ACCOUNTING PAYROLL SUPPLEMENTAL TOPIC I 1. Learning Objectives. After studying this supplemental topic, you should be able to:

Transcription

1 SUPPLEMENTAL TOPIC I ACCOUNTING FOR PAYROLL Learning Objectives After studying this supplemental topic, you should be able to: 1. Describe the basic separation of duties in a payroll system, and explain how this contributes to strong internal control. 2. Account for a payroll, including computation of amounts withheld and payroll taxes on the employer. I 1

2 I 2 TOPIC I Accounting for Payroll Accounting for Payrolls In most business organizations, the largest expense accruing on a daily basis is payroll. In the airline industry, for example, labour costs usually represent about 28 percent of total operating expenses. The task of accounting for payroll costs would be an important one simply because of the large amounts involved; however, it is further complicated by the many federal and provincial laws that require employers to maintain certain specific information in their payroll records not only for the business as a whole but also for each individual employee. Frequent reports of wages paid and amounts withheld must be filed with government authorities. These reports are prepared by every employer and must be accompanied by payment to the government of the amounts withheld from employees and of the payroll taxes levied on the employer. A basic rule in most business organizations is that every employee must be paid on time, and the payment must be accompanied by a detailed explanation of the computations used in determining the net amount received by the employee. The payroll system must therefore be capable of processing the input data (such as employee names, social insurance numbers, hours worked, pay rates, overtime, and taxes) and producing a prompt and accurate output of paycheques, payroll records, withholding statements, and reports to governmental authorities. In addition, the payroll system must have built-in safeguards against overpayments to employees, the issuance of duplicate paycheques, payments to fictitious employees, and the continuance on the payroll of persons who have been terminated as employees. LO 1 Describe the basic separation of duties in a payroll system, and explain how this contributes to strong internal control. Internal Control over Payrolls Every business needs to establish adequate internal control over payrolls. With such controls, a business has assurance that employees will be paid the correct amounts and that payroll-related taxes will be computed correctly and paid on time. Failure to pay employees promptly and in the proper amounts is certain to damage employee morale. Failures to remit payroll taxes to tax authorities on schedule may result in fines and penalties. Finally, payroll historically has been an area in which poor internal control has sometimes led to employee fraud. Payroll fraud can take many forms. Small-scale payroll fraud may consist of employees overstating the number of hours (or days) that they have actually worked. Padding the payroll adding fictitious employees to the payroll in order to generate extra paycheques is a larger-scale payroll fraud. A basic means of achieving adequate internal control over payrolls is an appropriate separation of duties. In most organizations, payroll activities include (1) employing workers, (2) timekeeping, (3) payroll preparation and record keeping, and (4) the distribution of pay to employees. Internal control is strengthened if each of these functions is handled by a separate department. Human Resources Department The work of the human resources department begins with interviewing and hiring job applicants. When a new employee is hired, the department prepares records showing the date of employment, the authorized rate of pay, and payroll deductions. It then sends a written notice to the payroll department to place the new employee on the payroll. The human resources department also is responsible for notifying the payroll department of changes in employees rates of pay and of persons whose employment has been terminated. Timekeeping For employees paid by the hour, the time of arrival and departure should be punched on time cards. A new time card should be placed in the rack by the time clock at the beginning of each week or other pay period. Control procedures should exist to ensure that each employee punches his or her own time card and no other. The

3 The Computation of Payroll Amounts I 3 timekeeping function should be lodged in a separate department that will control the time cards and transmit these source documents to the payroll department. In a computer-based payroll system, record keeping is simplified if the time clocks are on-line devices that is, if they are connected directly with the computer system. In this way, the hours worked by each employee are entered automatically into the payroll accounting system. OPERATION OF A PAYROLL SYSTEM Human Resources Department Timekeeping Department Payroll Department Paymaster (Finance Department) Hire, set pay rates, terminate Maintain record of hours worked Paycheques (unsigned) Name pay rate, exemptions, etc. Name pay rate, exemptions, etc. { Authorizes placement of employee on payroll Sign and distribute paycheques Time cards Time cards { Authorizes payment for hours worked Paycheques (signed) Distributed to employees { Prepare payroll Payroll records and reports Assures existence of employee Paycheques (unsigned) The Payroll Department The input of information to the payroll department consists of hours reported by the timekeeping department and authorized names, pay rates, and payroll deductions received from the human resources department. The output of the payroll department includes (1) payroll cheques, (2) individual employee records of earnings and deductions, and (3) regular reports to the government showing employee earnings and taxes withheld. THE COMPUTATION OF PAYROLL AMOUNTS The actual preparation of a payroll including the computation of dollar amounts, maintenance of payroll records, and printing of paycheques is the responsibility of the payroll department. The dollar amounts associated with payrolls fall into three categories: (1) employees gross pay, (2) amounts withheld from employees gross pay, and (3) payroll taxes levied on the employer. LO 2 Account for a payroll, including computation of amounts withheld and payroll taxes on the employer.

