Payroll
Accounting
Section 11 Payroll Source 2014
Presented by:
Veneia M. Dunbar, CPA, CPP
AVP-Payroll Manager
Nuveen Investments, LLC
AGENDA
What is Accounting and why does Payroll care?
 Accounting Principles
 Accounting Classifications
 Account Balances
 Journal Entries
 Recording Payroll Transactions
 Accounting Periods
 Accruals and Reversals
 Balancing and Reconciling Payroll Accounts
 Financial Statements and Audits
 Internal Controls
 Controlling Check Fraud

2
What is Accounting and why does Payroll care?
 Accounting is the basic language of business.
 In a company, payroll is the sum of all financial records of salaries for an
employee’s wages, bonuses and deductions. In accounting, payroll refers
to the amount paid to employees for services they provided during a
certain period of time. Payroll plays a major role in a company for
several reasons.
 Payroll Accounting is the measurement & communication process used
to report payroll transaction activity of organizations.
 Identifying, measuring & communicating payroll related financial
information = informed judgments & decisions made by users of the
financial information.
3
Generally Accepted Accounting Principles (GAAP)
K6302 , K7105
•
Since 1974, the Financial Accounting Standards Board (FASB)
has set the standards for recording financial transactions in
organizations.
•
In the public sector, The Government Accounting Standards
Board (GASB) sets the standards for recording financial
transactions.
•
GAAP are a combination of authoritative standards, concepts
and principles (set by the boards above).
•
GAAP are the commonly accepted ways of recording and
reporting accounting information.
4
Generally Accepted Accounting Principles (GAAP)
K6302 , K7105
•
Business entity concept – Each organization operates separately and
personal transactions of EE’s, managers and owners are kept separate
from the business entity.
•
Continuing concern concept – Assumes the business entity will
continue to operate indefinitely and assets are valued at cost.
•
Time period concept – Based on the type of business, each
organization must determine its own yearly accounting period (fiscal
year or calendar year).
•
Cost principle – Goods and services are recorded at cost. Over time the
assets are valued at cost less any depreciation. This is in accordance
with the continuing concern concept and the objectivity principle.
5
Generally Accepted Accounting Principles (GAAP)
K6302, K7105
•
Objectivity principle – Recorded transactions are not to be based on personal
opinions or emotions in order to ensure reliability of accounting information.
•
Matching principle – Allows comparison between different organization’s
financial statements because expenses and revenue are recorded in the
accounting period where expense is incurred or revenue is earned.
•
Realization principle – Governs the recording of revenue. Revenue is
recognized (or realized) and reported when it is earned. Revenue is earned in
the accounting period when the goods have been transferred or the services
provided.
•
Consistency principle – Transactions must be recorded in a consistent
manner based on the accounting method (cash or accrual), principle or period.
6
Account Classifications
K7201
•
Double Entry Accounting System – One account is increased, another
is decreased. Allows basic accounting equations to remain in balance.
•
Balance Sheet
 Assets – Liabilities = Equity
•
Income Statement and Statement of Retained Earnings

Revenue – Expenses = Net Income

Net Income – Income Distributed + Contributed Capital = Equity
7
Account Classifications
Five Types of Accounts
K7201
All Little Cats Reach Exhaustion


Assets (generally affected by payroll entries) – Something that provides an economic benefit or value to the
company over a period of time. Three types of assets: Current; Tangible/Property, Plant and
Equipment; and Intangible/Deferred. i.e. CASH and Inventory are current assets.
Liabilities (generally affected by payroll entries) – Accounts that show the debts of the company which must be
paid in the future. Two categories of liabilities: Current and Long-Term i.e. Wages Payable; Taxes
Payable (current liabilities, due within the fiscal year).

Capital/Equity – Accounts that represent the owner’s investment in the company (i.e. its net
worth; revenue – expenses – amount distributed to owners = equity). Equity accounts are
normally divided into two components: Contributed Capital and Retained Earnings.

Revenue – Accounts that show amounts received for goods sold and services rendered during the
accounting period.

