Chapter 7: Payroll Flashcards

Question

Private Pension Fund

Answer 1

An employee may also contribute to a private work-based pension fund. A private pension fund is an investment savings pot where individuals invest part of their gross earnings to be withdrawn after retirement. The amount of contributions to the pension plan is usually a fixed percentage of their gross Pay. Contributions paid into private pension funds are voluntary in most countries. In addition to the employee's contributions, employers may also pay a percentage of private pension contributions into the employee’s fund.

Answer 2

'Other deductions' covers anything else that needs to be deducted from an employee's gross pay by the business. Some businesses have voluntary saving schemes in which employees hold back part of their gross pay to be saved until an agreed date. Employees may also choose to make donations to charity from their wages. This will be deducted from gross pay.

Answer 3

Example Stephanie earns a salary of $25,000 a year. She pays 6% of her salary into her pension, and her employer pays 10%. How much do she and her company pay into the pension scheme in a month? Answer: Stephanie’s salary contribution (per annum) = $25,000 × 6% = $1,500 per year. Stephanie’s salary contribution (per month) = $1,500 / 12 months = $125 per month Company's contribution (per annum) = $25,000 × 10% = $2,500 per year Company’s contribution (per month) = $2,500 /12 = $208.33 per month

Answer 4

The cost of an employee to an employer includes all aspects of an employee’s gross pay, such as their basic wage, overtime, sick pay, and other earnings. Also, businesses that contribute to employees’ state benefits and private pension funds must include these payments in the cost of an employee.

Answer 5

GROSS PAY of employee + EMPLOYER CONTRIBUTION to employee state benefits/pension funds (or any other employer contributions) example3 Wendy's salary is $20,000 a year. The state benefit contribution the employer pays on top of the employee's contribution is 12% of gross pay. In addition, Wendy's employer pays its contribution of 5% of gross pay into a pension fund. What is the total annual cost to the employer of employing Wendy? Answer: Employer state benefit contributions: $20,000 × 12% = $2,400 Employer pension contributions: $20,000 × 5% = $1,000 The total cost of an employee is = Gross pay + Employer contributions $20,000 Gross + $2,400 State benefit + $1,000 Pension = $23,400

Answer 6

All payroll details such as basic Wage, bonuses and deductions are entered into the computerised system using journal entries. A PAYROLL REPORT is generated from the information entered into the system. The payroll report shows a summary of the information such as: - Gross pay - Income tax deduction from employees - State benefit contribution deduction from employees - Pension fund contribution deduction from employees - State benefit contribution deduction from employer - Pension fund contribution deduction from employer - Net pay example4 Rajiv from RFashion received the payroll report for RFashion, showing a summary of all payroll information for March 20X1. Gross Pay 6,800 Income tax deducted 1,340 State benefit contributions deducted from employees 710 State benefit contributions from employer 865 Pension contributions deducted from employees 325 Pension contributions from employer 520 Net Pay to Employees What is the total cost of employees to RFashion? Answer: The total cost to RFashion is the gross pay of $6,800 plus anything that is an additional cost for the employer: State benefit contributions from employer = $865 Pension contributions from employer = $520 $6,800 Gross + $865 State benefit + $520 Pension = $8,185 What is the Net pay to employees of RFashion? Answer: Net pay to employees = Gross pay − All employee deductions $6,800 Gross - $1,340 Income tax - $710 State benefit - $325 Pension = $4,425

Answer 7

A journal records transactions or adjustments in the general ledger and is, therefore, part of the double-entry process. Payroll transactions are recorded using double entries to relevant payroll ledger accounts.

Answer 8

This account shows every transaction relating to payroll. The items in this account should have a zero balance every period end.

Answer 9

This account shows all employee’s expenses to the business. It is debited because expense accounts are debit accounts. This expense account can also be called wages cost or staff costs account.

Answer 10

This account records deductions from employees for income tax. It is credited to show that the business owes money to the tax authority.

Answer 11

This account records all amounts relating to state benefit contributions. It is credited to show that the business owes money to the tax authority.

Answer 12

This account records all amounts relating to the pension fund. It is credited to show that the business owes money to the pension fund.

Answer 13

This account includes all the payments involved. This account will always be credited, as a payroll payment reduces the bank asset.

Answer 14

* Key Point - Salaries and other remuneration paid to the owner of the business as a sole trader are recognised as drawings, not business expenses (Wages) The double entry for the owner’s (sole trader) remuneration is Dr Drawings Cr Cash / Bank (Each payroll transaction is posted into the relevant ledger accounts. Below is a list of payroll transactions and their associated journal entries)

Answer 15

The total cost of an employee is the gross pay plus any employer contributions. The cost of employing workers increases a business's employee expenses (expenses). The total cost of employees is recorded using double-entry in two ledger accounts. - Employee Expense - Payroll Individual Account Category Explanation Dr. Employee Expense Expense Employee Expenses increased Cr. Payroll Liability Payroll (Liability) increased The payroll liability account is purely used to control all the entries relating to payroll to ensure they have been appropriately recorded.