4 I 4 TOPIC I Accounting for Payroll Gross Pay Gross pay (earnings) is the amount earned by the employees during the pay period. Except to the extent that employers withhold amounts for taxes or other purposes, all gross pay is payable directly to the employees. Gross pay also includes compensation during sick days, holidays, and vacations. However, it does not include fringe benefits, such as group life insurance paid by the employer or the use of a company car. The distinction is that fringe benefits are not payable directly to the employees. Gross pay must be computed separately for each employee. For employees paid an hourly wage, the payroll system must keep track of the number of hours that each employee works each day. In many cases, current laws require that employees be paid at an overtime rate for hours worked in excess of 44 hours per week. For employees who receive sales commissions, the system must record separately the sales revenue attributable to each salesperson. The amount of an employee s gross pay affects the amounts of taxes that must be withheld and also the payroll taxes levied upon the employer. Amounts Withheld from Employees Pay The net pay (or take-home pay ) of most employees is substantially less than their gross pay. This is because government authorities require employers to withhold specified amounts of income taxes, employment insurance premiums, and Canada Pension Plan contributions from each employee s gross pay. (Employees often refer to amounts withheld as deductions.) Taxes withheld from employees pay are taxes levied on the employees, not taxes on the employer. The employer s role in withholding taxes is that of a tax collector. The amounts withheld must be forwarded to governmental tax authorities weekly, twicemonthly, monthly, or quarterly, depending on the size of the amount involved. Therefore, the employer records the amounts withheld as current liabilities. Federal and Provincial Income Taxes The amount of income taxes withheld depends upon the amount of the earnings and upon the claim amount (income tax exemptions) to which the employee is entitled. To ensure that the proper amount of income tax is withheld, each employee is required to file with the employer a Personal Tax Credit Return, TD1 form, showing the total claim amount, the Claim Code, and the supporting details. However, this return may not need to be filed by employees claiming the basic personal amount only that is, claiming the minimum amount for tax credit. Based on the earnings and the amount claimed, the employer can determine the income tax to be withheld from the employee by referring to the income tax deduction tables provided by Canada Customs and Revenue Agency. The amount withheld from employees is remitted to Canada Customs and Revenue Agency. This amount includes both the federal and provincial income taxes for all provinces except the province of Quebec, which collects its own income tax. Employers in Quebec must withhold separate deductions for federal and Quebec income taxes. Up to December 31, 2000, provincial tax in all provinces except Quebec was calculated as a percentage of the Federal Income Tax. As of January 2001, for all provinces except for Quebec, Yukon, NorthWest Territories, or Nunavut, TONI (tax on net income) is used to calculate provincial income tax. This new provincial tax system requires two separate calculations based on the taxable income, one for federal tax withholdings and the other for the provincial tax withholdings. This new calculation allows the Provinces to set their own tax brackets and rates differently from that of the Federal government. (For more information on TONI, go to the Canada Customs and Revenue Agency website at

5 The Computation of Payroll Amounts I 5 Employment Insurance Since its inception in 1940, federal Unemployment Insurance legislation has undergone significant changes. The current law requires with a few exceptions both employers and employees to contribute to employment insurance on remuneration from insurable employment. Insurable employment includes most employment in Canada under a contract of service, that is, employee-employer relationship. Also, there is no age limit for contribution to employment insurance. The purpose of the legislation is to provide relief from financial hardships for those who are unemployed even though they are willing and able to work. The eligibility for, and the amount of unemployment benefits depends on a number of factors, including past insurable earnings, length of insurable employment, and regional unemployment rate. The employers are responsible for withholding an appropriate amount of employment insurance premium from their employees. The employee and employer amount of premiums is remitted to Canada Customs and Revenue Agency. For the year 2001 the employees premium has been set at 2.25 percent of their insurable earnings. The employers premium is 1.4 times that of the employee s premium. For example, if an employee s monthly insurable-earnings are $1,000, the premiums for the employee and the employer are $22.50 ($1, %) and $31.50 ($ ) respectively. For the year 2001, the rate of premium of 2.25 percent is applicable to annual insurable earnings to a maximum of $39,000. In other words, employees with annual earnings of $39,000 or more are required to pay premiums on the annual maximum amount of $39,000. Therefore, the maximum annual premium for an employee with maximum insurable earnings is $ ($39, %). Thus, the maximum payment by the employer for an employee earning $39,000 or more per year is $1, Since contributions are made periodically, employees with annual insurable earnings exceeding the maximum may pay the entire $ maximum annual premium in the early part of the year. The premium rate as well as the maximum amounts subject to the employment insurance premium may change from year to year. For an individual earning $60,000 annually, the maximum total deduction of $ for Employment Insurance is made up of $ for 7 months and $90.00 for the 8th month. On occasion, employees may have contributed more than the maximum amount of premium. In such cases, the employees should claim a refund by reporting the overpayment in their income tax return. While the individual contribution is small, the total contribution for employment insurance is huge. For example, the total contribution of employment insurance in a recent year was more than $18.6 billion. Canada Pension Plan The Canada Pension Plan Act requires, with a few exceptions, both employers and employees (between the ages of 18 and 70), including those who are self-employed, to make contributions to the Canada Pension Plan. Its purpose is to provide retirement, disability, and similar benefits. The eligibility for, and the amount of, benefits depends on a number of factors, including the amount of pensionable earnings, the length of the contribution period, and the age of the individual. The employers are responsible for withholding an appropriate amount of Canada Pension Plan contribution from the pensionable earnings of each of their employees and are required to contribute an amount equal to that of the employees contribution. The amount withheld together with the amount contributed by the employer is remitted to Canada Customs and Revenue Agency. For the year 2001, the employees contribution is 4.3 percent of the maximum annual pensionable earnings of $38,300, with the first $3,500 exempted. For this deduction, the employer s contribution is the same as that of the employee. For example, if an employee s annual pensionable earnings are $18,500, both the employee and the employer are required to contribute $645 each [($18,500 less $3,500 basic annual exemption) 4.3%)]. Therefore, in 2001, the 4.3 percent rate of contribution is applicable to annual pensionable earnings of over $3,500 up to a maximum of $34,800, that is, earnings of $38,300 less the $3,500 basic

