Definition
Payroll: The record of wages and salaries costs.
The payroll records all the individual amounts that appear on employees' payslips, namely:
Gross pay to employees:
– PAYE income tax
– employee's NI contributions – employee's pension contributions – net pay (cash paid to employees)
Additional costs for the employer:
– employer's NI contributions
– employer's pension contributions
Gross pay is not the amount paid to the employee. The employer needs to make deductions from gross pay before paying net pay to the employee.
The payroll is a source document as it contains information that is entered into the accounting system.
Worked example: Payroll
Sunny Climes Ltd employs three people: Anja earns £36,000 a year, Mark earns £33,000 a year and Dipak earns £30,000 a year. The gross pay in September for each employee is as follows:
£
Anja 3,000 Mark 2,750 Dipak 2,500
However, these are not the amounts that each employee will receive. Sunny Climes Ltd first of all has to deduct income tax from gross pay under the PAYE scheme to be paid to HMRC. It
deducts National Insurance (employees' NI) from gross pay, again to be paid to HMRC. As it runs a pension plan, it has to deduct each employee's pension contribution, to be paid to the
pension plan.
Deductions
PAYE
NI
Employee pension contribution
Net pay
Gross pay
£ £ £ £ £
Anja 550 250 150 2,050 3,000
Mark 500 230 135 1,885 2,750
Dipak 460 210 125 1,705 2,500
1,510 690 410 5,640 8,250
Deductions + Net pay = Gross pay The employees will receive the net pay.
The employer has deducted amounts the employees owe to other people from the gross pay the employer owes to them. This is not the end of the story, however; the employer also owes additional NI to HMRC, and employer pension contributions to the pension plan, over and above the amount of gross pay. The final payroll will be as follows:
Deductions
PAYE
Employees' NI
Employee pension contribution
Net pay
Gross pay
Employer's NI
Employer pension contribution
Total payroll
cost
£ £ £ £ £ £ £ £
Anja 550 250 150 2,050 3,000 310 200 3,510
Mark 500 230 135 1,885 2,750 265 180 3,195
Dipak 460 210 125 1,705 2,500 230 165 2,895
1,510 690 410 5,640 8,250 805 545 9,600
Gross pay + Employer's NI + Employer pension = Total payroll cost
The total payroll cost for Sunny Climes Ltd is £9,600. This is paid out as follows:
£
Employees (net pay) 5,640
HMRC: Income tax PAYE 1,510
HMRC: Employee and employer NI (690 + 805) 1,495
Pension plan: Employee and employer pension (410 + 545) 955
Total payroll cost 9,600
C H A P T E R 3
Interactive question 2: Payroll
Fantab Ltd has 10 employees who had gross pay of £190,000 per annum between them in 20X4. In that year, Fantab Ltd made net pay payments to employees of £129,200, and paid
£20,900 to the pension plan. Its total payroll cost was £220,400.
Requirement
How much did Fantab Ltd pay to HMRC in respect of NI and PAYE?
See Answer at the end of this chapter.
Summary and Self-test
Summary
Recording financial transactions
Orders Delivery notes
Sales invoices
Petty cash book Bank transaction
report
Computerised accounting system Petty cash
vouchers Payroll
Orders GRNs
Purchase invoices
C H A P T E R 3
Self-test
Answer the following questions.
1 'Transactions are processed in the computerised accounting system at the point at which they occur' is a description of 'batch processing' in a computerised accounting system. True or false?
2 Sales orders are source documents that are recorded in the accounting system. True or false?
3 When an entity returns goods to a supplier it will expect to receive from the supplier:
A An invoice B A credit note C A purchase order D A goods received note
4 Which of the following are source documents for credit purchases?
A Suppliers' invoices and credit notes B Invoices and credit notes to customer C Delivery notes
D Goods received notes
5 Which of the following documents would be issued by a supplier if it was discovered it had overcharged its customer by £400?
A A remittance advice B A debit note C A credit note
D A supplier invoice
6 Sepi downloads a report of her bank transactions for the day. The report shows a deposit of
£150 which the computerised accounting system has not been able to match to a transaction. Which of the following transactions may have resulted in the cash receipt?
A A direct debit payment in respect of telephone expenses B A receipt from a customer who had purchased goods on credit C The purchase of a new office chair
D The payment of a supplier invoice
7 Expenditure that has been incurred via petty cash does not need to be recorded in the accounting system. True or false?
8 Petty cash is controlled under an imprest system. The imprest amount is £100. During a period, payments totalling £53 have been made. How much needs to be reimbursed at the end of the period to restore petty cash to the imprest account?
A £100 B £53 C £47 D £50
9 The cost of employer's NI contributions is part of a company's:
A Net pay B Gross pay
C Gross wages and salaries cost D Income tax charge
Now, go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved the objectives, please tick them off.
Answers to Interactive questions
Answer to Interactive question 1 Credit note; sales invoice
Answer to Interactive question 2
£
Total payroll cost 220,400
Employees (net pay) (129,200)
Pension plan (20,900)
Amount paid to HMRC 70,300
C H A P T E R 3
Answers to Self-test
1 False. This is a description of real-time processing.
2 False. The sales invoice is recorded in the accounting system.
3 B An invoice (A) is received in respect of the original purchase, after a purchase order (C) has been placed and a goods received note (D) has been created in respect of the delivery of goods.
4 A Suppliers' invoices and credit notes are source documents for credit purchases.
Customer invoices and credit notes (B) relate to credit sales. Delivery notes and goods received notes (C and D) are not source documents.
5 C A credit note should be issued by the supplier when it discovers it has overcharged its customer.
6 B The income must be a receipt of cash from the customer. The other options are all payments out of the bank account.
7 False. The total of each column in the petty cash book is recorded in the accounting system.
8 B Under the imprest system, a reimbursement is made of the amount of the vouchers (or payments made) for the period.
9 C The cost of employer's NI contributions is added to gross pay (B) (which includes net pay (A)) to form the gross wages and salaries cost. Payroll taxes are not included in the company's income tax charge (D).
Ledger accounting and double entry
Introduction
Examination context TOPIC LIST
1 Ledgers
2 The nominal ledger
3 Double entry bookkeeping 4 Journal entries
5 Double entry for petty cash
6 The receivables and payables ledgers 7 Accounting for discounts
8 Accounting for VAT Summary and Self-test
Answers to Interactive questions Answers to Self-test
CHAPTER 4
Introduction
Learning outcomes Tick off
Identify the sources of information for the preparation of accounting records and financial statements
Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements
Prepare journals for nominal ledger entry and correct errors in draft financial statements
Specific syllabus learning outcomes are: 1c, d; 2c
Syllabus links
The material in this chapter will be developed further in this exam, and then in the Professional Level module Financial Accounting and Reporting.
Examination context
Questions on the topics in this chapter will be set as multiple choice questions, multi-part multiple choice or multiple-response questions, some of which may involve calculations so that the correct answer can be selected. Very often double entry questions are phrased in terms of preparing a journal entry.
In the exam you may be required to:
identify the effect of debit and credit entries in ledger accounts for the elements of financial statements
specify the double entry needed to record particular transactions
identify entries in ledger accounts for VAT, payables and receivables
C H A P T E R 4
1 Ledgers
Section overview
• The nominal ledger, receivables ledger and payables ledger are the main ledgers used in an accounting system.
• Records should be kept in ledgers in chronological order, with cumulative totals built up.