Accounting Fundamentals II: Lesson 11 Page 1 of 8

Accounting Fundamentals II: Lesson 11 (printer-friendly version)

Your Instructor: Charlene Messier

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Chapter 1

Introduction

In this lesson and in Lesson 12, we'll move away from

Teammates, Inc. and learn all about payroll. You'll be computing
a payroll and preparing a quarterly Report 941, as well as
various other end-of-quarter reports. You'll also be preparing the
year-end federal reports required of all businesses with
employees, including W-2 forms and Federal Unemployment Tax
forms.

This payroll and tax information is of the utmost importance to

any business that wants to be sure to pay employees correctly
and fulfill all tax obligations to the federal government (and state
government, where applicable). Without this knowledge, the business can end up spending a bundle in
interest, late fees, and penalties for not complying with the timelines set by government agencies.

Unlike the first 10 lessons of this course, we won't be working with the entire General Ledger. We'll
only work with accounts that are affected by our payroll transactions.

Just like you did way back in Lesson 1, you'll print out a set of General Ledger accounts. But this time,
the accounts will already have several amounts entered in them. These transactions are from the first
three quarters of the year. We'll be working on payroll and reports for the last quarter of the year.

In addition to the General Ledger, you'll need to print out a few other forms for this lesson. They're all
located in the Supplementary Material, and they include the following forms:

z Earnings Records for William Boudreau, Joseph Barnes, and Sara Lawton.

z The Payroll Register for December 23 of this year.

z Biweekly Federal Income Tax tables for both married and single persons.

z The General Ledger accounts: Employee Income Tax Payable, FICA Tax Payable, Health
Insurance Premiums Payable, United Way Donations Payable, U.S. Savings Bonds Payable,
Payroll Tax Expense, and Salary Expense.

z One copy of the Cash Payments Journal.

There's a lot to do! So go ahead and print those forms out now, then turn to the next chapter and we'll

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get started.

Chapter 2

Reviewing the Payroll Register

Take a close look at all of the forms that you printed out. You'll
see one Payroll Register form. We use this form to calculate
the payroll for the three employees for the period ending
December 23. All employees are listed on one Payroll Register,
so you only need one for each pay period. Notice that there are
columns for each employee's earnings, deductions, and net
pay.

There are also three partially filled-in individual Employee

Earnings Records, one for each employee. These forms keep
track of earnings, deductions, net pay, and accumulated
earnings for each individual employee.

You will then see two tax tables: one for single employees and
one for married employees, both for biweekly (every other week) pay periods. We'll use the tax tables
to determine the appropriate amount of federal income tax to withhold from the employees' pay.

Last are the General Ledger accounts that you'll be using in this lesson and again in Lesson 12. The
General Ledger accounts include entries for October, November, and part of December. Today, you'll
complete the last payroll of the year and make entries into these accounts.

The Payroll Register form is the first form that you'll fill out when preparing a payroll. I have filled in the
dates on the form for you. You'll be entering the payroll for the three employees on the first three lines
of the register.

Take a look at the columns on the Payroll Register. The first is for the employee’s number, and the
second is for the employee’s name. Next is a column for the employee's marital status, and to the right
of that is a column for the number of allowances that the employee is claiming.

Employers have their employees fill in a form W-4 when they're hired and yearly thereafter. This form
shows the employer the employee's name, address, Social Security number, and the number of
withholding allowances the employee is claiming. An employee may change this information at any
time by filling out a new W-4 and giving it to his/her employer.

Let's talk for a minute about withholding allowances. In most cases, the number of allowances an
employee claims represents the number of people the employee is supporting. But there are instances
in which an employee can claim more or less allowances than dependents.

For example, a married employee with two children might claim four allowances: one for herself, one
for her husband, and one for each of her two children. But she doesn't have to claim all four if she
chooses not to.

The more allowances she claims, the less federal income tax she has deducted from each paycheck.
The fewer allowances she claims, the smaller her paycheck will be. If she doesn't have enough tax
withheld throughout the year, she may have to make a big payment to the IRS come April 15 to cover
the difference.

If both the wife and husband work, they'd probably claim a total of four allowances between them. The
wife would claim two and the husband two, or the wife one and the husband three, or any other
combination. But their combined incomes could push them into a higher tax bracket than they would
have been in individually, so they may want to claim fewer than four total allowances between them. By

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claiming fewer, more federal income tax will be withheld from their paychecks each payday.

