Chapter 1 Payroll Accounting - Transtutors · 2017. 12. 14. · Payroll Accounting ... Payroll Fundamentals 2 1-3 Introduction In Payroll Compliance Legislation (PCL), students learned

© The Canadian Payroll Association – Payroll Fundamentals 2 1-1 Vs 11.0

Payroll Accounting

Learning Objectives: Upon completion of this chapter, you should be able to:

1. identify and apply the payroll-specific accounts in a chart of accounts

2. prepare a payroll journal entry

3. determine the effect of payroll journal entries on the income statement and balance sheet

4. demonstrate the difference between cash accounting and accrual accounting

5. prepare accrual and reversal journal entries

6. analyze the payroll expense accounts for reasonableness

7. reconcile payroll liability accounts

8. prepare journal entries for payroll corrections

Communication Objective: Upon completion of this chapter, you should be able to explain the impact of charging an employee’s payroll expense to the wrong account and how to correct the error.

Chapter

1

Chapter 1 Payroll Accounting

© The Canadian Payroll Association – Payroll Fundamentals 2 1-2

Chapter Contents Introduction ........................................................................................................................ 1-3 General Accounting ........................................................................................................... 1-3

The General Ledger ....................................................................................................... 1-4 Types of Accounts ..................................................................................................... 1-4 Posting Journal Entries .............................................................................................. 1-8 Trial Balance ............................................................................................................ 1-14 Income Statement and Balance Sheet ...................................................................... 1-15

Content Review ............................................................................................................ 1-17 Review Questions ........................................................................................................ 1-18

Payroll Accounting .......................................................................................................... 1-19 Payroll Journal Entries ................................................................................................. 1-19 Content Review ............................................................................................................ 1-37 Review Questions ........................................................................................................ 1-38

Accrual Method of Accounting ....................................................................................... 1-41 Workers’ Compensation Accruals ............................................................................... 1-43 Vacation Accruals ........................................................................................................ 1-44 Sick Leave Accruals .................................................................................................... 1-46 Employer Health Taxes ................................................................................................ 1-46 Labour Costs Accruals ................................................................................................. 1-46 Content Review ............................................................................................................ 1-49 Review Questions ........................................................................................................ 1-50

Reconciliation and Analysis of Accounts ........................................................................ 1-54 Journal Entry Analysis ................................................................................................. 1-55 Expense Accounts ........................................................................................................ 1-55 Liability Accounts ........................................................................................................ 1-59 Payroll Audit ................................................................................................................ 1-63 Payroll and Budgets ..................................................................................................... 1-63 Content Review ............................................................................................................ 1-64 Review Questions ........................................................................................................ 1-65

Chapter Review Questions and Answers ......................................................................... 1-67



Introduction In Payroll Compliance Legislation (PCL), students learned about the federal and provincial/territorial legislation and government agencies that impact payroll, from an employer and an employee’s perspective. Payroll Fundamentals I provided students with the information and processes necessary to produce payroll at an employee level. Payroll Fundamentals 2 covers the areas that payroll is responsible for at the organizational level. These include payroll accounting, government and third party remittances and reconciliations, and federal and provincial year-end filing requirements. Successful completion of an introductory accounting course is a pre-requisite for students enrolled in Payroll Fundamentals 2. This chapter on Payroll Accounting will apply specific payroll-related accounting requirements to the general concepts and processes already learned.

General Accounting The accounting process begins with a financial transaction following a specific flow or cycle ending with the financial statements.

One of the responsibilities of the payroll department is to ensure that all payroll transactions are accurately recorded in the accounting system of the organization. Payroll information will be tracked from the payroll transaction through the General Ledger to the financial statements of the organization. Note: The calculations of the individual employees’ pays in this material are not necessarily based on current year statutory deductions and are used only to demonstrate the accounting process. Dates used throughout the chapter may not be for the current year and are being used for demonstration purposes only. In most cases the year will be referred to as 20XX.



Prior to exploring the specifics of payroll accounting, it is important to understand the general accounting principles that guide the payroll function.

The General Ledger All the accounts that we use to record financial transactions form the General Ledger of an organization. The purpose of the General Ledger is to keep an organized record, by account, of the organization’s financial transactions and holds information that is required to prepare financial statements. Each of the accounts is given a numerical reference number that is usually grouped by account type into a chart of accounts. An example of a simple chart of accounts is listed below: Account Number Range Account Type

1000 – 1999 Asset accounts 2000 – 2999 Liability accounts 3000 – 3999 Owners’ equity accounts 4000 – 4999 Revenue accounts 5000 – 5999 Expense accounts Each account in the General Ledger can have two types of entries − debits and credits. Debit entries are recorded in the left column of a ledger account and credit entries are recorded in the right column of the ledger account. Note: For purposes of this course we will use account names for journal entries however, most systems use both a number and a name as a unique identifier.

Types of Accounts A typical for-profit organization has five different types of accounts:

asset accounts

liability accounts

revenue accounts

expense accounts

owners’ equity accounts (sometimes called shareholders’ equity accounts if there are shareholders in the business or partnership’s equity accounts if the business is in the form of a partnership)

The number of accounts used by different organizations can vary; some small organizations can have as few as a dozen accounts while large organizations may have hundreds or thousands of accounts.



The account types are described as: Asset Accounts

An asset account contains the value of items owned by the organization. An organization’s asset accounts could include cash, accounts receivable, prepaid expenses and inventory. Payroll assets are typically items that have been prepaid to or for the employee, such as pay advances or loans.

Liability Accounts

A liability account indicates the money that the organization owes to its creditors. A liability account could be accounts payable, salaries and wages payable (sometimes referred to as net pay or payroll clearing account) or vacation pay payable. Since employees’ deductions are monies collected by the organization and owed to a third party, the deductions appear in a liability account. Payroll liability accounts may be for statutory, legal, company-compulsory or voluntary deductions.

Revenue Accounts

Revenue accounts are used to record the income earned by the organization during the accounting cycle. Generally, the revenues result from the sale of merchandise, the performance of services, the rental of property and the lending of money. When a loan is paid back with interest, the interest becomes revenue for the lender. Since the employees’ payroll is not generating revenue, the payroll function does not normally use any of these accounts. Expense Accounts

Expenses are costs incurred by an organization in the process of earning revenue during a given period of time. Typical expense accounts related to payroll would include such items as wages, salaries, employer payroll costs, and group insurance benefits costs. Payroll costs or expenses have a direct impact on the profitability of an organization. Equity Account

The equity account shows the owners’ or shareholders’ worth or interest in the organization. Equity is the amount remaining of the assets after the liabilities are deducted. Sometimes equity is referred to as net assets. Owners’ equity is divided into contributed capital (equity created through investments by owners or shareholders) and retained earnings (equity that has resulted from the organization’s profitable activities). Each type of account is shown in the following chart with the effect that a debit or credit entry has on the normal balance. In the case of asset and expense accounts, which have normal debit balances, debit entries will increase the account balance. Credit entries made to these accounts will have a negative effect and will decrease the normal debit balance.



Similarly, liability, revenue and equity accounts that have normal credit balances will see those balances increase with each credit entry. Debit entries made to liability, equity, and revenue accounts will have a negative effect and will decrease the normal credit balance.

TYPE OF ACCOUNT

NORMAL BALANCE

DEBIT ENTRY CREDIT ENTRY

Asset Debit Increases Balance Decreases Balance Liability Credit Decreases Balance Increases Balance Revenue Credit Decreases Balance Increases Balance Expense Debit Increases Balance Decreases Balance Equity Credit Decreases Balance Increases Balance

The different types of accounts are used for different accounting purposes. The closing balances in the revenue and expense accounts are used to produce the Income Statement and the closing balances in the asset, liability and owners’ equity accounts are used to produce the Balance Sheet. Both the Income Statement and the Balance Sheet will be explained later in this chapter. To better understand the impact of payroll in financial activities, the following is a sample of a chart of accounts where the payroll related accounts are highlighted.

Example: CHART OF ACCOUNTS

Assets 1000 Liabilities 2000 Current Assets Current Liabilities 101 Cash – petty cash 201 Accounts payable – general 102 Bank 202 Interest payable 103 Bank – Payroll account 203 Office salaries payable 104 Accounts Receivable 204 Rent payable 105 Interest Receivable 205 Warehouse salaries- payable 106 Rent Receivable 206 C/QPP contributions payable 107 Employees’ advances 207 EI premiums payable 108 Merchandise inventory 208 Federal income tax payable 109 Office Supplies 209 Quebec income tax payable 110 Allowance for doubtful accounts 210 QPIP premiums payable 111 Prepaid insurance 211 Life insurance payable 112 Prepaid interest 212 AD&D payable 113 Prepaid property taxes 213 United Way payable 114 Prepaid rent 214 Medical/dental payable 215 Union dues payable Long-term Investments 216 CNT payable 141 Investment in shares 217 RRSP payable 142 Investment in bonds 218 Pension payable 219 Social club payable Capital Assets 220 Third Party Demand payable 151 Trucks 290 Garnishments payable 152 Accumulated amortization-trucks 300 Miscellaneous deductions



Example: CHART OF ACCOUNTS

Assets 1000 Liabilities 2000 Current Assets Current Liabilities 153 Office equipment 301 Accrued office salaries 154 Accumulated amortization-office

equipment 302 Accrued warehouse salaries

155 Building 303 Accrued office vacation 156 Accumulated amortization-building 304 Accrued warehouse vacation 157 Land 305 Salaries and wages payable (net

pay) 158 Land improvements 306 Accrued payroll expenses 159 Accumulated amortization-land

improvements 310 Workers’ Compensation accrual

311 HST payable Intangible Assets 312 GST payable 191 Patents 313 QST payable 192 Franchise 314 PST payable

Revenues 4000 Owners’ Equity 3000 701 Sales revenue 401 Owners’ equity 702 Returns and allowances 402 Retained earnings 703 Sales discounts 403 Net earnings to date 704 Interest earned 705 Earnings from investment

Expenses 5000 Administration expenses Warehouse expenses 201 Office – salaries 601 Raw material purchase 202 Office – sick pay 602 Warehouse wages-regular 203 Office – overtime 603 Warehouse overtime 204 Office – vacation 604 Warehouse shift pay 205 Staff incentive 605 Warehouse stat pay 206 Office lieu/severance pay 620 Warehouse sick pay 207 Office – stat pay 621 Warehouse vacation pay 301 Marketing – salaries 640 Warehouse – lieu/severance pay 302 Marketing – overtime 651 Warehouse – C/QPP employer 308 Sales – salaries 652 Warehouse – EI employer 309 Sales – overtime 653 Group benefits – employer 654 Company pension employer Employee fringe benefits – administration 655 Employer RRSP 401 C/QPP employer 656 Workers’ compensation expense 402 EI employer 660 Employer payroll expenses 403 Group insurance benefits 404 Company pension plan Other expenses405 Employer RRSP contributions 700 Amortization & depreciation 406 Manitoba employer tax 720 Interest expense 407 Newfoundland and Labrador employer tax 725 Office supplies



408 Ontario EHT 740 Rent expense 409 QHSF 750 Office equipment expense 410 Quebec employer taxes – other 781 Utilities 411 Workers’ compensation expense 782 Telephone 412 QPIP employer 783 Corporate tax 413 CNT 784 Auditors expense 414 Vacation – administration 785 Bank service charges 786 Processing fee 800 Clearing accounts 850 Income summary

Each General Ledger account consists of the following five elements:

account name

opening balance – debit (DR) or credit (CR)

reference (source of the entry)

debit and credit transactions

closing balance (DR or CR)

Posting Journal Entries In order to record each financial transaction in the accounts, the transaction is journalized and the debits and credits are posted to the relevant accounts. To journalize a transaction is to create a journal entry which reflects the financial impact of a particular transaction. To post the journal entry to the accounts is to record each debit or credit amount in the journal entry in the appropriate account. Each journal entry must contain the following components:

a journal entry reference or number

the date of the transaction

the debit and credit amounts to be applied to each account

a total of the debit entries and of the credit entries

a brief explanation of the transaction



Example:

The organization received a payment of $1,000.00 on account from one of its customers. Journal Entry #XXX

DATE ACCOUNT NAME DEBIT CREDIT September 3, 20XX Cash 1,000.00 Accounts Receivable 1,000.00Total 1,000.00 1,000.00To record cash received from an accounts receivable account.

