Labor Part2

ACCA F2 - Management Accounting

Payroll accounting is supposed to be tough by many of the early learners of accounting.

It is only because a number of net payment and (including payroll tax) deduction (segregated from the gross payment) heading fits under payroll accounting to give the overall figure of the payroll account. Calculation of payment and deduction requires estimate and prudence.

Payroll expenses include items (sub-accounts) of gross payments like wage, salary, bonus and other benefits. Payroll tax, insurance and other expenses are the deduction segregated from the gross expense to give the net amount paid to the employee. Payroll causes an increase in the operating expenses of a business. The salaries and wages expense account must be debited for the total gross earnings of the employees.

Prepaid wage is accounted as assets, which appears on the balance sheet. The expense paid and prepayments reduce cash balance of firm. Payroll items under liability heading do not affect cash position until they are paid.

There are number of items that fit under payroll liabilities. Salaries and Wages Payable are a liability of the company and is increased by the amount of net pay earned by the employees. Deductions like income taxes, insurance, social security, income taxes and other items are accounted as liabilities until they are paid.

A simple approach of understanding the fundamental principle of account helps to simplify any complex issues involved in payroll accounting. The tax calculation for the payroll is different for different tax jurisdiction. Many countries use progressive taxation policy. Tax laws and rules define calculation basis for amount of tax to levy different earning groups. Precise calculation of fixed benefit pension scheme is difficult and can expose the firm to uncertain future liability. It can have negative impact in the growth of the firm and can drag down market value of the firm. In recent days, companies adopt alternative approach of pension scheme known as fixed contribution pension scheme.

Thus, we can simplify the process of payroll account starting from daybook and ending up with balances for financial position.