Showing Page:
1/8
1 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
Payroll Accounting
In accounting, the term payroll refers to the amount paid to employees for the services they provide
during a period.
The payroll and related payroll taxes have a significant effect on the net income of most businesses.
Although the amount of such expenses varies widely, it is not unusual for a business’s payroll and payroll
related expenses to equal nearly one-third of its revenue.
Gross and net earnings
Gross pay: the total amount earned by the employee (Basic pay plus allowances)
Net pay: the amount paid to the employee after the employer makes deductions for income tax
and other statutory deductions.
Total labour cost to employer: employees’ gross pay plus any additional payroll taxes and
pension contributions that the employer has to bear.
Liability for Employee Earnings
Salaries and wages paid to employees are an employer’s labor expenses.
The term salary usually refers to payment for managerial, administrative, or similar services.
The rate of salary is normally expressed in terms of a month or a year.
The term wages usually refers to payment for manual labor, both skilled and unskilled.
The rate of wages is normally stated on an hourly or weekly basis.
In practice, the terms salary and wages are often used interchangeably.
The basic salary or wage of an employee may be increased by commissions, profit sharing, or
cost-of-living adjustments.
Many businesses pay managers an annual bonus in addition to a basic salary. The amount of the
bonus is often based on some measure of productivity, such as income or profit of the business.
Although payment is usually made by cheque or in cash, it may be in the form of securities,
notes, or other property or services. Generally, the form of payment has no effect on how
salaries and wages are treated by either the employer or the employee.
Deductions from Employee Earnings.
The total earnings of an employee for a payroll period, including bonuses and overtime pay, are called
gross pay. From this amount is subtracted one or more deductions to arrive at the net pay.
Net pay is the amount the employer must pay the employee. The deductions for income taxes are
usually the largest deduction. Other deductions may be made for medical insurance (NHIF, contributions
to pensions (NSSF, and for items authorized by individual employees.
Withholding tax/tax at source
The income tax act requires that withholding tax or tax at source be deducted at source when payment
is made in respect of interest, dividend, insurance commission, employment income and pension.
The importance of deducting withholding tax at source is that it makes tax collection easy. It also
ensures that incomes do not escape taxation.
Showing Page:
2/8
2 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
The withholding tax should therefore be viewed as tax paid in advance.
The person(s) making payments of incomes subject to withholding tax is legally required to deduct
the withholding tax at appropriate rates before effecting payments. He should then;
Remit the tax to the KRA.
Pay the payee the amount Net of tax.
Issue the payee with a certificate of withholding tax at source.
The employment income is taxed at source on a monthly basis under the PAYE system. This applies to
salaries, wages, directors fees & benefits, etc.
Every employer is legally required to operate the PAYE system.
The main features of this system are;
1. The employers deduct PAYE tax monthly on all employment incomes they pay to their
employees.
2. A PAYE deduction card (Form P9) is maintained for each employee showing monthly gross pay,
benefits, allowed deductions, PAYE deducted, personal reliefs and net pay.
3. The details of the above must be given to every employee by the employer every month. This is
called the payslip (pay advice).
4. The employer is required to issue a certificate of PAYE (Form 39) at the end of each year or
when the employee leaves employment.
Other Deductions
Neither the employer nor the employee has any choice in deducting taxes from gross earnings. However,
employees may choose to have additional amounts deducted for other purposes. For example, you as an
employee may authorize deductions for retirement savings, for contributions to charitable organizations,
or for premiums on employee insurance. A union contract may also require the deduction of union dues.
Although payroll systems differ among businesses, the major elements common to most payroll systems
are the payroll register, employee’s earnings record, and payroll cheques. We discuss and illustrate each
of these elements next. We have kept the illustrations relatively simple, and they may be modified in
practice to meet the needs of each individual business.
National Hospital Insurance Fund (NHIF)
Effective 1st April 2015, individuals contribute NHIF on a graduated scale rate. NHIF is payable by the 1st
day of the month following the month of deduction. However, in practice, the fund accepts payments
made by 9th of the following month without penalties.