Note that the left side of the account, the debit side, is entered first, followed by the transactions to the credit side. This is not always the case in a larger organization where more complex transactions are recorded as one entry, or where the journal entry may be system-generated. Regardless, the total of the debit entries for each journal entry must equal the total of the credit entries. The journal entries, detailing the debit and credit amounts for each account, are posted to the General Ledger at regular intervals. Posting is the process of transferring information from the journal entry to the applicable account in the General Ledger. Once the transactions are journalized and each journal entry has been posted to the General Ledger accounts, each of the accounts will have either a debit (DR) or credit (CR) balance. This shows the balance of that account for a particular accounting period.

Example:

Using the previous example, the General Ledger would appear as follows once the information from the journal entry has been posted: Account Name: Cash

DATE REFERENCE DEBIT CREDIT BALANCE 20XX Balance forward 1,000.00 DRSept. 3, 20XX JE #1 1,000.00 2,000.00 DR

Account Name: Accounts Receivable

DATE REFERENCE DEBIT CREDIT BALANCE

20XX Balance forward 4,500.00 DR

Sept. 3, 20XX JE #1 1,000.00 3,500.00 DR



Double-entry Method of Accounting The double-entry method of accounting is the universally used method of accounting. This means that each journal entry posted to the accounts must balance; the total of the debit amounts in the journal entry must equal the total of the credit amounts in that same journal entry. Example:

The journal entry for the following transaction which took place on September 3, 20XX is shown below. The organization remits union dues of $2,000.00, deducted from the employees, to the union.

Journal Entry #XXX DATE ACCOUNT NAME DEBIT CREDIT

September 3, 20XX Union dues payable 2,000.00 Cash 2,000.00Total 2,000.00 2,000.00To record union dues paid to the union.

To illustrate the effect of posting to accounts, a visual representation of the accounting process using the standard transaction data entry method called a T-account. This method demonstrates the fundamental principles of the double-entry method of accounting. These are referred to as T-accounts because they resemble the letter T and visually show the effect of each transaction as it affects the account.

Each class of account is shown below with the effect that a debit or credit entry has on the normal balance. In the case of asset and expense accounts, which have normal debit balances, debit entries will increase the account balance. Credit entries made to these accounts will have a negative effect and will decrease the normal debit balance. T-accounts represent actual general ledger accounts but are simpler to use for demonstration on how entries are posted.

Similarly, liability, equity, and revenue accounts that have normal credit balances will see those balances increase with each credit entry. Debit entries made to liability, equity, and revenue accounts will have a negative effect and will decrease the normal credit balance.

ASSETS

(normal DR balance) LIABILITIES

(normal CR balance) OWNER'S EQUITY

(normal CR balance)

DR CR DR CR DR CR

+ - - + - +



REVENUES (normal CR balance)

EXPENSES (normal DR balance)

DR CR DR CR

- + + -

Accounting Periods An organization records its financial transactions and activities over consecutive periods of time. Many organizations use a twelve-month calendar period as their annual accounting year, in which case their accounting year ends on the same date every year. This date is not necessarily December 31st. Example:

Smith Broadcasting’s twelve-month accounting year runs from January 1st to December 31st. Creative Cushion’s twelve-month accounting year runs from April 1st to March 31st. Some organizations will divide the accounting year into monthly accounting periods that end on the last day of each calendar month while others will divide the accounting year into periods of four and five week months.



Example:

Smith Broadcasting divides their accounting year of January to December into the twelve calendar months. Their month-end is the last day of the calendar month.



Creative Cushion divides their accounting year from April to March into periods of four and five week months, always ending on a Friday. The month-end dates are bolded in the following calendar.

APRIL MAY S M T W T F S S M T W T F S 1 1 2 3 4 5 6 2 3 4 5 6 7 8 7 8 9 10 11 12 13 9 10 11 12 13 14 15 14 15 16 17 18 19 20 16 17 18 19 20 21 22 21 22 23 24 25 26 27 23 24 25 26 27 28 29 28 29 30 31 30

JUNE JULY

S M T W T F S S M T W T F S 1 2 3 1 4 5 6 7 8 9 10 2 3 4 5 6 7 8 11 12 13 14 15 16 17 9 10 11 12 13 14 15 18 19 20 21 22 23 24 16 17 18 19 20 21 22 25 26 27 28 29 30 23 24 25 26 27 28 29 30 31

AUGUST SEPTEMBER

S M T W T F S S M T W T F S 1 2 3 4 5 1 2 6 7 8 9 10 11 12 3 4 5 6 7 8 9 13 14 15 16 17 18 19 10 11 12 13 14 15 16 20 21 22 23 24 25 26 17 18 19 20 21 22 23 27 28 29 30 31 24 25 26 27 28 29 30

OCTOBER NOVEMBER

S M T W T F S S M T W T F S 1 2 3 4 5 6 7 1 2 3 4 8 9 10 11 12 13 14 5 6 7 8 9 10 11 15 16 17 18 19 20 21 12 13 14 15 16 17 18

22 23 24 25 26

27 28 19 20 21 22 23 24 25

29 30 31 26 27 28 29 30

DECEMBER JANUARY

S M T W T F S S M T W T F S 1 2 1 2 3 4 5 6 3 4 5 6 7 8 9 7 8 9 10 11 12 13 10 11 12 13 14 15 16 14 15 16 17 18 19 20 17 18 19 20 21 22 23 21 22 23 24 25 26 27 24 25 26 27 28 29 30 28 29 30 31 31

FEBRUARY MARCH

S M T W T F S S M T W T F S

1 2 3 1 2 3

4 5 6 7 8 9 10 4 5 6 7 8 9 10

11 12 13 14 15 16 17 11 12 13 14 15 16 17

18 19 20 21 22 23 24 18 19 20 21 22 23 24

25 26 27 28 25 26 27 28 29 30 31



The accounting period used to record financial transactions is determined by the organization and may be based on the type of business activity. Example:

Tyler Automobile Sales starts their year on October 1st, just before the new car models are brought out, and ends their year on the following September 30th.

Trial Balance Creating the trial balance is the first step in the preparation of financial statements. It is used to ensure that for every debit entry recorded, a corresponding credit entry has been recorded, in accordance with the double-entry method of accounting. A trial balance report is a listing of all the organization's accounts and their balances. If the totals of the Trial Balance do not agree, the differences must be investigated and resolved before the financial statements are prepared. This is especially important when transactions are recorded in a batch (for example, a group of 100 payroll entries), summarized and posted as one entry. If each single entry does not balance, the entire batch will be out of balance. Trial balance totals may agree even if there are errors. An example would be an incorrect debit entry being offset by an equally incorrect credit entry. Likewise, a Trial Balance gives no proof or exception errors when transactions are recorded incorrectly or omitted. The following is an example of a partial Trial Balance:

ABC Company

Trial Balance

As at October 31, 20xx

ACCOUNT NO. ACCOUNT NAME DR CR

1000-102 Cash - Bank $ 857.74

1000-104 Accounts Receivable 1,630.13

1000-153 Office Equipment 495.33

2000-312 GST Payable $ 126.41

3000-401 Owner's Equity 1,000.00

4000-701 Sales Revenue 2,106.79

5000-201 Office Salaries Expense 250.00

$3,233.20 $3,233.20



Income Statement and Balance Sheet The account balances in the General Ledger are used to create the two primary statements that are used in financial reporting: the Income Statement and the Balance Sheet. Income Statement The Income Statement is a financial statement which presents the revenue, expenses, and net profit or loss of an organization during a specified period of time. This is called an accounting period or cycle (commonly 3-month, 6-month or 12-month periods); the length of the period would depend on management’s needs for up-to-date information to make sound business decisions. Revenue and expense accounts appear on the Income Statement. The main purpose of an Income Statement is to show whether the organization has earned a profit or incurred a loss during the period being reported. This is determined by calculating the net income.

Revenue - Expenses = Net Income/Loss A profit is earned if revenues exceed expenses; a loss is incurred when expenses exceed revenues. At the end of the accounting period the revenue and expense accounts are closed out to zero balances with the resulting net income being added (credited) to the owners’ equity account on the Balance Sheet. A net loss would be subtracted (debited) from the owners’ equity account. The following is an example of a partial Income Statement.

Example:

ABC Company Income Statement

For the period ended August 31, 20XX

Revenue:

Sales A $42,000.00 Sales B 33,000.00 Total Revenue $75,000.00

Expenses:

Payroll 11,000.00

Net Income $64,000.00



The Balance Sheet The Balance Sheet is a financial statement which presents and summarizes the organization’s assets, liabilities and owners’ equity at a specified point in time. The information provided on the Balance Sheet is used in the decision-making process of an organization; it also presents the organization’s financial position to the shareholders or investors. It shows that the assets are equal to the combined total of the liabilities and equity. As an organization’s profits increase, the gain can be used to pay off debts (liabilities). The owners’/shareholders’ equity, also called retained earnings, is the total of investments made by the owners or shareholders in the business and the accumulated profits (or losses) earned by the business from prior years. The Balance Sheet is normally presented in such a manner that the reader easily sees that its components are balanced.

Assets = Liabilities + Owners’ Equity For example, on a one-page Balance Sheet the assets could be presented on the top portion of the page and the liabilities and owners’ equity could be presented on the lower portion of the page, below the assets. Another format, as shown below, is to present the assets on the left side of the page and the liabilities and owners’ equity on the right side. The reader can quickly see that the total of the assets equals the total of the liabilities and owners’ equity. The following is an example of a simple balance sheet. Example:

ABC Company Balance Sheet

As at August 31, 20XXAssets Liabilities and Owner’s Equity

Cash $ 240,000.00 Office Equipment 20,000.00 Building 1,000,000.00 Total Assets $1,260,000.00

Accounts Payable $140,000.00 Payroll Payable 200,000.00 Bank Loan 500,000.00 Total Liabilities 840,000.00 Owners’ Equity H. Smithers 420,000.00 Total Liabilities and Owners’ Equity $1,260,000.00

Remember that the total of the organization’s net profit or loss is included in the Owners’ Equity as retained earnings. Therefore payroll expenses, which are recorded on the Income Statement, do not appear as a separate item on the Balance Sheet.