Expenses (generally affected by payroll entries) – Accounts that show the company’s cost for goods and services
consumed during the accounting period. i.e. Payroll Salary Expense; Employer Benefits Expense.
8
Account Balances
K7202, K7304
•
Normal Account Balances for each type of account
 Debit/Credit Account Balance
“T-Accounts” (when in doubt “T” it out).
 Accounting Transactions are recorded by debit (DR) or credit (CR) entries
on either side of a symbolic diagram of an account, it looks like a T.
9
Account Balances
K7202, K7304
•
The Normal Balance of an account dictates if a debit/credit entry increases or
decreases the account.
10
Account Balances
K7202, K7304
11
Journal Entry Process (record/post)
K7200, K7303
•
The Journal Entry is a record of the transactions of a company during the accounting period
(typically monthly). For each transaction, the journal entry shows both the debits and
credits to be entered in specific accounts and a description of the transaction.
•
Most Payroll Journal Entries are considered “Compound Entries” meaning they have more
than one debit or credit.
•
Posting Journal Entries – Posting a journal entry merely means that a transaction having
financial impact to an organization is being recorded to the organization’s subsidiary or
general ledger.
•
A subsidiary ledger is basically a “subset” of the general ledger. The general ledger is an
organization’s book of final entry, so entries are posted to the general ledger after they are
posted to the subsidiary ledger.
•
The subsidiary ledger breaks out the general ledger into sub groups/accounts that share
common information. Example, the Payroll register may be considered a subsidiary ledger
as well as Accounts Payable or Accounts Receivable.
12
Journal Entry Process (record/post)
K7303
•
A transaction is posted/recorded as a debit or credit in the journal entry
based on the type of account it is.
•
The debit or credit increases or decreases the account based on the
account’s normal balance.
Example: A Payroll Checking Account is considered an Asset Account
(CASH) so the normal balance is a DEBIT balance. Therefore, any journal
entry recording a “debit” to the payroll checking account is increasing the
balance of the account (i.e. depositing cash; direct deposit return). Then,
the exact opposite is true, any journal entry recording a “credit” to the
payroll checking account is decreasing the balance of the account (i.e.
writing a check on the account; transmitting a direct deposit).
13
Journal Entry Process/Recording Payroll Transactions
K7301, K7302, K7303, K7305
•
Payroll Expenses – Recorded by Functionality (i.e. Manufacturing/Sales)
or Type of Pay (i.e. Regular Pay/Overtime Pay). Payroll journal entries
should be recorded in the accounting period that contains the ending
date of the pay period.
 Expense accounts are normally titled Salary/Wages Expense and carry a normal DEBIT
Balance. So, an increase to expense would be a DEBIT to the expense account.
 Based on if the employer pays current or in arrears, the CREDIT side of the payroll expense
entry can be to a liability account, Salary/Wages Payable, or an asset account, CASH.
•
Payroll Deductions – Amounts that are withheld from employees' wages
that must be remitted to a 3rd party (i.e. IRS, State Revenue Agency) are a
liability (payable) to the employer the date they withhold the amounts
from the employee’s check, normally the pay date.
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Journal Entry Process/Recording Payroll Transactions
K7301, K7302, K7303, K7305
•
Payroll cash distribution/net pay – When employees are paid, entries
must be made to show the distribution of cash. This entry occurs in the
accounting period in which the employees are actually paid.
Salary Expense
1,500.00
Salary Wages Payable
Salary Wages Payable
Cash/Net Pay
1,500.00
1,500.00
1,500.00
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Journal Entry Process/Recording Payroll Transactions
K7301, K7302, K7303, K7305
•
Employer Taxes – Employers are responsible for Social Security and
Medicare taxes, as well as federal and state unemployment taxes. The
recording of the expenses and liabilities for these taxes must also be
recorded via a journal entry and posted to the general ledger in the
accounting period in which the expense/liability are incurred.
•
Payment of the Tax Liabilities must also be recorded via a journal entry
and posted to the general ledger in the accounting period when
payments to the 3rd party agencies are remitted.
16
Journal Entry Process/Recording Payroll Transactions
K7301, K7302, K7303, K7305, K7306
17
Journal Entry Process/Recording Payroll Transactions
K7301, K7302, K7303, K7305, K7306
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Accounting Periods
K6301, K7104
•
Accounting Period - The time span in which certain financial events take
place. An accounting period is any length of time covered by an income
statement, which could be a month, a quarter, six months, or a year.

Companies must define their accounting year (fiscal year). It can be a calendar
based year, or any 12 month period.

