Payroll Accounting (Advanced) PJ Grabowski, CPP, SPHR Consultant, HR Systems, Mercy Health Pamela.Grabowski@Mercy.net 3146283582 1
Double Entry Bookkeeping Assets Liabilities = Equity OR Assets = Liabilities Equity 2
Types of Accounts Assets property of the company or what the company owns Liabilities what the company owes to others Equity what the sole proprietor, partners, or shareholders can claim as theirs; contributed capital and retained earnings Revenue what the company earns from sales of goods or services for the owner(s) Expenses the cost to the owner(s) to make the goods or provide the services 3
TAccounts 4
Assets minus Liabilities = Equity OR Assets = Liabilities Equity 5
Ledger Book of Final Entry A list of accounts and the impact to the accounts Assets = Liabilities Equity Revenue Expenses 6
Journal Book of Original Entry A daily record of transactions as they occur 8/17/17 Payroll bank account (asset) $50,000 Corporate bank account (asset) $50,000 Transfer cash for upcoming payroll from corp to division 7
General Ledger Book of Final Entry Balance by Account 111 Division Bank Acct 112 Corporate Bank Acct $50,000 $50,000 Typical Balances Assets Liabilities Equity Income Expenses 8
Chart of Accounts Asset Accounts 100s Liability Accounts 200s Equity Accounts 300s Revenue Accounts 400s Expense Accounts 500s 11x Current Assets 12x Longterm Investments 13x Plant, Property, and Equipment 14x Intangible Assets 111 Cash 112 Accounts Receivable 113 Inventory Bus Unit Division FDC Dept Expense 008 011 42 0214 6010 Company Expense Account Sub Account 10 100507 700000 9
Account Structure By category $300,000 Salaries $100,000 Fringes $50,000 Supplies $50,000 Fixed Costs By activity by category Fixed costs $5,000 Process sales order $2,000 Source parts $2,000 Expedite supplier orders $4,000 Expedite internal processing $5,000 Receive supplier quality $5,000 Reissue purchase orders $9,000 Expedite customer orders $5,000 Schedule intracompany sales $2,000 Request engineering change $6,000 Resolve problems $5,000 Schedule parts 10
Direct vs. Indirect Costs The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects. A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs). The concept is critical when determining the cost of a specific product or activity, since direct costs are always used to compile the cost of something, while indirect costs may not be assigned to such a cost analysis. It can be too difficult to derive a costeffective methodology for the assignment of indirect costs; the result is that many of these costs are considered part of corporate or production overhead, which will exist even if a specific product is not created or an activity does not occur. Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation. Direct costs tend to be variable costs, while indirect costs are more likely to be either fixed costs or period costs. https://www.accountingtools.com/articles 11
Payroll Example 8/17/17 Salary Expense (Equity/Expense) Salaries/wages payable (Liability) Cost of payroll for month of July $6,000 $6,000 Assets = Liabilities Equity 211 Salaries/wages payable $50,000 $6,000 Revenue Expenses 511 Salary Expense $6,000 12
Amount of EE s Pay Owed to Others 8/17/17 Salaries/wages payable (Liability) $2,159 Fed Inc Tax Withheld (Liability) State Inc Tax Withheld (Liability) Soc Security Tax Withheld (Liability) Medicare Tax Withheld (Liability) Health Ins Premiums (Liability) $1,200 $ 300 $ 372 $ 87 $ 200 Deductions from employees checks that are owed to third parties. 13
8/17/17 2017 Midwest Payroll Conference Payroll Example Salaries/wages payable (Liability) Fed Inc Tax Withheld (Liability) State Inc Tax Withheld (Liability) Soc Security Tax Withheld (Liability) Medicare Tax Withheld (Liability) Health Ins Premiums (Liability) $2,159 $1,200 $ 300 $ 372 $ 87 $ 200 Deductions from employees checks that are owed to third parties. Assets = Liabilities Equity 111 Division Bank Acct 211 Salaries/wages payable $50,000 $2,159 $6,000 Revenue Expenses 511 Salary Expense $6,000 14
