Mary Cris L.

Luzada, CPA, MSA

ACC 111 – Financial Accounting & Reporting
Payroll Accounting

Payroll Accounting

What is a Payroll?
Generally, payroll refers to the process wherein employers pay salaries to
their employees for the services they rendered. It can also refer to the financial records
that show the employees’ pay computations. The following are the common terms
related to payroll:
1. Payroll period refers to the period for which an employer ordinarily makes
payment of salaries or wages to the employees. This can be on a daily weekly,
bi-monthly or monthly basis depending on the established policy of the entity.

2. Gross pay refers to the total earnings of an employee for a given payroll period
before any deductions are taken out.

3. Payroll deduction refers to the amount withheld by the employer from the
employee’s pay for various purposes which may include but not limited to
employees’ contributions to SSS, Philhealth and Pag-ibig, withholding taxes
and union dues.

4. Net pay refers to the amount received by the employees after all payroll
deductions. This is also referred as the take-home pay.
Taking into consideration the importance of having an accurate and timely
payroll, accountants have developed a payroll system for a more orderly recording of
transactions. The next section presents the essential components of the payroll system.

Source: https://www.youtube.com

To have accurate and reliable record of the

employees’ work hours during a particular
payroll period, a time card or daily time
record (DTR) is maintained by each
employee. The time card serves as the
source document to establish the gross pay
due to the employee for a particular
payroll period. This may be filled in either
manually or through time clocks or
biometrics.
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting
 Every payroll period, the payroll in-charge collects the time cards and organizes
the payroll data in a special journal called the payroll register. This record
contains the list of all employees indicating their gross pay, applicable payroll
deductions and net pay. Payroll register also serves as the accountant’s basis in
recording the payroll transaction.

From the payroll register, individual payslip of employees is generated. Each

payslip contains the pertinent figures found in the payroll register. Also, the
entity must keep a detailed record of cumulative earnings and withholdings for
each employee in an employee earnings record. This form is designed to help
the employer comply with various reportorial requirements.

Once the payslip of each employee is ready, the payroll in-charge can already
disburse the payroll. Disbursement can be done manually by paying in cash or
check or thru automated teller machines (ATMs). Most entities with a large
number of employees maintain a special bank account to disburse net pays of
employees often referred as payroll fund.

After disbursing the payroll to the employees, the accountant then records
transaction in the journal. Payroll entries usually include the following:

∙ To record salaries expense for the period based on the payroll register.
Pro-forma entry:

Salaries Expense xx SSS Premium

Payable xx Philhealth Premium
Payable xx Pag-ibig Premium Payroll deductions Net Pay
Payable xx Withholding Taxes
Payable xx Salaries Payable xx
Gross Pay
∙ To record employers’ payroll expenses related to contributions.
SSS Contribution xx
Philhealth Contribution xx
Pag-ibig Contribution xx
SSS Premium Payable xx
Philhealth Premium Payable xx
Pag-ibig Premium Payable xx
∙ To record disbursement of payroll.
Salaries Payable xx
Cash in Bank xx
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting
 Finally, the contributions collected by the employers through payroll deduction
along with the employers’ counterpart contributions shall be remitted to the
appropriate government agencies. Remittances of such contributions shall be
recorded in the journal as follows:

∙ To record remittance of SSS premium.

SSS Premium Payable xx
Cash in Bank xx
∙ To record remittance of Philhealth premium.
Philhealth Premium Payable xx
Cash in Bank xx
∙ To record remittance of Pag-ibig premium.
Pag-ibig Premium Payable xx
Cash in Bank xx
∙ To record remittance of withholding taxes to BIR.
Withholding Taxes Payable xx
Cash in Bank xx

Mandatory Payroll Deductions

Private employees, whether permanent, temporary or provisional, who is not
over 60 years old, is subject to compulsory coverage under the Social Security System

(SSS), the Philippine Health Insurance Corporation (PhilHealth) and the Pag-ibig
Fund. Such mandatory payroll deductions are discussed as follows:
1. Contributions. The mandatory contributions are based on the compensation – basic
plus cost of living allowance – of the member and payable under the three
programs as follows:

∙ Social Security System (SSS)

Every employee or laborer is mandated under Republic Act 1161 to become a
member of SSS. If you are an SSS member, you will be entitled to some benefits in
return to your monthly contribution. SSS benefits include sickness, death, maternity,
salary and educational loans, pension benefits after retirement and burial expenses.
The SSS contribution of an employee is shared between the employee and his
employer. The share of the employee is to be deducted from his monthly payroll,
whereas, the share of the employer is treated as a business expense. The SSS
contribution of each employee is determined based on the basic salaries which include
the emergency cost of living allowance.
Aside from SSS contribution, the employers will also pay for employees’
compensation contribution (ECC) which insures each employee against injury or
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

death sustained in connection to his work. The amount of SSS to be deducted from
payroll and the counterpart of the employer for SSS and EC is determined using the
table shown below.

Source: https://sssinquiries.com/contributions

Illustration on how to use the table:

The first thing to do is to locate under the “range of compensation column” to
what salary range will the employee’s monthly salary fall. Let us say that you are
employed and your monthly basic salary P12,000.
Looking at the table, your salary falls on the 11,750-12,249.99 range. Your
contribution and that of your employer will be as follows:
Employee (EE) Employer (ER) Total
SSS P480.00 P960.00 P1,440.00 EC - 10.00 10.00 Total P480.00
P970.00 P1,450.00
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

Thus, you will have a payroll deduction amounting to P480.00 and your
employer will incur an expense amounting to P970.00. Needless to say, a total of
P1,450.00 will be remitted to SSS and credited in your name (the employee).