Late payment of any contribution attracts a penalty equal to two times of the unpaid contribution.
National Social Security Fund (NSSF)
Employees are required to contribute 5% of their salary to a maximum of KES 200 per month. The
employer is required to contribute an equivalent amount for each employee. For casual employees, the
employer pays 5% of gross wages as a special contribution. The special contributions are treated as
Showing Page:
3/8
3 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
surplus available to augment registered individual accounts. NSSF is payable by the 15th of the month
following the month of deduction.
Payroll Register
The payroll register is a multicolumn report used for summarizing the data for each payroll period.
Its design varies according to the number and classes of employees.
The nature of the data appearing in the payroll register is evident from the column headings. The
number of hours worked and the earnings and deduction data are inserted in their proper columns.
The sum of the deductions for each employee is then subtracted from the total earnings to yield
the amount to be paid. The cheque numbers are recorded in the payroll register as evidence of
payment. The last two columns of the payroll register are used to accumulate the total wages or
salaries to be debited to the various expense accounts. This process is usually called payroll
distribution.
Wages are paid mostly to workers on hourly basis. The hours worked are recorded on clock
cards issued to them. These clock cards contain information regarding name, clock number,
hours worked on different dates of the month and so on.
From these cards, the number of hours worked showing normal time and overtime are
transferred to the payroll.
Payroll/ wage sheet is a list of all employees showing details of their gross wages,
deductions and net wages due to them.
The gross pay of laborers is calculated on the basis of the following documents
i. Clock cards they give number of hours worked by each employee.
ii. Piece tickets provide information regarding number of items produced by
each worker. They are used for workers who are paid according to work
completed.
iii. Employee’s personal cards provide information regarding the wage rates
Payroll contain different columns which are used to record some specific figures and one
line is used for one worker.
Names of workers are arranged alphabetically or according to the serial numbers of their
clock cards. A separate wage sheet is prepared for each month.
Procedure of preparing the payroll
i. Number of hours worked are multiplied by wage rate per hour. Overtime
worked is multiplied by wage rate applicable to the overtime hours worked. In
this way, gross wage of each employee is recorded into the gross wages
column.
Showing Page:
4/8
4 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
ii. The income tax payable by each employee is calculated under the system of
P.A.Y.E. This tax amount is entered into P.A.Y.E. column of the payroll.
iii. The contributions of each employee regarding N.S.S.F and N.H.I.F are shown
into respective columns. These two are compulsory deductions and these
amounts are paid by the employer on behalf of employee to the respective
departments.
iv. Total deductions for each employee are shown in a separate column.
v. The total deductions are subtracted from gross wages to get net wages which
are entered into a separate column.
vi. Any advance taken by employees or loan repayments are subtracted to find out
the wages payable.
Payroll format
S.N
O
NAM
E
Total
hours
worked
Rat
e
Gros
s
wage
Deductions
Advance
or loan
repayme
nt
Balance
due
P.A.Y.E
NSSF
NHIF
Tota
l
Showing Page:
5/8
5 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
Illustration
From the following information, prepare a payroll for the month of May 2018.
Clock
No.
Name
No. Of
hours
worked
Rate of pay
Advance paid
5012
A. Robert
180
shs 10 per hour
500
5016
S. Mwangi
200
shs 14 per hour
700
5011
J. Alex
190
shs 12 per hour
600
5015
R. Josphet
210
shs 10 per hour
800
5013
P. Wachira
200
shs 16 per hour
800
5014
G. Paul
170
shs 13 per hour
500
Additional information
1. Normal working hours per month are 180. Overtime payable for extra hours at the
rate of 50% above normal pay rate.