6 I 6 TOPIC I Accounting for Payroll annual exemption. In other words, employees with annual pensionable earnings of $3,500 or less are not required to contribute, and employees with pensionable earnings of $38,300 or more are required to contribute on the maximum amount of $34,800. Accordingly, the maximum annual contribution for an employee for the year 2001 is $1, ($34, %). Since contributions are made periodically, employees with annual earnings exceeding the maximum pensionable earnings will pay the maximum contribution of $1, For the above employee who earned $60,000 annually, the Canada Pension Plan maximum total deduction of $1, will be made up of $ [($5,000 less the monthly exemption of $291.67) 4.3%] for seven months and $79.18 in the eighth month. In the first seven months the employee will have contributed $1, and thus will only be required to contribute the balance of $79.18 in the eighth month. 1 The rate, and the maximum earnings subject to the Canada Pension Plan, may change from year to year. On occasion, an employee may have contributed more than the maximum amount. In such cases, the employee is eligible to claim a refund by reporting the overpayment in his or her income tax return. The Canada Pension Plan applies to all provinces except the province of Quebec, which has its own similar pension plan. The two plans are closely coordinated so that contributing employees are protected wherever they may work in Canada. The total contribution to Canada Pension Plan is very large; a recent year s contribution amounted to more than $16.2 billion. Other Deductions from Employees Earnings In addition to the compulsory deductions for employment insurance, Canada (or Quebec) Pension Plan, and income taxes, many other deductions are voluntarily authorized by employees. Insurance premiums, savings bond purchases, charitable contributions, retirement programs, and pension plans are examples of voluntary payroll deductions. Employer s Responsibility for Amounts Withheld In withholding amounts from an employee s earnings for either voluntary or involuntary deductions, the employer acts merely as a collection agent. The amounts withheld are paid to the designated organization, such as governmental authorities or a labour union. The employer is also responsible for maintaining accounting records that will enable it to file required reports and make timely payments of the amounts withheld. From the employer s viewpoint, the amounts withheld from employee s earnings represent current liabilities. Basic Payroll Records The formats of payroll records vary greatly among different businesses, depending upon the number of employees and the extent of automation. However, there are two basic records common to the payroll system of every organization: the payroll register and the employees individual earnings records. Payroll Register The payroll register is a special journal used for developing all of the information needed for processing and recording the payroll of a specific pay period. This journal includes a separate line of data about each employee. On this line, the employee s gross pay, various amounts withheld, and net pay are entered in separate 1 The monthly exemption is arrived at by dividing the annual exemption of $3,500 by 12. The proper amounts of contributions can be obtained from the deduction tables provided by Canada Customs and Revenue Agency. Since the exemption has already been taken into account in these tables, there is no need to deduct the monthly or weekly exemption from the earnings. For example, if the monthly earnings plus taxable benefits, if any, are $5,000, look up the earnings bracket between $4, and $5, to obtain the proper amount of contribution, which is $

