Payroll Accounting - Labour Cost, Cost Accounting B Com Notes | EduRev

Cost Accounting

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B Com : Payroll Accounting - Labour Cost, Cost Accounting B Com Notes | EduRev

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Payroll Accounting
The accounting for payroll involves all aspects of paying compensation and benefits to employees. The outcome of this process is precise records regarding the expenses associated with all types of compensation, as well as timely payments to employees. Though some systems that incorporate more or less automation may not include all of these steps, the general process flow will apply to most payroll systems:

  1. Set up new employees. Have new employees fill out payroll-specific information as part of the hiring process, such as the W-4 form and medical insurance forms that may require payroll deductions. Set aside copies of this information in order to include it in the next payroll.
  2. Collect timecard information. Salaried employees require no change in wages paid for each payroll, but you must collect and summarize information about the hours worked by non-exempt employees. This may involve having employees scan a badge through a computerized time clock.
  3. Verify timecard information. Summarize the payroll information just collected and have supervisors verify that employees have correctly recorded their time.
  4. Summarize wages due. Multiply the number of hours worked by the pay rate for each employee, also factoring in any overtime or shift differentials.
  5. Enter employee changes. Employees may ask to have changes made to their paychecks, usually to the number of tax exemptions or pension withholdings. You may need to record much of this prior to calculating taxes, since it impacts the amount of wages to which taxes are applied.
  6. Calculate taxes. Use IRS tax tables to determine the amount of taxes to be withheld from employee gross wages.
  7. Calculate wage deductions. There may be a number of additional deductions to take away from employee net income, including deductions for medical insurance, life insurance, garnishments, and union dues. You must also track the goal amounts for these deductions, so that you stop deducting once the goal totals are reached.
  8. Deduct manual payments. If manual payments have already been made to employees, such as advances, then deduct these amounts from the remaining net pay.
  9. Create a payroll register. Summarize the wage and deduction information for each employee in a payroll register, which you can then summarize to also create a journal entry to record the payroll. This document is automatically created by all payroll software packages.
  10. Print paychecks. Print employee paychecks using the information in the payroll register. You normally itemize gross wages, deductions, and net pay in a remittance advice that accompanies the paycheck.
  11. Pay by direct deposit. Notify your direct deposit processor of the amount of any direct deposit payments, and issue remittance advices to employees for these payments.
  12. Issue paychecks. Have a paymaster issue paychecks to employees, requiring employee identification if there are a large number of employees.
  13. Deposit withheld taxes. Deposit all withheld payroll taxes and employer matched taxes at a bank that is authorized to handle these transactions.

Types of payroll accounting journal entries
There are three types of payroll accounting entries:

  • Initial recordings
  • Accrued wages
  • Manual payments

Each type of payroll entry is handled differently. Usually, you work with initial recording entries.
Initial recordings are the primary entries for payroll accounting. For these entries, record the gross wages your employees earn and all withholdings. Also, include employment taxes you owe to the government.
Accrued wages are recorded at the end of each accounting period. These entries show the amount of wages you owe to employees that have not yet been paid. Later, when you pay those wages, you reverse the entries. Initial recording entries take the place of accrued wages.
Manual payments will come up occasionally in payroll accounting. Use these entries when you manually cut a check for pay adjustments or employee terminations.

Payroll liabilities and expenses
You need to record all payroll transactions in your journal. The entries are expenses (amounts already paid), liabilities (amounts owed but not yet paid), and assets (cash).
Here are some common payroll entries:

  • Gross wages and salaries
  • FICA tax payable
  • Federal income withholding payable
  • State income withholding payable
  • Payroll payable (wages you owe but haven’t paid yet)
  • Other deductions and withholdings (e.g., retirement contributions)

As you do your payroll accounting, record debits and credits in the ledger. Whether you debit or credit a payroll entry depends on the type of transaction made. The debits and credits in your books should equal each other.
Some accounts are increased by debits and decreased by credits. Other accounts are increased by credits and decreased by debits. Use this chart to see how each account is affected by debits and credits:
Payroll Accounting - Labour Cost, Cost Accounting B Com Notes | EduRev
With payroll accounting, you work with expenses, liabilities, and assets.
Expenses (amounts you already paid) are increased by debits. You want to increase the expense account because when you pay an employee, you gain an expense.
Liabilities (amounts you owe) are increased by credits. You want to increase the liability account because as employees earn wages, you owe more. Payables are liabilities.
Assets (items of value) are decreased by credits. You want to decrease the asset account because when you pay an employee, you lose cash (an asset).
Keep these concepts in mind as you learn how to account for payroll. If you are unsure of whether to debit or credit an entry, refer to the chart above.

