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QUEENS’ college

Training, Teaching and Learning Materials

ACCOUNTS AND BUDGET SUPPORT LEVEL III

Learning Guide
Unit of CompetenceProcess Payroll
Module TitleProcessing Payroll
LG Code: BUF ACB3 11 0812

TTLM Code: BUF ACB3M 11 0812

1
TTLM Development Manual Date: october 12,2013
Compiled by: Acct department
QUEENS’ college
Training, Teaching and Learning Materials

INTRODUCTION

Welcome to the module “Process Payroll”. This learner’s guide was


prepared to help you achieve the required competence in “Accounts and Budget
Support Level III”. This will be the source of information for you to acquire
knowledge attitude and skills in this particular occupation with minimum
supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:


Lo1:- Record payroll data
Lo2:- Prepare payroll
Lo3:- Handle payroll enquiries
How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections


that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

2
TTLM Development Manual Date: october 12,2013
Compiled by: Acct department
QUEENS’ college
Training, Teaching and Learning Materials

Lo1:- Record payroll data

I. The Importance of Payroll Accounting


The concept payroll is often referred to the total amount paid to employees of a
firm as a compensation for the service rendered to a firm in a given period of time.
The payroll accounting of a firm has to be given emphases of significance for the
following reasons (as stated in the book entitled “Accounting Principles” by Fees
and Warren, Page 297).
1. Employees are sensitive to payroll errors and irregularities, and maintaining
good employees moral requires that the payroll be paid on a timely, accurate
basis.
2. Payroll expenditures are subject to various government regulations.
3. The payment for payroll and related taxes has significant effect on the net
income of most business is unquestionable.
Moreover, since the payroll related payment is highly subject to certain
fraudulent activities it is imperative that businesses need to properly design their
payroll system so that it safeguards the company’s assets against unauthorized
payments of payroll and the accuracy as well as reliability of the accounting
records is assured pertaining to payroll. Some of the possible frauds that can be
made on the payroll system are the following:
 Adding fictitious employees to the payroll
 Listing terminated employees on the payroll
 Using unauthorized pay rates

3
TTLM Development Manual Date: october 12,2013
Compiled by: Acct department
QUEENS’ college
Training, Teaching and Learning Materials

 Overstating working hours


 Issuing duplicate payroll checks
 Not deducting employees’ absent time
 Making incorrect totals on the payroll register
Thus, separation of duties on the functions of payroll activities is essential for
strong internal control over payrolls in order to protect the above-mentioned
methods of stealing money from company. Payroll activities involve four
functions: hiring employees, timekeeping, preparing the payroll, and paying the
payroll. For an internal control system to work effectively these four functions
should be assigned to different departments or individuals.

4
TTLM Development Manual Date: october 12,2013
Compiled by: Acct department
QUEENS’ college
Training, Teaching and Learning Materials

OPERATION SHEET 1: Describe team role and scope


Purpose:
This learning outcome aims to provide trainees with the knowledge, skill and
attitude teamwork. Understanding the concept of teamwork helps to make easy the
daily work activity.
Equipment, Tools and Materials:
 Computer
 Projector
 White board
 White board marker &Duster
 Lecture room
 Printer
Condition:

Students and trainer’s are legally required to lock the health and safety of trainer.
This applies to all organizations and including voluntary organizations.
 Students must provide safe working environment.
 Students must not put themselves or others at risk.

Procedure:
 Need to establish a team
 Identify the team objective
 Prepare effective common plan
 Apply practically

5
TTLM Development Manual Date: october 12,2013
Compiled by: Acct department
New Millennium University college
Training, Teaching and Learning Materials

Lo2:- Prepare payroll

II. Terminology of Payroll Related Terms


Salary or Wages:
Salary and wages are usually used interchangeably. However, the term wages
is more correctly used to refer to payments for manual labor that are paid based on
the number of hours worked or the number of units produced. So, they are usually
paid when a particular piece of work is completed or weekly. On the other hand,
compensations to employees on monthly or annual basis are termed as salaries.

It must be clear that when we say an employee, we refer to an individual who


works primarily to an organization and whose activities are under the direction and
supervision of the employer. Hence, an employee is different from an independent
contractor, a self-employed individual who works on a fee basis to a firm.
The Pay Period: The length of time covered by each payroll payment. Pay period
for wage workers are usually made on weekly or biweekly. On the other hand,
salaried employees’ pay periods are monthly or semimonthly.
The Pay Day: The day, on which wages or salaries are paid to employees, usually
the last day of the pay period, is known as the payday.
A basic record of a payroll accounting system includes:
1. A payroll register (or sheet)
2. Individual employees’ earnings records, and

6
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
New Millennium University college
Training, Teaching and Learning Materials

3. Usually, pay checks.


These records are generated from a payroll system that is operated manually or
using computers.
A Payroll Register (Sheet): The entire list of employees of a business along with
each employee’s gross earnings, deductions and net pay (or the take home pay) for
a particular payroll period. The basis for the preparation of the payroll register can
be the attendance sheets, punched (clock) cards or time cards.