Payroll Example Assets = Liabilities Equity 212 Fed Inc Tax Withheld payable $1,200 213 State Inc Tax Withheld payable $300 15
Payroll Example Assets = Liabilities Equity 214 Soc Security Tax Withheld payable $372 215 Medicare Tax Withheld payable $87 16
Payroll Example Assets = Liabilities Equity 216 Health Ins Premiums payable $200 17
Payroll cash distribution/net pay 8/20/17 Salaries/wages payable (Liability) $3,841 Cash from Payroll Checking Acct (Asset) Employees are paid the cash we owe them $3, 841 18
Payroll Example 8/20/17 Salaries/wages payable (Liability) Division Bank Acct (Asset) Pay employees for month of July $3,841 $3,841 Assets = Liabilities Equity 111 Division Bank Acct 211 Salaries/wages payable $50,000 $3,841 $2,159 $6,000 $3,841 Acct Bal = $0 Revenue Expenses 511 Salary Expense $6,000 19
Employer s tax liabilities; an expense of doing business 8/17/17 ER Payroll tax expense $831 Social Sec tax payable (Liability) Medicare tax payable (Liability Fed Unemployment tax payable (Liability) State Unemployment tax payable (Liability) $372 $ 87 $ 48 $324 Expenses incurred for employer taxes 20
8/17/17 Payroll tax expense Payroll Example Social Sec tax payable (Liability) Medicare tax payable (Liability Fed Unemployment tax payable (Liability) State Unemployment tax payable (Liability) Expenses incurred for employer taxes $831 Assets = Liabilities Equity $372 $ 87 $ 48 $324 111 Division Bank Acct 211 Salaries/wages payable $50,000 $3,841 $2,159 $3,841 Acct Bal = $0 $6,000 Revenue 511 Salary Expense $6,000 512 ER Tax Expense $831 21
Payroll Example Assets = Liabilities Equity 217 ER SS Tax payable $372 218 ER Medicare Tax payable $87 22
Payroll Example Assets = Liabilities Equity 219 FUTA Tax payable $48 220 SUI Tax payable $324 23
Paying Employee Taxes and Health Ins 8/20/17 Fed Inc Tax Withheld (Liability) State Inc Tax Withheld (Liability) Soc Sec Tax Withheld (Liability) Med Tax Withheld (Liability) Health Ins Premiums (Liability) $1,200 $ 300 $ 372 $ 87 $ 200 Cash from Payroll Checking Acct (Asset) Paying taxes that were withheld from employees $2,159 24
8/20/17 2017 Midwest Payroll Conference Payroll Example Fed Inc Tax Withheld (Liability) State Inc Tax Withheld (Liability) Soc Sec Tax Withheld (Liability) Med Tax Withheld (Liability) Health Ins Premiums (Liability) Cash from Payroll Checking Acct (Asset) $1,200 $ 300 $ 372 $ 87 $ 200 Paying taxes that were withheld from employees $2,159 Assets = Liabilities Equity 211 Salaries/wages payable $50,000 $3,961 $2,159 $6,000 $3, 841 Revenue 511 Salary Expense $6,000 512 ER Tax Expense $831 25
Payroll Example Assets = Liabilities Equity 212 Fed Inc Tax Withheld payable $1,200 $1,200 213 State Inc Tax Withheld payable $300 $300 26
Payroll Example Assets = Liabilities Equity 214 Soc Security Tax Withheld payable $372 $372 215 Medicare Tax Withheld payable $87 $87 27
Payroll Example Assets = Liabilities Equity 216 Health Ins Premiums payable $200 $200 28
Paying the Employer Taxes 8/20/17 Social Sec Tax Payable (Liability) Medicare Tax Payable (Liability) FUTA Tax Payable (Liability) SUTA Payable (Liability) $372 $ 87 $ 48 $324 Cash from Payroll Checking Acct (Asset) Paying employer taxes $831 29
Payroll Example 8/20/17 Social Sec Tax Payable (Liability) Medicare Tax Payable (Liability) FUTA Tax Payable (Liability) SUTA Payable (Liability) Cash from Payroll Checking Acct (Asset) Paying employer taxes $372 $ 87 $ 48 $324 $831 Assets = Liabilities Equity 111 Division Bank Acct 211 Salaries/wages payable $50,000 $3,841 $2,159 $ 831 $6,000 Revenue $3,841 $6,000 511 Salary Expense 512 ER Tax Expense $831 30
Payroll Example Assets = Liabilities Equity 217 ER SS Tax payable $372 $372 218 ER Medicare Tax payable $87 $87 31
Payroll Example Assets = Liabilities Equity 219 FUTA Tax payable $48 $48 220 SUI Tax payable $324 $324 32
Accrual estimated payroll for fiscal period 8/31/17 Accrued Payroll Expense $30,000 Accrued Payroll Liability $30,000 Accrual of 10 days pay at $3,000 per day May also want to accrue 10 days overtime pay at a determined % times $3,000 per day 33
