TOPIC 2: PAYROLL ACCOUNTING
All business entities have to pay employee’s for the services. An employee is the one who perform services, subject to the supervision and control of another part known as an employer.
Relationship between employee and Employer
The employer has the power to terminate services offered by the employee.
Employer sets the hours of work for the employee’s. The employer provides to the employees with place to work.
Objective of Payroll Accounting
-To provide accurate payment of remuneration to employee promptly
-To provide and maintain the necessary employee and employer record statements and any report relevant to and required by the government agencies and statutory.
-To prevent fraud
-To control salaries and wages expenses
Employees are paid either a wage or a salary. If you see an advert
for a job and it mentions that the rate of pay will be pound 8 per hour
that is an example of a wage. If on the other hand, an advert refers to
an annual amount that is a salary.
Wage is paid daily or weekly depending on hours worked WHILE Salary is paid at the end of every month.
Basic Pay
Is made up of an employee’s remuneration fixed at the time of employment before taking accounts of other benefits.
- Salary are not linked to weekly or piece rate, they are paid on a monthly basis
- Wages are associated with employee’s paid weekly, often on the basis of a piece of an hourly rate.
Monetary Benefits
There are certain benefit’s some time are accrue, to employee’s when such benefits are received in monetary form they increase employee’s monetary earning and are part of payroll form e.g. transport allowance, Housing Allowance.
Some of the benefits are exempt from tax and some are not. It is important to distinguish the tax status in order to compute. (Pay as you earn) Tax.
Gross Pay
Is obtaining by the summation of all sources of employee’s and overtime payments. Gross means before deductions.
PAYROLL DEDUCTION AND STATUTORY CONTRIBUTIONS
Payroll accounting is significant influenced by legislation and acted by government. This law affects payroll accounting because they levy taxes based on payroll amounts and their exactly statutory contribution by both employer and employee.
1. STATUTORY CONTRIBUTIONS
(a) Payee tax (Pay as you earn)
Income tax Act (1973) and financed bills passed each budget session governed payment of individual tax. Is a tax levied on monthly income of individuals.
Monthly income for this purpose will be Gross pay reduced by earning which are not taxable.
(b) NSSF, PPF, PSPF, LAPF NHIF and Others
NSSF Act requires every employee and employer toward the fund. Upon retirement a lump-sum is paid to employee from the fund depending on his contributions;
(i) Employee contribution (10% at the basic pay)
(ii) Employer contribution (10% at the basic pay)
Others
PPF 5% to be contributed by the employee and 15% be contributed by the employer.
PSPF employee and employer contribute 10% each on basic salary.
2. DEDUCTIONS
Salary Advances and Staff Loans
Employees will sometimes want to receive their salary or part of their salary of in advance. At the end of the month an employee’s net pay must be reduced by the salary receive before the month end.
Loans are advances to staff to be received in more than one month. Usually there will be an agreement as to athere at of loan repayment.
Repayment Installments will be reduced from an employee Net pay.
Voluntary Deductions
Employee can choose to contribute towards any organization. Individual. In this case written employee concern and the stated amount will be deducted from the employee’s salary and resettled by the employer to the stated person e.g. Lion Club, Rotary Club, Simba Club etc.
PAYROLL RECORDS
Employer’s are required to maintain records with information of each employee salary and hours worked the rate of pay, Total overtime, entitlement and additions to salary, reductions from salary and employee’s net salary pay.
Employee’s earning statement (Salary slip)
This record contain information on the employee earning and reductions, clearly analyzed and showing how net pay has been arrived at the end of each month this statement is sent to every employee to communicate her earning information of the month. This statement is known as Salary Advice or Salary Slip.
SALARY ADVICE OR SALARY SLIP
| Name of employee ……………… | ||
| No …………… | ||
| Basic pay | xxx | |
| Add; overtime payment | xx | |
| Transport allowance | xx | |
| Rent allowance | xx | |
| Meal allowance | xx | |
| Gross pay | xxxx | |
| less; Deductions | ||
| salary advance/loan | xx | |
| Trade union | xx | |
| NSSF / PPF / LAPF/GEPF/NHIF | xx | |
| P.A.Y.E | xx | |
| xx | xxx | |
| Net pay | xxxx | |
Example I
Silunka Company has four persons (all married) and pays the weekly salaries. The detail of the firm is as follow,
| Name | Weekly
Pays (Tshs) |
Deduction per week
Medical Insurance (Tshs) |
| Aisha | 7500 | 300 |
| Safina | 8000 | 300 |
| Blandy | 7800 | 400 |
| Pyurity | 6200 | 300 |
Addition Information
(i) Each employee pays 5% for income tax per week.
