© 1991 John Petroff

INTRODUCTION TO PAYROLLS
Payrolls represent the entire amount paid to all employees over a
given accounting period. Because employees are very sensitive to
payroll errors or any irregularities, payroll systems should
assure accurate and timely payments. Accurate records are also
required by federal and state government agencies. Payroll
expenditures typically have a significant impact on the income
statement of a firm. Manual labor, whether skilled or unskilled
usually receives renumeration in the form of wages. Wages are
usually stated in terms of an hourly rate, weekly rate, or on a
piecework basis.

DETERMINING EMPLOYEE EARNINGS 1) Earnings are computed by multiplying hours worked by a hourly rate. 2) When hours worked is less than or equal to 40, Earnings = Hours * Rate (E = H * R). 3) When a employee works more than fourty hours and is entitled to time and a half for each hour worked over fourty, the following formula should be used: E = 40R + 1.5(H - 40).

INTRODUCTION TO PAYROLLS
Salaries are paid to those individuals that hold administrative,
executive, managerial or sales positions. Their pay is usually
stated on a monthy or annual basis. Payment for work can take the
form of property, shelter, food, services, securities, or
promissory notes. Salaries and wages are often supplemented
by commissions, bonuses, cost-of-living adjustments, profit
sharing and/or pension plans. Employers and employees typically
meet and agree on a fair salary or wage rate.

PROFIT-SHARING BONUSES
Bonuses are usually based upon the productivity of an individual.
Today's companies are relying less on salary and more on bonuses
to attract and reward executives. Bonuses can be computed in
several different ways, each yielding a different amount. The
bonus percentage can be based on income
1)- before deducting the bonus and income taxes,
2)- after deducting the bonus, but before deducting income taxes,
3)- before deducting the bonus, but after deducting income taxes,
4)- after deducting the bonus and income taxes.

CALCULATING A BONUS BASED ON INCOME BEFORE DEDUCTING A BONUS OR TAXES 1) Formula: bonus = bonus rate * income (B = BR * Y) 2) Example: income = $75,000, bonus rate = 15%, and tax rate = 43%. 3) Solution: B= .15($75,000) = $11,250

EMPLOYEE EARNINGS DEDUCTIONS
Gross pay is total earnings of an employee before any deductions.
Net pay is the ammount an employee receives after all deductions.
Deductions are commonly made for federal, state, and local income
taxes. While state and local income taxes vary from state to
state, all employers must withhold federal income and FICA taxes.
Deductions can be made for voluntary items such as health
insurance, charitable contributions, pension fund contributions
and union dues.

FICA TAXES The Federal Insurance Contributions Act requires most employers to withhold FICA taxes from their employees. The purpose of FICA taxes is to use them for federal programs that provide medicare benefits, old-age and disability benefits, and survivor benefits. The amount of FICA taxes that may be collected is subject to a ceiling, making it necessary for the employer to keep track of cumulative earnings of each employee.

EMPLOYER'S PAYROLL TAX LIABILITIES
Employers can be subject to both federal and state taxes
based on the amount of compensation paid to their employees.
FICA taxes by the employer are equal to the payments made by an
employee. Federal Unemployment Compensation Tax is levied on
employers only, and the funds collected are used to provide a
temporary relief to individuals unemployed as a result of
economic forces beyond their control. State Unemployment
Compensation Taxes are paid by employers only.

INCOME TAXES Most employers are required to withhold federal income taxes. State and local income taxes do not exist everywhere. In areas where they do exist, income taxes should also be withheld. Factors that influence the amount of income tax deductions are: gross pay, estimated deductions, exemptions claimed, and marital status.

PAYROLL ACCOUNTING SYSTEMS
The three major components of a payroll system are:
1)- payroll register: it is used to assemble and summarize data
for each payroll period,
2)- employee's earnings record: it provides detailed information
for each employee, and
3)- payroll checks, direct ATM deposits or cash, usually
accompanied by a statement showing all the deductions.

PAYROLL REGISTER The payroll register is a multicolumn journal used to assemble and summarize payroll data. Information that can typically be found is the following: employee names, total hours worked, regular earnings, overtime earnings, total earnings, tax deductions, net amount paid, check number, and a debit to an expense account. Checks are recorded in the payroll register so no other records need to be maintained on payments. The accuracy of the payroll register can be determined by cross-verification of its columns. The regular and overtime pay columns should always be equal to the salary and wage expense columns.

COMPONENTS OF THE PAYROLL SYSTEM
The payroll register consists of constant and variable elements.
Wage rate are typical constant element. Hours worked vary.
Information obtained from the payroll register is used for
general ledger entries, to issue payroll checks and statements,
and to update employees' earnings records. Data from the
employees' earnings records are used to prepare wage and tax
statements and payroll tax returns. Entries recorded in the
general ledger are used to prepare the income statement and
balance sheet.

PAYROLL SYSTEM CONTROLS
Internal controls for payroll systems are similar to those for
cash disbursements. A voucher system is recommended. When names
are to be deleted or added to the payroll register, they should
be supported by a written statement from personnel. Attendance
records are taken by personnel to ensure accurate determination
of pay, vacation benefits and sick leave benefits. As an extra
measure of safety, employee identification cards are often issued
and must be presented by employees when receiving paychecks.

LIABILITIES FOR EMPLOYEE FRINGE BENEFITS
When employers agree to pay part or all of the costs of fringe
benefits, they incur an expense and a liability. Fringe benefits
commonly offered by employers are vacations, health insurance,
pension plans, life insurance and disability insurance. The cost
of the fringe benefits should be properly matched to the period
an employee has worked. If the employee has not received the
fringe benefit, a liability remains. Depending on when the
liability is expected to be paid, it may be classified as either
short-term or long-term on the balance sheet.

NOTES PAYABLE & INTEREST EXPENSE
Promissory notes are commonly issued for goods purchased on
account or when a bank extends a short-term loan. Notes issued
by banks can be interest-bearing or non-interest bearing.
Non-interest bearing notes deduct the interest from the face
value (or maturity value) of the note from the amount loaned to
the borrower. An interest bearing note requires payment of both
the principal and interest accrued at maturity. An adjusting
entry is necessary whenever interest is paid a day other than the
end of the financial periods.

PRODUCT WARRANTY LIABILITIES
To record a product warranty liability, Debit Product Warranty
Expense and credit Product Warranty Payable. When a product is
repaired or replaced, debit Product Warranty Payable and credit
Inventory or an expense account. The amount recorded for product
warranty liabilities is estimated, and adjustments may be
necessary if more or less goods are actually replaced or
repaired.

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