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10/13/2011
ACTBAS1 Lectures, Prof. L. Landicho,
DLSU, 2nd Term AY 2011-2012
Payroll and related fringe benefits often
make up a large percentage of current
liabilities
Employee compensation is often the most
significant expense that a firm incurs
Government regulations relating to the
payment and reporting of payroll taxes apply
only to employees
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Payroll pertains to both salaries and wages
Managerial, administrative, and sales personnel
are generally paid salaries. Salaries are often
expressed in terms of a specified amount per
month or year
Sale assistants, factory employees and manual
labourers are normally paid wages based on a
rate per hour
Payments made to professional individuals who
are independent contractors are called
professional fees
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Objectives of internal accounting control
concerning payroll:
To safeguard company assets from unauthorised
payments of payrolls
To ensure the accuracy and reliability of the
accounting records pertaining to payrolls
Payroll activities involve four functions:
hiring employees
timekeeping
preparing the payroll
paying the payroll
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Hiring Employees
The human resources (personnel)
department is responsible for posting job
openings, screening and interviewing
applicants, and hiring employees
The human resources department is also
responsible for authorizing changes in
employment status:
Changes in pay rates
Termination of employment
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Timekeeping
Hourly employees are usually required to
record Llme worked by unchlng u Llme clock
In large companies procedures are often
monitored to ensure an employee punches
only 1 card
1he emloyees suervlsor
Approves the hours shown by signing the time card
at the end of the pay period
Authorises overtime hours for an employee
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Preparing the payroll
The payroll is prepared in the payroll
department on the basis of two inputs:
Human resources department authorisations
Approved time cards
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Paying the payroll
Payroll is paid by the finance department
Many employees have their pay credited
electronically into their bank accounts
Employers use a payroll software package
which processes the pay and provides control
Some firms prefer to pay by cheque which
also minimises risk of loss from theft
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Determining the payroll involves calculating 3
amounts
Gross earnings
Payroll deductions
Net pay
Gross Earnings
This is the total compensation earned by an
employee
It consists of wages or salaries, plus any
bonuses and commissions
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Type of
Pay
Hours
times
Rate
equals
Gross
earnings
Regular 40 X PhP 200.00 = Php 8,000.00
Overtime 4 x PhP 300.00 = 1,200.00
Total
wages
Php 9,200.00
=========
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Payroll Deductions
The difference between gross pay and amount
actually received is attributable to payroll
deductions
Mandatory deductions are required by law are
income taxes & government fund contributions
The employer is merely a collection agent and
subsequently transfers the amounts deducted
to the government and designated recipients
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Income Taxes
Under Philippine laws on withholding of
income tax, employers are required to
withhold income tax from employees each
pay period
The amount to be withheld depends on
Lmloyees gross eurnlngs
Any special allowances
Length of pay period
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Other Deductions
Employees may voluntarily authorise
withholdings for charitable donations and
other purposes [i.e. union dues]
Other Requirements
The employer is to pay SSS, HDMF & PHIC
contributions on behalf of employees
This is partly an expense of the business, and
urLly u deducLlon from emloyees uy
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Net Pay
This is determined by subtracting payroll
deductions from gross earnings
Example
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Gross earnings 20,000.00
Payroll deductions
Income taxes 4,333.33
SSS, HDMF & PHIC 850.00
Union fees 500.00 5,683.33
Net pay PhP 14,316.67
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Maintaining payroll department records
An employee earnings record is a cumulative
record of gross earnings, deductions and net
pay during the year
A separate earnings record is kept for each
employee
Firms may also prepare a payroll register to
accumulate gross earnings, deductions and
net pay by employee for each pay period
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Recognising payroll expenses and liabilities
Example
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May 21
Office Salaries Expense 82,300
Wages Expense 122,700

Income Taxes Payable 38,000
SSS, HDMF & PHIC Payable 12,500
Union Fees Payable 20,000
Salaries and Wages Payable 134,500
(To record payroll for the week
ending 21 May)
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Recognising employer SSS, HDMF & PHIC
contributions
Example

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May 21
SSS, HDMF & PHIC Expense 20,000
SSS, HDMF & PHIC Payable 20,000
(To record SSS, HDMF & PHIC employer share
for pay period ending 21 May)
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Recognising annual leave provisions
Regular employees are entitled to mandatory 5 days
incentive leave pay
Therefore, for each pay period, the employer is
required to record the amount of the liability owing
to employees

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May 21
Annual Leave Expense 7,200
Provision for Annual Leave 7,200
(To record the annual leave payable )
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Recording payment of the payroll
Payment by cheque is made either from the
emloyers regulur bunk or u uyroll bunk
account, and is accompanied by a payslip
document

Journal entry to record payroll payment:
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May 21 Salaries and Wages Payable 134,500
Cash 134,500
(To record payment of payroll)
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
Preparation of payroll tax returns is the
responsibility of the payroll department
Payment of the taxes is made by the finance
department
Much of the information in the returns is
obtained from employee earnings records
Under taxation law, firms must keep payroll
records for at least 5 years
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10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012
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Identify two internal control procedures that apply to
each payroll function.
What are the primary sources of gross earnings?
What payroll deductions are (a) mandatory and (b)
voluntary?
What account titles are used in recording a payroll,
assuming only mandatory payroll deductions are
involved?
10/13/2011 ACTBAS1 Lectures, Prof. L. Landicho, DLSU, 2nd Term AY 2011-2012