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How complex is payroll accounting.

How Complex Is Payroll Accounting

On the surface, payroll accounting appears to be a very straightforward and easy subject. Wages and salaries are paid out of the cash account on a regular basis. Payroll taxes are withheld and deposited in a timely manner. Just debit payroll expense and payroll tax expense, then credit cash and the job is done. But an in-depth look shows many complexities and several areas which must be considered.

Let's divide our discussion into three major areas and first look at regular payroll and the related taxes and withholdings. In many businesses, usually on a Friday. These expenses are paid on a weekly basis, usually on a Friday. These expenses are generally recorded only when paid. However, at the end of an accounting period, in order to more accurately match revenues and expenses, a liability for unpaid wages is recorded. The entire accrued amount can be recorded as wages payable with no attempt made to identify any related withholdings, or a separate liability for wages and for each of the related payables can be recorded. The reversing entry in the first case becomes somewhat more complex because gross wages accrued must then be allocated to all the proper accounts, such as payroll taxes withheld, insurance and union dues.

We have now accrued any unpaid wages and the related withholding. So our second area of discussion will cover employer expense related to payroll. The most apparent expense is the employer payroll taxes, including the employer share of FICA, and federal and state unemployment taxes. These amounts are usually accrued at the time wages are paid. And so at the end of an accounting period, when unpaid wages are accrued, any related employer payroll tax expense must also be accrued.

All the accruals mentioned so far are standard in any business. But other payroll related expense will vary from company to company. And so, the accountant finds that he must review the firm's employee policy to verify that these expenses have been handled properly. He must determine what portion, if any, of employee handled properly. He must determine what portion, if any, of employee medical coverage is paid by the employer, whether life insurance is provided, and whether any other employee expense such as organization dues is covered by the employer. The accountant also needs to know if differences on coverage exist which are based on length of service or salary scale. And, of course, the date on which the last payment was made to the appropriate agency will play a role in determining the materiality of the accrual. If for instance, a payment was made to Blue Cross for health insurance two days prior to the end of the accounting period, the amount remaining to be accrued for those last two days may not be material enough to consider.

Third and last, we come to an area usually referred to as "Compensated Absences," vacations, sick leave and paid holidays. Again, a liability should be recognized when it is expected that employees will be paid for these absences. And the matching principle further indicates that these costs should be matched with the revenues from the same period. FASB Statement No. 43 states that an employer should accrue a liability for compensation of future absences if all of the following conditions are met:

1. The employee's right to receive

compensation for future absences

is attributable to employee services

already rendered.

2. The right vests or accumulates.

3. Payment of the compensation is


4. The amount of the payment can

be reasonably estimated.

So we see that here again the accountant must have some knowledge of the company's personnel policy. Are sick days and/or vacation days vested, that is, do they continue to accumulate until the employee terminates at which time payment is made? Is there a limitation to the number of days vested, which would then limit the amount required to be accrued? If the rights do not vest until termination, is there an accrual from one year to the next? Are unused vacation and/or sick days paid at the end of the year if they are not used? All these questions must be answered in order to make a correct accrual. FASB Statement No. 43 makes an exception when sick days are accumulated but not paid unless used. No accrual is required in this case, but one may be made. Whether or not these days will be used is guesswork and the difficulty of trying to make a reasonable estimate indicates that an accrual is not necessary.

There is one additional area of employee expense that must be considered for accrual and that is pensions and profit sharing. But that subject is complex and is made up of many facets, so we can save it for another column.

As you can see, payroll accounting can be somewhat more complex than believed at first glance. And just to add a little challenge, I'd like to introduce a new feature for this column, a monthly problem. See how well you do on this month's quizzer. The answer will appear in next month's column.
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Author:Schwartz, Marlyn A.
Publication:The National Public Accountant
Article Type:column
Date:Apr 1, 1990
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