Payroll Journal Entries
The primary journal entry for payroll is the summary-level entry that is compiled from the payroll register, and which is recorded in either the payroll journal or the general ledger. This entry usually includes debits for the direct labor expense, salaries, and the company's portion of payroll taxes. There will also be credits to a number of accounts, each one detailing the liability for payroll taxes that have not been paid, as well as for the amount of cash already paid to employees for their net pay. The basic entry (assuming no further breakdown of debits by individual department) is:

 
Debit
Credit
Direct labor expense
xxx
 
Salaries expense
xxx
 
Payroll taxes expense
xxx
 
Cash
 
xxx
Federal withholding taxes payable
 
xxx
Social security taxes payable
 
xxx
Medicare taxes payable
 
xxx
Federal unemployment taxes payable
 
xxx
State withholding taxes payable
 
xxx
State unemployment taxes payable
 
xxx
Garnishments payable
 
xxx

When you later pay the withheld taxes and company portion of payroll taxes to the IRS, you then use the following entry to reduce the balance in the cash account, and eliminate the balances in the liability accounts:

 
Debit
Credit
Cash
 
xxx
Federal withholding taxes payable
xxx
 
Social security taxes payable
xxx
 
Medicare taxes payable
xxx
 
Federal unemployment taxes payable
xxx
 
State withholding taxes payable
xxx
 
State unemployment taxes payable
xxx
 
Garnishments payable
xxx
 

It is quite common to have some amount of unpaid wages at the end of an accounting period, so you should accrue this expense (if it is material). The accrual entry, as shown next, is simpler than the comprehensive payroll entry already shown, because you typically clump all payroll taxes into a single expense account and offsetting liability account. After recording this entry, you reverse it at the beginning of the following accounting period, and then record the actual payroll expense whenever it occurs. 

 
Debit
Credit
Direct labor expense
xxx
 
Salaries expense
xxx
 
Accrued salaries and wages
 
xxx
Accrued payroll taxes
 
xxx


1 – Payroll Journal Entry Wage, Payroll And Insurance

Date     

Account Names                              

Debit          

Credit          

3/1

Wage Expense

720.00

 
 

FICA Taxes Payable (7.65% x 720)

 

55.08

 

Federal Income Tax Payable

 58.00
 

State Income Tax Payable

 21.00
 

Health Insurance Payable

 50.00
 

Wages Payable

 535.92

When ABC Company issues Mary her paycheck for the most recent pay period, they would post the following entry to decrease (debit) the Wage payable account balance and payroll tax balance and decrease (credit) cash.

2 – Payroll Journal Entry For Salary Payable

3/1Wage Payable  
535.92  


Cash
535.92

In addition to the wages and withholding in the previous payroll journal entries, ABC Company has incurred additional payroll liability expenses that must be recorded.
These expenses include their share of Mary’s FICA, ABC Company’s estimated cost for unemployment tax, worker compensation insurance, and ABC Company’s portion of Mary’s health insurance.

3 – Payroll Journal Entry Payroll Taxes Payable

3/1       

ABC CO FICA Expense                                     

55.08         

 
 

Unemployment Tax Expense

3.00

 
 

Workers Comp Insurance Expense

20.00 
 

Health Insurance Expense

50.00 
 

ABC Co FICA Payable

 55.08      
 

Unemployment Tax Payable

 3.00
 

Workers Comp Insurance Payable

 20.00
 

Health Insurance Payable

 50.00

When it comes time to pay the payroll payable such as FICA and Federal Income Tax Payable, you would simply debit the payable accounts you are paying and credit cash.

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