Basic Payroll Accounting - Squarespace 1 2014 New York Statewide Conference. ROADMAP TO PAYROLL COMPLIANCE September 15, 2014 Robyn Maslouski, CPP Basic Payroll Accounting …

9/15/2014

1

2014 New York Statewide Conference.

ROADMAP TO PAYROLL COMPLIANCE

September 15, 2014

Robyn Maslouski, CPP

Basic Payroll Accounting

INTERNALUSEONLY

2014 New York Statewide Conference Road Map to Payroll Compliance

Agenda

• Payroll’s stake in accounting

• Elements of accounting

9/15/2014

2

INTERNALUSEONLY


Why does Payroll care about accounting?

• Salary, benefit and other payroll-related expenses represent a large portion of a company’s income statement

• Balancing accounts is critical for accurate reporting and acts as an internal control

• Good check and balance on employees following procedure

INTERNALUSEONLY


Accounting Principles

• Business Entity: Organization operates separately is treated as a business

• Continuing Concern: Business entity will continue to operate indefinitely as a business

• Time Period: Each organization must determine its own accounting period

• Cost Principle: All goods and services purchased are recorded at cost

• Objectivity Principle: Ensure personal opinions and emotions are not part of the recorded transaction

9/15/2014

3

INTERNALUSEONLY


Accounting Principles

• Matching Principle: Expenses and revenue are recorded in the accounting period in which expense is incurred or revenue is earned.

• Realization Principle: Revenue is recognized and reported when earned and the value is the cash received or the fair market value

• Consistency Principle: Transactions must be recorded in a consistent manner based on particular accounting method, principle or period

INTERNALUSEONLY


Recording Transactions

Payroll transaction

Journal entry

General ledger

Financial statements

9/15/2014

4

INTERNALUSEONLY


Accounting Basics to Understand

• Requirements of accounting

• Account classifications

• Account balances

• Accounting statements

INTERNALUSEONLY


Requirements of Accounting

• Everything must balance!

– Keep this in mind & you can’t go wrong!

Debits Credits

Revenues Expenses*

Assets Liabilities

Equity

9/15/2014

5

INTERNALUSEONLY


Account Classifications

Cost of goods or services

Anything of value owned by the company

Anything owed by the company

Net worth of the company

Income

Asset LiabilityExpense RevenueEquity

INTERNALUSEONLY


Account Balances

• An account carries a debit (DR) or a credit (CR) balance

– Debit and credit do not mean “minus” and “add,” respectively

– Debits are on the left side of the account; credits are on the right side of the account

9/15/2014

6

INTERNALUSEONLY


Account Balances

• “Left” and “Right” side can be visualized with a T account

• Your general ledger will display account activity in this format in “the books”

Debit Credit

Debit on the left – credit on the right

INTERNALUSEONLY


Debit on the left – credit on the right

Account Balances

• Transactions are recorded using double-entry accounting

– In a transaction, the value of the debits must match the value of the credits.

Account #1 500

Account #2 300

Account #3 200

9/15/2014

7

INTERNALUSEONLY


Account Balances

• Revenues normally carry a Credit balance

• Expenses normally carry a Debit balance

• Assets normally carry a Debit balance

• Liabilities normally carry a Credit balance

• Hint: Assets and Expenses (both begin with vowels)

normally have debit balances…on the same side of the

ledger

INTERNALUSEONLY


Account Balances

• A debit will increase an expense & asset account

• A debit will decrease a revenue and liability account

Debit Credit

Expense

Asset Liability

Revenue

9/15/2014

8

INTERNALUSEONLY


Account Balances

• A credit will increase a revenue and liability account

• A credit will decrease an expense and asset account

Debit Credit

Expense

Asset Liability

Revenue

INTERNALUSEONLY


Accounting Statements

Income Statement

• Revenues

• Expenses

Balance Sheet

• Assets

• Liabilities

• Owner’s Equity

9/15/2014

9

INTERNALUSEONLY


What’s Needed to Journal?

Knowledge of account classifications

+ Knowledge of account balances

+ Basic math skills

Ability to journal entry a payroll

INTERNALUSEONLY


Journaling a Payroll Run

1. Record the “gross-to-net” of the payroll run

2. Record the disbursement of cash for wages

3. Record any additional employer expense

4. Record the payment of taxes

5. Record the payment of deductions

9/15/2014

10

INTERNALUSEONLY


Journaling a Payroll Run

• Remember that you have to have at least one debit and one credit

• Remember all debits must equal all credits

• Assess what the journal entry should try to accomplish

– Are you paying out something? Then you need to decrease an asset, which is your credit.

– Are you incurring an expense? Then you need to increase an expense, which is your debit.

INTERNALUSEONLY


Journal Entries

• ABC Corp has a monthly payroll and payday is on June 30th.

• Assume the following:– ABC Corp runs payroll on Monday and distributes cash on

Friday (payday)

– Benefit deductions are not remitted to a third party – they’re posted in-house to offset premium payments

– Facts on the following slide…

9/15/2014

11

INTERNALUSEONLY


Journal Entries

• Wages

• Federal income tax

• Social security tax

• Medicare tax

• Health insurance

• United Way

• Garnishments

• State unemployment tax

• Federal unemployment tax

$100,000.00

$ 20,000.00

$ 6,000.00

$ 1,450.00

$ 200.00

$ 150.00

$ 3,600.00

$ 600.00

$ 250.00

INTERNALUSEONLY


Journal Entries

• To journalize the gross-to-net portion of the payroll, the employer must record

– The expense of the salaries

– The liabilities of withholdings that need to be remitted, and

– The net pay that is payable to the employee

• The journal entry should look like the gross-to-net of the paycheck.

