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Lesson 06 (printer-friendly version)

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Chapter 1

Introduction

I'm sure that you now feel quite confident about journalizing and posting the various transactions that occur in
businesses on a regular basis. You're well on your way to becoming proficient in the aspects of general bookkeeping
techniques. You should be proud of your new knowledge and accomplishments!

In this lesson, you'll gain information that is valuable for any business with employees: how to compute payroll. When
you have a business with employees, you need to know how to determine such things as gross pay, deductions, and
net pay. Most importantly, you must understand how to journalize these transactions into the business journal so they
can be considered as expenses. You will learn how to do all of these things as we explore another bookkeeping
adventure with Children's Capers.

Chapter 2

Review Transactions

As before, I'm going to give you a few review transactions before we go on to the new concepts to be presented in this
lesson. Please journalize these transactions in your journal, which is now at page 14.

Since this will be the beginning of a new journal page, please add all the columns down on page 13 and prove the
journal. By that, I mean add all the Debit column totals and all the Credit column totals. They must agree before you can
continue. When they do, carry the totals onto the first line of the new journal page. Then go ahead and journalize the
following transactions.

Don't forget to post these transactions to the General Ledger and the Accounts Receivable Ledger. Check your work by
viewing the solutions in the Supplementary Material section.

Transaction #1: December 15, Recorded cash sales for the day, $600.00 plus $30.00 tax, total received,
$630.00, T15.

Transaction #2: December 15, Received cash as an investment from Joan Caldwell, $10,000.00, R8.

Transaction #3: December 15, Sold merchandise on account to Larry Hamilton, $200.00 plus $10.00 tax,
total $210.00, S8.

Transaction #4: December 15, Received cash on account from Steven Miller, $140.00, R9.

Transaction #5: December 15, Paid the electricity bill (Utilities Expense), $155.00, C28.

Transaction #6: December 15, Purchased office supplies for cash $175.00, C29.

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Chapter 3

Computing Wages and Deductions/Payroll Forms

Children's Capers employs people in its store. Some of the employees are paid on salary. This means that they receive
the same pay each pay period no matter how many hours they work. Other employees are paid an hourly wage. They
are also paid overtime pay for all hours over 40 in a week. The standard rate of pay for overtime hours is the overtime
hours multiplied by the overtime hourly pay. The overtime hourly pay is the regular hourly pay multiplied by one and a
half.

For example, let's say you have an employee, Jack, who earns $12.00 an
hour regularly; he would receive $18.00 an hour for overtime hours. You can
calculate that pay by multiplying his regular hourly rate, $12.00, times one and
one-half. You would then multiply the number of overtime hours Jack had
times his overtime hourly pay. This would give the gross overtime pay.

You would then add Jack's regular pay, which is his regular hourly rate times
regular hours worked, and his overtime pay to come up with his total gross
pay for the payroll period.

There are various payroll periods available to businesses. They might pay
their employees each week, every other week, twice a month, or even once a
month. The choice is up to the business.

Payroll Deductions

It is important that you understand the difference between gross pay and net pay. Gross pay is what an employee
actually makes before any deductions. Net pay is what the employee actually takes home after all deductions are
made. It's the amount for which his paycheck is written. Deductions vary from business to business, but there are a few
that are mandatory throughout the entire United States.

The first is federal income tax. The federal government in the United States mandates that employees pay a portion of
their income to fund various government programs. Charts that the government sends out to each and every employer
determine the amount of this deduction.

The amount of tax withheld from an employee depends on the answers to these questions:

z Is the employee married or single?

z What is the amount of the employee's gross pay?

z How many allowances is the employee claiming?

An employee is allowed to claim one allowance for each person that he/she is supporting. Other factors may allow
additional exemptions. To determine the correct number of exemptions, each employee should complete a W-4 form.

The second mandatory deduction is Social Security tax. This is a percentage of an employee's pay, with no allowance
for how many people the worker is supporting or for marital status. Each and every employee who works in the United
States must pay a percentage of his/her wages to the Internal Revenue Service. This tax is for funding the Social
Security retirement system and Medicare, which is a health insurance plan for elderly persons.

These are the two mandatory deductions for workers in the United States.
Some states have their own state tax, which is mandatory if you work in
such a state. Other countries have different mandatory taxes on a worker's

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pay.

Besides the mandatory deductions, there are many voluntary deductions that a worker may elect to have deducted from
his pay. Some examples would be union dues, health insurance premiums, charitable contributions, loan payments (if
the business has a credit union), and deductions for a 401(k) plan, which is a voluntary retirement savings plan.

