 monthly or P111.04 semi-monthly. Minimum wage
earners shall be exempt from the payment of income tax.
PAYROLL SHEET
WE HEREBY ACKNOWLEDGE receipt of the sum specified opposite our respective names as full compensation for our
services rendered for the period July 1 to 15, 2018.
Driver/Me
Total
Withholdin g Tax
Deductions Net Pay Signature
Social
Names Position Gross Pay
Security Philhealth HDMF
Danilo Cruz Enrica
Fajardo
Stephanie Perez
ssenger ₱ 6,200.00 ₱ - ₱ 250.00 ₱ 85.25 ₱ 50.00 ₱ 385.25 ₱
5,814.75 Delivery
Clerk 7,300.00 - 290.00 100.38 ₱ 50.00 440.38 6,859.62
Delivery
Manager 11,500.00 111.04 320.00 158.13 ₱ 50.00 639.17
10,860.83 ₱ 25,000.00 ₱ 111.04 ₱ 860.00 ₱ 343.76 ₱ 150.00
₱ 1,464.80 ₱ 23,535.20
Analysis Date Particulars F Debit Credit
Gross pay represents services of employees debited to
decrease owner's equity. Credited to increase liabilities for
the deductions made against gross pay and credit to
decrease assets in cash.
July Salary Expense 25,000.00 15 Withholding Taxes
Payable 111.04 SS Premiums Payable 860.00 Philhealth
Premiums Payable 343.76 HDMF Premiums Payable 150.00
Cash in Bank 23,535.20
Page 4 of 10
Entry and analysis on July 20 assuming Enrica got a cash advance on this date:
Jul 20 Advances to Employees 500.00 Cash on Hand
Debit asset to increase receivable in the form of service 500.00 Salary advanced to Enrica
and credit to decrease cash.
Analysis Date Particulars F Debit Credit July Salary Expense 25,000.00
31 Withholding Taxes Payable 111.04
Same analysis as the first entry. Advances is an asset
representing service paid in advance which is now
Employer’s Contributions
credited to decrease assets as it is applied against the
SS Premiums Payable 860.00 Philhealth Premiums Payable
gross pay.
343.76 HDMF Premiums Payable 150.00 Advances to
Employees 500.00 Cash in Bank 23,035.20
EC or employees’ compensation insurance – paid only by the employer, a requirement contribution mandated by law.
A schedule of total employer’s contributions, based on the given illustration, will appear thus:
Names SS Philhealth EC HDMF Total Danilo Cruz ₱ 1,000.00 ₱ 170.50 ₱ 10.00 ₱ 100.00 ₱ 1,280.50 Enrica Fajardo
1,160.00 201.00 10.00 100.00 1,470.75 Stephanie
Perez 1,280.00 316.00 30.00 100.00 1,726.25 ₱ 3,440.00 ₱ 687.50 ₱ 50.00 ₱ 300.00 ₱ 4,477.50
Decrease in owner's equity
HDMF Premiums Expense
contribution expense of the business,
and increase in liabilities due to the SS Premiums Payable
different agencies.
PhilHealth Premiums Payable EC
July SS Premiums Expense
Premiums Payable
31 PhilHealth Premiums Expense EC
Premiums Expense
HDMF Premiums Payable
Analysis Date Particulars F Debit Credit
3,440.00
687.50
50.00
300.00
3,440.00
687.50
50.00
300.00
Page 5 of 10
Assume remittances were made on August 10 for: Tax, SS, PhilHealth, and Pag-ibig.
Analysis Date Particulars
Debit Credit
Decrease in
EC Premiums Payable 50.00
liabilities and
Cash in Bank 5,210.00 Paid for SSS contributions.
decrease in assets. Note that except for tax, the
other
PhilHealth Premiums Payable 1,375.00
liabilities represent both employees' and employer's Cash in Bank 1,375.00 Paid to PhilHealth premiums.
share.
Aug. 10 Withholding Taxes Payable 222.08 Cash in HDMF Premiums Payable 600.00
Bank 222.08 Paid withholding taxes to the BIR.
Cash in Bank 600.00 Paid to HDMF
SS Premiums Payable 5,160.00
Internal Control for Payroll
Internal control is a procedure intended to protect the assets of the business and to ensure compliance not only with company
policies but also contracts and government regulations.
Internal control procedures being implemented by business entities for payroll:
a) A record is maintained by the Human Resource Department for each employee or worker. Pertinent information is always
updated for evaluation and promotion purposes.
b) Time in and out is better controlled by means of a computerized timekeeping machine using either employee’s
thumbmark or identification card.
c) The payroll sheet is also a control device which is reviewed by an authorized personnel and signed as approved by the
Finance Officer before payment can be made.
d) Payments should be made by check rather than cash or should be withdrawn through the ATM machine. Cash
on Hand and in Bank
Current or checking account – used by a business when it pays using a bank check
Savings account – wherein a business deposits all extra cash to earn interest
Three account titles for cash: Cash in Bank-Current, Cash in Bank-Savings and Cash on Hand.
Usually, it is the treasurer who keeps the cash on hand in the vault or safe deposit box within the company premises. Cash is
not always in the form of paper money and coins. Negotiable instruments like a bank check, government’s treasury
warrant and the postal money order are accepted also as medium of exchange and considered as cash.
Illustration
June 1 For service rendered, the firm received P50,000 cash and a check for P100,000.
June 2 Opened a current account with PNB and deposited the check received.
July 1 Issued a check for P15,000 in payment of an account.
July 15 Paid the salary of the secretary, P5,000 in cash.
Page 6 of 10
Date Particulars Debit Credit
Jun
1 Cash on Hand 150,000
Service Income 150,000
Received cash for services rendered.
