PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

CHAPTER 11 Manual payroll system

Learning outcome

To calculate income tax rates for employees, prepare manual payroll sheets and to record

details in accounting records

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

KEY TERMS• Awards• Deductions• Enterprise bargaining• Instalment activity statements• Internal controls over the pay procedure• PAYG summary

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

KEY TERMS cont.• PAYG tax system• Payroll sheets• Pay slips• Suspense accounts• Time sheets• Withholding tax

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

DEFINITIONS• Awards are terms and conditions of

employment for particular industries• Deductions are amounts withheld from

employees’ pay as per legislation or employee request

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

DEFINITIONS cont.

• Enterprise bargaining results in a workplace agreement between employer and employee

• Payslips document wage payments to show tax, amounts deducted and net payment to the employee

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

DEFINITIONS cont.

• PAYG tax system gives effect to the legislative requirement that tax be withheld from employees’ pay and paid to the ATO on a regular basis

• Salaries are payments to employees on an annual salary

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

DEFINITIONS cont.

• Suspense accounts contain amounts held by the business on behalf of the employee

• Wages are paid to employees for work under an award or for casual work

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYG SYSTEM• Employer deducts income tax from employees’

wages• Employer remits tax collected to the ATO• Employer reconciles PAYG for the ATO at year

end (30 June)

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYG SYSTEM cont.

• Employers prepare payment summaries, with an employee copy and a copy for the ATO

• Taxation deductions must comply with the latest Income Tax Instalment Schedule

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYG SYSTEM cont.

• Income Tax Instalment Schedules are issued by the ATO to assist in the calculation of tax deducted

• Most computerised payroll packages automatically calculate PAYG

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

SIX MAIN FUNCTIONS OF PAYROLL PROCEDURE

1. Engaging staff and keeping personnel records

2. Recording time worked by employees

3. Preparing payroll

4. Disbursing payroll

5. Accounting for salaries and wages

6. Remittance of PAYG, superannuation and other withholdings

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYROLL INTERNAL CONTROLS

Adequate internal controls required because:– payroll is a large business expense– payroll information is confidential– payroll fraud is very common– legislative requirements must be met

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYROLL INTERNAL CONTROLS cont.The most usual control is to allocate the payroll procedures to different departments or staff members within the organisation

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

SEGREGATION OF PAYROLL DUTIESTo provide security within the payroll system, different staff or departments should be allocated the following jobs:

– Updating payroll database– Preparing time sheets– Preparing payroll– Authorising payment

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

SEGREGATION OF PAYROLL DUTIES cont.Helps reduce the incidence of fraud and error, for example:

– cheques drawn for incorrect amounts– fictitious employees– overstatement of pay rates– disappearance of unclaimed wages

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

OTHER INTERNAL CONTROLS FOR PAYROLL

• Proper employee records– Employee history, payroll records, entitlement

records, time sheets

• Reconciliation of payroll – Individual pays to total payroll

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

OTHER INTERNAL CONTROLS FOR PAYROLL cont.

• Proper authorisation– Payroll or cheques authorised by signature of two

officers– Employee to sign for pay (if appropriate)

• Security– Unclaimed pay locked in safe place

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

OTHER INTERNAL CONTROLS FOR PAYROLL cont.

• Proper accounting records– Correct classification in journals and ledgers

• Automated payroll systems– Ensure operation of internal controls

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PAYROLL PROCEDURES

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL

• The recorded expense is gross pay• The difference between gross pay and net pay

is deductions (both mandatory and elective)

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL cont.

• Mandatory deductions may be:– PAYG tax

– Child Support Agency payments

– HECS repayments

• Deductions are held in ‘suspense’ or ‘holding’ (liability) accounts until paid out (e.g. to superannuation fund)

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL cont.

• Net pay is credited to Payroll clearing account

• Payment of wages clears the Payroll clearing account

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ACCOUNTING FOR PAYROLL cont.

11-23PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL cont.

11-24PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL cont.

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PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING FOR PAYROLL cont.

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