Content Review The General Ledger is used to keep an organized record, by account, of the

organization’s financial transactions and holds information that is required to prepare financial statements.

Financial transactions are recorded in five different types of accounts: revenue, expense, asset, liability and owners’ equity.

Asset and expense accounts have a normal debit balance, while liability, revenue and equity accounts have a normal credit balance.

A journal entry is created to record each financial transaction of the organization and the debits and credits are posted to the relevant accounts.

Each journal entry must contain the following components:

o a journal entry reference or number

o the date of the transaction

o the debit and credit amounts to be applied to each account

o a total of the debit entries and of the credit entries

o a brief explanation of the transaction

The double-entry method of accounting means that each journal entry posted to the accounts must balance; the total of the debit amounts in the journal entry must equal the total of the credit amounts in that same journal entry.

The account balances in the General Ledger are used to create the two primary statements used in financial reporting: the Income Statement and the Balance Sheet.

The Trial Balance is used to ensure that for every debit entry recorded, a corresponding credit entry has been recorded in accordance with the double-entry method of accounting.

The Income Statement presents the revenue, expenses, and net profit or loss of an organization during a specified period of time.

The main purpose of an Income Statement is to show whether the organization has earned a profit or incurred a loss during the period.

The formula for calculating net income is: Revenue - Expenses = Net Income/Loss.

The Balance Sheet is a financial statement which presents a summarized list of the amounts of all the organization’s assets, liabilities, and owners’ equity at a specified point in time.

The equation for a balance sheet is: Assets = Liabilities + Owners’ Equity.



Review Questions 1. What is the purpose of the General Ledger? 2. List the five elements of a General Ledger account. 3. What does double-entry accounting mean? 4. What is the main purpose of the Income Statement?



Payroll Accounting There are many payroll costs that must be accounted for in an organization. These include employee salaries and wages expenses, employer expenses for statutory and non-statutory requirements and any employer-paid employee benefits required by organizational policy or the terms of a collective agreement.

Payroll Journal Entries Information about each payroll transaction is recorded in the payroll journal or payroll register, which is used to prepare the payroll journal entry. The payroll journal entry is an accounting document that summarizes the information on the payroll register for posting to the General Ledger. As such, it shows:

a journal entry reference number

the date of the transaction

the debit and credit amounts to be applied to each account

the totals of the debit entries and of the credit entries

a brief explanation of the transaction Often the payroll information is journalized and entered into the organization’s accounting system before the payroll is actually issued. When this occurs, the net pay amount is not credited to the cash account but to a clearing account often referred to as “salaries and wages payable”, “net pay” or “payroll clearing”, depending on the organization. This account will be cleared when the payroll is issued with a journal entry that debits the clearing account and credits the cash account. The payroll journal entries in this material will use a salaries and wages payable account. The payroll register for the warehouse might look like the following. For demonstration purposes, only the employee details for part of the register are shown.



Example: Atkins, K.

#64839

Wages

Overtime

Sick Pay

Tax Ben

900.00

247.50

100.00

29.30

CPP

EI

Tax

56.54

23.45

387.68

Union

Med/Den

12.00

50.00

Net Pay

717.83

Cool, L.L.

#35212

Wages

Overtime

Sick Pay

Tax Ben

1,000.00

29.30

CPP

EI

Tax

44.29

18.89

325.43

Union

Med/Den

12.00

50.00

Net Pay

549.39

Gibson, M.

#53972

Wages

Overtime

Sick Pay

Tax Ben

1,200.00

352.47

35.16

CPP

EI

Tax

71.92

29.19

401.25

Union

Med/Den

12.00

80.00

Net Pay

958.11

Knight, B.

#86753

Wages

Overtime

Sick Pay

Tax Ben

1,475.00

147.50

43.22

CPP

EI

Tax

75.79

30.50

397.53

Union

Med/Den

12.00

80.00

Net Pay

1,026.68

Li, S.

#72813

Wages

Overtime

Sick Pay

1,198.08

CPP

EI

Tax

50.36

22.46

124.80

Union

Med/Den

Net Pay

1,000.46

Totals

Wages

Overtime

Sick Pay

Tax Ben

575,730.08

12,685.34

1,005.22

2,474.68

CPP

EI

Tax

24,591.23

11,964.29

73,873.09

Union

Med/Den

587.50

1,250.00

Net Pay

477,154.53 The payroll register is used to accumulate information from all the organization’s employees for a pay period or possibly even multiple pay periods. When there are multiple transactions, the entries are often consolidated and posted to the General Ledger from specialized or sub-journals, such as a payroll journal. Instead of having a line on each journal entry posted to each account in the General Ledger for each employee, a single line will post the amount for all employees in each account. The payroll register is a sub-journal that shows the detail for each employee’s gross earnings and deductions. However, in the General Ledger account, only the total of similar transactions recorded (posted) to the same account appears.



The advantage of using a payroll register as a sub-journal is that only one journal entry is required to post the entire register to the General Ledger. Other reports may also be produced when the payroll is processed, such as reports which show the totals for each earning and deduction type, employer costs (for example, C/QPP, EI, QPIP) and taxes. If the organization uses a service provider the report may also show the provider’s service charges for processing the payroll. The journal entries for the payroll would be created using these reports. Some organizations may have the journal entries for payroll posted to the General Ledger using an automatic interface. In other words, the system is programmed to post the payroll journal entries to the General Ledger automatically at a specific time. In this case there are usually edit reports provided from either the payroll or General Ledger system. The report would show the amounts posted and any amounts that were not posted because of errors. These errors need to be corrected as soon as possible or the entire entry would not balance. Example:

The information from the payroll register shown in the previous example would be recorded in the payroll journal entry as follows:

Journal Entry #1

DATE ACCOUNT NAME ACCOUNT

NO. DEBIT CREDIT

May 26, 20XX Regular wages 5000-602 575,730.08

Overtime 5000-603 12,685.34

Sick pay 5000-620 1,005.22

C/QPP contributions payable 2000-206 24,591.23

EI premiums payable 2000-207 11,964.29

Federal Income tax payable 2000-208 73,873.09

Union dues payable 2000-215 587.50

Medical/dental payable 2000-214 1,250.00

Wages payable (net pay) 2000-305 477,154.53

Total 589,420.64 589,420.64

To record wages expense for payroll of May 26, 20XX Note: The recording of the employer’s payroll expenses will be explained later in the chapter. Once the information from the journal entry has been posted, the General Ledger accounts would be updated and each transaction affecting the employees’ earnings and deductions would be posted to a separate account.



The updated General Ledger is then used to create internal financial statements which are distributed within the organization to analyze and reconcile the accounts. Labour Costs In some organizations, payroll salaries and wages expenses may be allocated or distributed to one or more of the organization’s expense accounts. Salaries and wages expenses can be classified into two types:

direct labour costs

indirect labour costs Direct labour costs are those incurred by employees who produce products or perform services that are sold to customers. Example:

Enzo Mazzone is a cabinet installer for Ramsey Kitchens. Enzo earns $1,500.00 each bi-weekly pay period, a direct labour cost to the organization for the installation of cabinets. Enzo’s salary would therefore be charged to direct labour. Indirect labour costs are those incurred by employees such as supervisors, managers, executives, and administrative support staff who do not produce products or perform services that are sold to customers, but perform administrative functions. Example:

At Ramsey Kitchens, Olga Schmidt, who manages the accounting department, earns $2,200.00 bi-weekly, an indirect labour cost to the organization. Olga’s salary would therefore be charged to indirect labour. The allocation of direct and indirect labour costs is often handled through the posting of the payroll journal entry. Using the following example, the distribution of labour costs through the payroll journal entry is illustrated.



Example:

Assume that Jim is considered indirect labour and that Bob and Mary are considered direct labour.

EMPLOYEE NAME

SALARY & WAGES

CANADA PENSION

PLAN

EMPLOYMENT INSURANCE

INCOME TAX

NET PAY

Jim Rogers 1,384.61 61.88 25.34 289.65 1,007.74

Bob Smith 1,439.79 64.61 26.35 325.42 1,023.41

Mary Wilson 1,249.50 55.19 22.87 279.47 891.97

Totals 4,073.90 181.68 74.56 894.54 2,923.12

The resulting journal entry is as follows:

Journal Entry # 4

DATE ACCOUNT NAME DEBIT CREDIT

September 28, 20XX Salaries and wages expense - indirect

1,384.61

Salaries and wages expense – direct 2,689.29

Canada Pension Plan payable 181.68

Employment Insurance payable 74.56

Income tax payable 894.54

Salaries and wages payable 2923.12

Total 4,073.90 4,073.90To record payroll register for September 20XX.

Most organizations report their payroll expenses over many accounts or business segments (based on multiple locations) to track their costs for the different products or services they offer. Accounting for Statutory Requirements The employer’s expenses for compensating employees not only include the labour costs, but also a number of other payroll-related costs, such as those required by law. Expenses an organization incurs as a result of federal and provincial legislation are known as statutory requirements.



Depending on the employees’ province of employment, examples of statutory expenses for the employer are:

1. portion of Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions

2. portion of Employment Insurance (EI) premiums

3. portion of Québec Parental Insurance Plan (QPIP) premiums

4. Ontario Employer Health Tax (EHT)

5. Manitoba Health and Post-Secondary Education Tax Levy

6. Newfoundland and Labrador Health and Post-Secondary Education Tax

7. Québec health services fund contributions

8. Québec Labour Standards (CNESST/CNT) contributions

9. Workforce Skills Development and Recognition Fund (WSDRF) contributions

10. Workers’ Compensation (WC) premiums (CNESST/CSST in Québec)

Journal Entries for Statutory Requirements There are two journal entries required to record the employer’s statutory requirements:

one to account for the statutory deductions withheld from the employees

one to account for the employer’s costs for statutory requirements In many organizations, these two journal entries are incorporated into a single journal entry.



Example:

The totals from the payroll register for the month of September are: Gross pay $70,398.93 Employee CPP contributions $ 2,341.46 Employee EI premiums $ 1,253.10 Income tax deducted $37,208.64 Employer CPP contributions $ 2,341.46 (100% of employee’s contributions) Employer EI premiums $ 1,754.34 (1.4 times employee’s premiums) The journal entries to record the payroll and the employer’s costs are:

Journal Entry # 5


September 28, 20XX Salaries and wages expense 70,398.93

Canada Pension Plan payable 2,341.46

Employment Insurance payable 1,253.10

Income tax payable 37,208.64

Salaries and wages payable 29,595.73

Total 70,398.93 70,398.93

To record payroll register for the month of September 20XX.

Journal Entry # 6


September 28, 20XX Canada Pension Plan expense 2,341.46

Employment Insurance expense 1,754.34



Total 4,095.80 4,095.80

To record payroll expenses for the month of September 20XX.

The $4,095.80 payroll expenses will remain in the General Ledger as part of the cumulative total for the payroll expenses for the year. The CPP contributions and EI premiums payable, however, will be cleared from the liability account by a debit entry when the payment is processed to remit the statutory deductions to the government.



