CHAPTER 18

Recording payroll
Contents
 The nature of payroll
 Gross pay and basic pay
 Overtime, bonus payments and
commissions
 Payroll administration and
documentation
 Payroll deductions
 Payment methods
 Updating records
Payroll
 A payroll is a list of employees and what
they are to be paid.
 Being on the payroll of an organisation
means that you are selling your labour to
it for an agreed price.
Employer's legal
responsibilities to collect
Employer's duties
(a) Operate the income tax system for all
covered by it.
(b) Maintain the necessary records.
(c) Pay the income tax and benefit
contribution collected from employees to
the tax authorities every month (in most
cases).
(d) Let the tax office inspect the records.
(e) Submit end of year returns.
(f) Give employees payslips
(g) Maintain for three years, at the minimum,
Question
All an employee's income is assessed to
tax through the system operated by
employers?

False. The employer only deals with

income arising from the employment. If
the employee, say, received interest on
a deposit account, this would not be
taxed directly, through his or her
employer's payroll system, although it
might be reflected in the tax code.
Question
It is the employee's duty to ensure that
the correct deductions are made from
his or her income and that the correct
records are kept?

False. Although the employee owes the

tax, it is the employer's legal duty to
ensure the correct working of the tax
deduction system.
Any underpaid tax under a payroll
scheme is collected from the employer,
The main requirements of a
payroll processing system
 Accuracy
 People get paid what they are owed
 The government receives what it is legally
entitled to
 The employer's cost information is
appropriate
 Timeliness
 The employees do not being short of cash
 Employee morale does not suffer
 The government's requirements
Gross pay and basic pay
 Gross pay is what an employee earns.,
not what the employee actually receives
in cash
 Basic pay is the rate for the job, and is
what you expect to receive for a normal
period's work, irrespective of overtime
and so forth.
Basic pay: Fixed rate per
period
Your contract of employment states that
you are to receive an annual salary of
$9,000. You join on 1 January 20X2. You
are told that the first three months of
your employment are a probationary
period, and that from 1 April 20X2 your
annual salary will increase by 10%. You
are informed on 20 May 20X2 that
everyone in the company is to receive a
pay rise: yours works out at $600 per
year in addition to the 10% rise you have
already received, effective from 1 July
Task
(a) What will be your basic pay for each of the
following months.
(i) January 20X2
(ii) May 20X2
(iii) July 20X2
(b) (i) At 31 December 20X2, how much basic pay
would you have received since 1 January 20X2?
(ii) Assuming no further rises, how much basic
pay could you expect to receive in the 12
months to 31 March 20X3?
Answer
(a) (i) $9,000/12 = $750
(ii) $9,000 + (10% × $9,000) =
$9,900, your new annual salary. So,
$9,900/12 = $825
(iii) $9,900 + $600 is $10,500, your
latest annual salary. So, $10,500/12 =
$875
(b) (3 × $750) + (3 × $825) + (6 × $875)
=
$9,975 in the 12 months to 31 December
Basic pay: Hourly rate
 Some workers get paid a rate per hour. If
you work 40 hours at $5 per hour then
your basic pay will be $200.
Piecework
 Wages = Units produced × Ra
 It is common for pieceworkers to be
offered a guaranteed minimum wage, so
that they do not suffer loss of earnings
when production is low through no fault
of their ownte of pay per unit
Example: Piecework
 Penny Pincher is paid 50c for each towel
she weaves, but she is guaranteed a
minimum wage of $60 for a 40 hour week.
In a series of four weeks, she makes 100,
120, 140 and 160 towels. What was her pay
each week?
Output Pay
Units $
1 100 60 (minimum wage)
2 120 × 50c 60
3 140 × 50c 70
4 160 × 50c 80
Example: Piecework hours
An employee is paid $3 per piecework
hour produced. In a 40 hour week the
employee produces the following output.
Piecework time allowed
per unit
15 units of product X 0.5 hours
20 units of product Y 2.0 hours
What is the employee's pay for the week?
Answer
Piecework hours produced:
Product X 15 × 0.5 hours 7.5 hours
Product Y 20 × 2.0 hours 40.0 hours
Total piecework hours 47.5 hours
Therefore the employee's pay = 47.5 × $3
= $142.50 for the week
Differential piecework
 Offer an incentive to employees to
increase their output by paying higher
rates for increased levels of production.
 Up to 80 units per week, rate of pay per
unit = $1.00
 80 to 90 units per week, rate of pay per
unit = $1.20
 Above 90 units per week, rate of pay per
unit = $1.30
Overtime
 Overtime comprises hours worked over a
standard working week
 If an hour at basic rate is $4, how much
is an hour of overtime at time and a
half?
 $6 per hour.
Example: Overtime
 Marguerite Yourcenar works in a library. She
is paid on an hourly basis. Her basic rate for
the 35 hours she normally works a week is
$6 per hour.
 The first five hours overtime are paid at
time and a quarter. Any more overtime
hours worked are paid at time and a half.
 In the week ended 3 August 20X2 she
worked a total of 47 hours.
 For the week ended 3 August 20X2
calculate Marguerite Yourcenar's basic pay
and the overtime payments she receives,
Answer
Basic pay is 35 hours at $6 per hour 210.00
Overtime 5 hours at [$6 × 1.25 =] $7.50 per hour
37.50
Overtime 7 hours at [$6 × 1.50 =] $9.00 per hour
63.00
Total 47 hours 310.50
Question - Hourly pay
Alphonse is an hourly paid employee. His
basic rate is $5 per hour for daytime shifts,