9/15/2014

12

INTERNALUSEONLY


Journal Entries

• To journalize the payment of the salaries on payday, the employer must recognize

– The removal of the liability

– The decrease in assets to pay the liability…

Wages payable

68,600.00

INTERNALUSEONLY


Journal Entries

• When an employer pays an employee, it not only incurs a salary expense; there are also employer-only expenses, such as taxes

• To journalize the employer tax expense the employer must recognize the expense and liability for

– The match on FICA

– Employer-only taxes, such as unemployment

9/15/2014

13

INTERNALUSEONLY


Journal Entries

• When the time comes for an employer to remit taxes to the tax jurisdictions, the employer needs to ensure the journal entry includes

– The decrease in an asset to pay the taxes

– The decrease in tax liabilities

INTERNALUSEONLY


Journal Entries

• Tax liabilities

Fed inc tax payable

20,000.00

SS tax payable

6,000.00

Med tax payable

1,450.00

SUI tax payable

600.00

FUTA tax payable

250.00

6,000.00 1,450.00

9/15/2014

14

INTERNALUSEONLY


Journal Entries

• When the time comes for an employer to remit monies for deductions it has collected, the employer needs to ensure the journal entry includes

– The decrease in an asset to pay the deductions

– The decrease in deduction liabilities

INTERNALUSEONLY


Journal Entries

• Deduction liabilities

Garn’s payable

3,600.00

United Way payable

150.00

9/15/2014

15

INTERNALUSEONLY


Journal Entries

• What would you do if you ran a manual check?

– Same journal entries as a regular payroll run!

• What would you do if the employee paid back the check and you reversed the check?

– Same thing…except your debits become credits and vice versa!

INTERNALUSEONLY


Journal Entries

• An employer pays one of its employees an off-cycle bonus via manual check. The gross-to-net information is as follows:

– Bonus $50,000.00

– Federal income tax $11,875.00

– Medicare tax $ 2,250.00

– 401k deferral $ 2,500.00

• 5% deduction; employer matches 100% up to 3%

9/15/2014

16

INTERNALUSEONLY


Journal Entries

• Now let’s assume that the wrong employee was paid this bonus and pays it back to the employer.

– Bonus $50,000.00

– Federal income tax $11,875.00

– Medicare tax $ 2,250.00

– 401k deferral $ 2,500.00

• 5% deduction; employer matches 100% up to 3%

• Let’s journal the reversal….

INTERNALUSEONLY


Payroll Accruals

• Expenses must be recorded in the financial period realized

– Accounting is not based on constructive receipt

• If the pay period end date for the last payday of the month is before the last day of the month, a company must accrue the “realized expense” for the remainder of the month.

9/15/2014

17

INTERNALUSEONLY


Payroll Accruals

Sun Mon Tue Wed Thr Fri Sat

14 15 16 17 18 19 20

21 22 23 24 25 26 27

28 29 30 31

• Last biweekly payday is the 26th

• Reflects wages paid through 19th

• Must accrue expenses of 20th through 31st (12 days)

INTERNALUSEONLY


Payroll Accruals

• Process

1. Calculate average payroll expense per day or pay

2. Calculate payroll expense for the days remaining in the month

3. Record journal entry to accrue expense and liability in current month

4. Reverse accrual in next month

9/15/2014

18

INTERNALUSEONLY


Payroll Accruals

Biweekly Payroll Rate

• Prior calendar showed we needed to accrue for the 20th through the 31st

– Need to accrue for 12/14 (or 85.7%) of the pay

– Average biweekly payroll expense is $490,000

• Accrual in current month: – Debit Salary Expense $420,000 (490,000 x .857)

– Credit Salaries Payable $420,000

• Reversal in next month:– Debit Salaries Payable $420,000

– Credit Salary Expense $420,000

INTERNALUSEONLY


Payroll Accruals

Daily Payroll Rate

• Average daily payroll expense is $10,000 and there are six days remaining in the month

• Accrual in current month:

– Debit Salary Expense $60,000

– Credit Salaries Payable $60,000

• Reversal in next month:

– Debit Salaries Payable $60,000

– Credit Salary Expense $60,000

9/15/2014

19

INTERNALUSEONLY


Partnering with Finance

• Common responsibility for accurate financial reporting

• Inclusion– Finance programs and strategies

– New payroll system releases

– Fiscal year end/year begin initiatives

– Service delivery model

• Ensure their responsibility for key controls

INTERNALUSEONLY


Internal Controls

• Segregation of duties

• Rotation of duties

• Phantom employees

• Computer system edits

• Checks

9/15/2014

20

INTERNALUSEONLY


Sarbanes-Oxley

• Incorrect paychecks can impact your company’s financial statements…which confuses stakeholders…which causes problems for the company

• Payroll as a process has many sub-processes for which you should have controls, tests, results

– Risk of buddy punch

– Risk of unauthorized work

INTERNALUSEONLY


Balancing and Reconciliation

• Each pay period...

– Gross to net on payroll register, payroll register equals GL detail, check numbers are accounted for, liabilities booked equals payments made

• Quarterly…

– Tax return detail equals liabilities booked & payments made

• Bank account reconciliation

9/15/2014

21

INTERNALUSEONLY


Thank you!

Documents

Basic Payroll Accounting - Squarespace 1 2014 New York Statewide Conference. ROADMAP TO PAYROLL COMPLIANCE September 15, 2014 Robyn Maslouski, CPP Basic Payroll Accounting …