Some employers offer plans for purchasing United States Savings Bonds. The employer takes a set amount out of the
employee's check each pay period and when there is enough to purchase a savings bond, the employer does so and
gives it to the employee. There are many different voluntary deductions depending on the employer and the needs of
his employees.

Hourly Paid Employees

You are going to complete a payroll for the period ending December 15. Children's Capers has many employees, but
we will only be completing payroll for two of their employees, one paid on a salary basis and one paid on an hourly
basis.

First, you'll complete the Employee Earnings Records. In the line following Earnings Records for Quarter Ended, put
December 31, 20--. This form covers an entire quarter of the year. There is one form for each employee for the quarter
ended March 31, June 30, September 30, and December 31. There are seven lines on each form for payroll entries.
One line is used for each payroll.

Fill in the information at the top for this employee:

Name: John Jones

Employee No: 7
Marital Status: Married
Allowances: 4
Rate of pay: $9.00/hr.
SSN: 434-43-5656
Position: Shipping and receiving clerk

John worked 80 regular hours this payroll period, which is two weeks' long. He also worked two overtime hours during
the two-week period.

On the first line, enter the date ended as December 15. Multiply his regular hours, 80, times his regular rate, $9.00, to
get his regular earnings, which would be $720.00. He worked two overtime hours. His overtime rate is $9.00 times 1½,
or $13.50 per hour. Two hours times $13.50 per hour equals $27.00, which goes in the overtime column. Add his
regular earnings and his overtime earnings to get his total earnings, which go in the total column. His total earnings
would be $747.00. This is the gross pay and the amount used to determine his deductions.

Using the tax chart for married employees that you printed out at the beginning of this lesson, look up the tax for an
employee making $747.00 with four allowances. Notice that the first column in the tax chart reads at least and the
second column reads but less than.

Looking at the tax chart, you can see that John's gross pay falls in the at least $740 but less than $760 row. Follow that
row over until you get to the column that has a 4 at the top, which is the number of allowances John is claiming. Where
the row and the column meet is $45.00. That's the amount of federal withholding tax that John will have deducted from
his pay this pay period. Enter the $45.00 in the federal income tax column on John's line in the Payroll Register.

Next, multiply John's total gross earnings, $747.00 by 8%. This is the amount that John must pay for Social Security tax.
Enter this amount, $59.76, in the column labeled FICA tax. FICA and Social Security tax are one and the same. FICA
stands for Federal Insurance Contributions Act, which is the name of the act when it was passed in Congress. Most

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people know it as simply Social Security tax.

Now, let's say that John has $15.00 per paycheck deducted to pay part of his health insurance premium. Enter that
amount in the health insurance column.

Next, add all the deductions you've just figured—federal tax, FICA tax, and health insurance. Enter this total in the
column labeled Total. Last, subtract this amount, total deductions, from the column labeled Total, which is the total
gross wages. This subtraction of deductions from gross pay will give us the amount of net pay or the amount for which
we would write John's paycheck. John's net pay for this pay period is $627.24

The accumulated earnings column is a running balance of gross pay year-to-date. Let's enter $25,600.00 in that column
above our line for this payroll. To figure the new accumulated pay, add the previous accumulated pay, $25,600.00 and
John's gross pay for this pay period, $747.00. This gives us a new accumulated pay of $26,347.00. The last figure in
this column at the end of December is John's total yearly wages. This column shows John's total gross wages at any
given point in the year.

Now, please transfer this information from John's individual earnings record onto the Payroll Register on line 1. The
date of the payroll is December 15, and the date of payment would be December 16. You're now simply copying
information from John's earnings record onto the Payroll Register. The Payroll Register will contain information for all
employees paid. Each employee has his own individual earnings record, but all employees are grouped together in the
Payroll Register. A new Payroll Register is prepared for each payroll.

Salary Paid Employees

Okay, let's do the payroll for a salaried employee now. Open a new earnings record for the following employee:

Name: Sara Dowling

Employee No: 12
Marital Status: Single
Allowances: 1
Rate of pay: $630.00 per pay period
SSN: 437-67-3232
Position: Mail clerk

Sara is paid on salary, so she will receive her salary of $630.00 every two weeks, no matter how many hours she works.

On line 1 of Sara's earnings record, enter the date, December 15, and enter $630.00 in the Regular Earnings column.
Carry the $630.00 over into the Total Earnings column. Look up her federal income tax from the tax chart for single
persons. The amount should be $76.00. Next, multiply her earnings by 8% to get her FICA tax, which is $50.40. Sara
has no other deductions, so add those two and enter them in the Total column. Subtract this amount from her total
gross earnings of $630.00 to get her net pay.