(ii) All employees contribute 10% monthly for PSPF.
Required;-
(a) Prepare the payroll journal for the month of June, 2006 using the headings which will accomplish the purpose.
(b) Using a general journal as a Memorandum record only, prepare a journal entry to record the payroll.
Payroll Journal (Summary for the Month of June 2006
| S/N | Name of Employee | Basic pay | Gross pay | Income tax | Medical insur. | PSPF | Net pay |
| 1 | Aisha | 30,000 | 30,000 | 1500 | 1200 | 3000 | 24,300 |
| 2 | Safina | 32,000 | 32,000 | 1600 | 1200 | 3200 | 26,000 |
| 3 | Blandy | 31,200 | 31,200 | 1560 | 1600 | 3120 | 24,920 |
| 4 | Pyurity | 24,800 | 24,800 | 1240 | 1200 | 2480 | 19,880 |
| TOTALS | 118,000 | 118,000 | 5900 | 5200 | 11,800 | 95,100 |
JOURNAL ENTRIES
| DATE | PARTICULARS | DEBIT | CREDIT |
| Salary expenses a/c | 118,000 | ||
| Income Tax payable a/c | 5,900 | ||
| Medical Insurance payable | 5200 | ||
| PSPF a/c | 11,800 | ||
| Net pay a/c | 95,100 | ||
| being recognition of | |||
| payable salary | |||
| Profit & loss a/c | 118,000 | ||
| salary expenses | 118,000 |
Payroll Summaries/Journal
Some organization will have several departments or operating units. Usually payroll is prepared along departmental lines. From the information on the salary slip, it should be possible to prepare a payroll summary for the department.
KIBASILA HIGH SCHOOL
ECA DEPARTMENT
PAYROLL SUMMARY /JOURNAL MONTH ENDING………….
| Employee’s name | Basic pay | Gross pay | Advance | Loan | P.A.Y.E | NSSF | Net pay |
| Juma | 89,000 | 110,000 | 40,000 | – | 8,630 | 8,900 | 52,470 |
| Rashid | 120,000 | 135,000 | – | 60,000 | 12,380 | 12,000 | 50,620 |
| Mary | 86,000 | 120,000 | – | – | 10,120 | 8,600 | 101,280 |
| Frida | 150,000 | 160,000 | 50,000 | – | 16,620 | 15,000 | 78,380 |
| George | 140,000 | 158,000 | – | 70,000 | 16,620 | 14,000 | 57,780 |
| TOTALS | 585,000 | 683,000 | 90,000 | 130,000 | 63,970 | 58,500 | 340,530 |
From the Departmental Payroll summaries it should be possible to prepare an organization summary.
This would be a list of departments together with department totals of contents of salary slips.
KIBASILA HIGH SCHOOL
ALL DEPARTMENTS
PAYROLL SUMMARY MONTH ENDING
| DEPARTMENT | BASIC PAY | GROSS PAY | ADVANCE | LOAN | PAYE | NSSF | NET PAY |
| ECA | 585000 | 683,000 | 90,000 | 130,000 | 63,970 | 58,500 | 340,530 |
| HGE | 490,000 | 525,000 | 90,000 | 60,000 | 47,750 | 44,500 | 282,760 |
| EGM | 229,000 | 268,000 | 40,000 | 70,000 | 24,850 | 22,900 | 110,260 |
| TOTAL | 1,304,000 | 1,476,000 | 220,000 | 260,000 | 136,570 | 125,900 | 733,530 |
ACCOUNTING ENTRIES
Payroll Accounting involves accounting Principles and techniques covered previously;
In some organization payroll entries passed to the General ledger directly, in this case, the payroll summary act as a special Journal.
But, in most cases, payroll summary is not part of double entry, it only save as a working paper, for preparation of General Journal. Kibasila High School. Payroll summary for all departments will be recorded in general Journal basis/follows:
|
Dr, ECA salary Expenses |
683,000 |
|
| Dr; HGE Salary Expenses | 525,000 | |
| Dr; EGM Salary expenses | 268,800 | |
| Cr; Salary Advance | 220,000 | |
| Cr; Loans | 260,000 | |
| Cr; PAYE | 136,570 | |
| CR; NSSF Payable | 125,900 | |
| CR, Salary Expenses (Payable) | 733,530 |
One transaction that needs recording is employer’s contribution to NSSF since it is 10% of each employee’s
Basic pay will be Tshs. 125, 900
Dr, NSSF Employers Contribution 125,900
Cr, NSSF Payable 125,900
At the end of the month
Dr; Salary payable 733,530
CR; Cash A/C 733,530
Being payment of salaries to employee’s
DR, NSSF payable 251,800
Cr, Cash A/C 251,800
Remittance to NSSF employee’s and employer contribution
DR, P.Y.E 136,570
Cr, Cash 136,570
Mode’s of Payment of salaries
- i) Currency (notes & coins)
- ii) By cheques
iii) Credit transfer to employees bank account.