2 Cash in Bank 100,000
Cash on Hand 100,000
Cash deposits made.
Jul
1 Accounts Payable 15,000
Cash in Bank 15,000
Payment of account.
15 Salary Expense 5,000
Cash on Hand 5,000
Payment for salary.
Investment of Owner
a) Cash
b) Property – must be recorded at its market value; if with attached liability to be assumed by the business, the liability will
be recognized in the books of the business.
c) An already existing business
Illustrations
Marvin Aquino on May 8 invested land with a previous cost of P300,000 and a current market value P500,000. The land was
mortgaged to Metrobank for P200,000 but P150,000 is still due. This liability will be assumed by the business.
Date Particulars Debit Credit
May 8 Land 500,000
Mortgage Payable 150,000
Aquino, Capital 350,000
Owner's investment net of mortgage.
Assume that Ferdie Versoza has a business called Ferdie’s store which Mark Roces wants to buy. On May 12, Ferdie Versoza
offered to sell it to for P208,000 after agreeing to decrease the value of the merchandise inventory and the office furniture and
equipment. The assets and liabilities of the store are listed below at book values and current market values on the investment
date:
Value
Reported Cost
Per Books
Current Market
Accounts Receivable ₱ 100,000.00 ₱ 100,000.00 Merchandise
Inventory 240,000.00 138,000.00 Office Furniture & Equipment
250,000.00 120,000.00 Total ₱ 590,000.00 ₱ 358,000.00 Less:
Accounts Payable 150,000.00 150,000.00 Net Assets ₱ 440,000.00 ₱
208,000.00
Page 7 of 10
Date Particulars Debit Credit
May 12 Accounts Receivable 100,000
Merchandise Inventory 138,000
Office Furniture & Equipment 120,000
Accounts Payable 150,000
Roces, Capital 208,000
To record owner's investments.
Drawings of Owner
- If in the form of property, it should be recorded at its original cost or at book value (cost less accumulated
depreciation).
Illustration
On May 12, the owner Karen Gil transferred to her house a computer unit owned and being used in the business with a cost of
P40,000, accumulated depreciation of P6,000 and a current market value of P25,000.
Date Particulars Debit Credit May 12 Gil, Drawing 34,000 Accumulated Depreciation 6,000
Equipment 40,000 To record the computer withdrawn by the owner.
Acquisition Cost of Properties
Acquired property, plant and equipment should be recorded at its cost. Aside from the purchase price, the following costs must
also be considered:
1. Incidental expenses incurred in transporting the asset to the place of the buyer such as taxes, import duties, storage,
insurance while in transit and freight. These costs form part of the asset cost as the acquisition of the asset would not
be possible without these incidental expenses. These cash outlays are called capital expenditures.
2. Additional expenditures needed to set up and test the property to make it ready for use are also capitalized such as
installation cost, expenses for the test runs, salary of hired expert, if needed.
Trade discounts, rebates, returns and allowances are deducted from the purchase price of the acquired property. A rebate
is a discount granted for paying an account promptly while an allowance is a reduction on the price given to the buyer to cover
up for defects or spoilage on the asset purchased without returning the asset.
Illustration
Assume that a machine was purchased for P150,000 less a 5% trade discount. Taxes of P7,250, freight of P5,000 and insurance
of P15,000 were also incurred. A check was issued for all the payments made. Upon receipt of the machine additional cost was
incurred for assembly, installation and test runs all amounting to P20,000 which was paid in cash.
Date Particulars Debit Credit Machinery 169,750
Cash in Bank 169,750 To record the purchase of machine plus incidental
expenses.
Machinery 20,000
Cash on Hand 20,000 Cash paid for assembly, installation and test run.
Page 8 of 10
Return of Asset Purchased
If the asset, because of a defect or not the right specification, is returned, the effects are: 1) value of the asset will decrease 2)
cash will increase if there is a refund or liability will decrease if the asset was purchased on credit.
June 1 Bought tables and chairs from Alpha Furniture Store and paid cash, P15,000.
4 A defective table was returned and a cash refund for P2,500 was received.
7 Bought an Acer computer on account, P70,500.
8 Complained of a slight defect in the Acer computer purchased and was given a price adjustment of P1,000.
Date Particulars Debit Credit June
1 Furniture & Fixtures 15,000
Cash on Hand 15,000 Cash purchase of furniture.
4 Cash on Hand 2,500 Furniture & Fixtures 2,500 Cash refund for returns made.
7 Equipment 70,500 Accounts Payable 70,500 Equipment bought on account.
8 Accounts Payable 1,000 Equipment 1,000 Allowance received for defect in purchase made.
Sale of Properties
Rules that should be observed:
1. Close the asset at its cost price.
2. Close the related accumulated depreciation.
3. Compare the cash proceeds against the book value of the asset sold to determine the gain or loss from the sale.
Illustration
Assume the following transactions:
May 1, 2017 Bought an equipment for cash of P15,000
July 1, 2018 The equipment had to be replaced and so it was sold for cash P6,500. On this date, the accumulated depreciation
was P7,000.
July 5, 2018 A similar type of equipment but with a larger capacity to produce was acquired. A check was issued for P50,000 for
the purchase price plus P5,000 incidental expenses for freight, insurance and taxes.
Page 9 of 10
Date Particulars Debit Credit 2017
Mar 1 Equipment 15,000 Cash on Hand 15,000
2018
Jul 1 Cash on Hand 6,500 Accumulated Depreciation 7,000
Loss on Sale of Equipment 1,500
Equipment 15,000
'5 Equipment 55,000 Cash in Bank 55,000
Page 10 of 10