Employee Earnings Record: It is a summary of each employee’s earnings,


deductions, and net pay for each payroll period and of cumulative gross earnings
during the year. It is a separate record kept for each employee. The individual
employees’ earnings record helps the employer organization to properly
summarize and file tax returns.
Pay Check: An instrument for paying salary if the firm makes payment via writing
a check in the name of each employee for the net pay or a check for the total net
pay.
Gross Earnings: - The total pays to an employee before deductions for the pay
period.
Payroll Taxes: Are taxes levied against the employer on the payroll of a firm. It is
an additional payroll related expense to an employer.
Withholding Taxes: These are taxes levied against the earnings of employees of an
organization and withheld by the employer per the regulations of the concerned
government.

7
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
New Millennium University college
Training, Teaching and Learning Materials

Payroll Dedications: All the reductions from the gross earnings of an employee
such as withholding taxes, union dues, fines, credit association pays, etc.
Net Pay: The gross earnings after subtracting all the deductions. An employee
sometimes knows it as take home pay, the amount collected on the payday.
III. Possible Components of a Payroll Register
1. Employee number: Numbers assigned to employees for identification
purpose when a relatively large number of employees are included in the
payroll register.
2. Name of employees: List of the names of employees
3. Earnings: money earned by an employee(s) of a firm from various sources.
It may include:
a. The basic salary or regular earning a flat monthly salary of an employee
that is paid for carrying out the normal work of employment and subject to change
when the employee is promoted.
b. Allowances: Money paid monthly to an employee for special reasons,
which may include.
i. Position Allowance: A monthly sum paid to an employee for
bearing a particular office responsibility, head of a particular
department or division.
ii. House allowance: A monthly allowance given to cover housing
costs of the individual employee when the employment contract
requires the employer to provide housing but fails to do so.
iii. Hardship Allowance: A sum of money given to an employee to
compensate for an inconvenient circumstance caused by the

8
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
New Millennium University college
Training, Teaching and Learning Materials

employer. For instance, unexpected transfer to a different and


distant work area or location. It is sometimes known as
disturbance allowance.
iv. Desert Allowance: A monthly allowance given to an employee
because of assignment to a relatively hot region.
v. Transportation (fuel) Allowance: A monthly allowance to an
employee to cover cost of transportation up to the work place if the
employer has committed itself to provide transportation service.

c. Overtime Earning
Overtime work is the work performed by an employee beyond the regular working
hours or days. Overtime earning is the amount payable to an employee for
overtime work done.
In Ethiopia, in this respect, according to Article 33 or proclamation no. 64/1975 the
following is stated about payment for overtime work.
 A worker shall be entitled to be paid at a rate of one and one quarter (1 ¼)
times his ordinary hourly rate for overtime work performed before 10
o’clock in the evening (10 p.m).
 A worker shall be paid at the rate of one and one half (1 ½) times his
ordinary hourly rate for overtime work performed between 10 O’clock in the
evening (10 p.m.) and six O’clock in the morning (6 a.m.)
 Overtime work performed on the weekly rest days shall be paid at a rate of
two (2) times the ordinary hourly rate of payment.

9
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
New Millennium University college
Training, Teaching and Learning Materials

 A worker shall be paid at a rate of two and half (2 ½) times the ordinary
hourly rate for overtime work performed on a public holiday.
Hence the gross earnings of an employee may, therefore, include the basic salary,
allowances and overtime earnings. You may find sometimes other form of
earnings such as bonus that is paid to employees for achieving results better than
usual.
4. Deductions
These are subtractions made from the earnings of employees that is because it is
required by government or permitted by the employee himself.
In our country, Ethiopia, some of the deductions against the earnings of employees
are:-
a. Employee Income Tax
In Ethiopia every citizen is required to pay something in the form of income tax
from his/her earnings of employment. In this case a progressive income tax system
that charges higher rates for higher earnings is applied on the gross earnings of ach
employee

OPERATION SHEET 1: Describe team role and scope


Purpose:
This learning outcome aims to provide trainees with the knowledge, skill and
attitude teamwork. Understanding the concept of teamwork helps to make easy the
daily work activity.
Equipment, Tools and Materials:
 Computer
 Projector
 White board
 White board marker &Duster
 Lecture room
 Printer
10
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
New Millennium University college
Training, Teaching and Learning Materials

Condition:

Students and trainer’s are legally required to lock the health and safety of trainer.
This applies to all organizations and including voluntary organizations.
 Students must provide safe working environment.
 Students must not put themselves or others at risk.

