CHAPTER 18Recording payroll transactions

Contents

The nature of payroll Gross pay and basic pay Overtime, bonus payments and

commissions Payroll administration and

documentation Payroll deductions Payment methods Updating records

Payroll

A payroll is a list of employees and what they are to be paid.

Being on the payroll of an organisation means that you are selling your labour to it for an agreed price.

Employer's legal responsibilities to collect income tax

Employer's duties(a) Operate the income tax system for all covered by it.(b) Maintain the necessary records.(c) Pay the income tax and benefit contribution

collected from employees to the tax authorities every month (in most cases).

(d) Let the tax office inspect the records.(e) Submit end of year returns.(f) Give employees payslips(g) Maintain for three years, at the minimum, after the

end of a tax year, the records relating to that year.

Question

All an employee's income is assessed to tax through the system operated by employers?

False. The employer only deals with income arising from the employment. If the employee, say, received interest on a deposit account, this would not be taxed directly, through his or her employer's payroll system, although it might be reflected in the tax code. However, lower rate tax on such income may be deducted at source.

Question

It is the employee's duty to ensure that the correct deductions are made from his or her income and that the correct records are kept?

False. Although the employee owes the tax, it is the employer's legal duty to ensure the correct working of the tax deduction system.

Any underpaid tax under a payroll scheme is collected from the employer, who may then try to recover it from the employee

The main requirements of a payroll processing system

Accuracy People get paid what they are owed The government receives what it is legally

entitled to The employer's cost information is

appropriate Timeliness

The employees do not being short of cash Employee morale does not suffer The government's requirements

Security

Gross pay and basic pay

Gross pay is what an employee earns., not what the employee actually receives in cash

Basic pay is the rate for the job, and is what you expect to receive for a normal period's work, irrespective of overtime and so forth.

Basic pay: Fixed rate per period Your contract of employment states that you

are to receive an annual salary of $9,000. You join on 1 January 20X2. You are told that the first three months of your employment are a probationary period, and that from 1 April 20X2 your annual salary will increase by 10%. You are informed on 20 May 20X2 that everyone in the company is to receive a pay rise: yours works out at $600 per year in addition to the 10% rise you have already received, effective from 1 July 20X2.

Task(a) What will be your basic pay for each of the

following months.(i) January 20X2(ii) May 20X2(iii) July 20X2

(b) (i) At 31 December 20X2, how much basic pay would you have received since 1 January 20X2?(ii) Assuming no further rises, how much basic pay

could you expect to receive in the 12 months to 31 March 20X3?

Answer

(a) (i) $9,000/12 = $750(ii) $9,000 + (10% × $9,000) = $9,900, your new annual salary. So, $9,900/12 = $825(iii) $9,900 + $600 is $10,500, your latest annual salary. So, $10,500/12 = $875

(b) (3 × $750) + (3 × $825) + (6 × $875) =

$9,975 in the 12 months to 31 December 20X2

(c) (3 × $825) + (9 × $875) = $10,350

Basic pay: Hourly rate

Some workers get paid a rate per hour. If you work 40 hours at $5 per hour then your basic pay will be $200.

Piecework

Wages = Units produced × Ra It is common for pieceworkers to be

offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their ownte of pay per unit

Example: Piecework

Penny Pincher is paid 50c for each towel she weaves, but she is guaranteed a minimum wage of $60 for a 40 hour week. In a series of four weeks, she makes 100, 120, 140 and 160 towels. What was her pay each week?Output PayUnits $

1 100 60 (minimum wage)2 120 × 50c 603 140 × 50c 704 160 × 50c 80

Example: Piecework hours

An employee is paid $3 per piecework hour produced. In a 40 hour week the employee produces the following output.

Piecework time allowed

per unit15 units of product X 0.5 hours20 units of product Y 2.0 hoursWhat is the employee's pay for the week?

Answer

Piecework hours produced:Product X 15 × 0.5 hours 7.5

hoursProduct Y 20 × 2.0 hours 40.0

hoursTotal piecework hours 47.5

hoursTherefore the employee's pay = 47.5 × $3

= $142.50 for the week

Differential piecework

Offer an incentive to employees to increase their output by paying higher rates for increased levels of production. Up to 80 units per week, rate of pay per

unit = $1.00 80 to 90 units per week, rate of pay per

unit = $1.20 Above 90 units per week, rate of pay per

unit = $1.30

Overtime

Overtime comprises hours worked over a standard working week

If an hour at basic rate is $4, how much is an hour of overtime at time and a half? $6 per hour.