7 The Computation of Payroll Amounts I 7 columns. Thus, each line of the payroll register provides the data necessary for preparing one employee s paycheque, and for updating the employee s individual earnings record. Totalling each column, on the other hand, provides information about the entire payroll, which is posted to the general ledger accounts. To illustrate, assume that Exhibits International Limited has 35 salaried employees who are paid semi-monthly (on the fifteenth and the end of each month). A payroll register containing data relating to the March 31st payroll is illustrated below. The illustrated payroll register includes separate columns for gross pay, four different types of withholding and net pay. 2 The totals of these columns represent the expenses and liabilities associated with the issuance of pay cheques to employees. (These totals do not reflect the payroll deductions required by the employer for March 31st.) BI-MONTHLY PAYROLL REGISTER Payroll period ended March 31, 2000 Amounts Withheld Employee Gross Pay Income Tax Employment Canada Group Net Pay Cheque No. Insurance Pension Plan Insurance Abrams,B. $ 1, $ $ $ $ $ 1, Bolce, C. $ 2, $ $ $ $ $ 1, Galo, Y. $ 3, $ $ $ $ $ 1, Zucco, Y. $ 2, $ $ $ $ $ 1, Totals $135, $ 26, $ 4, $ 8, $ 1, $94, One common practice is to summarize the column totals of the monthly payroll register in the form of a general journal entry, as follows: 3 Salaries Expense ,000 Liability for income tax withheld ,420 Liability for Employment Insurance withheld ,702 Liability for Canada Pension Plan withheld ,060 Liability for group insurance withheld ,780 Accrued payroll ,038 To record the monthly payroll for March Journal entry summarizing the March payroll except for taxes on the employer All of the accounts credited in this entry are current liabilities of the employer. Accrued payroll represents the net pay owed to employees; this liability will be discharged almost immediately through the issuance of paycheques. The liabilities for amounts withheld will be discharged within a short period of time by remitting these amounts to the appropriate recipients. 2 The illustrated payroll register is highly simplified. An actual payroll register includes many more columns for such items as employees social insurance numbers and several other types of withholding. For employees paid an hourly wage, additional columns would indicate pay rates and regular hours and overtime hours worked during the pay period. Actual payroll registers generally are a computer printout with perhaps 156 or more data columns. 3 A general journal entry is not actually necessary; the column totals could be posted directly from the payroll register to the general ledger accounts.

8 I 8 TOPIC I Accounting for Payroll Employees Individual Earnings Records An employer also must maintain an individual earnings record for each employee. These records contain basically the same information as does the payroll register each employee s gross pay amounts withheld and net pay. The difference between a payroll register and the employees individual earnings records is primarily the manner in which the data are organized. A payroll register shows in one place all of the payroll data for one payroll period, including data for all employees. An earnings record shows in one place all of the payroll data for one employee, including data for every payroll period. The individual earnings record for one of Exhibits International s salaried employees is illustrated on page I 9. An employee s earnings record always includes a column showing the employee s cumulative gross pay earned thus far during the year. This year-to-date earnings figure determines when (and if) the employee s earnings exceed the bases subject to employment insurance and Canada Pension Plan contributions. In addition, employers must report each employee s gross earnings for the year to the employee and to Canada Customs and Revenue Agency. By the end of February each year, employers must furnish each employee and Canada Customs and Revenue Agency with a copy of the Statement of Remuneration Paid (T4) showing the employee s gross earnings for the preceding calendar year and the amounts of all taxes withheld. When the employee files an income tax return, he or she must attach a copy of this statement. Payroll services and large companies now send more T4s by electronic tape with the paper T4 copies only as backup. This has allowed the government to process refunds more quickly. Payroll Taxes Levied upon the Employer As discussed earlier in this chapter, employers are required to contribute to employment insurance and Canada Pension Plan. These contributions are expenses to the business and are commonly called payroll tax expenses. 4 Entry Recording an Employer s Payroll Taxes The entry to record the employer s payroll taxes is usually made at the end of the month along with the entry recording the payroll. To illustrate, let us consider the entry for the payroll for the month of March for Exhibits International Limited. The entry to record this payroll, including the taxes withheld from employees, appeared on page I 7. Now, however, we are addressing the payroll taxes levied directly upon the employer. The employer s liability for employment insurance premium is 1.4 times the amounts withheld from the employees $12,183 (1.4 $8,702). The employer s liability for Canada Pension Plan is equal to the amount withheld from the employees $16,060. A general journal entry recording the payroll taxes levied upon Exhibits International Limited for the month of March appears below: Journal entry to record payroll taxes levied on the employer Payroll taxes expense ,243 Employment Insurance taxes payable ,183 Canada Pension Plan taxes payable ,060 To record employer s payroll taxes relating to the March payroll All of the accounts credited represent current liabilities that must be paid within a short period of time. 4 There are also payroll taxes at the provincial level. For example, employers in Ontario must pay employer health tax and insurance premium under the Workplace Safety and Insurance Act.