Next, enter $12,500.00 as her year-to-date accumulated earnings. Now add her gross pay this pay period, $630.00 to
her accumulated earnings to get her new up-to-date accumulated earnings, $13,130.00.

Last, transfer this information to the Payroll Register. Sara's earnings will go on the line immediately below John's.

Now, there would normally be more employees, but to save time, we will continue with only these two.

Please add all the columns of the Payroll Register down. To check the accuracy of your work, add the total of Regular
Earnings and Overtime Earnings. This should be the total of Total Gross Earnings. Then, add the totals of columns 4, 5,
6, and 7. This should equal the total of column 8, Total Deductions. Subtract the column 8 total from the column 3 total
and you should get the column 9 total. Think of it this way. Take the total gross earnings, subtract all deductions, and

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you should have the net pay total left. See? Not hard at all when you think of it that way.

When your totals have successfully proven out, double rule each column total. Now you know how to figure your own
paycheck to see if it is correct!

Chapter 4

Journalizing the Payroll

Once you've added all the columns in the Payroll Register and made sure they equal out, you're ready to journalize the
payroll. You will be journalizing this payroll by continuing of page 14 of December's journal.

Enter the date first, and then in the Account Title column, enter Salary Expense. In the Document column, enter C30. In
General Debit, column 1 of the journal, enter the total gross wages. This is the total from the third column in the register.
On that same line of the journal, under Cash Credit, column 11, for the total net payroll, enter the figure from column 9
in the Payroll Register.

Next, on the following journal line, enter Employee Income Tax Payable and enter the amount of federal income tax
withheld, the total of column 4 in the register. This amount will go in the General Credit column.

On the next line, enter FICA Tax Payable and enter in the General Credit column the amount of FICA tax withheld, the
total of column 5 in the register.

On the next line in the journal, enter Health Insurance Premiums Payable in the Account Title column. Then, in the
General Credit column, enter the total of column 6 in the register.

Now, your three general credits plus the credit to Cash should equal the one debit to Salary Expense.

You may now post your General Debit and Credit entries to the General Ledger. The credit to Cash will be posted at the
end of the month when the Total Cash Credit column, column 11, is posted.

You should post the debit to Salary Expense, and the three credits for the
deductions. Remember to enter the appropriate numbers in the Post Ref. columns
as you post. Use C30 for the document number. In Lesson 7, we will be writing
check number 30 to pay this payroll. To check your work, view the solutions in the
Supplementary Material section.

That's it! You've now completed a payroll and journalized the transaction. Good
job!

Chapter 5

Conclusion

Once again, you've mastered many new skills in this chapter. You've learned how
to figure gross pay, deductions, and net pay for two of the employees of
Children's Capers. These new concepts will surely help you in both your personal
and professional life. You now understand with greater clarity how your employer determines your net pay. In the next
lesson, you will learn about writing checks, endorsing checks, preparing a bank reconciliation, and completing a bank
deposit ticket.

When you feel ready, please take the quiz for Lesson 6. Good luck!

Supplementary Material

Lesson 6 Forms and Tax Tables

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/crs/pix/fun/L06-Forms.pdf
Here are all of the forms and tax tables that you will need in order
to complete this lesson.

Lesson 6 Solutions
/crs/pix/fun/L06-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper!

Note: Only those forms and accounts with new entries in them will
appear in each lesson's solutions. If you're curious about a
transaction in a previous lesson, you'll have to go back to that
lesson's Solutions link.

All Bookkeeping Resource

http://www.allbookkeepingresource.com/art-basicacc.html
Step-by-step instruction of entire accounting process. Excellent
definitions and examples.

FAQs

Q: What is the difference between an employee paid on salary and one paid an hourly
wage?

A: An employee who is paid on a salary basis receives the same amount of pay every pay
period, no matter how few or how many hours worked.

An employee who is paid on an hourly basis receives a set amount for every hour worked
and usually receives overtime pay for any hours worked over 40 in a week.

Q: What is the difference between gross pay and net pay?

A: Gross pay is what an employee actually makes before any deductions.

Net pay is the amount of money the employee actually receives after all deductions. It is the
amount for which his/her paycheck is written.

Q: What is the difference between a mandatory deduction and a voluntary deduction?

A: A mandatory deduction is one which an employee must have deducted from his/her pay.
This type of deduction is usually mandated by state or federal law. Examples would be
federal income tax and Social Security tax.

A voluntary deduction is one that the employee chooses to have taken out of his/her pay.
Some examples might be charitable contributions, health insurance premiums, union dues,
etc.

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No reproduction or redistribution without written permission.

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