Example: Overtime

Marguerite Yourcenar works in a library. She is paid on an hourly basis. Her basic rate for the 35 hours she normally works a week is $6 per hour.

The first five hours overtime are paid at time and a quarter. Any more overtime hours worked are paid at time and a half.

In the week ended 3 August 20X2 she worked a total of 47 hours.

For the week ended 3 August 20X2 calculate Marguerite Yourcenar's basic pay and the overtime payments she receives, showing how each is made up.

Answer

Basic pay is 35 hours at $6 per hour 210.00

Overtime 5 hours at [$6 × 1.25 =] $7.50 per hour 37.50

Overtime 7 hours at [$6 × 1.50 =] $9.00 per hour 63.00

Total 47 hours 310.50

Question - Hourly pay

Alphonse is an hourly paid employee. His basic rate is $5 per hour for daytime shifts, $7.50 per hour for nighttime shifts, $7.50 per hour for overtime (ie hours worked in excess of 40 hours a week) except weekends when the rate is always $10 per hour.

How much would he earn, assuming an 8-hour day.(a) For a 40 hour week of daytime shifts with no

overtime?(b) For a 40 hour week if one day is worked on

Saturday?(c) For a 40 hour week of nightshifts and an additional

four hours overtime?

Answer

(a) 40 hours × $5 = 200

(b) 32 hours × $5 = 160

8 hours × $10 = 80

240

(c) 40 hours × $7.50 = 300

4 hours × $7.50 = 30

330

Question - Pieceworker

Boris is a pieceworker, and is paid $5 per widget produced. However, he gets a guaranteed minimum wage of $30, and if he works more than 50 hours a week he gets $2 per hour as overtime. If he produces over 60 widgets per week he gets $6 per widget over 60. How much would he earn in each of the following weeks?(a) In the week ending 13/3/X1 Boris made 50 widgets and

did 4 hours of overtime.(b) In the week ending 20/3/X1 he produced one widget.(c) In the week ending 27/3/X1 he produced 6 widgets.(d) In the week ending 3/4/X1, Boris produced 70 widgets,

and worked 6 hours overtime.

Answer

(a) 50 widgets × $5 = 250Overtime 4 hours × $2 = 8

258(b) Guaranteed minimum $30(c) 6 widgets × $5 = $30(d) 1st 60 widgets × $5 = 300

Next 10 widgets × $6 = 606 hours overtime × $2 = 12

372

Bonuses

An extra payment made to an employee as a reward for results achieved.

To motivate employees to work harder and to reach or exceed some target

Example: Bonus schemes

Carrot and Stick uses a variety of bonus schemes:(a) Senior managers get a bonus based on how well the company is doing as a

percentage of their salary. If the company increases its annual profits by 1% then they get a bonus of 1% of their salary, paid on 30 June.

(b) The sales force, which has 100 members, gets a bonus paid on the last day of the month, based on the value of sales per month. If the value of sales (excluding sales tax) is over $35 million in a particular month, 1% of the excess is divided equally between the members of the sales force.

(c) Factory workers receive a bonus based on productivity. They normally produce 1,000 units an hour. If they produce more than this amount per hour, then they get a payment of 10c per worker for every extra unit produced.

(d) All employees get a one-off bonus, in addition to any others, of $30 if Carrot and Stick's profits in the year to 31 March exceed $127.5 million. This is paid on 30 June.

(e) Weekly workers are given an extra one week's wages if their performance at work has merited them a Grade 1 assessment by their bosses for four consecutive weeks.

Example: Bonus schemes

In the year ended 31 March 20X2, Carrot and Stick had made a profit of $130 million, a 3% increase over the year ended 31 March 20X1. This was $5 million more than anticipated. In the week ended 30 June 20X2 the factory staff produced 100 units more than usual. In the month of June 20X2, the value of sales excluding sales tax was $36 million.

Task: Calculate the bonuses:(a) David Eadwood, Senior Manager Finance Department, earns

$30,000 per year. What bonuses will he receive on 30 June 20X2 for the year?

(b) Bernadette Larney, Assistant Sales Executive, earns $18,000 per year. What bonuses does she receive in the month ending 30 June 20X2?

(c) Stan Takhanov is a factory worker with a Grade 1 assessment in the four weeks ended 30 June 20X2. He earns $150 per week. What bonuses will he receive in the four weeks ended 30 June 20X2?

