Payroll is a list of all the company’s employee. Payroll accounting is the method of accounting for payroll. Payroll in other words is the aggregate expenditure of a company on salaries and wages of the employee in an accounting year. It can also be known as information giving to employee about their earnings.
It also refers to:-
It also includes the gross pay which is due to the employee and employer taxes. Gross pay of employees is divided by various elements like Taxes, Pension Fund, Healthcare contribution etc. After the deduction from the gross pay, the value remaining is distributed to the employee and called as Net Pay.
If employees are paid weekly or biweekly and the company has calendar month/year accounting periods, the company will have to accrue for the wages and benefits earned by the employees (but not yet paid or recorded in the general ledger accounts) as of the date of the financial statements.
From a perspective of the business, it is so important to know about the payroll of the company as it affects the income of the business to a very large extent. And also, government regulations and tax authorities have made it compulsory for the organizations.
Different documents are used as source document for the accounting purpose. Pay checks, time sheets and payroll ledge are some examples.
It also allows the company’s management to make decisions on the labor cost.
As an employee, everybody wants to have an efficient payroll system in the organization they are working. They are highly motivated and their morale goes up when they receive all these on time.
Sole objective of the company’s payroll department is to pay the employees accurately and timely with correct deductions. And they also want to make sure that deductions are remitted on time.
Cash – This is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.
Accrued Payroll – This account represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.
Insurance Withheld- This is another deduction made by the employer in respect of insurance of the employee.
Pension Fund Contribution- Employer contributes some amount of money from employee’s salary and some from company’s account.
Payroll- This account is gross pay that is calculated by the payroll accountant i.e. the salary payment.
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Generally, companies outsource their payroll department to third party. These companies can perform the functions at a much lower cost than the department generated in house.
a) Compute Gross Pay- Computation of the gross pay of the employees are done by the accountant on the basis of nature of salary. If an employee is getting salary on hour basis, then the accountant will compute it by multiplying the total hours worked by rate per hour.
b) Compute the deductions- Deductions are almost made in all the companies now a days. So one of the most important works of the payroll accountant is to calculate the total deduction of the employee and deduct it from salary.
c) Calculation of Net Amount- Net salary refers to the salary remaining after the deductions are made from the gross salary. So calculation of net amount of salary is also important for the accountant.
d) Authorization of payments- Verification of payment of account is also important as company does not want to increase the company’s cost by paying extra salary and company also does not want to decrease the morale of the employee by paying less than what should be paid. So verification of the pay slip is very important.
e) Distribute the payroll after the verification- Timely distribution of the salary is one factor of increasing the motivation of the employee. If salary is paid after the time, then employee’s motivation might go down and he will work inefficiently. Thus, accountant should distribute the salary on time.
f) Reports- As payroll accountant works day and night on the payroll of an employee. It helps in gathering information about the labor cost. Thus he should present his monthly reports to the upper level managers, so that they can make changes, if the cost is exceeding the budget.
Traditionally there used to be two journals for the payroll accounting system. One journal was known as payroll journal which was used to record the accrued salaries, wages and government obligations like taxes. Other one was, disbursements journal system, in which transactions were recorded when they became due. Now, time has changed. There are several computer softwares, which has combination of Payroll Journal and Disbursement journal system. It combines both the data into a payroll ledger. This should be noted that these functions can be outsourced at a lower cost.
1) Time Importation- To calculate the salary on the basis of working hours, managers used to record time by hand earlier. Since the introduction of computerized payroll system, managers do not need to keep check on time of every employee. Punches and swipes is method that is famously used by the firms to measure the working hours of the employees. It saves managers from boredom and also workers cannot lie about their timings.
2) Automatic Calculation- Calculation of the salary of the employee is a tiring job. A manager has a lot of work to do and just to calculate these salaries, they employee clerks, which increases the cost of the organization. But since there is computerized system prevailing in the organization, calculation of the salary on the basis of the time is done automatically and it reduces the chances of errors.
3) Paycheck Processing- A manual payroll system requires us to type the paycheck in a type writer or by hand. A computerized payroll system has direct deposit system which saves money and time spent on live checks and reconciliation.
4) Reduces Cost- Traditionally, organization used to employ good number of human resources just for this petty work. But now when everything is done on the computer, organization doesn’t need to increase its workforce and thus it reduces the cost of salary and wages.
5) Auto Report Generation- Reports will be generated automatically through the software. Manager doesn’t need to sit back and spend huge number of hours on making reports.
6) Security of Data- Data generated by the software will be secured and safe. And also managers do not need to keep huge files for the same. They can be easily stored and procured whenever they want.
1) Needs heavy investment- Company need to incur a heavy cost on the installation of the computerized payroll system. Because they will have to develop software for their organization, have to spend on training and development of employee which will raise the cost of the product ultimately.
2) Loss of Data- There is always a threat of losing up of data. Company would have to make safety arrangement which again would be costly for the company.
3) Artificial Device- After all computers are artificial devices. They can be manipulated easily.
4) Not suitable for small firms- Small firms having a turnover of less than 20-30L a year should not opt for computerized payroll system. It is because the cost of investment is already very high and if they invest it in then the benefit will be received in a long run.
5) Hidden costs- Cost of the computerized payroll system is more than the benefit that will be derived in a shorter period. There are various hidden costs which are not seen at the time of installation but as the company progresses, company have to repair the systems timely, have to update the software timely which requires cost.
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