To illustrate this point, assume cheque voucher number (CV 4576) was issued to the Canada Revenue Agency for $44,899.00, as follows: CPP (employee and employer) $ 4,682.92 EI (employee and employer) $ 3,007.44 Income tax $37,208.64 Total remittance $44,899.00 Journal Entry # 7

DATE ACCOUNT NAME DEBIT CREDIT September 28, 20XX Canada Pension Plan payable 4,682.92



Cash 44,899.00

Total 44,899.00 44,899.00

To record payment of payroll expenses for CV 4576 for the month of September 20XX.

When the transactions have been posted, the accounts in the General Ledger will look as follows: Account Name: Canada Pension Plan payable

DATE REFERENCE DEBIT CREDIT BALANCE 20XX Sept 28, 20XX Sept 28, 20XX Sept 28, 20XX

Balance forwardJE #5 JE #6 CV #4576 4,682.92

2,341.462,341.46

0.00 2,341.46 CR 4,682.92 CR

0.00 Account Name: Employment Insurance payable

DATE REFERENCE DEBIT CREDIT BALANCE 20XX Sept 28, 20XX Sept 28, 20XX Sept 28, 20XX

Balance forwardJE #5 JE #6 CV #4576 3,007.44

1,253.101,754.34

0.00 1,253.10 CR 3,007.44 CR

0.00



Account Name: Income tax payable

DATE REFERENCE DEBIT CREDIT BALANCE 20XX Sept 28, 20XX Sept 28, 20XX

Balance forward JE #5 CV #4576 37,208.64

37,208.64

0.00 37,208.64 CR 0.00

Account Name: Cash


20XX

Sept 28, 20XX

Balance forward

CV #4576

44,899.00

576,484.00 DR

531,585.00 DR

Accounting for Other Expenses

Employer-Paid Benefit Premiums

Another payroll expense is the cost of the premiums required for employer-paid benefits, including:

group term life insurance premiums

provincial medical premiums

pension plan payments

deferred profit-sharing plan payments

sick leave

other employer-provided leaves The following is an example of how to account for employer-paid benefits.



Example:

World Health Drug Stores provide their employees with company-paid life insurance, dental and vision care coverage, and a non-contributory pension plan. World Health records the insurance premiums payable for life, dental and vision care in one liability account. For the month of August 20XX, the expenses for these benefits were as follows: Group term life insurance premiums $ 200.00 Dental plan premiums $ 243.83 Vision care premiums $ 186.40 Pension plan payments $2,009.12 The journal entry would be prepared as follows: Journal Entry # 8


August 31, 20XX Group term life insurance benefit expense*

200.00

Employee benefits expense** 2,439.35

Insurance premiums payable 630.23

Pension plan contributions payable

2,009.12

Total 2,639.35 2,639.35

To record the organization’s cost of employer-provided benefits for the month of August, 20XX.

* As the premiums paid for group term life insurance are a taxable benefit to the employees, World Health chose to separate the expenses that are a taxable benefit into a separate account so that they can be reconciled with the taxable benefits reported on the employees’ year-end information slips.

**Instead of having a separate expense account for each individual expense, such as pension plan expense and medical expense, an organization will sometimes combine the expenses into one account. In the General Ledger, the employee benefits expense account will have a closing balance that will include the total year-to-date employer-paid benefits expenses. In this example, the employee benefits expense account will not include the group term life insurance benefits expense as it is reported in a separate account.

The closing balance for each of the payable accounts for the employer-paid benefits will be cleared to zero when the insurance providers, pension fund administrators or other suppliers are paid.



Example:

World Health Drug Stores issued the following cheque vouchers (CV) on August 31, 20XX:

CV 3456, in the amount of $630.23, payable to Greenland Insurance Company for the total premiums for the employees’ insurance coverage; $200.00 of this amount is for group term life insurance coverage

CV 3457, in the amount of $2,009.12, payable to Marshall Funds for the employer’s contribution to the employees’ pension plan

World Health Drug Stores records the $200.00 for their employees’ group term life insurance in a separate expense account. When journal entry #8 and the cheque vouchers have been posted, the expense and payable accounts will look as follows:

Account Name: Employee benefits expense DATE REFERENCE DEBIT CREDIT BALANCE

20XX Aug. 31, 20XX

Balance forward JE #8 2,439.35

19,575.93 DR22,015.28 DR

Account Name: Group term life insurance benefit expense DATE REFERENCE DEBIT CREDIT BALANCE

20XX Aug. 31, 20XX

Balance forward JE #8 200.00

3,096.75 DR3,296.75 DR

Account Name: Insurance premiums payable DATE REFERENCE DEBIT CREDIT BALANCE

20XX Aug. 31, 20XX Aug. 31, 20XX

Balance forward JE #8 CV #3456 630.23

630.23

0.00630.23 CR

0.00

Account Name: Pension plan contributions payable DATE REFERENCE DEBIT CREDIT BALANCE

20XX Aug. 31, 20XX Aug. 31, 20XX

Balance forward JE #8 CV #3457 2,009.12

2,009.12

0.002,009.12 CR

0.00

Account Name: Cash DATE REFERENCE DEBIT CREDIT BALANCE

20XX Balance forward 297,473.67 DRAug. 31, 20XX CV #3456 630.23 296,843.44 DRAug. 31, 20XX CV #3457 2,009.12 294,834.32 DR



If any of the employer-provided benefits are taxable and have an impact on payroll, the total expense must be balanced so that the resulting year-end slips are correct. In our previous example, the group term life insurance benefits expense for the year should balance with the total amount reported on the employees’ year-end tax information slips. Example:

The balance in the group term life insurance benefits expense account at the end of December, 20XX is $4,945.30. The payroll department must ensure that the total amount of life insurance reported on the employees’ T4s equals $4,945.30. Accounting for Cancelled Cheques Occasionally an incorrect payroll cheque is issued, usually because the amount paid or one or more of the deductions was miscalculated. To correct this error, the original cheque must be cancelled and a replacement cheque issued. Journal entries may also have to be prepared to account for the corrections. When cancelling a cheque, the signature should be cut out and destroyed to prevent any attempts to cash the cheque. If the cheque to be cancelled is not on hand, a request for a stop payment on the cheque should be made to the bank. Example:

After balancing the weekly payroll for Edgepark Construction, the payroll administrator realized that cheque #3940 for $437.75, issued to Laszlo Somer on April 13, 20XX, was incorrect. The amount calculated for gross pay was $582.35 instead of $528.35, CPP contributions were $25.49, EI premiums were $10.66 and the income tax deduction was $108.45. The payroll administrator recalculated the statutory deductions as follows: CPP contributions $22.82 EI premiums $ 9.67 Income tax $93.60 The original cheque was cancelled and a replacement cheque, #3945, was issued in the amount of $402.26.

Assuming the journal entry had already been prepared for the regular weekly payroll, the payroll administrator now had to prepare journal entries to account for:

cancelling the original cheque

issuing the replacement cheque



The payroll records in the payroll register might look like these:

Laszlo Sommer Employee # 3495

Wages -582.35 CPP - 25.49 EI - 10.66 Tax - 108.45 Net Pay - 437.75

Laszlo Sommer Employee # 3495

Wages 528.35 CPP 22.82 EI 9.67 Tax 93.60 Net Pay 402.26

The journal entries to correct the situation should be prepared as follows:

Journal Entry # 9


April 13, 20XX Canada Pension Plan payable 25.49




Salaries and wages expense 582.35

Total 582.35 582.35

To cancel cheque #3940 issued in error.

Journal Entry # 10


April 13, 20XX Canada Pension Plan payable 25.49


Canada Pension Plan expense 25.49

Employment Insurance expense 14.92

Total 40.41 40.41

To cancel CPP and EI expense for cheque #3940.



Journal Entry # 11


April 13, 20XX Salaries and wages expense 528.35





Total 528.35 528.35 To account for replacement cheque #3945.

Journal Entry # 12


April 13, 20XX Canada Pension Plan expense 22.82




Total 36.36 36.36

To record CPP and EI expense for cheque # 3945.

If an organization has a manual process, the reversal should occur as soon as the error has been identified. This will ensure accurate reporting of expenses in the General Ledger for month-end. If an organization has automated payroll processing, this journal entry would not normally be prepared for one individual cancellation. It is more likely that an adjustment would be made on the pay register and the next journal entry for payroll would be processed accordingly. Payroll Journal Entry Templates The basic intent of the payroll journal entry and the employer expense entry do not change from organization to organization. While some organizations may have more line items than others, the concept is the same.



The line items in a basic payroll journal entry are:

debits to the salary and wages expense accounts for the employer’s cost

credits to the payable accounts for the amounts withheld from the employees and owing to a third party

a credit to the salaries and wages payable account for the employees’ net pays

an organization that withholds other deductions from their employees for legal, union, company-compulsory or voluntary deductions would expand the journal entry to add line items and credit the amounts to the payable account for each deduction.

Regardless of the number of deductions withheld from the employees, the total of all the deductions plus the salaries and wages payable will equal the salaries and wages expense of the organization. The line items in an employer expense journal entry are:

debits to the various expense accounts for the employer’s costs for the payroll

credits to the various payable accounts for the amounts owing An organization that incurs other payroll-related costs would expand the journal entry to add line items to record these costs to their respective expense accounts and credit the applicable payable accounts. The following is a summary that may be used as a reference tool for posting regular payroll entries.



Payroll Accounting

Pay Statement DR CR

Employer portion & other expenses

DR CR

Gross pay X C/QPP employer expense X

C/QPP contributions payable X EI employer expense X

EI premiums payable X QPIP employer expense X

QPIP premiums payable X EHT X

Federal income tax payable X Employer share of group benefits

X

Quebec income tax payable X C/QPP contributions payable X

Union dues payable X EI premiums payable X

Benefits payable X QPIP premiums payable X

Voluntary deductions X EHT payable X

Salaries and wages payable (Net pay)

X Employer group benefits payable

X

Paying Employees DR CR

Remitting cheques to 3rd Parties

DR CR

Salaries and wages payable

(Net pay)

X C/QPP contributions payable (EE & ER)

X

Bank - Payroll account X EI premiums payable (EE & ER)

X

QPIP premiums payable (EE & ER)

X

Union dues payable X

Benefits payable (EE & ER) X

EHT payable X

Bank - Payroll account X



Accounting for Stale-Dated Cheques Occasionally a payroll cheque is not cashed and remains outstanding for a number of months. Once a cheque becomes six months old and has not been cashed, it becomes stale-dated, which means it can no longer be cashed at the bank. If the stale-dated cheque is not on hand, it is recommended that a stop-payment be placed on the cheque. The treatment of a stale dated cheque is different than the cancellation of a pay cheque or deposit recall. The payroll record history is not affected; do not reverse the payment in the payroll system. The entries for the gross pay and deductions are not adjusted through payroll and the T4 slip information remains as originally reported. The employee worked and was paid wages for the pay period. The funds were available to the employee on payday. The pay has been posted to the various accounts for the accounting period in which the expense occurred. The wages have been expensed to the appropriate cost centre and deductions have been deducted and remitted to the appropriate third parties. The net pay for the stale-dated cheque is cancelled and a replacement cheque is issued. These transactions occur in the payroll bank account. This process leaves the accounting transactions recorded in the correct accounting period and leaves the employee’s payroll information correct. Also, remember that the deductions are based on the requirements for the year in which the payment was originally paid. The employer is simply replacing a cheque that is not negotiable at the bank for cash. The employee’s year-to-date earnings are not adjusted. Example:

When reconciling the bank account for the month ending September 30, 20XX, it was noticed that cheque# 2912 issued March 14, 20XX to Amir Dabu was still outstanding. As the cheque was over 6 months old, a new cheque was issued to the employee. The journal entries to correct the situation should be prepared as follows:

Journal Entry # 13


October 10, 20XX Bank – Payroll Account 375.75


Total 375.75 375.75

To cancel stale-dated cheque #2912 issued March 14, 20XX



Journal Entry # 14


October 10, 20XX Salaries and wages payable 375.75

Bank – Payroll Account 375.75

Total 375.75 375.75

To issue cheque #4012 (replacement of stale-dated cheque #2912)



Content Review Payroll costs that must be accounted for in an organization include employee salaries

and wages expenses, employer expenses for statutory requirements and any employer-paid employee benefits required by organizational policy or the terms of a collective agreement.