$7.50 per hour for nighttime shifts, $7.50
per hour for overtime (ie hours worked in
excess of 40 hours a week) except
weekends when the rate is always $10 per
hour.
How much would he earn, assuming an 8-
hour day.
(a) For a 40 hour week of daytime shifts with
no overtime?
(b) For a 40 hour week if one day is worked
on Saturday?
Answer
(a) 40 hours × $5 = 200
(b) 32 hours × $5 = 160
8 hours × $10 = 80
240
(c) 40 hours × $7.50 = 300
4 hours × $7.50 = 30
330
Question - Pieceworker
Boris is a pieceworker, and is paid $5 per
widget produced. However, he gets a
guaranteed minimum wage of $30, and if
he works more than 50 hours a week he
gets $2 per hour as overtime. If he
produces over 60 widgets per week he gets
$6 per widget over 60. How much would he
earn in each of the following weeks?
(a) In the week ending 13/3/X1 Boris made 50
widgets and did 4 hours of overtime.
(b) In the week ending 20/3/X1 he produced one
widget.
(c) In the week ending 27/3/X1 he produced 6
widgets.
Answer
(a) 50 widgets × $5 = 250
Overtime 4 hours × $2 = 8
258
(b) Guaranteed minimum $30
(c) 6 widgets × $5 = $30
(d) 1st 60 widgets × $5 = 300
Next 10 widgets × $6 = 60
6 hours overtime × $2 = 12
372
Bonuses
 An extra payment made to an employee
as a reward for results achieved.
 To motivate employees to work harder
and to reach or exceed some target
Example: Bonus schemes
Carrot and Stick uses a variety of bonus schemes:
(a) Senior managers get a bonus based on how well the company is
doing as a percentage of their salary. If the company increases its
annual profits by 1% then they get a bonus of 1% of their salary,
paid on 30 June.
(b) The sales force, which has 100 members, gets a bonus paid on
the last day of the month, based on the value of sales per month.
If the value of sales (excluding sales tax) is over $35 million in a
particular month, 1% of the excess is divided equally between the
members of the sales force.
(c) Factory workers receive a bonus based on productivity. They
normally produce 1,000 units an hour. If they produce more than
this amount per hour, then they get a payment of 10c per worker
for every extra unit produced.
(d) All employees get a one-off bonus, in addition to any others, of
$30 if Carrot and Stick's profits in the year to 31 March exceed
$127.5 million. This is paid on 30 June.
(e) Weekly workers are given an extra one week's wages if their
performance at work has merited them a Grade 1 assessment by
Example: Bonus schemes
In the year ended 31 March 20X2, Carrot and Stick had made
a profit of $130 million, a 3% increase over the year ended
31 March 20X1. This was $5 million more than anticipated.
In the week ended 30 June 20X2 the factory staff produced
100 units more than usual. In the month of June 20X2, the
value of sales excluding sales tax was $36 million.
Task: Calculate the bonuses:
(a) David Eadwood, Senior Manager Finance Department,
earns $30,000 per year. What bonuses will he receive on 30
June 20X2 for the year?
(b) Bernadette Larney, Assistant Sales Executive, earns
$18,000 per year. What bonuses does she receive in the
month ending 30 June 20X2?
(c) Stan Takhanov is a factory worker with a Grade 1
assessment in the four weeks ended 30 June 20X2. He
earns $150 per week. What bonuses will he receive in the
four weeks ended 30 June 20X2?
Answer
(a) David Eadwood
$30,000 × 3% profit increase is 900
One-off bonus 30
Total bonuses for the year ended 30 June 20X2 930
(b) Bernadette Larney
Sales bonus [ $36m-$35m ×1% ]/100 sales staff 100
One-off bonus 30
Total bonuses in the month ended 30 June 20X2 130
(c) Stan Takhanov
Grade 1 assessment bonus (ie one week's wage) 150
Extra production bonus 100 units at 10c 10
One-off bonus 30
Total bonuses in the four weeks ended 30 June 20X2 190
Commission
 Payment made to an employee (or agent)
based on the value of something (usually sales)
the employee (or agent) has generated
 Straight percentage of all sales
10%: $1,000 of sales get $100, for $100,000 get
$10,000
 Sliding scale, more valuable contracts earn
greater commission
Contracts up to $5,000 a 5% commission, over
$5,000 7.5%
 Increase with the total volume of sales.
Sales up to $100,000 a 5% commission is earned
If the target is exceeded, then a 7.5% commission
is paid on the excess (ie all sales over $100,000).
Example: Commission
The BS Company sells crates of BS for $100 each. The company
employs two sales staff. Each is paid commission, but on a
different basis
(a) Michele Thuselah receives no commission on the first hundred
crates she sells a week, 10% commission on crates sold in
excess of 100 but below 200, 15% on crates sold in excess of
200 but below 300 and 20% on crates sold in excess of 300.
She receives her commission at the end of the month in which
the sale is made. She receives a basic annual salary of $9,000
per year.
(b) Jerry O'Boam receives a basic salary of $4,500 per year and a
straight 7.5% commission on all he sells.
From 2 August 20X2, Michele sold 120 crates in the first week,
340 in the second week, 30 in the third week and 95 in the
fourth week. She made no sales on 1 August, 30 August or 31
Answer
Question: Commission
Cassandra works for a company which pays bonuses
and commission. Her basic pay is $900 per month, but
at the end of the month she receives commission of
5% of the sales she made in the previous month. If
her sales exceed $10,000 in any quarter, she gets a
one-off bonus of $1,000. These are paid in the month
after the quarter.
Here are her sales figures for the first six months of
20X2.
Jan 5,000 April 2,000
Feb 4,000 May 3,000
March 3,000 June 4,000
Her sales in December 20X1 were $5,000.