5011: Normal wage = 180 x 12 = 2,160
Overtime : 10 x 18 = 180
Total wage / Gross wage = 2160 + 180 = 2340
2. PAYE to be deducted at the rate of 10% of gross wage.
3. NSSF to be deducted shs 80 for each employee.
4. NHIF to be deducted shs 20 for each employee.
Suggested Solution
PAYROLL May 2018
s.no
Name
Total
hours
worked
Rat
e
Gross
wage
Deductions
Net
wage
Advance
Balance
Due
sh
shs
PAYE
NSS
F
NHIF
Total
deductions
shs
shs
shs
5011
J. Alex
190
12
2,340
234
80
20
334
2,006
600
1,406
5012
A. Robert
180
10
1,800
180
80
20
280
1,520
500
1,020
5013
P. Wachira
200
16
3,360
336
80
20
436
2,924
800
2,124
Showing Page:
6/8
6 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
5014
G. Paul
170
13
2,210
221
80
20
321
1,889
500
1,389
5015
R. Josphet
210
10
2,250
225
80
20
325
1,925
800
1,125
5016
S. Mwangi
200
14
2,940
294
80
20
394
2,546
700
1,846
Total
14,900
1,490
480
120
2,090
12,810
3,900
8,910
Accounting for labour costs
Step 1:
Dr Wages account with the gross wages
Cr Wages Control account with the gross wages
Step 2:
Dr Wages account with the additional employer’s costs
Cr Wages Control account with the additional employers costs
Step 3 (the payment of net wages to the employee):
Dr Wages Control account with the net wages
Cr Cash with the net wages
Step 4 (the payment of deductions to the state):
Dr Wages Control account with employee deductions
Cr Cash account with employee deductions
Step 5 (payment of other amounts to the state):
Dr Wages Control account with the other amounts due
Cr Cash account with the other amounts due
Illustration
a) The following transactions relate to the payroll data for the period given.
i. On 30 June, the gross wages are calculated as shs. 145,000; deductions for
employees’ taxes are Shs. 37,000; deductions for employees pensions are
18,000
Showing Page:
7/8
7 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
ii. On 30 June, the employer’s payroll tax is calculated as sh.39,000 and the
employer’s pension contributions as shs 15,000
iii. On 1 July, the employees are paid the amounts due.
iv. On 15 July, the tax authorities are paid the amounts due.
v. On 20 July, the pensions fund is paid the amounts due
Required: Wages Control account and the Wages account for the above.
Wages control a/c
1 July cash (paid to
employee){145000 -
37000 - 18000}
90,000
30 June Wages a/c {gross wages)
145,000
15 July cash (paid to tax
authorities){37000 +
39000}
76,000
30 June Wages a/c {employer
payroll tax)
39,000
20 July cash (paid to
pension fund){18000 +
15000}
33,000
30 June Wages a/c {employer
pension contribution)
15,000
199,000
199,000
Wages a/c
30 June Wages control a/c
{gross wages)
145,000
30 June Wages control a/c
{employer payroll tax)
39,000
30 June Wages a/c
{employer pension
contribution)
15,000
30 June bal c/d
199,000
199,000
199,000
Showing Page:
8/8
8 | P a g e
LECTURE NOTES BY FA CPA JARED OGANDA
WAGES CONTROL
The purpose of wage control is to ensure payment of wages in such a way that both
employer and employee benefited.
Sometimes wage payments are shown on the payroll to non-existent employees. These
wages are called dummy wages or “ghost” workers’ wages.
The supervisors embezzle funds through dummy wages.
When wages are paid according to hours worked, some employees may try to show more
hours in order to get extra wages. Precautionary measures are required to ensure that
wages are paid correctly.
In order to prevent wages frauds, the following steps should be taken.
1. The names of workers employed should be checked with the names of workers to
whom wages are paid.
2. Personnel records should be checked from time to time.
3. Time records and piece records must be maintained accurately.
4. The various stages of wages preparation should be assigned to different
employees.
5. The wage sheets should be signed by all persons responsible in preparation of
wages.
