Accounting for a Merchandising Business Organized as a Partnership

Chapter 12 &13
Preparing Payroll Records

You will report to work tomorrow morning. Included in this package is information to help you understand
the process used by this company to determine your pay. This company has several employees who get paid
each month according to the number of hours each employee has worked, as well as what their salary is. In
order to pay the employees the company needs to know several things:

SALARY -
PAY PERIOD -
(every week, twice a month, once a month).
PAYROLL

Payroll Time Cards

Payroll systems must have an accurate record of the time each employee has worked for the pay period. One
way to do this is to use a time card.

Time Cards record the following: Total Hours Worked Each Day, or Arrival and Departure Times Each Day.

Employee No. 3

Name Rick E. Shelby

Period Ending December 15, 20—

Morning

Afternoon

Overtime

Hours-Regular, Hours-Overtime 88 4.5

Rate-Regular, Rate-Overtime 12.00 18.00

Amount-Regular, Amount-Overtime 1056.00 81.00

Total Hours 92.5

Total Earnings 1137.00

Analyzing a Payroll Time Card
For example, Mr. Selby reports to work on December 1, and inserts his time card. The card keeps track of
the following times for each individual employee: arrival time,
leaves for lunch,
returns from lunch,
leaves for the day.

Regular Work Hours for a day are 8 hours, and 5 days in one week.
Overtime work hours are more than 8 hours in one day, and more than 5 days in a week.

Calculating Hours Worked

1st Task in Preparing Payroll is to calculate the number of hours worked by each
individual employee.

1- Calculate the number of regular hours for each day and enter the amounts in the Hours Reg
Column.
Departure - Arrival
=
Hours
Time
Time
 Worked
Morning:
Time Card 12.02
7:58
Nearest quarter hour 12:00

8:00

4:00
Afternoon
Time Card 5:06
12:59
Nearest quarter hour 5:00

1:00
4:00

Total regular hours worked on December 3

8:00

2ND Task is to calculate the number of overtime hours for each day and enter the
amounts in the Hours OT
(OT = Overtime) Column. Departure
-
Arrival
=
Hours
Time
Time

Worked
Time Card 9:33
7:01
Nearest quarter hour
9:30

7:00

2:30

3rd Task is to add the hours worked in the Hours Reg to the OT columns. Enter the totals in the
spaces provide at the bottom of the time card.

4th Task is to add the Hours Column to calculate the total hours. Enter the total amount in the Hours
Column at the bottom of the time card.

Calculating Employee Total Earnings

Total Earnings (Gross Pay or Gross earnings) - The total pay due for a pay period
before deductions.

1- Enter the rate for regular time in the Rate Column. Calculate the regular earning by multiplying
 the regular hours times the regular rate.

Regular Hours X Regular Rate =

Regular Earnings

2- Enter the rate for overtime in the Rate Column.

Regular Rate X 1½ =
Overtime Rate
 3- Calculate the overtime earnings by multiplying overtime hours times the overtime
rate.

Overtime Hours X Overtime Rate

= Overtime
Earnings

4- Add the Amount Column to calculate the Total Earnings.

Regular Earnings + Overtime Earnings =

Total Earning

Payroll Taxes

A business is required by law to withhold certain payroll taxes from employee salaries, all
based on the employees total earnings from their time card. Therefore, we can say that
the payroll taxes represent a liability for the employer until the taxes are paid.

Payroll Taxes are taxes based on the payroll of a business.

Employee Income Tax
A business must withhold Federal Income Taxes from employee’s total earnings and
forward it to the federal government.

Information used to determine the amount of income tax withheld is identified on the
W-4 Form (Employee’s Withholding Allowance Certificate). Employers are required
to have a current W-4 form on file for each employee.
 1. Write the employee’s name and address.

2. Write the employee’s social security number.

3. Check the appropriate marital status block.

4. Write the total number of withholding allowances claimed.

5. The employee signs and dates the form.

Amount of Income Tax Withheld is based on :

Marital Status is identified by the employee as to whether they are married
or single. Married people will have less income tax withheld than a single
person with the same earnings.
Withholding Allowance: a deduction from total earnings for each person
legally supported by a tax payer (the larger the number of withholding
allowances the smaller amount of income tax withheld from the employee).

1. Select the appropriate table.

2. Locate the employee’s total earnings.
3. Intersection of wages and number of allowances column.
 Employee and Employer Social Security Tax
Each employee must have a social security number (people who are 1 year old by end of a tax year
must have a SS number)

3 Programs are Included in the Federal Social Security Law

1- Old-age, survivors, and disability insurance benefits for qualified employees and their
spouses, widows or widowers, dependent children, and parents.
2- Payments to senior citizens for the cost of certain hospital and related
services.
Medicare

3- Grants to states that provide benefits for persons temporarily unemployed and for certain
relief, as well as welfare purposes.

FICA TAX (Federal Insurance Contributions Act) is a federal tax paid by employees and
employers for old-age survivors, disability, and hospitalization insurance which is based on the
total earnings of the employees.

Employers are required to withhold FICA taxes from a specified amount of employee
salary paid in a calendar year. (Employers must pay the same or = amount of FICA
tax as the Employee withholding)

FEDERAL UNEMPLOYMENT TAX

(Paid by employers)

STATE UNEMPLOYMENT TAX

(Paid by employers)

RETENTION OF RECORDS

Employers are required to retain all payroll records showing payments and deductions.
(Social security tax payments and deductions - 4 years, state unemployment tax payment records
varies from state to state)

Payroll Register

A payroll register summarizes the total earnings and payroll withholdings of all employees.