9 The Computation of Payroll Amounts I 9 EMPLOYEE EARNINGS RECORD Name Carole Bolce Soc. Ins. # Address: 900 Lake View Lane, Apt. F Date of Birth 4-Jul-75 Windsor, ON N9B 8P9 Date of Emp. 24-Jul-97 Position: Commercial Artist - Grade 1 Date of Termination Marital Status: M Reason Termination Claim Code A Monthly Sal: $4, Amounts Withheld Pay Gross Year-to Income Employment Canada Group Net Cheque Period Pay Date Tax Insurance Pension Plan Insurance Pay No. 15-Jan. $ 2, $ 2, $ $ $ $ $ 1, Jan. $ 2, $ 4, $ $ $ $ $ 1, Feb. $ 2, $ 6, $ $ $ $ $ 1, Feb. $ 2, $ 8, $ $ $ $ $ 1, Mar. $ 2, $10, $ $ $ $ $ 1, Mar. $ 2, $12, $ $ $ $ $ 1, Total for Quarter $ 12, $12, $ 3, $ $ $ $ 7, Payroll by Computer Because of the repetitious nature of payroll computations, payrolls are ideally suited to computer processing. In fact, accounting for payrolls was among the first applications of the computer in the business world. As an alternative to accounting for payrolls inhouse, small businesses often delegate this function to an outside agency. Given the complexities of payroll accounting, computer-based payroll systems are amazingly efficient. Often, the only input required for processing the entire payroll is the number of hours worked by each employee receiving an hourly wage. If time clocks are on-line devices, payrolls sometimes can be prepared without any manual input of data or manual computations. (Of course, the computer-based files must be updated for changes in pay rates, tax rates, and the personnel comprising the work force.) In conclusion, it simply is not cost-efficient to account for payrolls manually in a business that has more than just a few employees. Fringe Benefits Many companies provide employees with various fringe benefits, such as dental and extended health care insurance, group life insurance, and a pension plan. The cost of fringe benefits usually is determined for the work force as a whole, rather than computed separately for each employee. Separate expense accounts and liability accounts are used in recording each type of fringe benefit. To illustrate, assume that Exhibits International Limited pays 50 percent of the dental, extended health care insurance, and life insurance for its employees. A general journal entry recording the cost of fringe benefits relating to the March payroll is shown below: Group Insurance Expense (Dental, extended health care, and life) 3,780 Insurance premiums payable ,780 To record the cost of fringe benefits provided to employees for the month of March Journal entry to record the cost of fringe benefits

10 I 10 TOPIC I Accounting for Payroll The Total Cost of Employee Compensation Our discussion of payrolls has been based upon the $270,000 March payroll of Exhibits International Limited. Notice, however, that the company s total payroll cost in March actually amounts to $302,023 a figure substantially higher than the employees gross pay. The total payroll cost includes the following elements: 5 Employees cost more than they are paid Gross pay earned by employees $270,000 Payroll taxes levied upon employer ,243 Fringe benefits paid by employer ,780 Total employee compensation costs for the pay period $302,023 These results are not at all unusual. An employer s total payroll cost generally exceeds employees gross pay by more than 10 percent. Distinction between Employees and Independent Contractors Every business obtains personal services from employees and also from independent contractors. The employer-employee relationship exists when the company paying for the services has a right to direct and supervise the person rendering the services. Independent contractors, on the other hand, are retained to perform a specific task and exercise their own judgment as to the best method for performing the work. Examples of independent contractors include public accountants engaged to perform an audit, lawyers retained to represent a company in a law suit, and a plumber called in to repair a broken pipe. The fees paid to independent contractors are not included in payroll records and are not subject to withholding or payroll deductions. However, in Ontario, these fees must be included in the computation of the remittance for the Employment Health Tax and Workplace Safety and Insurance Board (WSIB). Visit the Internet site of the Canadian Payroll Association at: Check their journal called Dialogue for interesting features. NET CONNECTIONS Visit the Internet site of Ceridian at: This is a large company that does payroll processing for many Canadian firms that outsource their payroll function. See the services that they offer. 5 As noted earlier, the total costs will be much higher after the provincial payroll taxes are added.

