Spring 2016 Study Group March 5 2016 ACCOUNTING Accounting is a way of keeping track of an organizations financial transactions This information is used to prepare the companys financial statements ID: 643475
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Slide1
Payroll Accounting
Triad Chapter
Spring 2016 Study Group
March 5, 2016
Slide2
ACCOUNTING
Accounting is a way of keeping track of an organization’s financial transactions.
This information is used to prepare the company’s financial statements
.
Profit, Cash flow, losses, assets, liabilities and net worth
The reports are used by management, auditors, stockholders, etc. to gauge the company’s financial health and prospects for the future.
Accounting standards are not set by law but by private organizations
.Slide3
Accounting – Common Terms
GAAP
Generally Accepted Accounting Principles
Widely used in Public Sector Companies
Accrual Method of Accounting
Time Period Principles
Basic time periods for recording account activity.
(Monthly, Quarter, or Annual)
Companies can set their own accounting periods. (13 Week periods are the most commonSlide4
Accounting Terminology
General Ledger (G/L)
Record all transactions for financial period
Includes all Accounts
Assets
Liability
Owner’s Equity
Revenue
Expense Slide5
The general ledger is a record of business transactions posted to each account from the journal entries.
Many accounts will have a subsidiary ledger that is used to provide a detailed view of the information.
For example, accounts receivable will report the total due from all customers in the general ledger, while the subsidiary ledger will provide information about the amount that each customer owes that makes up the total in the general ledger account.
In today's accounting environment, subsidiary ledgers are commonly seen as systems such as payroll, accounts payable, accounts receivable, and fixed assets.
The payroll register is the subsidiary ledger that supports payroll transactions.
What is a General Ledger?Slide6
What is a Journal
?
A journal is a chronological record of the daily transactions of a business.
For each transaction, the journal shows the debits and credits to be entered in specific general ledger accounts and a description of the account. Slide7
Account Classifications
All of a company’s transactions are recorded and classified into various accounts using a “double entry” system based on two equations.Slide8
General Ledger Account Classification
Asset accounts
are anything that provides and economic benefit or value to the company over a period of time.
Cash, Inventory, Computers, Furniture, Accounts Receivable.
Owned by the companySlide9
General Ledger Account Classification
Liability accounts
are debts that must be paid in the future
Unemployment taxes – Accrued and will be paid at the end of the calendar quarter
Payroll processing
Taxes Payable
Benefits ( 401(k), FSA, Medical, Dental premiums
Garnishments PayableSlide10
General Ledger Account
Classification
Expense accounts
show the company’s costs for goods and services
Everyday expenses related to running the business
Payroll expenses
Salary Expense
Bonus Expense
Employer paid taxes- SS, Medicare, Federal and State Unemployment.Slide11
General Ledger Account Classification
Revenue accounts
identify amounts received for goods sold and services rendered
Equity accounts
represents the owner’s investment in the company.Slide12
Chart of Account Structure
Listing of all accounts used by the company
Typically it will have a unique identifier number associated with each account.
Assets
Liabilities
Equity Accounts
Revenue
ExpensesSlide13
Journal Entries
Debit is on the left
Credit is on the right
T- Accounts
T-accounts are helpful in showing you how to balance transactions within the general ledger.
Add up both sides of the entry on the T-Account worksheetSlide14Slide15
Account Balances
Transactions are recorded by entering debits on the left side and credits on the right side of a “T-account”.
