Advanced Accounting
Chapter 3
Calculating and Recording Departmental Payroll Data
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Salary: money paid for employee services
Payroll records are maintained for the business and for each employee
Pay Period: the period covered by a salary payment
Payroll: the total amount earned by all employees for a pay period
Payroll taxes: taxes based on the payroll of a business
Form W-2: yearly report provided to the employee by the employer by
January 31 of the following year that summarizes total salary earned and
total taxes withheld.
Business must keep records of each employee’s earnings, amounts
withheld, and net amount paid.
Payroll records must show the total amount of payroll taxes that a
business must pay.
Section 1: Employee Benefits and Earnings
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Employee Benefits: payments to employees for nonworking hours and
to insurance and retirement programs,
Common benefits: vacation, sick days, personal leave, employer paid
health insurance, retirement funds
Records must show each employee’s benefits earned, used and available
A two-week pay period is called a biweekly pay period
Personal leave is to be used for required time away from work for
personal reasons
Employee benefits, financial and non-financial, add value to a job
Detailed info about each employee’s benefits is maintained in a benefits
record – summarizes benefits used, earned, and available at the end of
each pay period
Accumulated benefits available at the end of one calendar year are
brought forward and recorded on the next year’s benefits records
Prepare a benefits record
o Done at start of year
o Write employee info at the top
o Enter accumulated hours from last pay period in the Begin. Hours
Avail. Columns
o Each payroll period
o Enter Hours Earned for each benefit
o Record Hours Used for each benefit
o Compute the accumulated hours at the end of each pay period
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Carry forward accumulated hours available at end of one pay
period as the beginning hours available for the next pay period
A benefits authorization form is used to record and authorize employee
benefits
Usually a dept. supervisor or store manager records employee benefits
hours used on the benefits authorization form as they are used during
each pay period
At the end of the pay period, completed benefits authorization forms are
returned to the accounting dept.
Prepare a Benefits Authorization Form
• Done by Accounting Dept.
• Enter employee info
• Record # of hours available at the beginning of the pay period
• Done by Dept. or Store Manager
• Write Vacation time used
• Enter Sick leave used
• Write Personal leave used
• Record the total hours used for each benefit during that pay period
• Sign and date the form and return to accounting dept.
For each benefits, beginning hours available plus hours earned minus
hours used equals accumulated hours available
Employee pay rates are stated as rate per hour, day, week, month, or
year
Pay rate can also by based on pieces produced per unit of time
Generally, all time worked in excess of 8 hours in any one day is
considered overtime and paid 1 times the regular rate of pay
Prepare a Payroll Time card – see page 67 for steps
Basic salary may be supplemented by commissions, cost-of-living
adjustments, profit sharing or a bonus
Prepare a Commission Record
• Record Employee info
• Calculate the commission – See page 68 for specific steps
Section 2: Completing Payroll Records
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Businesses are required by law to withhold federal income tax, social
security tax, and Medicare tax
FICA – Federal Insurance Contributions Act – provides for a federal
system of old-age, survivors, disability, and hospital insurance
Total earnings, marital status, and number of withholding allowances
determine amt. withheld
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Withholding Allowance: a deduction from total earnings for each
person legally supported by a taxpayer
Social Security tax is calculated on employee earnings up to a maximum
paid in a calendar year
Tax Base: the maximum amount of earnings on which a tax is calculated
Congress sets the tax base and the tax rates for social security
Medicare does not have a tax base so is calculated on total employee
earnings
Sometimes businesses will have to deduct for state and local taxes, health
insurance, life insurance, pension plans, and savings deposits
When an employee’s earnings exceed the tax base, no more social
security tax is deducted
Payroll Register: summarizes the payroll for one pay period and shows
total earnings, amounts withheld, and net pay for all employees
Total earnings * social security tax rate = social security tax deduction
Total earnings * Medicare tax rate = Medicare Tax Deduction
Total Earnings (column 9) – Total Deductions (18) = Net Pay (19)
Individual
Total Earnings (9) – Total Deductions (18) = Net Pay (19) Company
For employees earning commissions, the amount of the commission is
entered in column 8 of the payroll register – info taken from employee’s
commission record
Commissions from the commission records are entered in the Commission
Earnings column
Regular earnings and commission earnings are added to determine total
earnings for the pay period
Time cards and commission records show the department to be charges
for each employee’s total earnings
The Ck. No. column of the payroll register is not completed until the check
has been written
Businesses have to send quarterly reports to fed and state gov’ts showing
employee taxable earnings and withholdings
Employee Earnings Record: a business form used to record details
affecting payments made to an employee.
An employee’s total earnings and deductions for each pay period are
summarized on one line of the employee earnings record
Accumulated earnings are often referred to as year-to-date earnings
Accumulated earnings are needed because some taxes are not collected
after a certain amount – unemployment on first $7000 and also Social
Security
Section 3: Journalizing and Paying Payroll and Payroll Taxes
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After a payroll register has been completed, a check is written on the
general checking account to Payroll and then deposited into the special
payroll checking account. Then the payroll checks are written on this
account – will have a zero balance after all checks are cashed
Automatic Check Deposit: depositing payroll checks directly to an
employee’s checking or savings account in a specific bank – check is sent
directly to the bank
Electronic Funds Transfer: employers electronically transfer payroll
amounts from their account to the employee’s account. Eliminates the
needs for payroll checks – employees receive a statement of earnings and
deductions
All payroll taxes are reported as separate items in accounting records and
financial statements
4 Types of Payroll Taxes
• Employer social security tax - 6.5%
• Medicare tax - 1.5%
• Federal unemployment tax - .8% on first $7000 for each employee
• State unemployment tax – 5.4% on first $7000 for each employee
Source document for journalizing a payroll payment is the check written
for the net amount
Journalize a payment of payroll – see page 80
Employer payroll taxes expense is based on a percentage of employee
earnings
Journalize employer payroll taxes – see page 81
Employers have to periodically make payments to the state and federal
governments of the taxes they have withheld.
Depends on the amount collected how often have to deposit and what
form have to use
Journalizing Payments of Taxes – see pages 82 and 83