Information about each payroll transaction is recorded in the payroll journal or payroll register, which is used to prepare the payroll journal entry.

The payroll journal entry summarizes the information on the payroll register for posting to the General Ledger.

Direct labour costs are those incurred by employees who produce products or perform services that are sold to customers.

Indirect labour costs are those incurred by employees, such as supervisors, managers, executives and administrative support staff, who do not produce products or perform services that are sold to customers, but perform administrative functions.

Occasionally an incorrect payroll cheque is issued. To correct this error, the original cheque must be cancelled and a replacement cheque issued. Journal entries may also have to be prepared to account for the corrections.

A payroll cheque that is not cashed and remains outstanding for more than six months becomes stale-dated and can no longer be cashed at the bank.



Review Questions 5. What payroll costs must an organization account for? 6. a. What is a payroll journal entry? b. What information does a payroll journal entry show? 7. Fill in the blanks:

labour costs are those incurred by employees who produce products or perform services that are sold to customers. labour costs are those incurred by employees, such as supervisors, managers, executives and administrative support staff, who do not produce products or perform services that are sold to customers, but perform administrative functions.



8. List five statutory expenses an organization could incur, depending on the employees’ province(s) of employment.

9. True or false: A stale-dated cheque is one which is four months old, has not been cashed,

and is no longer valid because of the age of the cheque.



10. Given the following information from the payroll journal, calculate the net pay and prepare a journal entry for the month of November 20XX for Crosstown Appliances.

Savings Plan deductions $ 2,300.00 Registered pension plan deductions $ 750.00 Income tax deductions $24,163.54 Gross pay $71,069.23 Canada Pension Plan deductions $ 2,364.92 Employment Insurance premiums $ 1,300.57 (Do not complete a journal entry for the employer’s portion of CPP and EI.)

Journal Entry #123


Total



Accrual Method of Accounting The International Financial Reporting Standard (IFRS), which replaced the Canadian Generally Accepted Accounting Principles (GAAP) on January 1, 2011, stipulates that the matching principle must be followed. The matching principle requires that expenses are matched with revenues. Revenue earned in an accounting period must be matched to the expenses incurred to earn that revenue. In reality, not all expenses that are incurred happen in the same period as the related revenue is earned, so they must be matched to an appropriate period of time. Wages are reported as an expense in the period they are earned (date the work is performed), not the period they are paid. It is not uncommon for an organization to incur a liability in one accounting period and to pay for that liability in a different accounting period. Examples would be:

purchasing goods on account with the payment due in 60 days

hiring an independent contractor whose invoice is due in 30 days In order to accurately reflect the expenses in the period the goods were purchased, or the period the work was performed, the accrual method of accounting is used. Example:

An organization purchased office supplies on account and the terms of the account are net 30 days. The organization received the office supplies on August 22 and paid for them September 20. If the organization follows the cash method of accounting, where expense and revenue transactions are recorded in the accounting period when the actual cash is paid out or received, no entry would be made on August 22; however, the following entry would be made on September 20:

Journal Entry # 13


September 20, 20XX Office supplies expense 500.00

Cash 500.00

Total 500.00 500.00

To record cheque #283 for office supplies.

If the cash method of accounting was used to produce the month-end financial statements as at August 31, incomplete financial information would result as only cash transactions during the period would be recorded. Although the organization owes the supplier of the office supplies $500.00 and has incurred an expense of $500.00 as at August 31, this would not be reflected in the financial statements.



To provide more complete and accurate financial statements, most organizations use the accrual method of accounting. In fact, accrual accounting must be used for any external reporting which allows a common frame of reference to external stakeholders. The accrual method of accounting records transactions in the accounting period in which they are incurred. The purpose of accruing costs is to give employers an accurate account of their total financial transactions for a specific accounting period. Example:

Using the accrual method of accounting, the following journal entries would be recorded for the above transaction: Journal Entry # 14


August 22, 20XX Office supplies expense 500.00

Accounts payable 500.00

Total 500.00 500.00

To accrue expense for office supplies received on August 22, 20XX.

Journal Entry # 15


September 20, 20XX Accounts payable 500.00

Cash 500.00

Total 500.00 500.00

To record cheque #283 for office supplies.

Financial statements produced using the accrual method of accounting as at August 31, 20XX would reflect the organization’s liability to the supplier of the office supplies and the expense incurred in August, 20XX. There are two types of accruals:

continuous accruals reflect an ongoing expense incurred over a number of accounting periods, and paid at a later date

specific accruals reflect an expense incurred in one period that is reallocated to another



There are many instances when payroll will use the accrual method of accounting to more accurately reflect the financial position of the organization. Payroll accruals are used to allocate labour costs and other related expenses to the appropriate accounting period. The most common accruals that occur on a continuous basis are those that record the employer’s expenses for workers’ compensation premiums and vacation pay as they are on-going throughout the year. Note: It is important, especially for students of this course who may have practical experience in accounting or a payroll department, to understand that no two organizations may use exactly the same system to account for payroll transactions. Each organization uses a system which meets its own particular needs, given its own resources, but always in compliance with IFRS. As a result, the examples provided in this material may differ slightly from those used by a particular organization but are, in practice, commonly used.

Workers’ Compensation Accruals An organization’s workers’ compensation (WC) premiums will be based on actual or estimated payroll amounts, depending on the jurisdiction. If the premiums are based on estimates, a reconciliation of the estimated and actual payroll, and premiums due, will be done when the organization files their annual statement of payroll. Again, depending on the jurisdiction, the premium remittance frequency can be annual, semi-annual, quarterly, monthly (based on the organization’s remittance schedule with the Canada Revenue Agency) or another frequency that is determined by the annual premium amounts. Premiums that are based on the actual payroll amount will be expensed on the employer expense payroll journal entry with other known employer costs, such as Canada Pension Plan (CPP) and Employment Insurance (EI). In Nova Scotia, an employer’s WC premium is remitted to the Canada Revenue Agency along with the amounts due for CPP, EI and income tax. Premiums that are based on an estimated payroll and are paid on a non-payroll frequency may require an accrual to record the employer’s expense in the period in which it was incurred. If the employer’s expense was accounted for only when it was paid, the monthly financial statements of the organization would be misleading. Therefore, many organizations accrue the workers’ compensation premiums by journalizing the estimated expense each month.



Example:

Valid Care pays workers’ compensation premiums on a quarterly basis. They have estimated that their premiums for the current year will be $17,000.00 or $4,250.00 per quarter. The journal entry to accrue this expense on a monthly basis would be: Journal Entry # 16


January 31, 20XX Workers’ Compensation expense

1,416.67

Workers’ Compensation payable

1,416.67

Total 1,416.67 1,416.67

To record WC accrual for January 20XX.

The $1,416.67 accrual is debited to the expense account and credited to the payable account each month. Every quarter the payment of $4,250.00 to the WC Board will be recorded as a debit to the payable account. This debit entry will clear the $4,250.00 credit balance in the payable account. When the annual statement of payroll is filed, and the actual annual premium is known, the WC expense account will either be credited if the amount owing had been overestimated, or debited if the amount had been underestimated.

Vacation Accruals Vacation pay is an employer-paid benefit which must be accounted for and is generally done on a continuous accrual basis. The purpose of accruing the vacation costs is to give the employer an accurate account of their total expenses for a specific accounting period. Accounting for vacation costs on an accrual basis requires that journal entries are posted:

as the vacation expense is incurred

when the employee takes vacation leave Example:

Gilles Morin works for Brandon Interiors in Manitoba and earns $1,200.00 semi-monthly. He is entitled to 2 weeks’ vacation paid at 4% of his vacationable earnings for the year.

Brandon Interiors processes its journal entries on a monthly basis and at month-end, the payroll administrator prepares the journal entries for payroll. One of these transactions is to record the vacation pay accrued for the month.



For the month of January, based on Gilles’ vacationable earnings of $2,400.00, the payroll administrator calculated his vacation accrual amount to be $96.00 ($2,400.00 x 4%), and prepared the following journal entry: Journal Entry # 17


January 31, 20XX Vacation pay expense 96.00

Vacation pay payable 96.00

Total 96.00 96.00

To record vacation pay accrual for the month of January, 20XX.

This journal entry is repeated every month for all employees. The accrual for one employee has been shown for illustrative purposes only; an organization would normally accrue the vacation expense for all employees in one journal entry for the accounting period. Employment standards legislation states that vacation time earned in a year may be taken the following year and vacation pay is paid at the time the employee takes their vacation. Gilles decided to take his vacation leave during the first two weeks of August of the following year, at which time the amount accrued for his previous year’s vacation pay was $1,152.00 ($96.00 x 12). The entry to record the vacation paid to Gilles is: Journal Entry # 520


August 31, 20XX Vacation pay payable 1,152.00


Employment Insurance payable

21.66



Total 1,152.00 1,152.00

To record vacation pay paid for employee #123.

Note: Since payroll accounting information is not only accessed by payroll personnel, no reference to an employee’s name or Social Insurance Number should ever be included in the journal entries or supporting documentation.



Journal Entry # 521


August 31, 20XX Canada Pension Plan expense 49.81

Employment Insurance expense

30.32



30.32

Total 80.13 80.13

To record employer CPP and EI expense for vacation pay for employee #123.

For the vacation period, Gilles’ labour costs have already been charged to the vacation pay expense account, not to the salaries and wages expense account. The expense for one employee has been shown for illustrative purposes only; an organization would normally record the vacation expense for all employees who took vacation during a pay period in the payroll journal entry for that pay period.

Sick Leave Accruals If the organization has a sick leave policy in place, a best practice is to accrue for sick leave in the same manner as for vacation. When the employee uses the sick leave, the liability account is reduced by the amount paid to the employee.

Employer Health Taxes If the organization has employees in the provinces of Manitoba, Newfoundland and Labrador, Ontario or Québec, which assess health taxes on payroll, the estimated employer health tax expense is accrued with each payroll journal.

Labour Costs Accruals The accruals for employer costs such as workers’ compensation and vacation pay are on-going, regular accruals. The accrual for labour costs is considered specific as it relates to a particular period.