Whether a transaction is posted as a debit or credit depends on the type of account. Slide16
GL Categories
Debit
Credit
Assets Balance Sheet
Liabilities Balance Sheet
Expenses Income Statement
Income Income StatementSlide17
General Ledger
Assets – Liabilities = Equity
This formula is the basis for the financial statement called a Balance Sheet which shows the company’s financial position at a particular point in time. Slide18
General Ledger
Revenue – Expenses = Net Income
Net Income–Income Distributed + Contributed Capital = Equity
This is the basis for two financial statements:
Income Statement
Statement of Retained Earnings Slide19
Examples of GL Categories
Assets
Liabilities
Income
Expenses
Cash
EE PR WH
Sales
Salaries
A/R
Loans
Interest
ER PR Taxes
Equipment
A/P
Sale of assets
ER paid Benefits
Inventory
Accrued Salaries
Utilities
Bldg & Land
Commissions Payable
RentSlide20
Pay Check Journal Entry
Salary
Federal W/H Tax
SS Tax
Medicare Tax
State W/H
401(k) W/H
Section 125 WH
Net PayER Tax ExpenseER 401(k) Match
$2,000.00
$ 120.00
$ 124.00
$ 29.00
$ 50.00
$ 200.00
$ 100.00
$ 1,377.00
$ 217.00
$ 100.00Slide21
Payroll Check Journal Entry
Description
Debit
Credit
Effect (+/-)
Salary Expense
$2,000.00
+ Expense
Federal Income Tax Payable
$120.00
+ Liability
Medicare Tax Liability
58.00
+ Liability
SS Tax Payable
248.00
+ Liability
State Income Tax Payable
50.00
+ Liability
401(k) Payable
300.00
+ Liability
Medical Premiums Payable
100.00
+ Liability
Payroll Cash
1,377.00
-Asset
FUTA Tax Payable
16.00
+ Liability
SUI Tax Payable
48.00
+ Liability
ER Tax Expense
217.00
+ Expense
Employer 401(k) Match Expense
100.00
+ Expense
Totals
2,317.00
2,317.00
Slide22
Accrual Method Accounting
Most organizations use the accrual method of accounting which is:
Revenue is recognized when it is earned.
Expenses are recognized when it is incurred.Slide23
What is one example of an accrual?
When the accounting period and the pay ending period do not match at the end of the month, quarter or year, the accounting department needs to make an adjustment for
wages earned but not paid as of the last day of the accounting period
.Slide24
Payroll Accrual
Accrued Payroll Entry
Description
Debit
Credit
Effect
Payroll Expense
$25,000.00
Expense +
Accrued Payroll Payable
$25,000.00
Liability +
Employer Tax Expense
$2,212.00
Expense +
Medicare Tax Liability
$362.50
Liability +
Social Security Tax Liability
$1,550.00
Liability +
FUTA Tax Payable
$200.00
Liability +
SUI Tax Payable
$100.00
Liability +
Totals
$27,212.00
$27,212.50
Slide25
Why are accruals reversed?
Accruals are reversed because the actual wages will be recorded in the following accounting period when paid.
If it wasn’t reversed, the wage expenses and liabilities associated with the payroll would be overstated.Slide26
Reversing Payroll Accruals
Accrued Payroll Entry
Description
Debit
Credit
Effect
Payroll Expense
$25,000.00
Expense +
Accrued Payroll Payable
$25,000.00
Liability +
Employer Tax Expense
$2,212.50
Expense +
Medicare Tax Liability
$362.50
Liability +
Social Security Tax Liability
$1,550.00
Liability +
FUTA Tax Payable
$200.00
Liability +
SUI Tax Payable
$100.00
Liability +
Totals
$27,212.50
$27,212.50
Slide27
Calendar or Fiscal Year
Payroll is processed on a calendar year
Many companies run on a fiscal year
A fiscal year is a period of 12 consecutive months that ends on a day other than December 31
st
.
Example of a fiscal year:
July 1
st
– June 30thSlide28
Financial Statements and Audits
Most organizations publish annual financial statements after they have been audited by independent certified public accountants.
These statements generally include:
Balance Sheet
Income Statement
Statement of cash flows
Notes to financial statements
Report of the independent auditorsSlide29
Financial Statements and Audits
Balance Sheet:
Assets, Liabilities and Net Worth
Income Statement:
Revenues and Expenses
Notes to Financial Statements:
Generally includes notes explaining various elements of the financial statements, how they were constructed and a summary of the company’s accounting policies.
Slide30
Financial Statements and Audits
Other than the auditor’s report, all the financial statements are significantly impacted by the information and records received from the payroll department.Slide31
Financial Statements and Audits
Trial Balance
Typically runs after all journal information for the current accounting period has been completed
Lists the balances in all accounts in general ledger
Review the trial balance to ensure that all debits and credits are equalSlide32
Financial Statements and Audits
Balance Sheet
Will show the companies current Assets, Liabilities and Owner Equity at a specific point in timeSlide33
Financial Statements and Audits
Income Statement
Lists the companies revenues, expenses and profits over a specific period of time
Lists
Net Sales
Cost of Goods Sold
Selling and Administrative expenses
Income from operations
Other income, expenses, income before taxes, income after taxes and net incomeSlide34
Financial Statements and Audits
Equations for Financial Statements
Net Income = Operating profit + Non-operating income – non-operating expenses
Net Income = Net income before taxes – Taxes
Net Income = Revenue – Expenses
Equity = Net Income – Income Distributed + Contributed Capital
Net Income is referred to as the “Bottom Line”Slide35
Payroll Bank Account Reconciliation
Internal and external auditors will advise employers that employees who issue or control checks on a account should not be responsible for the reconciliation of that account.