Answer

(a) David Eadwood

$30,000 × 3% profit increase is 900

One-off bonus 30

Total bonuses for the year ended 30 June 20X2 930

(b) Bernadette Larney

Sales bonus [ $36m-$35m ×1% ]/100 sales staff 100

One-off bonus 30

Total bonuses in the month ended 30 June 20X2 130

(c) Stan Takhanov

Grade 1 assessment bonus (ie one week's wage) 150

Extra production bonus 100 units at 10c 10

One-off bonus 30

Total bonuses in the four weeks ended 30 June 20X2 190

Commission

Payment made to an employee (or agent) based on the value of something (usually sales) the employee (or agent) has generated

Straight percentage of all sales 10%: $1,000 of sales get $100, for $100,000 get $10,000

Sliding scale, more valuable contracts earn greater commission Contracts up to $5,000 a 5% commission, over $5,000 7.5%

Increase with the total volume of sales. Sales up to $100,000 a 5% commission is earned If the target is exceeded, then a 7.5% commission is paid on

the excess (ie all sales over $100,000).

Example: Commission

The BS Company sells crates of BS for $100 each. The company employs two sales staff. Each is paid commission, but on a different basis

(a) Michele Thuselah receives no commission on the first hundred crates she sells a week, 10% commission on crates sold in excess of 100 but below 200, 15% on crates sold in excess of 200 but below 300 and 20% on crates sold in excess of 300. She receives her commission at the end of the month in which the sale is made. She receives a basic annual salary of $9,000 per year.

(b) Jerry O'Boam receives a basic salary of $4,500 per year and a straight 7.5% commission on all he sells.

From 2 August 20X2, Michele sold 120 crates in the first week, 340 in the second week, 30 in the third week and 95 in the fourth week. She made no sales on 1 August, 30 August or 31 August. In the same month, Jerry sold 500 crates.

Task

What are Michele's and Jerry's earnings, both basic salary and commission, in the four weeks from 2 August to 29 August 20X2?

Answer

Question: Commission

Cassandra works for a company which pays bonuses and commission. Her basic pay is $900 per month, but at the end of the month she receives commission of 5% of the sales she made in the previous month. If her sales exceed $10,000 in any quarter, she gets a one-off bonus of $1,000. These are paid in the month after the quarter.

Here are her sales figures for the first six months of 20X2.Jan 5,000 April 2,000Feb 4,000 May 3,000March 3,000 June 4,000Her sales in December 20X1 were $5,000.

What will be included in her gross pay at the end of each month from January to June inclusive?

Answer

Question – Salaries

Dilys is a salaried worker, who also receives overtime of $10 per hour for hours worked over 156 a month, and a productivity bonus of 5% of her basic monthly salary if the quality of her work exceeds expectations.

Her salary was $12,000 per year, payable in equal monthly instalments. This has been increased to $15,000, by agreement on 1 May, backdated to 1 January.

In May she worked 175 hours, and produced work of better quality than standard.

What will she receive as gross pay in May?

Answer

Basic salary $15,000/12 1,250.00

Overtime (175 – 156) × $10 190.00

Quality bonus 5% × $1,250 62.50

1,502.50

Back pay Jan – April

($15,000 – $12,000) × 4/12 1,000.002,502.50

Payroll administration and documentation

Documents associated with payroll preparation. Timesheets record the hours spent by each

employee on each job, or doing the work of each client.

Attendance records are used by the personnel department to determine the reasons for absence from work, and to administer the granting of annual leave.

Other personnel record documentation includes cards to record a person's career progress.

Personnel department

Personnel record cardRecord of attendance card

Responsible for recruiting, engaging and holding certain basic data of employees

Payroll function

Calculation of gross pay

Calculation of tax, national insurance and other deductions

Preparing payslips

Making appropriate returns to external agencies

Making up wages, or preparing tapes for bank transfer

Distributing payslips

Preparing payroll statistics.

Documentation

Personnel records held in the personnel department document how much each salaried employee is to be paid, and for what periods

Payroll department will receive instructions from the personnel department relating to salary increases, or other alterations to an employee's pay.

Attendance cards are the basis for payroll preparation

Time recording clock

Salaried employeesHourly paid employees

The records required

Daily time sheets Filled in by employee

indicate time spent on each job

The total time on time sheet should correspond with attendance record’s

Job cards Cards are

prepared for each job

Weekly time sheets Similar to daily time

sheets but are passed to the cost office at the end of the week

Entries should be made daily to avoid error.

Route cards Similar to job cards,

except that they follow the product through the works and carry details of all operations to be carried out.

Payroll deductions

Income tax – tax deducted at source

Tax deducted at source covers all the employees of an organisation

Does not cover self-employed people

Benefit contributions

Borne in part by the employee and in part by the employer: Unemployment benefit Income support The state pension

scheme The National Health

Service in some countries

Contributions payable by the employee Form part of the

deductions from gross pay.

