Appendix D-1

Appendix

Payroll Accounting

Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Appendix D-2

Study Objectives
1. Discuss the objectives of internal control for payroll. 2. Compute and record the payroll for a pay period. 3. Describe and record employer payroll taxes.

Appendix D-3

Payroll Accounting
While the mechanics of payroll accounting are the same around the world, the particular accounts

used are country-specific. Each country has

different laws, different health and social programs, and different taxes related to payroll. The examples in this appendix illustrate payroll accounting applied in the United States.

Appendix D-4

Payroll Accounting
The term payroll pertains to both:
Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour).

Determining the payroll involves computing three amounts:

(1) gross earnings, (2) payroll deductions, and (3) net pay.

Appendix D-5

Internal Control for Payroll

As applied to payroll, the objectives of internal control are:
1. to safeguard company assets against unauthorized

payments of payrolls, and

2. to ensure the accuracy and reliability of the accounting

records pertaining to payrolls.

Appendix D-6

SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll

Fraud prevented:

Fictitious employees
being added to payroll.

Appendix D-7

SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll

Fraud prevented:

Employee paid for

hours not worked.

Appendix D-8

SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll

Fraud prevented:

Payroll calculation
errors and inappropriate amounts

being paid to an
employee.

Appendix D-9

SO 1 Discuss the objectives of internal control for payroll.

Internal Control for Payroll

Fraud prevented:

Checks lost through

theft; falsely endorsed used to pay for hours

not worked.

Appendix D-10

SO 1 Discuss the objectives of internal control for payroll.

Determining the Payroll

Gross Earnings
Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions).
Illustration D-3

Appendix D-11

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Payroll Deductions
Mandatory:
FICA taxes

Voluntary:
Charity

Federal income tax

State income tax

Retirement
Union dues Health and life insurance

Pension plans

Appendix D-12

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Payroll Deductions
Mandatory:
FICA taxes Social Security taxes
Supplemental retirement,

employment disability, and medical benefits.

In 2009, the rate was 7.65%

Federal income tax

State income tax

(6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D-13

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Payroll Deductions
Mandatory:
FICA taxes
Employers are required to

withhold income taxes from employees pay.

Withholding amounts are

Federal income tax

State income tax

based on gross wages and the number of allowances claimed.

Appendix D-14

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Employee must complete an Employees Withholding Allowance Certificate (Form W-4).
Illustration D-5

Appendix D-15

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Payroll Deductions
Mandatory:
FICA taxes

Federal income tax

State income tax

Most states (and some

cities) require employers to withhold income taxes from employees earnings.

Appendix D-16

SO 2 Compute and record the payroll for a pay period.

Determining the Payroll

Net Pay
Gross earnings minus payroll deductions.
Illustration D-7

Appendix D-17

SO 2 Compute and record the payroll for a pay period.

Recording the Payroll

Maintaining Payroll Department Records
Employer required by law to keep a cumulative record of each employees gross earnings, deductions, and net pay during the year.
Illustration D-8 Employee earnings record

Appendix D-18

SO 2 Compute and record the payroll for a pay period.

Recording the Payroll

Recognizing Payroll Expenses and Liabilities
Illustration D-9

Appendix D-19

SO 2 Compute and record the payroll for a pay period.

Recording the Payroll

Illustration: From the payroll register in Illustration D-9, Academy makes a journal entry to record the payroll.
Office Salaries Expense Wages Expense FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable United Way Payable 5,200.00 12,010.00 1,376.80 3,490.00 344.20 421.50

Union Dues Payable

Salaries and Wages Payable
Appendix D-20

115.00
11,462.50

SO 2 Compute and record the payroll for a pay period.

Recording the Payroll

Recording Payment of the Payroll
Using the facts from the previous Illustration. Salaries and Wages Payable 11,462.50

Cash

11,462.50

Appendix D-21

SO 2 Compute and record the payroll for a pay period.

Employer Payroll Taxes

Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are:
FICA taxes Federal unemployment tax State unemployment tax
Same rate and maximum

earnings as the employees.

In 2009, the rate was 7.65%

(6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D-22

SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes

Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are:
FICA taxes Federal unemployment tax State unemployment tax
FUTA tax rate is 6.2% of first

$7,000 of taxable wages.

Employers who pay the state

unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8%.

Appendix D-23

SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes

Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are:
FICA taxes Federal unemployment tax State unemployment tax

SUTA basic rate is usually

5.4% on the first $7,000 of wages paid.

Appendix D-24

SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes

Recording Employer Payroll Taxes
Illustration: The entire amount of gross pay ($17,210.00) shown in the payroll register in Illustration D-9 is subject to each of the three taxes mentioned above. Accordingly, Academy records the payroll tax expense.
Payroll Tax Expense FICA Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable 2,443.82 1,376.80 137.68 929.34

Appendix D-25

SO 3 Describe and record employer payroll taxes.

Employer Payroll Taxes

Question
Employer payroll taxes do not include:
a. Federal unemployment taxes. b. State unemployment taxes.

c. Federal income taxes.

d. FICA taxes.

Appendix D-26

SO 3 Describe and record employer payroll taxes.

Filing and Remitting Payroll Taxes

Companies must report FICA taxes and federal income taxes
withheld no later than one month following the close of each quarter.

Companies generally file and remit federal unemployment

taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment

taxes by the end of the month following each quarter.

Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31.

Appendix D-27

SO 3 Describe and record employer payroll taxes.

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Appendix D-28