[AJE]

I’m in my first year of auditing and am doing payroll control testing. Im trying to understand stuff I’m looking at.

1st basic question (made up):

Pay for the month for employees = 1,000,000 (June 1 to June 30)

People get paid on July 2nd (salaried), or July 8th (hourly)

Only close books in December

June 30th

Dr:Payroll expense 1,000,000

Cr: Employer obligations (e.g, taxes, deductions) 450,000

Cr: Cash 550,000

Does this make sense? What is a payroll recon?

Thanks!

FAR 91 - 04/16
BEC 87 - 05/15
REG 77 - 07/27
AUD 92 - 08/31

[Anonymous]

If they're paid July 2nd and 8th, then crediting cash on June 30th doesn't make sense. The June 30th entry should be crediting accrued wages.

HOWEVER…

If the books are only closed in December, then it could be that they simplify the entries through the year. So, prior year, Dec 31 entry was something like:

DR: Payroll expense (Dec amount)
CR: Accrued employer obligations (Dec amount)
CR: Accrued wages (Dec amount)

Then, rather than in January paying wages as:

DR: Accrued wages (Dec amount)
CR: Cash (Dec amount)

so that Accrued wages zeroed out, maybe instead they just left the balance in accrued wages alone and paid January 2nd and 8th wages as:

DR: Payroll expense (Dec net amount + Jan employer obligations)
CR: Accrued employer obligations (Jan employer obligations)
CR: Cash (Dec amount)

This would have a net effect very similar to the effect of reversing the accrual and re-accruing, presuming the hours worked are fairly similar. Since the accrual is left on the books at the December amount, there's still an accrual, so for management purposes the balance sheet is relatively accurate. The expense, for management purposes is also fairly accurate; December net is charged to January instead of January net, but it should still be fairly close.

Then at December 31 of the next year, they can do the actual reversal and correction entries to get the right ending balance.

In practicality, especially for companies without an accounting department or a small one, it's common to only do all the accruals for wages and such at year-end. Theoretically they should be done every month, but practically speaking, it can be more feasible to do them at year-end and just use the “close enough” for management purposes throughout the year. If it's a public company issuing quarterly statements to the SEC, then it's got to be right all along, but if it's a small private company that only issues one set of official financials after year-end, then the once-a-year treatment is probably fine.

[livealittle]

somehow I posted before I was finished 🙂

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[livealittle]

I really hate how simplified and goofy payroll entries look in the review material… Please see below for a simplified example that has everything broken down the way it really works.

1 – the company pays the employees – gross wages is the Dr to Wages Expense
2 – the company incurs matching payroll tax expenses – SS and Medicare – Dr to PRTE
3 – the company incurs the unemployment taxes which are only a company expense and do not have matching employee (EE) portions (in AL, where I live and work and which this example is based on) Dr to PRTE
4 – the company withholds the employee's portions of federal and state income taxes along with the SS and Med and any other deductions due to insurance companies, Child Support, garnishment, 401K, etc.
5 – the company records the liability due for the PRTE incurred by the company in 2 and 3 above
6 – the company records the net checks against cash

DR. Wages Expense – 100,000
DR PR Tax Expense (PRTE) SS 6,200
DR PRTE Med 1,450
DR PRTE FUTA 450
DR PRTE SUTA 2,160
CR. PR Tax due FWH 8,000
CR PR Tax due SWH 2,000
CR PR Tax due Med/SS EE side 7,650
CR PR ins/other deductions due 400
CR PR Tax Liabilities due Employer 10,230
CR Cash (Net Checks) 81,950

total Dr – 110,230
total Cr – 110,230

FWH – Federal Withholding
SWH – State Withholding
FUTA – Federal Unemployment Tax Assessment
SUTA – State Unemployment Tax Assessment

rate for FUTA is .06% on the first $7000 of wages paid per employee per calendar year per employer or $42 per employee
rate for SUTA is 2.7% on the first $8000 of wages paid per employee per calendar year per employer – the rate for new businesses in AL or $216 per person

PRTE SS – 6.2% on the first $118,000 of wages paid per employee per calendar year (all employers)
PRTE Med – 1.45% on all wages paid per employee per calendar year (all employers) the additional employee Medicare tax of .09% is on wages over $200,000 paid to an employee in a calendar year. The rules are a bit more complex than this, but because the employers can't possibly know every employee's situation, the IRS lets employers withhold this tax on all wages paid to employees over $200,000. It is the employee's responsibility to properly report all income.

my example is 10 employees making $10,000 each as the first payroll run of the calendar year.

Yes, I process payroll All. The. Time. at my job. Yes, I set up QB Payroll Accounts All. The. Time. yes, I process about 30 payrolls per week and 50-70 payroll quarterlies each quarter. If I don't process it myself, then I review them.

later, the company will pay the payroll liabilities to the respective agencies/companies.

DR. PR Liability
CR. Cash

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Anonymous]

AJE,

I'm inclined to think that this JE is not the complete payroll expense but only a summary of transactions for the payroll *account*. Then the cash payment would make sense. But the proper way to record payroll was explained by the other posters.

[AJE]

I love this forum. Thanks (especially livealittle). I went from zero understanding to clarity basically with that example. Now, when I go talk to the client at least I will inherently understand what the process is (even if their particular entry is still confusing to me because of how long/complex it is).

Follow up question – that wage expense in #1 can be broken down into many many lines right? For example, if they have many different GL accounts for salaries (e.g, regular staff salaries, temporary help wages, student employee wages, etc)?

FAR 91 - 04/16
BEC 87 - 05/15
REG 77 - 07/27
AUD 92 - 08/31

[FIFOisbetterthanLIFO]

Yes, you got it AJE. It can be broken out into a 100 different GL expense accounts if they wanted it to.

FAR - Passed (82)
BEC - Passed (76)
AUD - Passed (89)
REG - Passed! (81)
AICPA Ethics

Licensed CPA

[livealittle]

yes, AJE it can. If you are using Job Costing, depending on what payroll sofware you are using, the #1 could be

Direct Labor – $1000 – Job A2
Direct Labor – $2500 – Job A14

etc.

In my experience, Wages are often put into several big buckets with smaller buckets used for Job Costing.

Direct Labor – COGS account
Office Wages and Salaries – Indirect or OH expense accounts
Officer's Salaries – Indirect, but often in a separate GL account

etc etc etc

I'm so glad my simplistic example helped you.

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Author]

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