6. Total wages should be compared with original estimates of costing department.
7. Receipts of wages should be duly signed by the workers.
8. The amount drawn from the bank should tally with the actual amount required.
9. Any unpaid wages should be deposited in the bank immediately.

Unformatted Attachment Preview

LECTURE NOTES BY FA CPA JARED OGANDA Payroll Accounting In accounting, the term payroll refers to the amount paid to employees for the services they provide during a period. The payroll and related payroll taxes have a significant effect on the net income of most businesses. Although the amount of such expenses varies widely, it is not unusual for a business’s payroll and payroll related expenses to equal nearly one-third of its revenue. Gross and net earnings ➢ Gross pay: the total amount earned by the employee (Basic pay plus allowances) ➢ Net pay: the amount paid to the employee after the employer makes deductions for income tax and other statutory deductions. ➢ Total labour cost to employer: employees’ gross pay plus any additional payroll taxes and pension contributions that the employer has to bear. Liability for Employee Earnings ➢ ➢ ➢ ➢ ➢ ➢ ➢ Salaries and wages paid to employees are an employer’s labor expenses. The term salary usually refers to payment for managerial, administrative, or similar services. The rate of salary is normally expressed in terms of a month or a year. The term wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis. In practice, the terms salary and wages are often used interchangeably. The basic salary or wage of an employee may be increased by commissions, profit sharing, or cost-of-living adjustments. ➢ Many businesses pay managers an annual bonus in addition to a basic salary. The amount of the bonus is often based on some measure of productivity, such as income or profit of the business. Although payment is usually made by cheque or in cash, it may be in the form of securities, notes, or other property or services. Generally, the form of payment has no effect on how salaries and wages are treated by either the employer or the employee. Deductions from Employee Earnings. The total earnings of an employee for a payroll period, including bonuses and overtime pay, are called gross pay. From this amount is subtracted one or more deductions to arrive at the net pay. Net pay is the amount the employer must pay the employee. The deductions for income taxes are usually the largest deduction. Other deductions may be made for medical insurance (NHIF, contributions to pensions (NSSF, and for items authorized by individual employees. Withholding tax/tax at source The income tax act requires that withholding tax or tax at source be deducted at source when payment is made in respect of interest, dividend, insurance commission, employment income and pension. The importance of deducting withholding tax at source is that it makes tax collection easy. It also ensures that incomes do not escape taxation. 1|Page LECTURE NOTES BY FA CPA JARED OGANDA The withholding tax should therefore be viewed as tax paid in advance. The person(s) making payments of incomes subject to withholding tax is legally required to deduct the withholding tax at appropriate rates before effecting payments. He should then; • Remit the tax to the KRA. • Pay the payee the amount Net of tax. • Issue the payee with a certificate of withholding tax at source. The employment income is taxed at source on a monthly basis under the PAYE system. This applies to salaries, wages, directors fees & benefits, etc. Every employer is legally required to operate the PAYE system. The main features of this system are; 1. The employers deduct PAYE tax monthly on all employment incomes they pay to their employees. 2. A PAYE deduction card (Form P9) is maintained for each employee showing monthly gross pay, benefits, allowed deductions, PAYE deducted, personal reliefs and net pay. 3. The details of the above must be given to every employee by the employer every month. This is called the payslip (pay advice). 