11 Last A Head I 11 END-OF-SUPPLEMENTAL TOPIC REVIEW KEY TERMS INTRODUCED OR EMPHASIZED IN SUPPLEMENTAL TOPIC I Canada Pension Plan (p. I-5) A national plan established by a federal act that requires both the employer and the employee to make contributions to the plan. Its purpose is to provide retirement, disability, and similar benefits. Employment insurance (p. I-5) An insurance plan established by federal legislation that imposes a premium contribution on both the employer and the employee. Its purpose is to provide relief from financial hardships for the unemployed. Fringe benefits (p. I-4) Portions of the compensation package offered to employees that are not paid directly to the employees. Paid life insurance is an example. Gross pay (p. I-4) The total amount earned by an employee that is payable, at least in part, to that employee. Does not include fringe benefits. Independent contractor (p. I-10) A person or firm providing services to a company for a fee or commission. Not controlled or supervised by the client company. Not subject to payroll taxes. Payroll register (p. I-6) A form of payroll record showing for each pay period all payroll information for employees individually and in total. Personal Tax Credit Return (TD1) (p. I-4) A form prepared and signed by the employee that shows the total amount of claims and the supporting details. It is used to determine the proper amount of income tax to be withheld from the employee s remuneration. Workplace Safety and Insurance Board (WSIB) (p. I-10) A mandated insurance program insuring workers against job-related injuries. Premiums are charged to employers as a percentage of the employees wages and salaries. The amounts vary by jurisdiction and by the employees occupations but, in some cases, can be very substantial. DEMONSTRATION PROBLEM Geraldine, Cora, and Rose worked together for five years for Jenny Fong, Inc., a large manufacturing company. During the economic slow-down in the fall of 2001, the company restructured and by year-end 2001 each of these ladies were without a job. On a part-time basis, Geraldine had been making natural ingredient soaps in her basement. She was selling these soaps on the Internet. On January 1, the three ladies entered into the business as partners. This would be a full-time venture doing business under the name of The Canadian Natural Soap Company. All sales would be made on the Internet. Business was so good that, on July 1, 2002, they moved out of the basement to rented premises. On that date the company hired two additional staff to package and ship orders. They also hired a part-time accountant to do the bookkeeping and the weekly payroll. Payroll was to be prepared on a bi-monthly (15th and end of month). The following is a list of the bi-monthly salaries: Each owner $1, Packers/shipper $ Part-time accountant $ Since January 1, when the partnership began, the owners had been doing their own payroll. Up to June 30, 2002, each of the ladies had earned a gross pay of $21,600. Instructions Prepare the journal entries for a. net take-home pay for the month of July. b. remittance due to Canada Customs and Revenue Agency on the 15th of August. (Use a 20% tax rate.)

12 I 12 TOPIC I Accounting for Payroll Solution to the Demonstration Problem a. Calculation of July payroll cost Gross payroll $15, Income tax deducted (20% $15,000) $ 3, Employment Insurance deducted $ CPP deducted $ Net Pay $11, b. Company cost for payroll CPP (match) $ EI (1.4% $337.50) Total $ 1, Remittance amount to Canada Customs and Revenue Agency Income Tax $ 3, CPP ($ $ ) $ 1, EI ($ $472.50) Total $ 5, Maximum insurable earnings $39,000 No employee has earned this amount to date. Owners: $3,600 per month 7 months $25,200 Packer/Shippers: $1,600 per month 1 months $1,600 Accountant: $800 per month 1 month $800 2 CPP Calculation: Owners Maximum pensionable earnings $ 34,000 Owners earnings to date 21,600 $ 13,200 July earnings 3,600 Remainder $ 9,600 Each owners CPP: $3, % $ Each Packer/Shipper s CPP: ($1,700 $291.67) 4.3% $60.56 Accountant s CPP: ($800 $291.67) 4.3% $21.86 SELF-TEST QUESTIONS 1. Alison Ground receives a salary of $60,000 per year from Harrington Limited. Income taxes withheld amounted to $17,112. Employment Insurance premiums and Canada Pension Plan contributions withheld were $ and $1, respectively. Registered pension plan of $3,500 and union dues of $860 were also withheld. Ground s take-home pay and the total cost to Harrington of having Ground on the payroll are, respectively: a. $77,112 and $34, b. $62, and $34, c. $57, and $37, d. $36, and $62, Each of the following indicates a significant weakness in internal control over payroll except: a. The paymaster is responsible for timekeeping and for distributing paycheques to employees. b. The human resources department is responsible for hiring and firing employees and for the distribution of paycheques. c. The payroll department is responsible for preparing the payroll cheques for signature by the paymaster, maintaining individual employees earnings records of earnings and deductions, and filing required payroll reports with the government. d. The payroll department prepares the payroll, the paymaster prepares and signs paycheques, and the paycheques are distributed by the timekeeping department.