A company’s “fiscal year” can be January 1–December 31, same as calendar year. Or
a company’s “fiscal year” can be July 1– June 30 (typical for non-profits); October 1–
September 30 (some governmental agencies); or April 1–March 31 (UK tax year).
19
Accruals and Reversals
K7100, K7300
•
Two basic methods of accounting can be adopted by companies:
1)
Cash Accounting Method
2)
Accrual Accounting Method
•
The IRS accepts either method depending on the circumstances however, under GAAP only the Accrual
Accounting Method is acceptable.
•
The Accrual Method is used to satisfy the “Matching Principle”

Matching principle – Allows comparison between different organization’s financial statements
because expenses and revenue are recorded in the accounting period where expense is incurred or
revenue is earned.

Paydays, pay period end dates, and accounting period end dates normally do not occur on the same
day, so most companies must accrue to account for all payroll expenses through the end of each
accounting period.

The Accrual Method of accounting also allows managers, auditors, and other users of a company’s
financial information able to determine its financial condition and compare it to previous years and
other similar organizations.
20
Accruals and Reversals
K7100, K7300
•
Accruals made by payroll entries are to estimate the payroll expenses
and liabilities to be incurred between the last payroll period ending
dates and the end of the accounting period.
•
Accruals are booked to the general ledger via a payroll journal entry and
are “reversed” out during the next accounting period when the actual
expenses and liabilities are recorded.
•
Common accrual journal entries seen in payroll are bonus and vacation
accruals.
21
Accruals and Reversals
K7100, K7300
Example from pages 11-12 thru 11-14 of the 2014 Payroll
Source
22
Accruals and Reversals
K7100, K7300
23
Accruals and Reversals
K7100, K7300
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Balancing and Reconciling Payroll Accounts
K6201, K6300, K6500, K6503, K7400, K7401
•
The double entry journal method of accounting (debits/credits) done
accurately will ensure the correct recording of payroll related transactions to
the general ledger, as well as the summation of the journal entries balancing to
the general ledger account balances.
•
Balancing your payroll accounts should be done at several points along the
way, i.e. before and after journal entries are posted to the general ledger.
•
When you reconcile an account, you are proving/documenting that the
transactions that sum to the ending account balance for an account are correct.
•
Depending upon the activity in the account, some payroll accounts may need to
be reconciled after each pay period, monthly or even quarterly.
25
Balancing and Reconciling Payroll Accounts
K7401, K6201, K6300, K6500, K6503, K7400, K6110
•
A common two part payroll reconciliation would be to reconcile the
Payroll Taxes Payable account with a Payroll Tax Liability report
produced from your payroll system, to ensure that all taxes withheld
from an employee’s pay and the employer portion of taxes owed for a
specific period match.
•
The next phase of that reconciliation would be to make certain that all
checks issued by Accounts Payable to pay the tax liabilities due were
posted to the correct accounts in the general ledger. Also at month end,
check to see if the GL account balance agrees with the payroll
department records for that same period.
26
Balancing and Reconciling Payroll Accounts
K7401, K6201, K6110
•
Balancing and Reconciliation of Payroll Accounts is critical.

Payroll Register should be checked for accuracy.
 Gross wages less deductions equals the net amount due to employees.
 Total SS and regular Medicare tax withheld equals the current rate for each tax multiplied
by the total taxable wages for the payroll period.
 Other taxes not dictated by certain percentages of taxable wages, should be checked for
reasonableness based on history.
•
Payroll Bank Account Reconciliation should occur monthly and be
completed by someone NOT in the Payroll Department. Payroll has
direct access to issuing payroll checks, so should not reconcile the bank
account the checks are written on.
27
Financial Statement and Audits
K7101, K7102, K7103
•
Financial Statements are published annually for most companies after they
have been audited by independent certified public accountants.
•
Financial Statements are significantly impacted by information and records
gathered and recorded by the payroll department.