4. The employer is required to issue a certificate of PAYE (Form 39) at the end of each year or when the employee leaves employment. Other Deductions Neither the employer nor the employee has any choice in deducting taxes from gross earnings. However, employees may choose to have additional amounts deducted for other purposes. For example, you as an employee may authorize deductions for retirement savings, for contributions to charitable organizations, or for premiums on employee insurance. A union contract may also require the deduction of union dues. Although payroll systems differ among businesses, the major elements common to most payroll systems are the payroll register, employee’s earnings record, and payroll cheques. We discuss and illustrate each of these elements next. We have kept the illustrations relatively simple, and they may be modified in practice to meet the needs of each individual business. National Hospital Insurance Fund (NHIF) Effective 1st April 2015, individuals contribute NHIF on a graduated scale rate. NHIF is payable by the 1st day of the month following the month of deduction. However, in practice, the fund accepts payments made by 9th of the following month without penalties. Late payment of any contribution attracts a penalty equal to two times of the unpaid contribution. National Social Security Fund (NSSF) Employees are required to contribute 5% of their salary to a maximum of KES 200 per month. The employer is required to contribute an equivalent amount for each employee. For casual employees, the employer pays 5% of gross wages as a special contribution. The special contributions are treated as 2|Page LECTURE NOTES BY FA CPA JARED OGANDA surplus available to augment registered individual accounts. NSSF is payable by the 15th of the month following the month of deduction. Payroll Register The payroll register is a multicolumn report used for summarizing the data for each payroll period. Its design varies according to the number and classes of employees. The nature of the data appearing in the payroll register is evident from the column headings. The number of hours worked and the earnings and deduction data are inserted in their proper columns. The sum of the deductions for each employee is then subtracted from the total earnings to yield the amount to be paid. The cheque numbers are recorded in the payroll register as evidence of payment. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to the various expense accounts. This process is usually called payroll distribution. Wages are paid mostly to workers on hourly basis. The hours worked are recorded on clock cards issued to them. These clock cards contain information regarding name, clock number, hours worked on different dates of the month and so on. From these cards, the number of hours worked showing normal time and overtime are transferred to the payroll. Payroll/ wage sheet is a list of all employees showing details of their gross wages, deductions and net wages due to them. The gross pay of laborers is calculated on the basis of the following documents i. ii. iii. Clock cards – they give number of hours worked by each employee. Piece tickets – provide information regarding number of items produced by each worker. They are used for workers who are paid according to work completed. Employee’s personal cards – provide information regarding the wage rates Payroll contain different columns which are used to record some specific figures and one line is used for one worker. Names of workers are arranged alphabetically or according to the serial numbers of their clock cards. A separate wage sheet is prepared for each month. Procedure of preparing the payroll i. 3|Page Number of hours worked are multiplied by wage rate per hour. Overtime worked is multiplied by wage rate applicable to the overtime hours worked. In this way, gross wage of each employee is recorded into the gross wages column. LECTURE NOTES BY FA CPA JARED OGANDA ii. The income tax payable by each employee is calculated under the system of P.A.Y.E. This tax amount is entered into P.A.Y.E. column of the payroll. The contributions of each employee regarding N.S.S.F and N.H.I.F are shown into respective columns. These two are compulsory deductions and these amounts are paid by the employer on behalf of employee to the respective departments. Total deductions for each employee are shown in a separate column. The total deductions are subtracted from gross wages to get net wages which are entered into a separate column. Any advance taken by employees or loan repayments are subtracted to find out the wages payable. iii. iv. v. vi. Payroll format S.N O NAM E Total hours worked Rat e Gros s wage Deductions P.A.Y.E 4|Page Net wage NSSF NHIF Tota l Advance or loan repayme nt Balance due LECTURE NOTES BY FA CPA JARED OGANDA Illustration From the following information, prepare a payroll for the month of May 2018. Clock No. 5012 5016 5011 5015 5013 5014 No. Of hours worked 180 200 190 210 200 170 Name A. Robert S. Mwangi J. Alex R. Josphet P. Wachira G. Paul Rate of pay shs 10 per hour shs 14 per hour shs 12 per hour shs 10 per hour shs 16 per hour shs 13 per hour Advance paid 500 700 600 800 800 500 Additional information 1. Normal working hours per month are 180. Overtime payable for extra hours at the rate of 50% above normal pay rate. 5011: Normal wage = 180 x 12 = 2,160 Overtime : 10 x 18 = 180 Total wage / Gross wage = 2160 + 180 = 2340 2. PAYE to be deducted at the rate of 10% of gross wage. 3. NSSF to be deducted shs 80 for each employee. 