Procedure:
 Need to establish a team
 Identify the team objective
 Prepare effective common plan
 Apply practically

11
TTLM Development Manual Date: october 12,2013
Compiled by: : H/micaelTetemke, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

Lo3:- Handle payroll enquiries

According to the amended income tax proclamation no. 286/2002 the


tax on income from employment over one hundred fifty (Br 150) shall
be charged, levied and collected according to the following income tax
rates.
Rates of Tax (%) on Short cut
Taxable every additional Income Adjustment/Deduction
Monthly In Birr/
≤150 Exempt 0
151-650 10% 15.00
TTLM Development Manual Date: october 12,2013
Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

651-1400 15% 47.50


1401-2350 20% 117.50
2351-3550 25% 235.00
3551-5000 30% 412.50
>5000 35% 662.5

Generally, taxable income from employment includes salaries, wages,


allowances, director’s fees and other personal employment, all payments
in cash and benefits in kind.
However, according to income tax amendment proclamation no.
30/1992 issued on October 12,1992 stated that the following categories
of payments in cash or benefits in kind are exempted from taxation.
 Medical costs incurred by employer for treatment of employees.
 Transportation allowances paid by employer to its employees.
 Reimbursement by employer of traveling expenses incurred on
duty by employees.
 Traveling expenses paid to transport employees from else where to
place of employment and to return them upon completion of
employment.
b. Pension Contributions
Permanent employees of an organization, the employees of which are
governed by the existing regulations of the Ethiopian public servants are
TTLM Development Manual Date: october 12,2013
Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

expected to pay or contribute 4% of their basic (monthly) salary to the


government pension trust fund. This amount should be withheld by the
employer from the basic salary of each employee on every payroll and
later be paid to the respective government body.
On the other hand, the employer is also expected to contribute towards
the same fund 6% of the basic salary of every permanent employee of it.
It is this total amount we called earlier as payroll taxes expense to the
employer organization (i.e., 6% of the total basic salary of all permanent
employee).
Consequently, the total contribution to the pension trust fund of the
Ethiopian government is equal to 10% of the total basic salary of all
permanent employees of an organization to be entitled to the pension
pay given that the employee has satisfied the minimum requirements to
enjoy this benefit when retired.
Non-government organizations are also using this kind of scheme to
benefit their employees with some modifications. This is made in some
NGO’s by keeping a fund known as provident fund. Both the employees
and the employer contribute towards this fund monthly. Ultimately,
when as employee retired or drawn out of work a lump sum amount is
given at once.
c. Other Deductions
Apart from the above two kinds of deductions from employees earnings,
employees may individually authorize additional deductions such as
TTLM Development Manual Date: october 12,2013
Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

deductions to pay health or life insurance premiums; to repay loans from


the employer or credit association; to pay for donations to charitable
organization; etc.

Each of the major other deductions may be put in special column in the
payroll register.
Ultimately, the sum of the employees’ income tax, pension contributions
and other deductions given the total deductions from the gross earnings
of employees.
5. The Net Pay
This amount is held in one column of the payroll register representing
the excess of gross earnings over the total deductions of an employee.
The column “Net Pay” total tells the grand total deductions made from
the earnings of employees.

6. Signature
Unless some other document is used, the payroll sheet may be designed
to allow a column for signature of the employees after collection of the
net pay. In general, a payroll register should at least show the earnings,
deductions and the net pays along with the name of employees.
Demonstration Problem
ABC Company pays the salary of its employees according to the
Ethiopia calendar of Hidar 1996.

Basic
TTLM Development Manual Date: october 12,2013
Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

Basic Monthly OT Duration of Salary


S.N Name of Salary Allowan hours OT work Per
o Employee ce worked Hour
1 SenaitBahru 680 ---- 8 10 P.M. 4.25
to5a.m
2 PetrosChala 1800 --- 10 Weekly rest 11.25
days
3 Abdu 1280 200 --- -------------- ---
Mohammed
4 Leila Jemal 1900 300 6 10 P.M to 5 11.875
A.M.
5 KirkosWoldi 2400 100 10 Public 15
e Holiday

N.B.
Note that management of the agency usually expects a worker to work
40 hours in a week and during Hidar, 1996 all workers have done as they
have been expected. Besides, all workers of this agency are permanent
employees except PetrosChala; the monthly allowance of KirkosWoldie
is not taxable; Abdu Mohammed agreed to have a monthly Br. 200 be
deducted and paid to the credit association of the agency as a monthly
saving.