Salaries and wages, plus any related employer costs, are journalized in the period in which the payroll occurs. There are occasions, based on the employer’s payroll frequency, where the costs may be incurred in one period, but not paid until the next. This will occur when part of the pay period occurs in one accounting period but is not paid until the next. In this situation, many employers accrue for the cost of the salaries and wages and payroll-related expenses that have occurred in the period, but have not yet been paid, to more accurately reflect their costs for the period. The calculation of the amount to accrue for the salaries can be based on the number of unpaid days using an average daily rate from the previous pay. For organizations whose payrolls fluctuate, an estimated amount based on anticipated salaries and wages can be used. Some of the payroll-related expenses an organization might accrue are the employer’s costs for Canada/Québec Pension Plan, Employment Insurance, Québec Parental Insurance Plan, workers’ compensation, vacation, pension plan contributions, and group insurance premiums. Example:

The organization has a bi-weekly payroll, where the payment falls 2 days after the end of each pay period. In the month of May, the first pay period from May 1st to May 14 is paid on May 16. The second pay period from May 15 to May 28 is paid on May 30 and the third pay period from May 29 to June 11 is paid on June 13. The first two pay periods will be included in the May payroll journals. The third pay period (May 29 – June 11) will be included in the June payroll journals. To accurately record the payroll expenses for May 29 to May 31 in the correct accounting period, an accrual journal entry should be entered in May and reversed in June. Since exact figures for these costs are unknown, the organization would need to estimate its expense for the three days. A common method of accruing unknown payroll costs is to use a percentage or fraction of the most recent payroll. The estimate may or may not include estimates for the employer’s costs related to the payroll (that is, C/QPP, EI, QPIP, etc.). For example, the payroll of June 13 will include the payroll expense for three working days in May and the seven working days in June. In order to accrue the expense for May, the organization could divide the total payroll for the first two pay periods in May by 20 working days and multiply the result by three working days to accrue for May 29 – May 31. The accrual would be: $1,178,841.20 x 3 = $176,826.18 20 Since this amount is an estimate, the figure is usually rounded to the nearest dollar.



The Journal Entry would be:

Journal Entry #7


May 31, 20XX Warehouse wages 176,826.00

Accrued warehouse wages 176,826.00

Total 176,826.00 176,826.00

To accrue wages for May 29, 30 and 31, paid in June, 20XX An even more accurate payroll accrual would also include an estimate of other payroll-related employer costs, such as the employer’s share of CPP and EI, as well as any company-paid group benefits. The credit could be posted to a general Accrued Payroll Expenses Account; some organizations may set up specific accrual accounts for each liability.

For example, if an estimated 30% is typically spent on employer costs in addition to actual salaries, this 30% could also be accrued:

$176,826.00 x 30% = 53,047.80, rounded to $53,000.00

Journal Entry #8


May 31, 20XX Warehouse wages 176,826.00

Employer payroll expenses 53,000.00

Accrued warehouse salaries 176,826.00

Accrued payroll expenses 53,000.00

Total 229,826.00 229,826.00

To accrue payroll wages and expenses for May 29, 30 and 31, paid in June, 20XX

The following month Journal Entry #8 is reversed as the actual expenses and liabilities would be included in the June payroll registers and journals.

Journal Entry #9


June 1, 20XX Accrued warehouse salaries 176,826.00

Accrued payroll expenses 53,000.00

Warehouse wages 176,826.00

Employers payroll expenses 53,000.00

Total 229,826.00 229,826.00

To reverse accrued wages and expenses for May 29, 30 and 31 20XX



Content Review To provide more complete and accurate financial statements, most organizations use

the accrual method of accounting. The accrual method of accounting records transactions in the accounting period in which they are incurred.

There are two types of accruals, continuous and specific.

The most common continuous accruals are used to record the employer’s expenses for workers’ compensation premiums and vacation pay.

The most common specific accrual is for labour costs as it relates to a particular period.



Review Questions 11. Explain the difference between the cash method of accounting and the accrual method of

accounting.

12. What is the purpose of accruing costs? 13. Cassie Flohr, employee #375, was hired on May 1 last year at an annual salary of

$36,000.00, paid bi-weekly. As of May of the current year, Cassie was entitled to two weeks’ vacation at 4% of her vacationable earnings.

Cassie took her two weeks’ vacation leave from July 9 to July 20, of the current year at which time she was paid her vacation pay on a manual cheque. Prepare the journal entry required to accrue Cassie’s vacation payable every pay and the journal entry or entries required to record the manual cheque Cassie received when she took her vacation leave in July of the current year. For this question, use the following rates: CPP 4.95% EI 1.63% Income tax 26.00%



Journal Entry #


Total

Journal Entry #


Total

Journal Entry #


Total



14. Pantheon Inc. uses four and five week monthly accounting periods and pays its employees on a bi-weekly basis, where the pay date is one week after the pay period end date. The pay period end dates for the months of June and July are June 8, June 22, July 6 and July 20. The accounting month-end for June is June 29. For the bi-weekly pay period ending June 22, Pantheon Inc.’s salaries and wages expense was $95,000.00, its CPP expense was $5,040.00 and its EI expense was $1,700.00. As of June 29, the employees will have worked one week of the two week pay period ending July 6 which will not be paid until July 13. Pantheon Inc. wants to record the salaries and wages and employer’s payroll-related expenses for the last week of June in the June accounting period to accurately reflect their costs for the month. a. Prepare journal entries to record the labour and payroll-related costs for the week

ending June 29, 20XX (based on June 22 payroll) and the reversal entry in July. b. For the pay period ending July 6, the salaries and wages expense is $98,500.00, the

employees’ CPP contributions are $4,693.00, the employees’ EI premiums are $1,851.80 and their income tax withholdings are $37,580.00. Prepare journal entries for the July 6, 20XX payroll.

Journal Entry #


Total



Journal Entry #


Total

Journal Entry #


Total

Journal Entry #


Total



Reconciliation and Analysis of Accounts Account reconciliations are a critical control in the accounting process. Account reconciliation is the process of proving that the general ledger account balances are correct by reviewing transactions and supporting documentation, and resolving any discrepancies that are discovered. The complexity of payroll processing requires that payroll professionals pay meticulous and ongoing attention to the management of payroll data from the point of compiling pay information through completed reconciliation between the payroll worksheets, payroll reports and the general ledger. A benefit of reconciling accounts is that in the process of comparing transactions any incorrect entries, duplicated charges or fraudulent activity can be found. Account reconciliations should involve:

a review of all transactions

matching transactions with supporting documents

investigating and resolving any discrepancies of concern Payroll should have a reconciliation guidelines policy in place, along with other policies and procedures. The objective of the policy would be to validate that payroll transactions are appropriately authorized and properly recorded so that the financial amounts accurately reflect the payroll activity, and adequate reviews are performed and documented. The end of the accounting period is termed the close of the period. Once the period is closed, no further journal entries can be posted to the General Ledger for that period. Any journal entries prepared after the close are posted to the next accounting period. At the close of the period, the balances in all the General Ledger accounts should be analyzed to ensure the journal entries have been posted to the correct accounts and posted correctly as a debit or credit. Appropriate reports should be available showing details of the amounts posted in the general ledger. The size of the organization will often determine whether the General Ledger analysis will be done by one individual or if the accounts will be distributed for analysis purposes. The level of account analysis required will depend on the account type and the needs of the organization; the account transactions may be analyzed in detail or merely looked at for reasonableness. As there are many compliance requirements related to payroll withholdings, the payroll liability accounts should be examined in detail to ensure any balance in the account is related to a future payment, not to a missed remittance. Equally important is a review of the accuracy of the transactions to the payroll-related expense accounts.



As journal entries affect the General Ledger account balances, and impact the information reported on both the Income Statement and the Balance Sheet, their accuracy is crucial to providing correct information on the financial status of the organization.

Journal Entry Analysis Prior to posting the journal entry to the General Ledger, review the line items to make sure the debits and credits have been recorded correctly and that the entry will give the desired result. Some issues to examine when preparing journal entries include:

is it an asset, liability, owners’ equity, revenue or expense account?

does the account normally have a debit or credit balance?

is this entry intended to increase or decrease the account balance? In an expense account, debit entries increase the expense balance and credit entries decrease the expense balance. Amounts in the expense accounts are cleared to zero (or restarted at zero) at the fiscal year-end. This is the same way the employees’ totals in the payroll register are cleared to zero at the taxation year-end. In a liability account, credit entries increase the liability balance and debit entries decrease the liability balance. Amounts in liability accounts are not cleared at year-end, as the liability continues to exist; the amounts are only cleared when the liability is paid. If the journal entries are keyed into the accounting system, rather than downloaded from another program, special care should be made to ensure that the data is keyed correctly and that the entries balance. Most systems will not allow an unbalanced entry to be posted. Systems that do allow unbalanced entries will post the variance to a suspense or clearing account. These accounts must be reconciled and corrected immediately to restore the integrity of the financial data.

Expense Accounts Expense accounts include costs incurred by an organization in the process of earning revenue during a given time period. The salary expense account details the debits (for example, employee salaries and wages) and credits (for example, accrual reversals, recalls and cancelled pays) posted on the journal entries for the period. Entries are posted to the General Ledger at the organization or department total level, rather than with the individual employee details.



Since expense accounts continue to build over time and are not cleared until the end of the fiscal period, the most common reconciliation methods used for these accounts are:

reasonableness

year-over-year comparison A reasonableness test requires an individual to examine the General Ledger account in detail and to ensure that all the postings are in balance and seem valid. Example:

The organization’s fiscal year is July 1 of year one to June 30 of year two. The salary expense account would reflect all expenses posted to the account from July to June. In November, the manager of the Sales Department wants to know why the salary account is $3,000.00 for October instead of $5,000.00. Sales salaries and wages account postings: July $5,000.00 August $5,000.00 September $5,000.00 October $3,000.00 Balance $18,000.00 The payroll register for the Sales Department showed the following entries for October: Employee #1 salary $1,000.00 Employee #2 salary $1,000.00 Employee #3 salary $ 0.00 Employee #4 salary $1,000.00 Employee #5 salary $ 0.00 Total salaries for sales department $3,000.00 There are five employees in the Sales Department, each earning $1,000.00 a month. On October 1, employee #3 started her maternity leave and employee #5 transferred to the Marketing Department. By examining the payroll register or other reports providing details of the total amount posted to an account, it should be analyzed whether the amount shown in the account is correct. Recalled pays, cancelled cheques and manual cheques should be recorded as they occur so that accounts reflect the most current data.



Cost accounting plays a significant role in expense account reconciliation as well. An organization that uses cost accounting will charge expenses to a department, a project or a contract, according to their internal requirements. If an employee is transferred from one department or branch to another, and the paperwork is not processed when the change is effective, the employee’s salary, and any associated employer costs, will be expensed incorrectly. A journal entry will be required to move the expenses to the correct accounts. Example:

Continuing our previous example, employee #5 transferred from the Sales Department to the Marketing Department on September 1, at the beginning of a pay period. The documents to process the transfer were only received by payroll at the beginning of October, by which time the journal entry charging the employee’s September salary expenses to Sales had already been posted. A journal entry is required to transfer the salary expense from Sales to Marketing for September. Journal Entry #23


November 1, 20XX Marketing salaries and wages expense

1,000.00

Sales salaries and wages expense 1,000.00

Total 1,000.00 1,000.00

To transfer salary expense for employee #5 for September, 20XX.