•
Poor payroll processing and reporting practices can lead to financial statements that
materially misrepresent a company’s financial condition.
Balance Sheet is the financial statement that consists of Assets, Liabilities and
Capital/Equity:

Assets – CASH is impacted by Payroll as it generates the payment of employees’ wages
and the remittance of deductions from those wages. These transactions generate entries
crediting (reducing) the cash account. In companies that produce inventory for sale, the
account for that inventory (asset) may have entries for salary expense, since the cost of
goods sold should include the employees’ wages.
28
Financial Statement and Audits
K7101, K7102, K7103
•
Balance Sheet consists of Assets, Liabilities and Capital/Equity:





Plant, property and equipment-Payroll will affect this part of the balance sheet if the
company builds its own plant, property and equipment. The labor that goes into
constructing the plant facilities will be capitalized, with the amount being the portion of
the employees’ wages, benefits and taxes identified as a cost of producing the asset.
Deferred Assets-Payroll will affect this part of the balance sheet normally if the
organization has funded a nonqualified deferred compensation plan.
Current Liabilities-Very commonly affected by Payroll journal entries (i.e. Wages Payable;
Taxes Payable; Garnishments; Accrued Vacation; Accrued Bonuses).
Long-term Liabilities-Impacted by Payroll if the accrued vacation policy carries over past
one year; continuation of health benefits for retirees; pension for retirees (common for
employers to lump out this plan).
Shareholders’ Equity (net worth)-Represents the owner’s share of the business after all
debts have been paid.
29
Financial Statement and Audits
K7101, K7103
•
Income Statement is the financial statement that summarizes the
organization’s revenues and expenses and consists of:






•
Gross margin on sales – Net sales (gross sales – discounts) minus COGS (supplies, raw
material, labor).
Operating income (profit).
Nonoperating revenue.
Expenses (operating and nonoperating).
Net earnings (net income/loss) – “The Bottom Line.”
Earnings per share.
Payroll journal entries generally affect the Income Statement with operating
expenses (i.e. salaries), and possibly some nonoperating revenue (interest
received from overpaid taxes).
30
Financial Statement and Audits
K6504
•
Financial Statement Audits typically include external auditors reviewing
the payroll department in order to ensure that information gathered and
recorded by the payroll area is accurately reflected in the financial
statements. External auditors also want to review policies and
procedures being used by payroll to ensure that they are fiscally sound
and secure.
•
External auditors will conduct various “compliance tests” on samples of
payroll related items such as: canceled checks; time cards; W-4 records;
W-2 information; Payroll Registers; deduction authorizations; payroll
journals and general ledger entries all to ensure that calculations and
journals posted to the general ledger are correct.
31
Financial Statement and Audits
K6106, K6502
•
Auditors normally conduct a thorough review of a payroll department’s
procedure regarding the processing of live paychecks and direct deposits and
the input of payroll data.
•
Segregation of duties and proper internal controls is the primary reason for
this type of review.
•
Auditors want to ensure that one person is not responsible for the entire check
processing procedure; that blank check stock is securely stored; and that data
input is verified and approved by someone other than the person who initially
input the data.
•
Auditors may observe the payroll department’s process for live check
distribution to ensure that there is adequate protection against “phantom
employees” and that fraud is not in existence.
32
Internal Controls
K6101
•
Internal Controls are a system of checks and balances applied within an
organization to ensure the accuracy of its financial records and the
security of its assets.
•
Internal Auditors of an organization periodically review the internal
controls and make recommendations on how they can be improved.
•
Internal Controls encourage an organization’s employees to be in
compliance with policies and procedures and help to gauge the
efficiency of the organization’s operation.
33
Internal Controls
K6101, K6102, K6109
•
A solid system of internal controls contains the following basic
components to help prevent fraud:
 Segregation of job duties
 Critical job processes are not the total responsibility of one person or one department.
 Reduces the opportunity for fraud or embezzlement.
 Examples include:
the accounting department completing all payroll bank account
reconciliations; department heads being asked to check employee lists against the list of
employees who receive paychecks; the storing of paychecks outside the payroll department.
 Rotation of job duties
 Maintain compliance with company procedures and avoid short cuts that may compromise
them.
 Payroll distribution and security of checks
 Company policies should specify that payroll checks should only be delivered to the
employee whose name is on the check. Except in extreme cases with written authorization.
34
Internal Controls
K6107, K6114
•
A solid system of internal controls contains the following basic
components to help prevent fraud:
 Preventing Phantom employees
 Remote/Off-site work locations can fall victim to schemes creating nonexistent employees
with false names, social security numbers, etc.
 Physical payout can prevent the processing of paychecks for phantom employees by having
the payroll department or internal audit staff distribute paychecks and direct deposit stubs
at each work location to employees.
 Negative pay deductions
 Method used to refund an extra deduction; payment of a reimbursement to employees from
FSA’s; qualified transportation fringe benefit accounts; or T&E expense reimbursements.
 Negative pay deductions should be reviewed carefully by the payroll manager and the GL
account to which these negative pay deductions are posted should be reconciled by
someone outside of the payroll department.
35
Internal Controls
K6103, K6107, K6108, K6114, K6115
•
A solid system of internal controls contains the following basic components to help
prevent fraud:

Payroll bank account


Reconciliation of the payroll bank account with the GL should be completed outside of the payroll department.
Blank checks
Storage of blank check stock should be outside of the payroll department.
 Checks should not be signed until documentation supporting them is reviewed.


Time reporting


Computer system edits


Employee’s manager should review and approve the employee’s timesheet confirming its accuracy and
preventing overpayment of wages, which can lead to losses for the organization.
Computerized payroll system should alert payroll manager to unusual situations including new employees;
terminating employees; unreasonable time worked; negative wage detail.
Using an internal auditor

Internal auditors can help by reviewing the efficiency in internal controls and make sure payroll systems and
procedural changes have the approval of upper management. If internal controls are inadequate an internal
auditor can identify and help with ways to strengthen them.
36
Internal Controls
K6111, K6112
Sarbanes-Oxley Act impacts payroll departments


In 2002, the Public Company Accounting Reform and Investor Protection Act, commonly known as
SOX (Sarbanes-Oxley Act), was enacted in order to restore investor and public confidence in
corporate financial management after some serious financial scandals with publicly traded
companies.

SOX requires public companies to have a framework for identifying, documenting, and evaluating
their internal controls over financial reporting, and it provides a logical way to analyze a company’s
control system.

SOX prohibits public accounting firms from providing both external and most non-auditing services
to the same client, and it requires audit partners to rotate every five years.

Although SOX is only required for publicly traded companies, many smaller companies and non-profit
organizations apply it as well.

Under SOX the following is required: Certification of financial reports; Compliant procedures
established; No loans to officers or directors; and Internal control assessments and reports.
37
Internal Controls
K6111, K6112

Sarbanes-Oxley Act impacts payroll departments



Payroll information impacts a company’s balance sheet and income statement, so SOX compliance
affects the payroll department and adequate internal controls must be in place.
Adequate internal controls for Payroll SOX compliance include:
• Process and workflow maps that show each payroll function.
• “Current” written documentation for each payroll process and step in the process.
• Audit recordkeeping and retention procedures.
• Identify gaps and risks.
• Communication to management.
• Document the design, evaluation and testing of internal controls.
3rd Party Vendors used by Payroll should have adequate controls over the payroll process services they
deliver.
38
Internal Controls
K6113
•
SSAE 16
 Statement on Standards for Attestation Engagements 16 (AICPA definition)
 Reporting on Controls at a Service Organization
This section addresses examination engagements undertaken by a service auditor to report
on controls at organizations that provide services to user entities when those controls are
likely to be relevant to user entities' internal control over financial reporting.
 Two types of SSAE 16 reports
1.
2.
3.
Type 1 Report – Service auditor expresses an opinion on whether the service provider’s
description of its control procedures presents fairly the relevant aspects of the service provider’s
controls as of a specific date and whether the controls were suitably designed to achieve specified
control objectives.
Type 2 Report – In a Type 2 report, the service auditor will express an opinion on the same items
that are contained in a Type 1 report and whether the controls that were tested were operating
effectively enough to provide a reasonable assurance that the control objectives were achieved
during the period specified, which must be a least six months.
In most cases a Type 2 report is preferable.
39
Controlling Check Fraud
K6102, K6108
•
Group 1 security – Security features manufactured into the check paper.
 Watermarks
•
Group 2 security – Security features are printed onto the check paper.
 MICR lines
 VOID Features
•
Group 3 security – Positive Pay – bank sponsored electronic data
checking.
 Most effective security measure. Requires verification of check number and check
value before the check is processed.
40
CONGRATS
FUTURE
CPP’s
CONTINUED SUCCESS
Veneia M. Dunbar CPA, CPP
Nuveen Investments, LLC
AVP-Payroll Manager
Veneia.Dunbar@Nuveen.com