Payroll Example 8/31/17 Accrued Payroll Expense $30,000 Accrued Payroll Liability Accrual of 10 days pay at $3,000 per day $30,000 Assets = Liabilities Equity 111 Cash 221 Accrued Payroll Liability $150,000 $30,000 Revenue 513 Accrued Salary Exp $30,000 34
Employer s Accrued Tax Liabilities 8/31/17 Accrued Payroll Tax Expense Accrued SS Tax Expense Accrued Medicare Tax Payable Accrued FUTA Tax Payable Accrued SUI Tax Payable $4,155 $1,860 $ 435 $ 240 $1,620 Expenses accrued for employer taxes 35
Payroll Example 8/31/17 Accr ER Tax Expense $4,155 Accrued SS Tax Payable $1,860 Accrued Medicare Tax Payable $ 435 Accrued FUTA Tax Payable $ 240 Accrued SUI Tax Payable $1,620 Accrue for ER Taxes Assets = Liabilities Equity 221 Accrued Payroll Liability $150,000 $30,000 Revenue 513 Accr Salary Expense $30,000 514 Accr ER Tax Expense $4,155 36
Payroll Example Assets = Liabilities Equity 222 Accrued SS Tax payable $1,860 223 Accrued Medicare payable $435 37
Payroll Example Assets = Liabilities Equity 224 Accrued FUTA Tax payable $240 225 Accrued SUI Tax payable $1,620 38
Reverse Accruals in new fiscal period 9/1/17 Accrued Payroll Liability $30,000 Accrued Payroll Expense $30,000 Reverse Salary Accrual 39
Payroll Example 9/1/17 Accrued Payroll Liability $30,000 Accrued Payroll Expense $30,000 Reverse Salary Accrual Assets = Liabilities Equity 111 Division Bank Acct 221 Accrued Payroll Liability $150,000 $30,000 $30,000 Revenue 513 Accr Salary Expense $30,000 $30,000 514 Accr ER Tax Expense $4155 40
Reverse employer s accrued tax liabilities 9/1/17 Accrued SS Tax Payable Accrued Medicare Tax Payable Accrued FUTA Tax Payable Accrued SUI Tax Payable Payroll tax expense $1,860 $ 435 $ 240 $1,620 $4,155 Reverse expenses accrued for employer tax liability 41
Payroll Example 8/31/17 Accrued SS Tax Payable Accrued Medicare Tax Payable Accrued FUTA Tax Payable Accrued SUI Tax Payable Accr ER Tax Expense Reverse Accrual for ER Taxes $1,860 $ 435 $ 240 $1,620 $4,155 Assets = Liabilities Equity 111 Division Bank Acct 221 Accrued Payroll Liability $150,000 $30,000 $30,000 Revenue 513 Accr Salary Expense $30,000 514 Accr ER Tax Expense $4,155 $30,000 $4,155 42
Payroll Example Assets = Liabilities Equity 222 Accrued SS Tax payable $1,860 $1,860 223 Accrued Medicare payable $435 $435 43
Payroll Example Assets = Liabilities Equity 224 Accrued FUTA Tax payable $240 $240 225 Accrued SUI Tax payable $1,620 $1,620 What other expenses might need to be accrued? 44
Clearing Accounts and Suspense Accounts Both are temporary accounts used for recording income and expense Clearing accounts are used to hold transactions for later posting correctly and completely Accounts receivable check until the money is cleared Hold construction costs until project is complete Employee repays a previously received tuition reimbursement by personal check but check has not yet cleared the bank Suspense accounts are used when there appears to be a problem and offsets a transaction until the problem can be resolved Employee is owed a bonus but account to be charged has not yet been identified Employee sends a personal check to payroll but reason has yet to be determined Both are periodically balanced to zero; if source or purpose is unknown, balance may have to be written off. 45
Financial Statements Balance Sheet Value of a business at a specific point in time, generally the period end date Assets, Liabilities, Equity (from Income Statement) Income Statement Summarizes revenue and expenses for a period of time Income, Expenses, Retained Earnings, Contributed Capital 46
Subsystems Cash Receipts Journal All receipts of cash Cash Payment Journal All payments of cash Purchases Journal All purchases of merchandise or services on credit Sales Journal All sales of merchandise or services on credit Payroll Journal All payroll and personnel expenses/liabilities General Journal All remaining transactions Separate Ledgers may also be maintained Payroll Ledger