The effect of this journal entry is that the Sales salary expense account will be credited with the employee’s $1,000.00 salary, reducing the department’s expenses. The Marketing salary expense account will be debited with the employee’s $1,000.00 salary, increasing that department’s salary expenses. The original payroll entry for October was recorded on JE #22. Account Name: Sales salaries and wages expense



Oct. 31, 20XX JE#22 3,000.00 18,000.00 DR

Nov. 1, 20XX JE#23 1,000.00 17,000.00 DR



Account Name: Marketing salaries and wages expense



Oct. 31, 20XX JE#22 4,000.00 17,000.00 DR

Nov. 1, 20XX JE#23 1,000.00 18,000.00 DR

If the employee was paid more than one type of earning and each was posted to a different General Ledger account, then the journal entry would reflect this. Depending on how the General Ledger in an organization is set up and the requirements of the organization, additional entries may be required to adjust the employer’s costs. For example, if the employer portion of CPP and EI is expensed or charged to individual departments and your organization requires that these costs are accurately charged to the correct department, you would need to transfer these costs as well. Journal Entry #23

DATE ACCOUNT NAME DEBIT CREDIT November 1, 20XX Marketing salaries and wages expense 1,000.00 Marketing overtime expense 247.50 CPP expense-Marketing 47.31 EI expense-Marketing 23.45 Sales salaries and wages expense 1,000.00 Sales overtime expense 247.50 CPP expense-Sales 47.31 EI expense-Sales 23.45

Total 1,318.26 1,318.26To transfer payroll expenses for employee #5 for September, 20XX.

As expense accounts normally have a debit balance, to reduce the expense you credit the account and to increase the expense you debit the account. The Human Resources Department should indicate on all new hire documentation which department or cost centre the employee will be working in. This home department is where the employee’s salary expense will be charged. Each pay the employee’s salary, overtime, and other earnings will be expensed to the salary and wages account for that department or cost centre in the General Ledger.



If the employee is transferred to another department, the employee’s payroll record needs to be changed to reflect the new home department. If the employee is temporarily transferred, the salary expense needs to be charged to the temporary department. Depending on the payroll system and the organization’s procedure, you may be able to capture the correct department in the time card entry system or complete a journal entry to record the expense correctly. The salary expense for the employee’s home department is reduced or credited and the salary expense for the department the employee actually worked in is increased or debited. A year-over-year comparison would compare each expense account for a certain time frame to determine if there have been material changes.

Example:

DCF Inc.

EXPENSE ACCOUNTS: QUARTER 1 –

PREVIOUS YEAR

QUARTER 1 – CURRENT

YEAR Wage expense - Manufacturing 137,000.00 149,000.00 Wage expense - Office 68,000.00 69,000.00 Wage expense - Executive 123,000.00 156,000.00

It may be known to the individual analyzing the account why there has been an increase in the Manufacturing and Executive salary expenses in Quarter 1 of the current year. In this case, the organization hired a new vice-president of Sales, who has brought in a large order requiring an increase in the production staff. If the reason for the change is unknown, an analysis of the source documentation will be necessary to provide the details for the comparison between the quarters.

Liability Accounts Liability accounts capture what the organization owes; these accounts are not cleared on a fixed schedule. The analysis of each liability account should include a reconciliation of the account balance to the amount that is actually payable at a given date. As liability accounts normally have a credit balance, to reduce the liability you debit the account and to increase the liability you credit the account. Examples of liability accounts that are impacted by payroll include salaries and wages payable as well as the payable accounts for Canada/Québec Pension Plan, Employment Insurance, Québec Parental Insurance Plan and federal and provincial income taxes. Other liability accounts could include union dues, Canada Savings Bonds, employee-paid provincial medical premiums and employee insurance premiums.



The organization needs to reconcile statutory deductions against remittances and the CRA Statement of Account (PD7A). The statutory deductions from the employees’ pays are posted to the general ledger accounts as a credit. Amounts deducted from the employees’ pays and owed to a third party increase the liability to the organization. When the remittances are made the payment is posted to the account as a debit. This decreases the organization’s liability. Uploading data to spreadsheets can minimize the time spent identifying errors during the reconciliation of the payroll accounts. Liability accounts should clear to a zero balance when the cheque prepared to remit the net pay, withholdings or employer payroll expenses is posted against the account. Most amounts deducted from employees’ pay cheques are remitted to third parties, such as the Canada Revenue Agency (CRA) or an insurance carrier. One example of a deduction which is withheld from an employee’s pay cheque but not remitted to a third party is an employee loan repayment. The only entry necessary to register the loan repayment is to credit a loan receivable account. The deduction will automatically reduce the net salary payable amount. Unlike expense accounts which are closed out or cleared to zero at the end of the fiscal year, liability account balances are carried forward to the next accounting period, as the liability still exists. Liability accounts must be analyzed and reconciled on a regular basis. Income taxes withheld from the employees’ pays are posted to the income tax payable (liability) account as a credit, as the amounts deducted are owed to the CRA or Revenu Québec. The credit entry reflects the increase in the liability of the organization. When the remittance is paid, the payment is posted to the account as a debit, as the payment decreases the organization’s liability. Example:

This organization is a threshold 1 accelerated remitter. The remittance is due to the CRA on the 25th of the month for pays dated the 1st to the 15th of the month and the remittance is due on the 10th of the following month for pays dated the 16th to the end of the month. Income tax withheld on the July 18th payroll $36,000.00 Income tax withheld on the Aug. 1st payroll $37,000.00 – JE#29 Income tax remitted on Aug. 10th $36,000.00 – CV#4568 Income tax withheld on the Aug. 15th payroll $37,940.00 – JE#52 Income tax remitted on Aug. 25th $74,940.00 – CV#4592 Income tax withheld on the Aug. 29th payroll $38,100.00 – JE#72



The account details for the month of August are: Account Name: Income tax payable


20XX Balance forward 36,000.00 CR

Aug. 1, 20XX JE#29 37,000.00 73,000.00 CR

Aug. 10, 20XX CV#4568 36,000.00 37,000.00 CR

Aug. 15, 20XX JE#52 37,940.00 74,940.00 CR

Aug. 25, 20XX CV#4592 74,940.00 0.00

Aug. 29, 20XX JE#72 38,100.00 38,100.00 CR

The $36,000.00 credit balance at the beginning of the month is equal to the taxes deducted from the employees’ pays on July 18th, due to the CRA August 10th (CV#4568). The taxes deducted August 1st (JE#29) and 15th (JE#52) are due August 25th (CV#4592) and the closing balance represents the taxes withheld on August 29th (JE#72), due to the CRA on September 10th. When the payment is made on September 10th the account should have a zero balance as the next payroll is not until September 12th.

Finding Errors An analysis of the liability accounts will show if there have been any amounts posted in error. The Income tax payable and Union dues payable accounts showed the following entries and account balances for August.

Example:

Account Name: Income tax payable



Aug. 1, 20XX JE#29 37,000.00 73,000.00 CR

Aug. 10, 20XX CV#4568 36,000.00 37,000.00 CR

Aug. 12, 20XX CV#4576 13,092.00 23,908.00 CR

Aug. 15, 20XX JE#52 37,940.00 61,848.00 CR

Aug. 25, 20XX CV#4592 74,940.00 13,092.00 DR

Aug. 29, 20XX JE#72 38,100.00 25,008.00 CR



Account Name: Union dues payable



Aug. 1, 20XX JE#29 3,300.00 16,392.00 CR

Aug. 15, 20XX JE#52 3,370.00 19,762.00 CR

Aug. 29, 20XX JE#72 3,290.00 23,052.00 CR

When doing the monthly account reconciliation, it is noted that these two accounts do not have the correct balances. The Income tax payable account should have a credit balance of $38,100.00 for the employees’ August 29th withholdings and the Union dues payable account should have a credit balance of $9,960.00 for the employees’ August union dues deductions. In order to determine the incorrect entry, the source documentation, and either the journal entries or the cheque vouchers, should be examined. A review of the journal entries and the cheque vouchers reveals that the cheque for the union dues was posted to the Income tax account in error. A journal entry is required to correct the error: Journal Entry #39


August 31, 20XX Union dues payable 13,092.00


Total 13,092.00 13,092.00 To correct error for August 20XX cheque CV#4576 for union dues posted to tax account in error.

The correcting journal entry will credit the Income tax payable account with $13,092.00, resulting in a credit balance in the account of $38,100.00. This is the amount of the income tax withholdings for the pay of August 29th that are due to be paid to the CRA on September 10th. The Union dues payable account will be debited with $13,092.00, resulting in a credit balance of $9,960.00, the amount of the union dues withheld in August.



Payroll Audit Payroll, more than any other department, is subject to numerous controls, security and audits (internal and external) on a regular basis. Payroll normally represents the largest cost to any organization and as such there is a risk that, without controls, payroll funds can easily be misappropriated. Payroll controls include built-in checks and balances within the payroll system, fraud prevention measures and regular audits from various sources.

The payroll department can set up internal audit practices to test and maintain their payroll controls. With changing personnel at all levels within the system, periodic testing will determine if established controls are still being followed. Frequent reconciliations will also help discover possible errors or attempts to falsify the organization’s statements and ensure timely disclosure and correction; waiting until year-end to process manual and cancelled cheques can lead to a misstatement of payroll expenses. Auditors can be internal, external (an organization of professional accountants, management consultants, or other professionals) or governmental (Canada Revenue Agency, Service Canada, Revenu Québec, Ministries of Labour – Employment Standards, Workers’ Compensation Boards, Ministries of Finance – Manitoba, Newfoundland and Labrador, Northwest Territories, Nunavut, Ontario). Usually auditors want to be able to follow the trail of a transaction and the payroll department will have to assist auditors with the information they require. Depending on the legislative body performing the audit, you may be asked to provide:

source documents (time sheets, new hire documents, termination letters, TD1 etc.)

payroll registers

year-end documentation (T4 information slips, Workers’ Compensation reconciliations, etc.)

collective agreements and/or company policies

sub-contractor records

board minutes

financial statements

Payroll and Budgets A budget is a monetary plan which an organization uses to set financial goals, to measure financial performance against predetermined expectations, and to keep the finances on track. The primary goal of budgeting is to provide managers with a clear understanding of the activities to be undertaken and completed to accomplish the organization’s objectives. Payroll participates in developing budgets for the organization’s operating costs, government related payroll taxes, employees’ benefits such as sick leave, vacation and group benefits, employee head count as well as providing any additional information required.



Content Review Once the accounting period is closed, no further journal entries can be posted to the

General Ledger for that period.

The balances in all the General Ledger accounts should be analyzed to ensure the journal entries have been posted to the correct accounts.

The level of account analysis required will depend on the account type and the needs of the organization; the account transactions may be analyzed in detail or merely looked at for reasonableness.

As there are many compliance requirements related to payroll withholdings, the payroll liability accounts should be examined in detail.

Prior to posting the journal entry to the General Ledger, review the line items to make sure the debits and credits have been recorded correctly and that the entry will give the desired result.