13 Discussion Questions I Identify all correct statements concerning payrolls and related payroll costs. a. Both employers and employees pay Canada Pension Plan. b. Workplace Safety and Insurance Board (WSIB) premiums are withheld from employees wages. c. An employer s total payroll costs usually exceed total wages expense by about 20 percent. d. Under current law, employers are required to pay Canada Pension Plan payments on employees earnings. ASSIGNMENT MATERIAL DISCUSSION QUESTIONS 1. Explain why an employer s total payroll cost may exceed by a substantial amount the total wages and salaries earned by employees. 2. What are WSIB premiums? Who pays them? Who pays Canada Pension Plan premiums? 3. MetroScape has 210 employees, but no liability for accrued payroll appears in the company s balance sheet. Assuming no error has been made, how can this be? Explain. 4. The human resources department of Meadow Company failed to notify the payroll department that five hourly factory workers had been terminated at the end of the last pay period. Assuming a normal subdivision of duties regarding human resources, timekeeping, preparation of payroll, and distribution of paycheques, what control procedure will prevent the payroll department from preparing paycheques for these five employees in the current period? 5. Explain which of the following taxes relating to an employee s wages are borne by the employee and which by the employer: a. Employment Insurance b. Canada Pension Plan c. Income taxes 6. Is the Salaries Expense account equal to take-home pay or gross pay? Explain. 7. Why is the cost to an employer of having an employee on the payroll greater than that person s gross pay? 8. Distinguish between an employee and an independent contractor. Why is this distinction important with respect to payroll accounting? EXERCISES A supervisor in the factory of Mark Haines Corporation, a large manufacturing company, discharged an employee but did not notify the human resources department of this action. The supervisor then began forging the employee s signature on time cards. When giving out paycheques, the supervisor diverted to his own use the paycheques drawn payable to the discharged worker. What internal control measure would be most effective in preventing this fraudulent activity? The monthly payroll record of Rochelle Gordon Incorporated for January showed the following amounts for total earnings: sales employees, $16,000; office employees, $10,000. Amounts withheld consisted of Employment Insurance premiums, $702, Canada Pension Plan, $1,106, and income tax, $5,830. Instructions a. Prepare a general journal entry to record the payroll. Do not include taxes on the employer. b. Prepare a general journal entry to record the payroll tax expense to Rochelle Gordon Incorporated relating to this payroll. Assume that the employer s rate for Employment Insurance is 1.4 times the employees premium and that the employer s contribution to Canada Pension Plan is the same as that of the employee. EXERCISE I-1 Internal Control over Payroll LO 1 EXERCISE I-2 Journal Entries for Payroll and Payroll Taxes LO 2

14 I 14 TOPIC I Accounting for Payroll EXERCISE I-3 Employer s Payroll Tax LO 2 The payroll of Brenedlyn Corporation may be summarized as follows: Gross earnings of employees $250,000 Employee earnings subject to Employment Insurance ,000 Employee earnings subject to Canada Pension Plan ,000 The employer is required to contribute Employment Insurance at 1.4 times the employee s rate of 2.25 percent and to contribute 4.30 percent to the Canada Pension Plan. Instructions Compute the amount of Brenedlyn Corporation s payroll tax expense for the year. Show the amount of each of the two taxes separately and prepare a general journal entry to record the company s payroll tax expense. PROBLEMS PROBLEM I-1 Payroll A Short Problem LO 2 The payroll records of Oakland Ltd. for the first week of January showed total salaries earned by employees of $25,000. The amounts withheld from employees pay consisted of Employment Insurance of $563, Canada Pension Plan of $925, income taxes of $4,272, and union dues of $380. As a fringe benefit, Oakland Ltd. contributes an amount equal to 2 percent of employees gross pay to an employee group life insurance plan and 4 percent to an employee registered pension plan. The weekly payroll is recorded on Friday, January 6, and paycheques will be issued to employees on Monday, January 9. Instructions a. Prepare separate general journal entries to record the (1) salaries earned by employees, amounts withheld, and liability for net pay; (2) payroll taxes levied upon the employer; (3) cost of fringe benefits; and (4) issuance of paycheques. b. Compute the total cost to Oakland Ltd. of employee compensation for the first week of January. c. Assuming no change in pay rates, tax rates, or number of employees, would you expect the total cost of Oakland s weekly payroll to increase or decrease as the year progresses? Explain. PROBLEM I-2 Payroll A Comprehensive Problem LO 2 The individual employees earnings records of Paul Williams Surveillance Systems show the following cumulative gross pay (earnings) as of year end. Cumulative Cumulative Employee Gross Pay Employee Gross Pay Olivia Winters $28,500 Phyllis Sommers $35,000 Victor Newman 42,000 Jack Abbott 49,600 Beau Brady 60,000 Assume that the rate of Employment Insurance for employees is 2.25 percent and the rate for the employer is 1.4 times that of the employees. The maximum annual insurable earnings for each employee is $39,000. The rate for Canada Pension Plan is 4.30 percent for both the employees and the employer. The rate is applied to the employees first $34,800 annual pensionable earnings that is, gross pay of $38,300 less $3,500 exemption. During the year, the employer has withheld income taxes of $54,920 from employees pay and has incurred costs of $23,120 related to fringe benefits. Instructions a. Prepare a schedule with four data columns for each employee. In the first column, enter the employee s name, in the second, the employee s cumulative gross pay, as indicated above. In the remaining two columns, indicate the amounts of the gross pay that were subject to (1) Employment Insurance and (2) Canada Pension Plan. Show totals for each column. b. Compute the following total amounts for the current year (round amounts to the nearest dollar):

