Payroll Accounting
Section 11
Overview
Accounting Principles
 Account Classifications
 Account Balances
 Journal Entries
 Recording Payroll Transactions
 Accounting Periods




Accruals and Reversals
Balancing and Reconciliations
Financial Statements & Audits
Accounting Principles

FASB vs. GASB

GAAP

Business Entity Concept

Continuing Concern Concept

Time Period Concept

Cost Principle

Objectivity Principle

Matching Principle

Realization Principle

Consistency Principle
Account Classifications
 Double Entry Accounting
*always need a debit and a credit
 Equations:
ACRONYMS
ALE:
Assets – Liabilities = Equity
REN:
Revenue – Expenses = Net Income
NICE:
Net Income – Income Distributed +
Contributed Capital = Equity
[Contributed Capital + Net Income – Income Distributed = Equity]
Account Classifications

Asset Accounts
Current
Tangible
or Property,
Plant and Equipment
Intangible
or Deferred
Account Classifications
 Liability
Accounts
 Current
 Wages
payable
 Taxes Withheld
 Contributions to Benefit
Plans
 Accounts Payable
 Long
Term
 Notes
Payable
Account Classifications

Equity
 Contributed
 Retained
 Net
Capital
Earnings
Income
 Revenue

Amounts received for goods & services sold
 Expense

Cost of goods and services consumed
Account Balances
Type of Account
Typical
Balance
Debit
Credit
Asset
Debit
Increase
Decrease
Liability
Credit
Decrease
Increase
Equity
Credit
Decrease
Increase
Revenue
Credit
Decrease
Increase
Expense
Debit
Increase
Decrease
Contributed Capital
Credit
Decrease
Increase
Income Distributed
Debit
Increase
Decrease
T Accounts
Payroll Checking
Debits
Wages Payable
Credits
Debits
$100.00
$100.00
Credits
Chart of Accounts
Makes distinctions between Assets,
Liabilities, Expenses, and Revenues
 Makes distinctions between types of
Assets, Liabilities, Expenses, and
Revenues
 Uses cost centers or department codes

Types of
Journal Entries

Compound Entries

General Ledger

Subsidiary Ledger

Accounts Payable

Accounts Receivable

PPE (Fixed Assets)
Double Entry
Cash Journal Entry
A wage payment of $100 would appear
in a journal entry as follows:
Salary Expense
Cash
Debit
$100
Credit
$100
Compound Entry
Cash Journal Entry
A payroll check was issued and recorded to
the general ledger.
Gross wages were $500. Taxes were
withheld as follows: $75 for FIT, $35 for
Soc Sec, $7.25 for Medicare.
Salary Expense
Federal taxes withheld
Social security taxes withheld
Medicare taxes withheld
Cash
Debit
$500
Credit
$75.00
$21.00
$7.25
$396.75
Accrual Transactions
Simple Journal Entry
Record Wages of $6340 due to employee
but not yet paid
Wages Expense
Wages Payable
Debit
$6340
Credit
$6340
Accrual Transactions
Compound Journal Entry
Salary of $6340 and Taxes of $485 Accrued,
but not yet paid
Wages Expense
Payroll Tax Expense
Wages Payable
Payroll Taxes Payable
Debit
$6340
485
Credit
$6340
485
Accounting Periods



Monthly, Quarterly or Yearly
Fiscal Year vs. Calendar Year
Employment Tax Returns / Employee
or Payee Information Statements
Accrual & Reversing
Entries
 Accruals
at end of accounting
period
 Reversal
of Accruals
 Reversal
of Errors
Accrual Journal Entries
An accrual entry of $1000 was made in
2013 for a bonus to be paid in Jan. 2014.
The bonus was paid in 2014 and Soc Sec &
Medicare taxes were paid by the employer
of $76.50. Federal, SS & MC taxes were
withheld from the check of $326.50. What
is the journal entry to record the accrual in
2013 and what is the entry to record the
payment of the bonus in 2014?
Wages Expense
PR Taxes Expense
Wages Payable
PR Taxes Payable
Wages Payable
PR Taxes Withheld
Cash
Debit
$1000
$ 76.50
Credit
$1000
$ 76.50
Debit
$1000
Credit
$326.50
$673.50
Debit or Credit Quiz

Increase to Expenses
═
Debit

Increase to Liability
═
Credit

Decrease to Assets
═
Credit

Decrease to Revenue
═
Debit

Increase to Capital
═
Credit

Decrease to Expenses
═
Credit

Increase to Assets
═
Debit
Balancing and Reconciliation

Periodic Balancing



What?

Check against the payroll register

Verify checks issued by A/P

Verify the end of the month balance
When?

Every payroll period

Before filing tax returns

Before sending out W-2’s or 1099’s
Bank Accounts – dual control
Financial Statements

Balance Sheet

Income Statement

Statement of Cash Flows

Trial Balance

Statement of Retained Earnings

Notes to Financial Statements

Audited Financial Statements
Budgets and Variances


Budget vs. Actual format
Variances

Favorable Variance

Unfavorable Variance
Budgets and Variances
Quiz
Salary expense for the month of
January was budgeted at $500. The
actual expense incurred was $300.
Is the variance favorable or
unfavorable?
Answer:
Favorable by $200
Questions ?
Overview

Internal Controls

Sarbanes – Oxley Act

Check Fraud

Check 21

Accounting Interfaces with Payroll

Terminology
Internal Controls





Blank Checks
Computer
System Edits
Internal
Auditor
Negative Pay
deductions
Payroll Bank
Account





Payroll
Distribution
Phantom
Employees
Rotation of
job duties
Segregation
of job duties
Time
Reporting
Sarbanes-Oxley Act



Requires public companies to have a
framework for identifying, documenting, and
evaluating their internal controls over
financial reporting.
Provides a logical way to analyze a
company’s control system.
Prohibits a public accounting firm from
providing both external auditing and most
non-auditing services to the same client and
requires audit partners to rotate every 5
years.
Check Fraud
Group 1 security features
 Group 2 security features
 Group 3 security features

Check 21
 Substitute checks used in
clearing process
 Impact on payroll
Questions ?