4. NHIF to be deducted shs 20 for each employee. Suggested Solution PAYROLL – May 2018 s.no 5011 5012 5013 Name Total hours worked Rat e Gross wage Deductions sh shs PAYE NSS F Net wage Balance Advance Due NHIF Total deductions shs shs shs J. Alex 190 12 2,340 234 80 20 334 2,006 600 1,406 A. Robert 180 10 1,800 180 80 20 280 1,520 500 1,020 P. Wachira 200 16 3,360 336 80 20 436 2,924 800 2,124 5|Page LECTURE NOTES BY FA CPA JARED OGANDA 5014 5015 5016 G. Paul 170 13 2,210 221 80 20 321 1,889 500 1,389 R. Josphet 210 10 2,250 225 80 20 325 1,925 800 1,125 S. Mwangi 200 14 2,940 294 80 20 394 2,546 700 1,846 14,900 1,490 480 120 2,090 12,810 3,900 Total Accounting for labour costs Step 1: Dr Wages account with the gross wages Cr Wages Control account with the gross wages Step 2: Dr Wages account with the additional employer’s costs Cr Wages Control account with the additional employers costs Step 3 (the payment of net wages to the employee): Dr Wages Control account with the net wages Cr Cash with the net wages Step 4 (the payment of deductions to the state): Dr Wages Control account with employee deductions Cr Cash account with employee deductions Step 5 (payment of other amounts to the state): Dr Wages Control account with the other amounts due Cr Cash account with the other amounts due Illustration a) The following transactions relate to the payroll data for the period given. i. On 30 June, the gross wages are calculated as shs. 145,000; deductions for employees’ taxes are Shs. 37,000; deductions for employees pensions are 18,000 6|Page 8,910 LECTURE NOTES BY FA CPA JARED OGANDA ii. On 30 June, the employer’s payroll tax is calculated as sh.39,000 and the employer’s pension contributions as shs 15,000 iii. On 1 July, the employees are paid the amounts due. iv. On 15 July, the tax authorities are paid the amounts due. v. On 20 July, the pensions fund is paid the amounts due Required: Wages Control account and the Wages account for the above. Wages control a/c 1 July cash (paid to employee){145000 37000 - 18000} 90,000 30 June Wages a/c {gross wages) 145,000 15 July cash (paid to tax authorities){37000 + 39000} 76,000 30 June Wages a/c {employer payroll tax) 39,000 33,000 30 June Wages a/c {employer pension contribution) 15,000 20 July cash (paid to pension fund){18000 + 15000} 199,000 199,000 Wages a/c 30 June Wages control a/c {gross wages) 145,000 30 June Wages control a/c {employer payroll tax) 39,000 30 June Wages a/c {employer pension contribution) 15,000 199,000 7|Page 30 June bal c/d 199,000 199,000 LECTURE NOTES BY FA CPA JARED OGANDA WAGES CONTROL The purpose of wage control is to ensure payment of wages in such a way that both employer and employee benefited. Sometimes wage payments are shown on the payroll to non-existent employees. These wages are called dummy wages or “ghost” workers’ wages. The supervisors embezzle funds through dummy wages. When wages are paid according to hours worked, some employees may try to show more hours in order to get extra wages. Precautionary measures are required to ensure that wages are paid correctly. In order to prevent wages frauds, the following steps should be taken. 1. The names of workers employed should be checked with the names of workers to whom wages are paid. 2. Personnel records should be checked from time to time. 3. Time records and piece records must be maintained accurately. 4. The various stages of wages preparation should be assigned to different employees. 5. The wage sheets should be signed by all persons responsible in preparation of wages. 6. Total wages should be compared with original estimates of costing department. 7. Receipts of wages should be duly signed by the workers. 8. The amount drawn from the bank should tally with the actual amount required. 9. Any unpaid wages should be deposited in the bank immediately. 8|Page Name: Description: ...
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.
Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4