15 Analytical and Decision Problems and Cases I Total amount withheld from employees pay (combine all types of withholdings). 2. Employees net pay. 3. Payroll taxes levied upon the employer. 4. The employer s total payroll costs. c. Reconcile the total amount of employees net pay [b(2.)] with the total payroll costs incurred by the employer [b(4.)]. The Genoa Daily Chronicle is a large business organization, with 1,500 employees. For illustrative purposes, however, we will demonstrate certain payroll procedures using the earnings of only three of these employees for the month of July. The monthly salaries of these three employees, and their cumulative gross pay for the year as at June 30, appear below: Monthly Year-to-Date Employee Salary June 30 Adams $5,600 $33,600 Colbert ,000 6,500* Henderson ,800 40,800 *Colbert started work in late March. PROBLEM I-3 Payroll A More Comprehensive Problem LO 2 This information is obtained from the employees individual earnings records. Assume that the rate of Employment Insurance for employees is 2.25 percent and the rate for the employer is 1.4 times that of the employees. The maximum annual insurable earnings for each employee is $39,000. The rate for Canada Pension Plan is 4.30 percent for both the employees and the employer and the rate is applied to the employees first $34,800 pensionable earnings (i.e., gross earnings of $38,300 less $3,500 exemption). The Genoa Daily Chronicle provides the following fringe benefit to all employees: Paid group life insurance (cost: $100 per month for the three employees) Liabilities relating to fringe benefits are paid at the end of each calendar quarter. Instructions a. Prepare a three-column schedule showing payroll data for each employee. In the first column, enter each employee s gross pay for July. In the remaining columns, show the amount of July s gross pay that is subject to (1) Employment Insurance and (2) Canada Pension Plan. (If none of an employee s July salary is subject to a particular tax, explain why not. If only part of the employee s July salary is subject to a particular type of tax, show a supporting computation. Round amounts to the nearest dollar.) Show totals in each of the three columns. b. Prepare three separate general journal entries, each dated July 31, summarizing for the month: 1. The gross pay, amounts withheld, and net pay of these employees. In addition, the amounts withheld for income taxes is $4,860. Paycheques will be issued on the next business day (August 3). 2. The payroll taxes levied upon the employer. 3. The cost of fringe benefits. c. Compute the total cost to The Genoa Daily Chronicle of having these three employees on the payroll during the month of July. d. List all of the current liabilities at July 31 resulting from this monthly payroll. ANALYTICAL AND DECISION PROBLEMS AND CASES Fenmore Department Stores Ltd. is a large department store with a highly automated accounting system. The computer program used in processing payrolls includes all tax rates and withholding A&D I-1 Hey Can t We Do This By Computer? LO 1

16 I 16 TOPIC I Accounting for Payroll tables, employees individual earnings records, and every employee s rate of compensation. Employees gross pay is determined as follows: Wearhouse workers Office workers and management Salespeople Hourly wages Monthly salaries Monthly salaries plus commissions Sales commisions are based upon the sales generated by the individual salesperson during the pay period. Employees are paid twice each month. Every payroll period, the computer program compiles a payroll register, updates the employees earnings records, prints paycheques, and records in the general ledger both the payroll and the payroll taxes upon the employer. Instructions a. Indicate the additional information that must be entered into this computerized system each pay period to enable the computer to perform the processing tasks described above. Suggest means by which each type of additional information might be entered into the computerized payroll system automatically instead of manually. b. Describe a plan for distributing paycheques to the company s employees that is both efficient and contributes to strong internal control. A&D I-2 Real-world Payroll Costs LO 2 Interview the owner of a small business, or an employee responsible for payrolls. (You may find this more interesting if you select a business in which the employees are exposed to some jobrelated risk of injury, such as construction.) Determine the items that cause differences between gross wages and salaries expense earned by employees during a pay period and each of: 1. The employees take-home pay. 2. The employer s total related payroll costs. Also inquire whether any of these amounts tends to increase or decrease in later pay periods. Be prepared to explain in class the relative size of each item as a percentage of gross wages and salaries expense. Also be prepared to explain the absence of any of the payroll costs discussed in this text. (Note: All interviews are to be conducted in accordance with the guidelines discussed in the Preface of the textbook.) INTERNET ASSIGNMENT INTERNET I-1 Real Life Data LO 2 Go to the Internet site of the Canadian Payroll Association at and answer the following questions: 1. What is the filing deadline for Workers Compensation in your province? 2. What amounts are included in the source deductions return for dependent children? 3. What is the amount of the TD1 credit for each of the following? a. Basic Personal Amount b. Age 65 Amount c. Disability Amount d. Education Amount Full Time e. Education Amount Part Time ANSWERS TO SELF-TEST QUESTIONS 1. d 2. d 3. a, c, d