What will be included in her gross pay at the end of

Answer
Question – Salaries
Dilys is a salaried worker, who also receives
overtime of $10 per hour for hours worked
over 156 a month, and a productivity bonus
of 5% of her basic monthly salary if the
quality of her work exceeds expectations.
Her salary was $12,000 per year, payable in
equal monthly instalments. This has been
increased to $15,000, by agreement on 1
May, backdated to 1 January.
In May she worked 175 hours, and produced
work of better quality than standard.
What will she receive as gross pay in May?
Answer
Basic salary $15,000/12 1,250.00
Overtime (175 – 156) × $10 190.00
Quality bonus 5% × $1,250 62.50
1,502.50
Back pay Jan – April
($15,000 – $12,000) × 4/12 1,000.00
2,502.50
Payroll administration and
documentation
Documents associated with payroll
preparation.
Timesheets record the hours spent by
each employee on each job, or doing the
work of each client.
Attendance records are used by the
personnel department to determine the
reasons for absence from work, and to
administer the granting of annual leave.
Other personnel record documentation
includes cards to record a person's
Personnel department
 Responsible for recruiting, engaging and
holding certain basic data of employees

Personnel record card Record of attendance

card
Payroll function
 Calculation of  Making up wages,
gross pay or preparing
 Calculation of tax, tapes for bank
national transfer
insurance and  Distributing
other deductions payslips
 Preparing  Preparing payroll
payslips statistics.
 Making
appropriate
Documentation

Salaried employees Hourly paid

employees
Personnel records held  Attendance cards
in the personnel
department document are the basis for
how much each payroll
salaried employee is to
be paid, and for what preparation
periods  Time recording
Payroll department will
receive instructions clock
from the personnel
department relating to
salary increases, or
The records required
Daily time sheets Job cards
 Filled in by employee  Cards are prepared for
indicate time spent on each job
each job
 The total time on time
sheet should
correspond with
attendance record’s
 Weekly time sheets  Route cards
 Similar to daily time  Similar to job cards,
sheets but are except that they
passed to the cost follow the product
office at the end of through the works
the week and carry details of
 Entries should be
Payroll deductions
Income tax – tax deducted at
source
 Tax deducted at source covers all the
employees of an organisation
 Does not cover self-employed people
Benefit contributions