Answer 16

Income taxes, state benefit contributions and private pension contributions are deducted from an employee's gross pay. An employer deducts these contributions on behalf of an employee. The employer owes that amount upon deduction to the tax authorities and pension fund institutions. Since actual payments are made only in the following month, this gives rise to liability as the business owes money when the payroll is recorded. Deductions from the gross payment affect two ledger accounts. - Payroll - Individual Deduction Institution (Income Tax/ State Benefit/Pension Fund) Individual Account Category Explanation Dr. Payroll Liability Payroll (Liability) decreased Cr. Individual Deduction Institution Liability Deductions to Institutions (Liability) increased To increase a liability account, we will credit the income tax, state benefits and private pension contribution liability accounts and debit the payroll liability account. In the following month, payments are made to the tax authorities and pension fund. The business will then debit the individual deduction institution account (liability decreased) and credit the bank account (asset decreased).

Answer 17

The employees will be paid their net earnings (after all deductions) every month. Payments to employees will impact two ledger accounts. - Payroll - Bank Individual Account Category Explanation Dr. Payroll Liability Payroll (Liability) decreased Cr. Bank Asset Bank (Asset) decreased Employee wages and salaries are paid by bank transfer. This will decrease the balance left in the business’s bank account. (see example)

Answer 18

The double entry for the owner's (sole trader) remuneration is Dr Drawings Cr Cash/Bank

Answer 19

Depending on the computerised system of each company, it may no longer be necessary to create manual journal entries. Most computerised systems have the option to automate posting these journals into the payroll ledger alongside generating payroll reports. However, many small businesses with limited IT budgets still rely on manual journal entries to reflect transactions into the general ledgers. Moreover, it is essential to understand the basics of double entry and its’ effect on the accounting system.

Answer 20

Payslips are prepared by a company’s payroll function to be distributed to employees when payments are made. A payslip is a financial document with details of the employee, and it shows how an employee’s net amount paid is derived.

Answer 21

Header – Name of business Name and dept – Name and department the employee works in Employee information – The employee's unique internal reference number, employee code and national identity number are shown. The tax code, payment date and payroll week are also shown. Description – This column details every type of gross pay earned. Hours – This column indicates the hours worked for each gross pay. Amount (Gross) – This column shows the gross amount for each type of gross pay. Deductions – This column shows all deductions from the employee's gross pay. Amount (Deduction) – This column indicates the deduction made from the employee's pay. Year-to-date totals – The summary payment in a tax year, broken down into gross pay, income tax, state benefit contributions and pension paid. Note that a tax year runs from April to March in the UK. This period – The total earned in the specific period. Net Pay – The column shows the employee‘s actual amount received.

Answer 22

There are 2 payment methods to pay their employees: cash/cheque or bank transfer. For a deeper understanding of various payment types, return to 5 Cash and Bank.

Answer 23

Cash or cheques are distributed to employees in envelopes with each employee’s name on the pay envelopes. The payslip is usually included together with the cash or cheque.

Answer 24

Bank transfers (direct credit) are typically used to make payments to employees. Organisations send the bank a list of employee bank accounts and the amount to be paid. The bank transfers money from the business’s bank account to the employees. Payslips are then sent to employees separately by email or in hard copy.

Answer 25

There are several safeguards a business will undertake when paying an employee, such as: 1. Manager authorisation is obtained for payroll payments to ensure: - Gross wage or salary has been correctly calculated - Correct deductions have been made for each employee. Businesses may face severe fines and penalties if an incorrect amount is paid to the government. - Only genuine employees are paid. If not, it may be possible that someone puts in a fictitious employee and directs wages into their account. 2. For larger organisations, ensure that the segregation of duties is in place. This means that different people oversee different activities within the payroll department. For example, the person calculating the net payment differs from the one issuing cheques. 3. For cash payments, employees need to produce identification cards or passports for verification 4. Employees are to provide signatures in the payroll record after receiving pay envelopes in case of future discrepancies 5. Only authorised payroll personnel can distribute pay envelopes to employees 6. In case of absent employees, pay envelopes should be stored in a locked safe

Answer 26

The payroll department deals with private and sensitive information of business employees. Employee personnel records such as their name, address, date of birth, details of any work absences, qualifications and bank details are considered sensitive information. The employer is legally responsible for keeping such information about employees safe per the data protection legislation. If leaked, sensitive data can be used in a fraudulent manner whereby employees’ bank details are obtained, and money is stolen from their accounts.

Answer 27

Businesses that keep paper records (manual) - all info about an employee should be stored in a locked cabinet in a locked office - only the payroll supervisor should have keys to the office and cabinet. - Information should be stored alphabetically so it is organised and easy to access. Businesses that store information on a computer (digital) - Only payroll employees should be able to access the data on the computer. The payroll software must be password protected. - The computer screen is locked if payroll personnel is away from the computer to prevent others from viewing the data on the screen. - There must also be a regularly scheduled backup of the data.