These decisions are simply a matter of individual preference. Would the employees rather have higher
paychecks and pay more of their income tax in one lump sum in April? Or would the employees rather
have their tax deducted in smaller amounts throughout the year? It's best to sit down with a tax advisor
before making any final decisions.

The next column on the Payroll Register is for regular earnings. These are the employee's earnings
without overtime pay. Employees can either be paid at an hourly wage that's multiplied by the number
of hours worked, or they can be paid a flat salary, where the employee receives the same amount each
pay period regardless of the hours worked.

The next column is for overtime pay. In most states, this is pay for hours over 40 in a workweek, and is
usually paid at 1½ times the regular hourly pay rate. The next column is for total earnings, which is the
sum of the regular pay column plus the overtime pay column. This is the employee's gross earnings
before any deductions are made.

To the right of the Total Earnings column is a column titled Federal Income Tax. This is for income tax
that will be withheld from the employee based on marital status, allowances, and gross pay.

The business deducts this amount and sends it to the government at regular intervals throughout the
year. You will determine the amount by looking at the appropriate tax table, finding the income bracket
for the employee's earnings, and following that line over until you reach the column with the correct
number of allowances at the top. Then you'll enter this amount in the Federal Income Tax column.

The next column is for FICA tax withheld. This tax is more commonly known as Social Security tax.
The government uses this money to make retirement payments to elderly persons and to people with
disabilities and families of deceased wage earners. Right now, FICA tax is figured at 6.2% of an
employee's gross earnings, and Medicare tax is figured at 1.45% of an employee's gross earnings.
Most employers show two separate deductions for these two taxes, but we'll combine them and enter
7.65% of each employee's gross pay under the FICA Tax column.

To the right is a column for health insurance deductions. Many employers offer health insurance plans
to their employees. In most cases, the employee must pay a percentage of the annual premium, and
the employer withholds this portion from the employee's earnings throughout the year.

Some employees choose to have that portion deducted 13 times a year (every other payday), and
some choose to have it deducted in smaller amounts every payday (26 times a year).

The next column is labeled Other. We'll use this column for other deductions that the employee may
elect to have taken from his or her pay. Two examples we'll use in this lesson are U.S. Savings Bonds
and United Way donations. Some employers offer to deduct a certain amount of an employee's pay to
use in purchasing a U.S. Savings Bond when enough money has been deducted. This is of no benefit
to the employer but helps the employee save regularly. Employees may elect to donate a certain
amount of their pay to a charity, like the United Way. The employer sends these donations to the
United Way office at regular intervals throughout the year. Again, this deduction is of no benefit to the
employer but it helps employees give to charities on a regular basis.

Because we'll use this column for two different deductions, we'll put an abbreviation beside the dollar
amounts to identify where the amount deducted should be sent and which of the two General Ledger
accounts it should be posted to. We'll use SB as the abbreviation for Savings Bonds, and UW for
United Way donations.

The next column is labeled Total. This column is for the total of all of the deductions made from the
employee's gross earnings. This amount is the total of columns 4, 5, 6, and 7: Federal Income Tax,
FICA Tax, Health Insurance, and Other.

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The Net Pay is the difference between the Total Earnings column (column 3) and the Total Deductions
column (column 8). The employee's check will be written for this amount. To determine the amount of
net pay, subtract column 8 from column 3.

You can now see that we don’t get what we earn . . . there is, in fact, quite a difference!

Chapter 3

Preparing the Payroll Register

Now let's figure the payroll for the period ending December 23.
Each of the three employees is paid a salary every two weeks
rather than an hourly wage. Their salaries are based on the
hourly wage listed at the top of their Earnings Records times 40
hours per week. But it doesn't matter how many hours they work
during a two-week period; they'll still receive the same gross
earnings each payday. We'll enter the payroll on the Payroll
Register first, then transfer the amounts to the individual
Earnings Records.

On the first line of the Payroll Register, enter the first employee's
name: Joseph Barnes. By looking at his Earnings Record, you
can see that his Employee Number is 3. His Marital Status is S
(for single), and the number of Allowances he claims is 1.