Expense accounts include costs incurred by an organization in the process of earning revenue during a given period of time. The most common reconciliation methods used for these accounts are reasonableness and year-over-year comparison.

As expense accounts normally have a debit balance, to reduce the expense you credit the account and to increase the expense you debit the account.

Liability accounts capture what the organization owes; these accounts are not cleared on a fixed schedule.

Analysis of each liability account should include a reconciliation of the account balance to the amount that is actually payable at a particular point in time.

As liability accounts normally have a credit balance, to reduce the liability you debit the account and to increase the liability you credit the account.

A budget is a monetary plan which an organization uses to set financial goals, to measure financial performance against predetermined expectations, and to keep the finances on track.



Review Questions 15. What is the purpose of reconciling accounts?

16. When Parker Nyland received his copy of the General Ledger for the month of February (pay dates February 1st and 15th) it showed the following transactions in the Canada Pension Plan payable account:

Account Name: Canada Pension Plan payable


20XX Balance forward 0.00

Feb. 1, 20XX JE #143 (record employees’ payroll liability for February 1st)

812.68 812.68 CR

Feb. 15, 20XX JE #157 (record employees’ payroll liability for February 15th)

926.75 1,739.43 CR

Feb. 15, 20XX JE #163 (record employer’s liability for February 15th)

926.75 2,666.18 CR

Feb. 25, 20XX CV #3201 (record payment to the CRA)

3,478.86 812.68 DR

a. Determine why there is a closing balance.

b. Prepare the journal entry required to clear the closing balance of $812.68.

Journal Entry #:


Total



17. a. Why are liability accounts not closed or cleared to zero at the end of the fiscal period? b. When are the payroll liability accounts reduced or cleared?



Chapter Review Questions and Answers 1. What is the purpose of the General Ledger?

The purpose of the General Ledger is to keep an organized record, by account, of the organization’s financial transactions.

2. List the five elements of a General Ledger account.

The five elements of a General Ledger account are:

account name

opening balance ― debit (DR) or credit (CR)

reference (source of the entry)

debit and credit transactions

closing balance (DR or CR) 3. What does double-entry accounting mean?

Double-entry accounting means that each journal entry posted to the accounts must balance; the total of the debit amounts in the journal entry must equal the total of the credit amounts in that same journal entry.

4. What is the main purpose of the Income Statement?

The main purpose of an Income Statement is to show whether the organization has earned a profit or incurred a loss during the period being reported.

5. What payroll costs must an organization account for?

There are many payroll costs that must be accounted for in an organization. These include employee salaries and wages expenses, employer expenses for statutory and non-statutory requirements and any employer-paid employee benefits required by organizational policy or the terms of a collective agreement.

6. a. What is a payroll journal entry?

The payroll journal entry is an accounting document that summarizes the information on the payroll register for posting to the General Ledger.



b. What information does a payroll journal entry show?

A payroll journal entry shows:

o a journal entry reference number o the date of the transaction o the debit and credit amounts to be applied to each account o the totals of the debit entries and of the credit entries o a brief explanation of the transaction

7. Fill in the blanks:

Direct labour costs are those incurred by employees who produce products or perform services that are sold to customers.

Indirect labour costs are those incurred by employees, such as supervisors, managers, executives and administrative support staff, who do not produce products or perform services that are sold to customers, but perform administrative functions.

8. List five statutory expenses an organization could incur, depending on the employees’ province(s) of employment.

The statutory expenses an organization could incur, depending on the employees’ province(s) of employment, are an organization’s:

portion of Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions

portion of Employment Insurance (EI) premiums

portion of Québec Parental Insurance Plan (QPIP) premiums

Ontario Employer Health Tax (EHT)

Manitoba Health and Post-Secondary Education Tax Levy

Newfoundland and Labrador Health and Post-Secondary Education Tax

Québec health services fund contribution

Québec Labour Standards (CNESST/CNT) contributions

Workforce Skills Development and Recognition Fund (WSDRF) contributions

Workers’ Compensation (WC) premiums (CNESST/CSST in Québec)



9. True or false: A stale-dated cheque is one which is four months old, has not been cashed, and is no longer valid because of the age of the cheque.

False. A stale-dated cheque is one that is six months old and not yet cashed.

10. Given the following information from the payroll journal, calculate the net pay and prepare a journal entry for the month of November 20XX for Crosstown Appliances.

Savings Plan deductions $ 2,300.00 Registered pension plan deductions $ 750.00 Income tax deductions $24,163.54 Gross pay $71,069.23 Canada Pension Plan deductions $ 2,364.92 Employment Insurance premiums $ 1,300.57

(Do not complete a journal entry for the employer’s portion of CPP and EI.)

Journal Entry #123


November 30, 20XX Salaries and wages expense 71,069.23




Registered pension plan payable 750.00

Savings plan deductions payable 2,300.00


Total 71,069.23 71,069.23

To record payroll register for the month of November 20XX.

11. Explain the difference between the cash method of accounting and the accrual method of

accounting.

The cash method of accounting records expense and revenue transactions in the accounting period when the actual cash is paid out or received. The accrual method of accounting records transactions in the period in which they are incurred.



12. What is the purpose of accruing costs?

The purpose of accruing costs is to give employers an accurate account of their total financial transactions for a specific accounting period.

13. Cassie Flohr, employee #375, was hired on May 1, last year at an annual salary of $36,000.00, paid bi-weekly. As of May of the current year, Cassie was entitled to two weeks’ vacation at 4% of her vacationable earnings.

Cassie took her two weeks’ vacation leave from July 9 to July 20, of the current year at which time she was paid her vacation pay on a manual cheque. Prepare the journal entry required to accrue Cassie’s vacation payable every pay and the journal entry or entries required to record the manual cheque Cassie received when she took her vacation leave in July of the current year. For this question, use the following rates: CPP 4.95% EI 1.63% Income tax 26.00%

The journal entry required to accrue Cassie’s vacation every pay should be prepared as follows:

Bi-weekly salary: $36,000.00 = $1,384.62 26 Vacation accrual: $1,384.62 x 4% = $55.38

Journal Entry #1


May 11, 20XX Vacation pay expense 55.38

Vacation pay payable 55.38

Total 55.38 55.38

To record vacation accrual for the pay of May 11, 20XX.

The journal entry required when Cassie took her vacation leave should be prepared as follows: Vacation accrual for the year: $55.38 x 26 pays = $1,439.88



Journal Entry # 263


July 20, 20XX Vacation pay payable 1,439.88





Total 1,439.88 1,439.88

To record vacation pay paid by manual cheque to employee #375

Journal Entry #264

DATE ACCOUNT NAME DEBIT CREDIT July 20, 20XX Canada Pension Plan expense 64.61




Total 97.47 97.47

To record employer CPP and EI expense for vacation pay for employee #375.



14. Pantheon Inc. uses four and five week monthly accounting periods and pays its employees on a bi-weekly basis, where the pay date is one week after the pay period end date. The pay period end dates for the months of June and July are June 8, June 22, July 6 and July 20. The accounting month-end for June is June 29. For the bi-weekly pay period ending June 22, Pantheon Inc.’s salaries and wages expense was $95,000.00, its CPP expense was $5,040.00 and its EI expense was $1,700.00. As of June 29, the employees will have worked one week of the two week pay period ending July 6 which will not be paid until July 13. Pantheon Inc. wants to record the salaries and wages and employer’s payroll-related expenses for the last week of June in the June accounting period in order to accurately reflect their costs for the month. a. Prepare journal entries to record the labour and payroll-related costs for the week

ending June 29, 20XX (based on June 22 payroll) and the reversal entry in July.

b. For the pay period ending July 6, the salaries and wages expense is $98,500.00, the employees’ CPP contributions are $4,693.00, the employees’ EI premiums are $1,851.80 and their income tax withholdings are $37,580.00. Prepare journal entries for the July 6, 20XX payroll.

a. The first journal entry will record the estimated payroll cost for the week ending

June 29 as 50% of the last pay ($47,500.00), plus an estimate of 50% of the employer’s cost for Canada Pension Plan and Employment Insurance.

Journal Entry # 87


June 29, 20XX Salaries and wages expense 47,500.00

Canada Pension Plan expense 2,520.00

Employment Insurance expense

850.00




850.00

Total 50,870.00 50,870.00

To accrue salaries and wages and employer costs for the week ending June 29, 20XX.



In July, journal entry #87 will be reversed.

Journal Entry # 98


July 1, 20XX Salaries and wages payable 47,500.00



Salaries and wages expense 47,500.00

Canada Pension Plan expense 2,520.00


Total 50,870.00 50,870.00

To reverse JE #87 for the salaries and wages and employer costs accrued for the week ending June 29, 20XX.

b. The journal entries for the July 6, 20XX payroll, will be as follows:

Journal Entry # 111


July 6, 20XX Salaries and wages expense 98,500.00





Total 98,500.00 98,500.00To record payroll register for the payroll of July 6, 20XX.



Journal Entry # 112


July 6, 20XX Canada Pension Plan expense 4,693.00

Employment Insurance expense 2,592.52

Canada Pension Plan contributions payable

4,693.00

Employment Insurance premiums payable

2,592.52

Total $7,285.52 $7,285.52

To record payroll expenses for the payroll of July 6, 20XX.

15. What is the purpose of reconciling accounts?

At the close of the period, the balances in all the General Ledger accounts should be analyzed to ensure the journal entries have been posted to the correct accounts and posted correctly as a debit or credit.

16. When Parker Nyland received his copy of the General Ledger for the month of February (pay dates February 1st and 15th) it showed the following transactions in the Canada Pension Plan payable account:

Account Name: Canada Pension Plan payable


20XX Balance forward 0.00

Feb. 1, 20XX JE #143 (record employees’ payroll liability for February 1st)

812.68 812.68 CR

Feb. 15, 20XX JE #157 (record employees’ payroll liability for February 15th)

926.75 1,739.43 CR

Feb. 15, 20XX JE #163 (record employer’s liability for February 15th)

926.75 2,666.18 CR

Feb. 25, 20XX CV #3201 (record payment to the CRA)

3,478.86 812.68 DR



a. Determine why there is a closing balance.

There is a closing balance because the journal entry to record the employer’s Canada Pension Plan liability for the February 1st pay was not posted to the account, however the February 25th payment included the employer’s expense of $812.68 for the February 1 pay.

b. Prepare the journal entry required to clear the closing balance of $812.68.

Journal Entry #172


February 28, 20XX Canada Pension Plan expense 812.68 Canada Pension Plan payable 812.68

Total 812.68 812.68

To record the Canada Pension Plan expense for February 1, 20XX.

17. a Why are liability accounts not closed or cleared to zero at the end of the fiscal period?

Liability account balances are carried forward to the next accounting period, as the liability still exists.

b. When are the payroll liability accounts reduced or cleared?

The payroll liability accounts should be reduced or cleared to a zero balance when the cheque prepared to remit the net pay, withholdings or employer’s payroll expenses is posted against the account.

Documents

Chapter 1 Payroll Accounting - Transtutors · 2017. 12. 14. · Payroll Accounting ... Payroll Fundamentals 2 1-3 Introduction In Payroll Compliance Legislation (PCL), students learned