An employee outside the payroll department should be responsible for the payroll bank account reconciliation
. Slide36
Steps to Reconcile the Payroll Checking Account
Step 1
Add deposits, interest, or miscellaneous items that
appear on the bank statement but not in the ledger.
Step 2
Check off in the ledger each check withdrawal, EFT Transactions or deposit that is listed on the bank statement.
Step 3
Total all outstanding checks.
Step 4
Subtract the outstanding checks (step 3) from the closing balance on the bank statement.
Step 5
Compare the general ledger balance for the period with that of the bank.
If the amount in step 5 does not agree with the ledger, repeat steps 1 through 5 Slide37
What is SOX?
Sarbanes-Oxley Act (SOX) was enacted in 2002 in response to corporate finance scandals
SOX requires public companies to have a plan for identifying, documenting and evaluating their internal controls over financial reporting
SOX provides a logical way to analyze a company’s control system
SOX prohibits a public accounting firm from providing both external auditing and non-auditing services to the same clientSlide38
What is Payroll’s role in SOX compliance?
Develop process and workflow maps
Create & update written documentation for each step in the payroll process
Audit recordkeeping & retention procedures
Identify gaps and risks & report to management
Prepare an action to correct the gaps & risks
Develop a way to measure progress
Document & design testing of internal controlsSlide39
What is SSAE 16?
The new service organization reporting standard, Statement on Standards for Attestation Engagements (SSAE) No. 16, is now effective as of June 15, 2011. SSAE 16 supersedes Statement on Auditing Standards (SAS) No. 70 with the professional guidance on performing the service auditor's examinationSlide40
Two Types of SSAE 16 Reports
Type I – independent auditor expresses an opinion on whether the service provider’s description of its control procedures presents fairly the control objectives.
Type II – the auditor expresses an opinion on the same items in a Type I report
and
whether the controls tested were operating effectively enough to provide reasonable assurance that the control objectives were met during at least a 6 month period.
Type II is preferredSlide41
List important internal controls necessary in a payroll department.
Segregation of job duties
Rotation of job duties
Payroll distribution
Phantom employees
Negative pay deductions
Reconciliation of payroll bank account
Blank checks
Time reporting
Computer system edits
Internal auditSlide42
Check Fraud
3 types of security features
Security features are manufactured into the paper
Security features are printed onto the paper
Positive Pay – Bank sponsored electronic data checking
Examples:
Watermarks Warning bands
Fibers Prismatic printing
Toner Bond Holograms
Security lock icons Special ink
Positive Pay Chemical reactantsSlide43
Accounting The following charts and slides are taken from our previous Chapter Study Groups that you may find to be very helpful during your reviewsSlide44
Debits
Normally a Debit
Increase
Decrease
Cash
Debit
Credit
EE Receivables
Debit
Credit
Salaries/Wages
(Gross amount)
Debit
Credit
Employer paid taxes (SS/Med/SUI/ FUTA)
Debit
Credit
Employer paid benefits (WC, Health, AD&D, LTD, 401K match, etc)
Debit
CreditSlide45
Normally a Credit
Increase
Decrease
EE taxes withheld
Credit
Debit
EE portion of benefits withheld
Credit
Debit
401K withheld
Credit
Debit
Garnishments/ Child Support Withheld
Credit
Debit
ER taxes (SS, Med, Sui, Futa)
Credit
Debit
EE taxes withheld
Credit
Debit
CreditsSlide46
Helpful Hint – Normal Balances
Debit
Credit
A
ssets
L
iability
D
istributions
O
wner’s Equity
E
xpenses
R
evenueSlide47
Helpful Acronym
All Little Cats
Assets
Liabilities =
Balance Sheet
Capital
Reach Exhaustion
Revenue =
Income Statement
ExpenseSlide48
CPP Exam
Good Luck on the Spring Exam
Study, Study, then Study some More
Remain Positive no matter what the results. Most people in the payroll profession never attempt to pass the exam.Slide49
Contact Info
Kathy
Fearrington
, CPP
Krispy Kreme Doughnut Corporation
336-726-8913
or
Maurnita Jones, CPP
Lincoln Financial Group 336-691-3769