Next, enter $652.00 in the Regular column, nothing in the

Overtime column, and bring over the $652.00 into the Total column (column 3). Then look up the
amount of federal income tax due on the tax table for single people. The amount you determine by
looking on the tax table should be $51.00. Enter that amount in the Federal Income Tax column.

Now, multiply his gross earnings in column 3 by 7.65% to get his FICA and Medicare tax deduction.
You should get $49.88. Enter that amount in column 5. This is the pay period when Joseph pays his
portion of his health insurance, which is $20.00, so enter that amount in the Health Insurance column.
This is not the pay period when he makes a donation to the United Way, so we'll leave column 7 blank.

Go ahead and add up all of Joseph's deductions (columns 4 through 6) and put the total in column 8.
Then subtract the total in column 8 (Total Deductions) from the amount in column 3 (Total Earnings).
This is the amount that you will enter in the Net Pay column (column 9), and the amount of Joseph's
paycheck. You can leave the Check No. column blank because we won't actually write any checks for
the payroll.

Now go ahead and complete the Payroll Register for the other two employees the same way.
Remember, you'll have to refer to their Earnings Records to get the necessary information. But also
keep in mind the following two notes:

For William Boudreau, notice from the pattern on the Earnings Record that this is the pay
period when he makes a $10 donation to the United Way. He paid his portion of his
health insurance during the last pay period, so you can leave that column blank.

Sara Lawton paid her portion for health insurance during the last pay period, too, but this
is the period when she has $15 deducted from her pay to go toward U.S. Savings Bonds.

After you complete the Payroll Register, total all of the columns down and enter the totals on the last
line. Verify the accuracy of the Register by:

1. Adding column totals 1 and 2. This total should equal column 3.

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2. Adding column totals 4, 5, 6, and 7. This total should equal column total 8.

3. Subtracting column total 8 from column total 3. This should equal column total 9.

When the Payroll Register is completed and balanced out, double-rule the totals to show their equality.
Now you need to transfer each employee's information to his or her individual Earnings Records, using
line 6, which is for the pay period ending December 23.

First, enter each employee's regular pay in the Regular column. Because no one had overtime pay, put
a slash there and enter the same regular pay amount in the Total column. Enter each employee's
Federal Income Tax, FICA Tax, Health Insurance, and Other deductions in their appropriate columns.
Then enter the Total Deductions in the column 8 and subtract the amount in column 8 from the amount
in column 3 to calculate the Net Pay amount to enter in column 9.

There is one more column in the Earnings Records that you need to complete. You'll need to
determine each employee’s accumulated earnings for the year. Accumulated earnings are year-to-date
gross earnings before any deductions are taken out of the pay. You can see that before this pay
period, Joseph Barnes had accumulated earnings of $16,300.00.

To get his new accumulated earnings, simply add his gross earnings for this pay period—$652.00—to
his accumulated earnings. This sum reflects his new accumulated earnings for the year. Because this
is the last pay period of the year, this amount will also reflect Joseph's total earnings for the year.

Now complete the Accumulated Earnings column (column 10) for the other two remaining employees.

Next, add all of the columns down in each employee’s Earnings Record to arrive at their totals for the
fourth quarter. Once again, verify that the totals are correct. Then, carry the fourth quarter totals down
to the bottom of the page in the Earnings Record and enter them on the Qtr. 4 Totals line. Finally, add
the four quarter totals down to arrive at the year totals. Verify these year totals to be sure that they
balance out in the same manner as in the Payroll Register and the fourth quarter entries on the
Earnings Records.

Chapter 4

Journalizing and Posting the Payroll

You will now journalize and post from the Payroll Register to the General Ledger accounts. You will
use the Cash Payments Journal to journalize the payroll because, in reality, you would be writing a
check to pay the payroll.

Usually a business has two separate checking accounts, one for payroll and another for all other cash
payments. This is simply because payroll checks are printed differently from regular checks. There's
usually a stub that goes with an employee's paycheck to show gross earnings, deductions, and net
pay. Because regular checking accounts don't feature this type of stub, businesses generally use a
special account just for payroll.

A business ordinarily writes one check for the total net payroll
amount off its regular checking account and deposits it into its
special payroll checking account. The business then writes the
individual payroll checks for employees from this payroll checking
account. By doing this, there's only one check written from the
regular checking account to fund the entire net amount of the
payroll.