Compulsory Remittances to
contributions authorities
 Borne in part by the  Contributions payable

employee and in part by the employee

by the employer:  Form part of the
 Unemployment benefit deductions from gross
pay.
 Income support
 Contributions payable
 The state pension
scheme by the employer
 The National Health  An additional cost to
Service in some the employer.
countries
The total cost of wages and salaries in the income
statement is:
Gross wages + employer's benefit contribution
Payroll giving
 Payroll giving is entirely voluntary
 In a payroll giving scheme, an employee
is allowed to set aside a portion of his or
her gross salary for charitable donations.
 Thisportion of gross salary is not taxed
 Both employer's and employee‘s
contributions are still payable on this
amount.
Example: payroll giving
Gene Rowse earns a gross salary of $12,600 a
year, payable in equal monthly instalments.
The company which employs him, Tea and
Sympathy, operates a payroll giving scheme.
Gene contributes $50 permonth from his gross
pay.
Tasks
(a) What is his gross pay?
(b) What will be his taxable pay for month 1?
(c) Fill in columns 2, 3, 5, 6, and 7. Assume for
the purposes of this question, that his total free
pay in month 1 is $275.00.
(d) Assuming contributions are payable, fill in
Answer

(a) His gross pay is $12,600 pa divided into twelve

months or $1,050 per month.
(b) His pay in the week or month will be only
$1,000 for the purposes of income tax.
Other deductions

Sharesave payments Trade Union

contributions
 Deductions from net pay  Deducted from earnings,
linked to share options. if the employee is a
They do not affect payroll member of a union
calculations.
Pension scheme
 Run by employer co-
operates with building  Payroll department deducts
society or bank. from employees' pay,
maintain records and report
 The employer deducts an them to the pension fund
agreed sum from net pay administrators.
of the employee and  The employer only (a
deposits it in a building
so-called non-
society or bank.
contributory pension
scheme)
Example: Contributions
Authentic Instruments runs a company pension scheme
for all its employees, contributing a sum equal to 10%
of each employee's gross salary into the scheme.
Each employee has to contribute 5% of his or her
gross salary to the scheme.
Horatio Arpsichord earns $15,000 per annum.
Letitia Ute earns $21,000 per annum.
Task
In a typical month how much will
(a) Horatio and Letitia earn gross?
(b) Horatio and Letitia contribute, out of salary, to the
company pension scheme?
(c) Authentic Instruments contribute to the company
pension scheme on Horatio's and Letitia‘s behalf?
Answer
Payment methods

Cash payment Automated payment

system
 Have reduced due  The payroll
to the following department prepares
reasons. the payroll on
magnetic disk or
Security problems tape, then sends it
Extra time and to the automated
effort compared to service run by the
other payment clearing banks.
methods  The system then
automatically
 Part time transfer the funds
employees, from the employer‘s
Payroll ledger accounts
Comecon Ltd pays its workers every month. In Month 1,
the payroll details are as follows.
Gross wages 31,200
Employer's NICs 2,000
Net wages paid to workers via Direct Credit (BACS)
25,000
Deductions for PAYE made from workers' wages
4,000
Deductions for employees' National Insurance 1,000
Employees' contributions to the pension fund 1,200
Employer's contributions to the pension fund 1,500
Assume there was $50,000 in the bank at the beginning
of Month 1 (an asset of $50,000). Details of these
items are beyond the scope of your studies, but you
Answer
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Question
Aroma has the following payroll details in Month 1. Write out
the double entry for these transactions and show the
wages control account at the end of all the transactions.
Gross wages and salaries: Administrative staff 102,531
Sales and marketing staff 226,704
Production staff 1,067,895
Employer's NICs 104,782
Employees' NICs 83,829
PAYE deductions 351,826
Pension deductions: Employer's 41,728
Employees' 37,860
Net wages and salaries 903,893
GAYE donations 10,180
Season ticket loan repayments 9,542
Answer
Quiz
1 What are the three main requirements for
payroll processing?
2 What are the three main ways of calculating
basic pay?
3 What is an overtime premium?
4 If personnel are paid wages out of petty
cash, no tax or contribution is payable. True
or false?
5 Unless automated transfer is used, much of
the payroll department's time is spent
signing cheques. True or false?
6 What is the cost of wages and salaries in
the income statement made up of?
Answer
1 Accuracy, timeliness and security.
2 (a) The same every month
(b) Hourly rate
(c) Performance basis (eg per unit of
output)
3 The extra amount paid for overtime
hours on top of the basic rate.
4 False
5 True
6 Gross wages plus employer's benefit
QB 40
At the end of the month, an organisation needs to
accrue for one week's wages. The gross wages
amount to $500, tax amounts to $100,
employer's national insurance is $50, employees'
national insurance is $40, and employees'
contributions to pension scheme amount to $30.
The ledger entries to record this accrual would be