Financial Ratios Number ratios, percent ratios, fraction ratios Sales / Net Income = Number ratio $400,000 / $40,000 = 10 Expressed as 10:1 ratio New Income / Sales = Percent ratio $40,000 / $400,000 =.10 Expressed as 10% Net Income / Sales = Fraction ratio $40,000 / $400,000 = 1/10 Expressed as 1/10 th 48
Financial Ratios Liquidity ratio Ability to pay shortterm debts Current ratio = Current assets / current liabilities $20,000 / $10,000 = 2:1 Business owns $2.00 of current assets for each $1 of current liabilities owed Leverage ratios Relative amount of funds in the business supplied by creditors and shareholders; ability to meet longterm financial obligations Debtequity ratio = Long term liabilities / equity $150,000 / $500,000 =.3 Ratio of less than 1.5 is generally acceptable $750,000 / $500,000 = 1.5 49
Financial Ratios Profitability ratios Management s ability to generate a financial return on sales or investments; also called ROI (Return on Investment). Ratio of profit to capital, or rate of return from capital (equity plus longterm debt) Net Income / (Equity Long Term Debt) = ROI $200,000 / ($750,000 $250,000) =.20 or 20% 50
SarbanesOxley Compliance Publicly traded companies CEO and CFO certifications Complaint procedures established No loans to officers or directors Payroll s roll in SOX Develop process and workflow maps Create written documentation Audit recordkeeping and retention Identify and communicate gaps and risks Prepare action plans, when needed Monitor progress of action plans Monitor outsourcing companies SAS 70 Type I and II 51
Internal Controls Segregation of duties Rotation of job duties Check distribution Negative deductions Secure blank check stock Time and salary change approvals Internal auditors 52
GAAP Generally Accepted Accounting Principles Business Entity Concept Personal transactions kept separate from business transactions Continuing Concern Concept Ongoing business with assets valued at cost, not a business for sale with assets valued at FMV Time Period Concept Fiscal Year may, or may not, coincide with Calendar Year Cost Principle Assets valued at cost minus depreciation since this is an ongoing business concern Objectivity Principle Assets are valued without respect to personal opinions or emotions Matching Principle Expenses and revenue are recorded in the period in which they are spent or earned Realization Principle Revenue is recognized (or realized) when earned Consistency Principle Transactions must be recorded in a consistent manner 53
International Financial Reporting Standards IFRS Approximately 120 nations and reporting jurisdictions permit or require IFRS. Approximately 90 countries have fully confirmed with IFRS. The IFRS Foundation is the legal entity under which the International Accounting Standards Board (IASB) operates. The Foundation is governed by a board of 22 trustees. IFRS Foundation is the new name, approved in January 2010, of the IASC Foundation. The name change formally took effect on 1 July 2010. From that date, the Foundation's website (including IASB materials) also changed to www.ifrs.org 54
International Financial Reporting Standards IFRS The objectives of the IFRS Foundation are: to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. These standards should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world s capital markets and other users of financial information make economic decisions to promote the use and rigorous application of those standards in fulfilling the above objectives, to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings to promote and facilitate adoption of International Financial Reporting Standards (IFRSs), being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs. 55
What is the difference between the IFRS and GAAP? PwC has a free, 256 page download IFRS and US GAAP: similarities and differences https://www.pwc.com/us/en/cfodirect/publications/accountingguides/ifrsandusgaapsimilaritiesanddifferences.html 56
Questions? 57