Sec 11: Payroll Accounting Flashcards
Within a company’s overall system of financial recordkeeping, there are several areas that make use of data provided by the payroll department:
- General accounting uses payroll data to record transactions in the company’s books of account and to prepare financial statements both for internal and external purposes.
- Cost accounting uses payroll data to determine the cost of producing a product or providing a service and to show ways of controlling these costs (e.g., wage data used to determine the cost of labor).
- Budgeting involves projecting the costs and revenues associated with various business activities and trying to keep the costs— including payroll costs— within target limits.
Financial Statements
The company’s cash flow, profits, losses, assets, liabilities, and net worth. They are used by management, stockholders, auditors, Investors to gauge the company’s financial health and prospects for the future.
Business entity concept
Every organization that operates separately is treated as a business under the business entity concept. The purpose of accounting is to report each entity’s financial position on a balance sheet and its
profitability on an income statement
Continuing concern concept
This concept assumes a business entity will continue to operate indefinitely as a business
Time period concept
Each organization must determine its own accounting period based on the type of business it is engaged in
Cost principle
Because organizations are assumed to continue as going concerns, all goods and services purchased (assets) are recorded at the cost of acquiring them
Objectivity principle
Transactions must be recorded objectively to ensure personal opinions and emotions are not part of the recorded transaction
Matching principle
Expenses and revenue are recorded in the accounting period in which the expense is incurred or the revenue is earned
Realization principle
The realization principle governs the recording of revenue. Revenue is the income received for goods and services provided by the organization
Consistency principle
Transactions must be recorded in a consistent manner based on the particular accounting method, principle, or period.
All of a company’s transactions are recorded and classified into various accounts using a “double entry” system that is based on two equations.
The first equation is:
Assets – Liabilities = Equity
The second equation is actually made up of two:
Revenue – Expenses = Net Income
Net Income – Income Distributed + Contributed Capital = Equity
The first equation provide the basis for the financial statement called a Balance Sheet
A balance sheet is a statement of the financial position of a business at a specific period in time. It is an itemized list showing the business’s assets, liabilities, and owner’s equity. The difference between the debits and credits to an account
The second equation is
The basis for two financial statements, the Income Statement and the Statement of Retained Earnings
Types of accounts (ALERE)
Five types of accounts used by businesses to classify transactions: assets, liabilities, expenses, revenue, and equity. Asset, liability, and expense accounts generally are the only ones affected
by entries from the payroll department
Asset Accounts
Anything that provides an economic benefit or value to the company over a period of time. Asset accounts are divided into three types: Current; Tangible or Property, Plant, and Equipment; and
Intangible or Deferred. (Cash, inventory, land, buildings, computers, furniture, cars, trademarks, leases, goodwill).
Expense Accounts
Show the company’s costs for goods and services consumed during the accounting period. The items generally are provided by other organizations, but they also include the labor supplied by the company’s employees (wages paid to EE’s, ER paid benefit costs, maintenance for comp, office supply costs, ER share of taxes)
Liability Accounts
company debts that must be paid in the future. They represent a claim against the company’s assets. Liabilities are divided into two categories: Current and Long- Term (Income and employment taxes withheld but not yet deposited, accounts payable, wages payable, unions dues deducted but not paid, contributions owed to benefit plan).
Revenue accounts
Revenue accounts identify amounts received for goods sold and services rendered during the accounting period. The income can be in the form of cash, the expectation of receiving cash, or services.
Equity accounts
Equity represents the owner’s investment in the company (i.e., its net worth). Generally, equity accounts are divided into two components: Contributed Capital and Retained Earnings. Contributed capital is
the amount the company’s owners— proprietors, partners, or shareholders— have contributed to the organization. Retained earnings is the amount by which revenue has exceeded expenses, reduced by any amount returned to the owners.
Chart of Accounts
In most companies, a “chart of accounts” lists each account by name and number, with the number being used to identify accounts in an automated system.
Journal Entries
The journal is a record of the transactions of a company during the accounting period. For each transaction, the journal shows both the debits and credits to be entered in specific accounts and a description of the transaction. The journals common name is Record of Original Entry
Compound Entries
A journal entry that has more than one debit or credit is called a compound entry.
Subsidiary ledgers
Summarized entries are posted directly to the general ledger. Subsidiary ledgers are used for a single type of account and are subordinate to the general ledger.
General Ledger
After entries have been recorded in the journal/subsidiary ledger, they are posted to the General Ledger (i.e., the book of final entry). The general ledger is a record of a company’s transactions by account to which journal entries are periodically transferred (e.g., daily, weekly, or monthly, depending on the volume of transactions). The general ledger keeps a running total of all the entries and period- to- date balance for all the company’s accounts.
Payroll Deductions
Entries made to the payroll deduction journal credit the liability account set up for each type of deduction and debit the liability account Salaries/Wages Payable
Payroll Expenses
Recorded functionally or by type of pay. If functionallly (aales, admin, etc) then you need labor distribution. Type of pay is regular and overtime pay.
Payroll cash distribution/net pay
When the employees are paid, entries must be made into the payroll cash distribution journal debiting the accrued salaries/wages liability account and crediting the payroll checking (cash)
account.
Employer tax liabilities
Entries made into the journal will debit an expense account for the amount of the expense and credit a liability account.
Accounting Periods
Any 12- month accounting period adopted by a business that ends on a day other than December 31 is called a fiscal year. An accounting period is any length of time covered by an income statement, which could be a month, a quarter, a half- year, or a year.
Double Entry Method
The double entry method of accounting provides a ready- made way to check the accuracy of the recording of payroll transactions. The recorded debits and credits for each transaction, each journal, and the general ledger should balance
Within a payroll system there are checks and balances to ensure the accuracy of a company’s financial records and the security of its assets. What are they called?
Internal Control
Explain accrual accounting as it applies to payroll
Under accrual accounting, revenue is recognized and recorded when earned and expenses are recognized and recorded when incurred. Accrual entries are made at the end of an accounting period to estimate payroll expenses and liabilities incurred between the end of the last payroll period and the accounting period end.
What are reversals, and how do they affect accounting?
Accruals generally are estimates, so they must be corrected by reversing entries during the next accounting period when the actual expenses and liabilities are recorded.
What are earnings per share?
Earnings per share show the company’s net income divided by the weighted average number of outstanding shares of stock.
Income Statement
The income statement summarizes the organization’s revenues and expenses, determining the organization’s earnings for the current and preceding fiscal years.