Overtime Payments
Usually employees are required to work 8 hours a day, 40 hours a week or 176 hours a month.
If an employee works more than he mentioned hours about the entitled to overtime payment.
On a normal working day overtime is paid at one and half times the normal rate of pay.
On weekends or Holidays overtime is paid at twice the normal rate of pay.
Formula for overtime Payments;- (Basic pay x factor x hours of overtime)/(176 hrs)
Example 1
HGK Company employs four people, each of whom is married, whose monthly salaries are;
| Sadiki Tshs | 85,000 |
| Zuberi Tshs | 90,000 |
| Rehema Tshs | 96,000 |
| Mgaya Tshs | 120,000 |
Determine the correct amount of P.A.Y.E and Net Pay for each employee
Additional Information;-
Income Exceeds Tshs 65,000 but not exceeds Tshs.85,000 is Tshs 9500 plus 5% of the Excess of Tshs 65,000
Income Exceeds Tshs 86,000 but not exceeds Tshs.100,000 is Tshs 10,500 plus 6% of the excess of Tshs.86,000
Income Exceeds Tshs 100,000 but not exceeds Tshs.120,000 is Tshs.11,500 plus 15% of the excess of Tshs.100,000.
Solutions
Payee for SADIKI and Net Pay
= (85,000 – 65,000) x 5% + 9500
= 1000 + 9500
= 10,500
Net Pay = 85,000 – 10,500
= 74,500
ZUBERI
PAYE = 240 + 10,500
= 240 + 10,500
= 10,740
Net pay = 90,000 – 10740
= 79,260
REHEMA
PAYE = (96,000 – 86,000) x 6% + 10,500
= 600 + 10, 500
= 11,100
Net pay = 96,000 – 11,100= 84,900
MGAYA
PAYE = (120,000 – 100,000) x 15% + 11,500
= 20,000 x 15% + 11,500
= 3,000 + 11,500
= 14,500
Net Pay = 120,000 – 14,500
= 105,500
Example 2
In the following summary of data obtained from 1 MICU Company’s payroll records some amounts have been intentionally omitted.
| Earnings | Tshs | |
| I | Basic Pay | – |
| Ii | Overtime | 504,000 |
| Iii | Gross Pay | – |
| Deductions | ||
| Iv | PAYE Tax | – |
| V | NSSF (on Gross pay) | 580,650 |
| Vi | Worker association contribution | 77,000 |
| Total deduction | 2,087,750 | |
| Net pay
Account debited |
– | |
| Ix | Factory Wages | 2,124,500 |
| X | Sales salaries | – |
| Xi | Office Salaries | 1,652,000 |
Required
-Determine amounts omitted in (i) (iii), (iv), (Vii) and x
Workings
If 580,650 = 10%
Then x = 10%
x= 580650 x 10
x = 5,806,500
: Gross pay 5,806,500
Basic Pay = Gross pay – Overtime
= 5,806,500 – 504,000
Basic pay =6,310,500
PAYE Tax = Total deduction – Worker Association –(on Gross pay)
= 2,087,750 – 77,000 – 580 650
= 1,430,100
PAYE Tax 1,430,100
Net pay = Gross pay – Total Deduction
= 5,806,500 – 2,087,750
= 3,718,750
(x) Gross pay and NSSF (Employer contribution = Salaries Expenses)
5806 500 + 580,650 = 6,387,150
Salaries Expenses 6,387,150
Sales salaries = Salaries Expenses – Office Salaries – Factory Wages
= 6,387,150 – 1,652,000 – 2,124,500
= 2,610,650
EXERCISE
The following are details related to the coming of two Employees during the week ended 28/2/2001.
| Employee | Omega | Alfa |
| Piece work rate per unit | 240 | 260 |
| Units produced | 400 | 280 |
| Hours Worked | 40 | 44 |
| Hourly rate of pay | 750 | 820 |
A 40 hours week is in operation and overtime is paid at time and quarter. If an employee’s piece work earnings fall below his earnings rate at the hourly rate, then the hourly rate then the hourly rate earning are paid. Both employees have the following deductions.
Pension Scheme – 2% of Gross pay.
NSSF – 10% of Gross Pay.
PAYE – 25% of all earning in excess of 150% per week your are required to calculate the Gross and Net wages of each employee showing clearly the amount of each deduction.
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