Payroll Register -
usiness form used to record payroll information.

1. Pay period date

2. Payment date
3. Employee personal data
4. Earnings
5. Federal income tax withheld
6. Social security tax withheld
7. Medicare tax withheld
8. Health insurance premium deductions
9. Other employee payroll deductions
10. Total deductions
11. Net pay
12. Total, prove, and rule
13. Check number
Recording Earnings- obtained from Form W-4 time card

Recording Deductions

1. Federal Income Tax, used to record the amount of federal income tax withheld
from employee earnings. Determined from tables by federal government

2. FICA Tax (8% current), used to record the amount deducted for social security
tax. (Total Earnings X Tax Rate = FICA Tax Deduction)

3. Health Insurance column – used to record health insurance premium

4. Other Column – used to record voluntary deductions requested by an employee (Savings Bonds – B,
United Ways contributions – UW)

5.Total Column – Used to record total deductions.

Federal Income Tax + FICA Tax + Health Insurance + Other = Total Deductions

Completing a Payroll Register

In the Employee Name Column, Totals, is written with each amount column totaled.

Accuracy is verified with the following formula:

Total Earnings - Total Deductions =

Net Pay

Prove Payroll Register (Net Pay Column = Totals)

Double Line Ruled under Totals

Register is given to a partner of the company for Approval

Before a Check Can be Written

Payroll Calculations are Checked for Accuracy
Partner Approves the Payroll

After a Check is Written

Check Number is Recorded in Ck. No. Column
Payroll Bank Account

A separate checking account for payroll checks helps to protect and control payroll
payments.

The exact amount needed to pay the payroll is deposited in the special payroll account.
If an amount on a check is altered or an unauthorized payroll check is prepared, the
account will be insufficient to cover all the checks and the bank will be able to tell
which check was altered.
Payroll Checks
A company has a special payroll checking account to pay its employees.
A check for the total net pay is written on the company’s general account, the check is deposited in
the Payroll Checking Account.
Information used to prepare payroll checks is taken from payroll register

1. Prepare the check stub.

2. Prepare the check.

A special payroll check form is used that has a detachable stub for recording earnings and amounts
deducted. Employees keep the stubs for a record of deductions and cash received.

1. Prepare the check stub of each employee’s payroll check.

2. Prepare each employee’s payroll check.

Automatic Check Deposit

 Automatic Check Deposit:
Employees request to have check automatically deposited and employer sends the check to the
employee’s bank for deposit.

Electronic Funds Transfer

Electronic Funds Transfer (FET) is a computerized cash payments system that uses electronic
impulses to transfer funds.

The Bank’s computer deducts the amount of net pay from the business’ bank account and adds the
amount to each employee bank account. Employees receive a statement of earnings and deductions
similar to the detachable stub on a payroll check.

Payroll must still be calculated, but individual checks are not written and distributed.

Employee Earnings Records

The employee earnings record is recorded each pay period and enables the company to complete
required tax forms at the end of the year.
Employee Earnings Record is:

Recorded each pay period and includes: Earnings, Deductions, Net Pay, Accumulated earnings for the
Calendar Year.

Recording Information in an Employee Earnings Record

Employee No
Employee Name
Employee Marital Status
Employee Withholding Allowance
Rate of Pay per hour
Social Security Number
Position
Pay Period - No., Ended
Earnings - Regular, Overtime, Total
Deductions - Federal Income Tax, FICA Tax, Health Insurance, Other, Total
Net Pay
Accumulated Earnings
Quarterly Totals of all columns

A company keeps all employee earnings records on cards, one card for each employee is used for each
quarter in the calendar year.

After a payroll register has been prepared, the payroll data for each employee are recorded on each earnings
record. Quarterly totals are used in the preparation of payroll reports required by the government.

Analyzing an Employee Earnings Record

Columns of an employee earnings record are the same as the amount columns of a payroll register.

Accumulated Earnings Column from the previous third quarter is carried forward to the
fourth quarter of the new record.

The total earnings for a pay period are added to the accumulated earnings in the previous line to calculate the
new total accumulated earnings (Year To Date Earnings) earnings from the first of the year.

Accumulated Earnings + Total earnings for Pay Period = Accumulated

Earnings
as of December 1 ended December 15
As of
December 15

Quarterly Earnings is calculated after the payroll for the pay period ended December 31 is recorded.
Accuracy is verified with the following formula:

Total Earnings - Total Deductions =

Net Pay

Total Earnings - Total Deductions = Net Pay

Double lines are ruled under the totals.

Recording A Payroll
Payroll Register

Analyzing Payment of a Payroll

Journalizing Payment of a Payroll
Recording Employer Payroll Taxes
Unemployment Taxable Earnings

1. Enter accumulated earnings and total earnings for each employee.

2. Enter unemployment taxable earnings.
3. Total the unemployment Taxable Earnings column

Journalizing Employer Payroll Taxes

December 15. Recorded employer payroll taxes expense, $485.92, for the semimonthly
pay period ended December 15. Taxes owed are: social security tax, $354.11; Medicare
tax, $82.83; federal unemployment tax, $6.32; state unemployment tax,

Journalizing Payment of Liability for Employee Income Tax, Social Security Tax and
Medicare Tax.
January 15. Paid cash for liability for employee income tax, $757.00; social security tax, $1,451.38; and
Medicare tax, $339.42; Total, $2,547.80. Check No. 347.

Journalize Payment of Liability for Federal Unemployment Tax

January 31. Paid cash for federal unemployment tax liability for quarter ended December 31, $34.60. Check
No. 367.