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Appendix D
Payroll Accounting
Financial Accounting, Seventh Edition
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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.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
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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).
Payroll AccountingPayroll AccountingPayroll AccountingPayroll Accounting
Determining the payroll involves computing three amounts:
(1) gross earnings,
(2) payroll deductions, and
(3) net pay.
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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.
SO 1 Discuss the objectives of internal control for payroll.
Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll
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Fraud prevented:
Fictitious employees
being added to
payroll.
SO 1 Discuss the objectives of internal control for payroll.
Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll
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Fraud prevented:
Employee paid for
hours not worked.
SO 1 Discuss the objectives of internal control for payroll.
Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll
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Fraud prevented:
Payroll calculation
errors and
inappropriate
amounts being paid
to an employee.
SO 1 Discuss the objectives of internal control for payroll.
Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll
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Fraud prevented:
Checks lost through
theft; falsely
endorsed used to
pay for hours not
worked.
SO 1 Discuss the objectives of internal control for payroll.
Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll
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Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions).
Gross Earnings
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Illustration D-3
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Mandatory:
FICA taxes
Federal income tax
State income tax
Payroll Deductions
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Voluntary:
Charity
Retirement
Union dues
Health and life insurance
Pension plans
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Mandatory:
FICA taxes
Federal income tax
State income tax
Payroll Deductions
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Social Security taxes
Supplemental retirement, employment disability, and medical benefits.
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.
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Payroll Deductions
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Employers are required to withhold income taxes from employees pay.
Withholding amounts are based on gross wages and the number of allowances claimed.
Mandatory:
FICA taxes
Federal income tax
State income tax
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Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4).
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Illustration D-5
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SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Most states (and some cities) require employers to withhold income taxes from employees’ earnings.
Payroll Deductions
Mandatory:
FICA taxes
Federal income tax
State income tax
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Gross earnings minus payroll deductions.
Net Pay
SO 2 Compute and record the payroll for a pay period.
Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll
Illustration D-7
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Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year.
Maintaining Payroll Department Records
SO 2 Compute and record the payroll for a pay period.
Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll
Illustration D-8 Employee earnings record
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Recognizing Payroll Expenses and Liabilities
SO 2 Compute and record the payroll for a pay period.
Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll
Illustration D-9
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Illustration: From the payroll register in Illustration D-9, Academy makes a journal entry to record the payroll.
SO 2 Compute and record the payroll for a pay period.
Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll
Office Salaries Expense 5,200.00
Wages Expense 12,010.00
FICA Taxes Payable
1,376.80
Federal Income Taxes Payable
3,490.00
State Income Taxes Payable
344.20
United Way Payable
421.50
Union Dues Payable
115.00
Salaries and Wages Payable
11,462.50
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Using the facts from the previous Illustration.
Recording Payment of the Payroll
SO 2 Compute and record the payroll for a pay period.
Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll
Salaries and wages payable11,462.50
Cash11,462.50
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Payroll tax expense results from three taxes that governmental agencies levy on employers.
SO 3 Describe and record employer payroll taxes.
Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
These taxes are:
FICA taxes
Federal unemployment tax
State unemployment tax
Same rate and maximum earnings as the employee’s.
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.
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Payroll tax expense results from three taxes that governmental agencies levy on employers.
SO 3 Describe and record employer payroll taxes.
Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
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%.
These taxes are:
FICA taxes
Federal unemployment tax
State unemployment tax
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Payroll tax expense results from three taxes that governmental agencies levy on employers.
SO 3 Describe and record employer payroll taxes.
Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
SUTA basic rate is usually 5.4% on the first $7,000 of wages paid.
These taxes are:
FICA taxes
Federal unemployment tax
State unemployment tax
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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.
SO 3 Describe and record employer payroll taxes.
Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
Recording Employer Payroll Taxes
Payroll Tax Expense 2,443.82
FICA Taxes Payable
1,376.80
Federal Unemployment Taxes Payable
137.68
State Unemployment Taxes Payable
929.34
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Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.
QuestionQuestion
SO 3 Describe and record employer payroll taxes.
Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes
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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.
SO 3 Describe and record employer payroll taxes.
Filing and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll Taxes
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