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

Instructions:
Based on the above information
1. Prepare a payroll register (or sheet) for the company for the month
of Hidar, 1996.
2. Record the payment of salary and accrued liabilities as of Hidar 30,
1996 using Ck. no. 1641 as a source document.
3. Record the payroll taxes expense for the month of Hidar, 1996.
4. Record the payment of the claim of the credit association of the
company,and other payroll related liabilities to the concerned
authorities(withholding taxes,and payroll taxes) that arouse from
Hidar’s payroll assuming that the payment was made on Hidar’s 1,
1996 via Ck. no.1650
Solution
Over time earning = OT hours worked X(hourly rate x OT rate)
Hourly rate=basic salary
No.hrs.per month
= basic salary
160hrs
SenaitBahru------------------------- (8(4.25X1.5)) =51
PetrosChala-------------------------- (10(11.25X2)) =225
Leila Jemal --------------------------- (6(11.875X1.25)) =89
KirkosWoldie------------------------- (10(15X2.5)) =375
Gross earnings
TTLM Development Manual Date: october 12,2013
Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

Basic salary + Allowance+ OT earnings = Gross


earnings
SenaitBahru-----------680 + -------- + 51 =735
PetrosChala------------- 1800 + --------- +225 = 2025
Abdu Mohammed-----1280 +200 +-------- = 1480
Leila Jemal -------------- 1900 + 300 + 89 = 2289
KirkosWoldie------------2400 + 100 + 375 = 2875
Deductions & net pay
Exercise - 1
Ethiopia for Better, a governmental organization pays salary of its
employees according to the Ethiopian calendar month. The following
data relates the month of Tkimt, 1996 E.C.
Basic
Name of Basic OT Duration of Monthly Salary
S.No. Employee Salary hours OT work Allowance Per
Worked Hour
1 TizitaDagne 640 10 Weekly rest 100 4
days
2 MamoRegassa 1280 7 Public --- 8
holiday
3 Ali Temam 1920 9 10 P.m. –5 150 12
A.m

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

4 BerihuGebre 320 --- --- --- 2


5 NigistAbebe 3520 12 Up to 10 300 22
P.m

Additional Information:
 An employee is expected to work 176 hours in a month and during
Tkimt, 1996 all employees have done as they have been expected.
 All employees are permanent employees except AtoMamoRegassa
 The monthly allowance of Ato Ali Temam is not taxable
TizitaDagne agreed to have a monthly Br 150 be deducted and paid to
the organization’s credit association as a monthly saving

Instructions: Based on the above Information


1. Prepare a payroll register (or sheet) for the organization for the
month of Tikimt, 1996 E.C.
2. Record the payment of salary and the accrued liabilities as of
Tikimt 30, 1996 E.C. using check no. 03391
3. Record the payroll taxes expense for the month of Tikimt, 1996
4. Record the payment of the claim of the credit association of the
company,and other payroll related liabilities to the concerned
authorities(withholding taxes,and payroll taxes) that arouse from
Tikimt’s payroll assuming that the payment was made on Tikmit’s
1, 1996 via Ck. no.0339

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

Exercise – 2
Admin.
No Employees Basic Overtime Allowa.
Salary
1. AyeleLema 270 --- ---
2. AzebMebrahtu 340 50 ---
3. Belay Nega 420 180 50
4. BirzafDebesay 510 60 ---
5. DendirTenkir 600 120 100
6. KidaneBeyene 285 75 ---
7. FekaduZewdie 380 --- 50
8. Getachew Desta 400 --- 100
9. Solomon Hailu 310 75 70
10. Zena Melaku 135 70 ---

Additional Information:
a) The payroll register of RAL Co. more or less is the same as
the payroll register shown in the illustration. The exceptions
are the deduction columns. The deduction columns are the

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

following: Income tax, Idir fund, union fees, pension fund


and total deductions.
b) All employees are to pay Idir fees of:
1. Birr 2 for all employees whose basic salary is up to Birr
500,000
2. Birr 3 for all employees whose basic salary is above Birr
500
c) All employees are required to pay union fees of 1% of their
basic salary (assume that all employees are members of the
Labour Union).
d) Ato Belay Nega, AtoDendirTenkir, AtoFekaduZewdie and
Ato Zena Melaku contribute 5% of their basic salary to the
Credit association of the company

Instruction:
1. Prepare the payroll register for the month of Tir, 1996
2. Prepare a journal entry to record the payment of salary and the
accrued liabilities for the month of Tir, 1996
3. Record the payroll taxes expense for the month of Tir, 1996
4. Record the payment of the claim of the credit association of the
company, and other payroll related liabilities to the concerned
authorities (withholding taxes, and payroll taxes) that arouse from
Tir’s payroll assuming that the payment was made on Tir 1, 1996
via Ck. no.1050

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department
Soloda Health and Technology college
Training, Teaching and Learning Materials

TTLM Development Manual Date: october 12,2013


Compiled by Frehiwotgidey, Acct department

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