Contributions payable by the employer An additional cost to

the employer.

Compulsory contributions

Remittances to authorities

The total cost of wages and salaries in the income statement is:

Gross wages + employer's benefit contribution

Payroll giving

Payroll giving is entirely voluntary In a payroll giving scheme, an employee

is allowed to set aside a portion of his or her gross salary for charitable donations. This portion of gross salary is not taxed Both employer's and employee‘s

contributions are still payable on this amount.

Example: payroll giving

Gene Rowse earns a gross salary of $12,600 a year, payable in equal monthly instalments. The company which employs him, Tea and Sympathy, operates a payroll giving scheme. Gene contributes $50 permonth from his gross pay.

Tasks(a) What is his gross pay?(b) What will be his taxable pay for month 1?(c) Fill in columns 2, 3, 5, 6, and 7. Assume for the purposes

of this question, that his total free pay in month 1 is $275.00.

(d) Assuming contributions are payable, fill in columns 1a, 1b and 1c. The contribution tables give the following figures.

Answer

(a) His gross pay is $12,600 pa divided into twelve months or $1,050 per month.(b) His pay in the week or month will be only $1,000 for the purposes of income tax.

Other deductions

Deductions from net pay linked to share options. They do not affect payroll calculations.

Run by employer co-operates with building society or bank.

The employer deducts an agreed sum from net pay of the employee and deposits it in a building society or bank.

Deducted from earnings, if the employee is a member of a union

Sharesave payments Trade Union contributions

Payroll department deducts from employees' pay, maintain records and report them to the pension fund administrators.

The employer only (a so-called non-contributory pension scheme)

The employer and the employee (called a contributory pension scheme)

Pension scheme

Example: Contributions

Authentic Instruments runs a company pension scheme for all its employees, contributing a sum equal to 10% of each employee's gross salary into the scheme. Each employee has to contribute 5% of his or her gross salary to the scheme.

Horatio Arpsichord earns $15,000 per annum. Letitia Ute earns $21,000 per annum.TaskIn a typical month how much will(a) Horatio and Letitia earn gross?(b) Horatio and Letitia contribute, out of salary, to the company

pension scheme?(c) Authentic Instruments contribute to the company pension

scheme on Horatio's and Letitia‘s behalf?

Answer

Payment methods

Have reduced due to the following reasons. Security problems Extra time and effort

compared to other payment methods

Part time employees, temporary staff and casual staff.

The payroll department prepares the payroll on magnetic disk or tape, then sends it to the automated service run by the clearing banks.

The system then automatically transfer the funds from the employer‘s banks accounts to the employees'

Cash payment Automated payment system

Payroll ledger accounts

Comecon Ltd pays its workers every month. In Month 1, the payroll details are as follows.

Gross wages 31,200Employer's NICs 2,000Net wages paid to workers via Direct Credit (BACS) 25,000Deductions for PAYE made from workers' wages 4,000Deductions for employees' National Insurance 1,000Employees' contributions to the pension fund 1,200Employer's contributions to the pension fund 1,500Assume there was $50,000 in the bank at the beginning of

Month 1 (an asset of $50,000). Details of these items are beyond the scope of your studies, but you need to know how to post the payments to the main ledger

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Question

Aroma has the following payroll details in Month 1. Write out the double entry for these transactions and show the wages control account at the end of all the transactions.

Gross wages and salaries: Administrative staff 102,531Sales and marketing staff 226,704Production staff 1,067,895

Employer's NICs 104,782Employees' NICs 83,829PAYE deductions 351,826Pension deductions: Employer's 41,728

Employees' 37,860Net wages and salaries 903,893GAYE donations 10,180Season ticket loan repayments 9,542

Answer

Quiz

1 What are the three main requirements for payroll processing?

2 What are the three main ways of calculating basic pay?

3 What is an overtime premium?4 If personnel are paid wages out of petty cash, no tax

or contribution is payable. True or false?5 Unless automated transfer is used, much of the

payroll department's time is spent signing cheques. True or false?

6 What is the cost of wages and salaries in the income statement made up of?

Answer

1 Accuracy, timeliness and security.2 (a) The same every month

(b) Hourly rate(c) Performance basis (eg per unit of output)

3 The extra amount paid for overtime hours on top of the basic rate.

4 False5 True6 Gross wages plus employer's benefit

contribution.

QB 40

At the end of the month, an organisation needs to accrue for one week's wages. The gross wages amount to $500, tax amounts to $100, employer's national insurance is $50, employees' national insurance is $40, and employees' contributions to pension scheme amount to $30. The ledger entries to record this accrual would be