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APPENDIX H
Payroll Accounting
LEARNING OBJECTIVES
PERIOD.
2. DESCRIBE AND RECORD EMPLOYER PAYROLL TAXES.
3. DISCUSS THE OBJECTIVES OF INTERNAL CONTROL
FOR PAYROLL.
APPENDIX H REVIEW
Accounting for Payroll
1. (L.O. 1) The term payroll pertains to all salaries and wages paid to employees. Payments made to
Gross Earnings
2. Gross earnings is the total compensation earned by an employee. There are various types of gross
earnings: wages, salaries, and bonuses and commissions.
for overtime work.
Payroll Deductions
3. Mandatory payroll deductions consist of FICA taxes and income taxes.
disability, and medical benefits.
c. FICA taxes are also known as Social Security Taxes.
4. Income taxes are required to be withheld from employees each pay period and the amount
(c) the length of the pay period.
5. Voluntary deductions pertain to withholdings for charitable, retirement, and other purposes and are
authorized by the employee.
6. Net pay is determined by subtracting payroll deductions from gross earnings.
Recording the Payroll
7. The employee earnings record provides a cumulative record of each employee’s gross earnings,
c. Providing each employee with a statement of gross earnings and tax withholdings for the year.
8. Many companies use a payroll register to accumulate gross earnings, deductions, and net pay by
9. The typical journal entry to record a payroll is as follows:
Salaries and Wages Expense ................................................ XXX
FICA Taxes Payable....................................................... XXX
Federal Income Taxes Payable ...................................... XXX
State Income Taxes Payable .......................................... XXX
United Fund Contributions Payable ................................ XXX
Union Dues Payable ....................................................... XXX
Salaries and Wages Payable .......................................... XXX
Employer Payroll Taxes
tax expense:
a. FICA Taxes. The employer must match each employee’s FICA contribution.
b. Federal Unemployment Taxes. The employer is required to pay a tax on the first $7,000 of
during a calendar year.
11. The typical entry for recording payroll tax expense is as follows:
Payroll Tax Expense .............................................................. XXX
FICA Taxes Payable....................................................... XXX
Federal Unemployment Taxes Payable .......................... XXX
State Unemployment Taxes Payable .............................. XXX
12. Preparation of payroll tax returns is the responsibility of the payroll department; payment of the taxes
is made by the treasurer’s department.
13. The employer is required to provide each employee with a Wage and Tax Statement (Form W-2) by
Internal Control for Payroll
14. (L.O. 3) The objectives of internal accounting control concerning payroll are (a) to safeguard
15. The payroll activities consist of four functions: (a) hiring employees, (b) timekeeping, (c) preparing the
or individuals.
LECTURE OUTLINE
A. Accounting for Payroll
1. Payroll accounting involves maintaining payroll records for each employee,
employee compensation tax laws
B. Gross Earnings
commissions.
2. Companies determine total wages for an employee by multiplying the
hourly rate of pay by the hours worked. An employee’s salary is generally
based on a monthly or yearly rate rather than on an hourly basis.
3. Many companies have bonus agreements for employees. Bonus
arrangements may be based on such factors as increased sales or net
income.
C. Payroll Deductions and Net Pay
income taxes.
a. FICA taxes are designed to provide workers with supplemental
retirement, employment disability, and medical benefits. FICA taxes
are commonly referred to as Social Security taxes.
b. Under the U.S. pay-as-you-go system of federal income taxes,
withheld:
(1) The employee’s gross earnings.
(2) The number of allowances claimed by the employee.
(3) The length of the pay period.
collectively referred to as fringe benefits.
D. Internal Control for Payroll
1. The objectives of internal control for payrolls are:
a. To safeguard company assets against unauthorized payments of
payrolls.
pertaining to payrolls.
2. Payroll activities involve four functions: hiring employees, timekeeping,
preparing the payroll, and paying the payroll. The company should assign
these four functions to different departments or individuals for effective
internal control.
the employees.
b. The Federal Unemployment Tax Act (FUTA) is another feature of the
federal Social Security program. Federal unemployment taxes provide
benefits for a limited period of time to employees who lose their jobs
through no fault of their own. The employer bears the entire federal
unemployment tax.
employer.
3. Companies usually record employer payroll taxes at the same time they
record the payroll. Payroll Tax Expense is debited and the separate liability
accounts are credited because these liabilities are payable to different
taxing authorities at different dates.
4. Preparation of payroll tax returns is the responsibility of the payroll
department; the treasurer’s department makes the tax payment.
payrolls.
b. To ensure the accuracy and reliability of the accounting records
pertaining to payrolls.
internal control.
10 MINUTE QUIZ
Circle the correct answer.
True/False
True False
2. Net pay is determined by applying the hourly rate of pay to the number of hours worked less
payroll deductions.
True False
True False
4. Federal and state unemployment taxes are deducted from an employee’s gross pay to arrive
at net pay.
True False
5. The employer is required to provide each employee with a Wage and Tax Statement by
January 31.
True False
Multiple Choice
a. hiring employees.
b. timekeeping.
c. preparing the payroll.
d. All of the above.
2. The initial journal entry to record the weekly payroll would include a:
a. credit to Payroll Tax Expense.
b. credit to Salaries and Wages Payable.
c. debit to FICA Taxes Payable.
d. debit to Cash.
a. federal income tax payable.
b. federal unemployment tax payable.
c. FICA tax payable.
d. state unemployment tax payable.
4. Which of the following taxes are paid by both employees and employers?
a. Federal unemployment taxes.
b. FICA taxes.
c. State unemployment taxes.
d. None of the above.
a. charitable contributions.
b. insurance premiums.
c. federal unemployment taxes.
d. FICA taxes.
ANSWERS TO QUIZ
True/False
Multiple Choice