To journalize the payroll, enter the date, December 26, on the first
line of the Cash Payments Journal. Remember, in reality, there
would be many transactions recorded in the journal for December,

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so you wouldn't necessarily enter the payroll transaction on line 1.

In the Account Title column, enter Salary Expense. In the Ck. No. column, enter check number 511.
Then enter the total gross pay of all three employees (the total of column 3 of the Payroll Register) in
the General Debit column. On that same line, enter the total Net Pay of all three employees (the total of
column 9 of the Payroll Register) in the Cash Credit column.

Now you'll use one line in the journal for each deduction total, entering them all in the General Credit
column. Start with Employee Income Tax Payable. That's the General Ledger account title for Federal
Income Tax withheld. Take the total of column 4 from the Payroll Register and enter it in the General
Credit column of the Cash Payments Journal.

On the next line of the journal, write FICA Tax Payable and enter that total from the Payroll Register
into the General Credit column of the journal. On the next line, write Health Insurance Premiums
Payable and enter that column total from the Payroll Register into the General Credit column of the
journal.

Finally, write U.S. Savings Bonds Payable on one line and United Way Donations Payable on the next.
Don't forget that we used abbreviations to differentiate between these two deductions and listed them
in the same column of the Payroll Register. So don't enter the total of the column for these two; you'll
have to add up how much goes to each account and enter those amounts on the appropriate lines in
the General Credit column of the journal.

That's it! If you add all of your credits together (those in the General Credit and Cash Credit columns),
the sum should equal your debit to Salary Expense.

You should now post the amounts in the General Debit and General Credit columns to the General
Ledger accounts. Do not post the Cash Credit amount because we will make more entries into that
column in Lesson 12, and will post the column total at the end of that lesson.

Chapter 5

Conclusion

Whew—that was quite a process! But it does get easier as you complete more payrolls. The Payroll
Register and Employee Earnings Records are very important documents because they pertain to taxes
that must be remitted to the federal government. Accurate records are a must for the business and the
employees, and for the federal government.

In Lesson 12, we'll make a quarterly deposit of taxes withheld from this payroll, then prepare the yearly
W-2 forms and the federal 941 Report for the quarter.

See you then!

Supplementary Material

Lesson 11 Forms
/crs/pix/af2/L11-Forms.pdf
Here's the General Ledger and all of the other payroll forms you'll
need to print out to complete the work in this lesson.

Lesson 11 Tax Tables

/crs/pix/af2/L11-Tables.pdf
Here are the biweekly federal income tax tables, for both married
and single persons, that you'll need to print out for this lesson's
work.

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Lesson 11 Solutions
/crs/pix/af2/L11-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper! Note: Only those
forms and accounts with new entries in them will appear in each
lesson's solutions. If you're curious about a transaction in a
previous lesson, you'll have to go back to that lesson's Solution
link.

Payroll Accounting
http://tenonline.org/art/bsr/9807.html
This link provides a description of payroll and deductions.

FAQs

Q: Why are payroll deductions considered liabilities?

A: Because they represent money that the business owes to other organizations. This
money doesn't belong to the business.

Q: What are Social Security taxes used for?

A: They're used to make payments to retired persons and disabled workers. Families of
deceased wage earners can also apply for benefits.

Q: When does a business send in the federal income tax and Social Security tax withheld
from employees?

A: The frequency with which a business makes federal tax deposits depends on how
much the tax liability is. Some small businesses make monthly tax deposits to a bank,
which then sends the funds to the federal government. Very large businesses might be
required to make federal tax deposits after each payroll. The frequency of deposits
directly relates to the amount of money involved. Most banks accept federal tax deposits
and then forward the amount of the deposit to the federal government. The business
receives a dated receipt for its deposit.

Q: Is it imperative that a business have two checking accounts, one for payroll and one
for all other transactions?

A: It isn't mandatory, but most businesses find it more convenient because payroll
checking accounts have special stubs that show the employee's gross earnings,
deductions, and net pay. Regular checking accounts don't have these features.

Q: Why does an employee with four allowances pay less in federal income tax than an
employee with two allowances?

A: The amount of federal income tax withheld is directly related to the number of
allowances that an employee claims. The reasoning is that it takes more money to
support four people than it does two people, so the more allowances, the less tax
withheld.

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Course content © 1997-2007 by Charlene Messier. All rights reserved. Reproduction or redistribution
of any course material without prior written permission is prohibited.

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