∙ Philippine Health Insurance Program (Philhealth)

This is a health insurance program designed to help employees in their needs of

financial assistance whenever they get hospitalized or any of their qualified
dependents. Pursuant to the Universal Health Care Act (RA 11223), every Filipino
becomes a member of Philhealth. Effective December 7, 2019, the following premium
contribution applies.

Source: https://newstogov.com
The Philhealth contribution is based on the basic monthly salary of the
employee and shared equally by both employee and employer. Starting year 2020, the
Philhealth contribution will be computed as follows:
Assume that the basic monthly salary of the employee is P12,000.
Total premium contribution: P12,000 x 3% = P360.00

Employee’s share (50%xP360) = P180.00 (payroll deduction) Employer’s

share (50%xP360) = P180.00 (expense) ∙ Pag-ibig

This program is designed to help

employees
own a home through financing scheme. It also
assured employees to get back the total
contributions composed of both employee and
employer share upon retirement plus
dividends.
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

The contribution of Pag-ibig is equally shared by the employee and the

employer at a maximum amount of P200. However, an employee may opt to increase
his contribution to more than the maximum amount.
Based on the preceding discussion, if the basic monthly salary of the employee
is P12,000, his total Pag-ibig contribution shall be P200, P100 of which is his payroll
deduction while the other P100 is a business expense of his employer. Again, he may
opt to increase his contribution to his liking.

2. Withholding Taxes. The Bureau of Internal Revenue (BIR) requires every

employer to deduct or withhold income taxes from his employees. It is applied on
gross pay after deducting the mandatory employee contributions and other non
taxable benefits. Withholding tax tables are available for various payroll periods as
 applicable. The revised withholding tax table under the TRAIN Law is presented
below.

To illustrate how to use the withholding tax table, let us again consider an
employee with P12,000 basic monthly pay. His income subject to withholding tax is
computed as follows:
Gross Pay P12,000.00
Less: Payroll Deductions
SSS Contribution P480.00
Philhealth Contribution 180.00
Pag-ibig Contribution 100.00 760.00
Withholding tax base P11,240.00
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

To compute for the withholding tax base, you determine the compensation
level where the employee belongs. Specifically, look into the monthly compensation
level since our example is on a monthly basis. The P11,240.00 withholding tax base
of the employee will fall under level 1 (20,833 and below); hence, the prescribed
withholding tax is zero and the net pay is P11,240.

Gross Pay P12,000.00

Less: Payroll Deductions
SSS Contribution P480.00
Philhealth Contribution 180.00
Pag-ibig Contribution 100.00 760.00
Withholding tax base P11,240.00
Less: Withholding tax* 0.00
Net Pay P11,240.00

For the sake of illustration, let us say that the monthly computed withholding
tax base of the employee is P35,250. Looking at the withholding tax table, you would
know that his compensation level is 3 (P33,333). The withholding tax is computed as
follows:

For P33,333 P2,500.00

In excess of P33,333
(P35,250-P33,333=P1,917)
(P1,917 x 25%) 479.25
Withholding tax* P2,979.25

Hence, the net pay is computed as follows:

Withholding tax base P35,250.00

Less: Withholding tax* 2,979.25
Net Pay P32,270.75

Illustration of Net Payroll

Presented below are employees’ data which are needed in the preparation of
OK Company’s payroll for the month of July 2020.
Employee Position Gross Pay
001 Manager P48,000.00
002 Accountant 30,000.00
003 Cashier 18,000.00
004 Office Clerk 15,000.00 005 Admin Aide 9,000.00
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

Required: Prepare the following:

1. Payroll register for the month of July 2020.

2. Schedule of SSS and EC Contributions for the month of July
2020. 3. Schedule of Philhealth Contributions for the month of July
2020. 4. Schedule of Pag-ibig Contributions for the month of July
2020. 5. Payroll entries:
5.1. To record salaries expense for the month of July 2020.
5.2. To record employers’ payroll expenses related to contributions.
5.3 To record disbursement of payroll.
5.4 To record remittances to respective agencies.

Solution:

1. Payroll register for the month of July 2020.

2. Schedule of SSS and EC Contributions for the month of July 2020.

Mary Cris L. Luzada, CPA, MSA

ACC 111 – Financial Accounting & Reporting
Payroll Accounting

3. Schedule of Philhealth Contributions for the month of July 2020.

4. Schedule
of Pag-ibig Contributions for the month of July 2020.
5. Payroll entries:

5.1. To record salaries expense for the month of July 2020.

Salaries Expense P120,000.00

SSS Premium Payable P 3,280.00 Philhealth Premium
Payable 1,815.00 Pag-ibig Premium Payable 500.00
Withholding Taxes Payable 7,325.15
Salaries Payable 107,079.85 To record salaries expense
for the month of July 2020.
5.2. To record employers’ payroll expenses related to contributions.

SSS Contribution P 6,690.00

Philhealth Contribution 1,815.00
Pag-ibig Contribution 500.00
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

SSS Premium Payable P6,690.00

Philhealth Premium Payable 1,815.00
Pag-ibig Premium Payable 500.00
To record employers’ payroll expenses related to contributions for
the month of July 2020.
5.3 To record disbursement of payroll.

Salaries Payable P107,079.85

Cash in Bank P107,079.85
To record disbursement of payroll.

5.4 To record remittances to respective agencies.

SSS Premium Payable P9,970.00

Cash in Bank P9,970.00
To record remittance of SSS premium.

Philhealth Premium Payable P3,630.00

Cash in Bank P3,630.00
To record remittance of Philhealth premium.

Pag-ibig Premium Payable P1,000.00

Cash in Bank P1,000.00
To record remittance of Pag-ibig premium.
 Withholding Taxes Payable P7,325.15
Cash in Bank P7,325.15
To record remittance of withholding taxes to BIR.

Internal Control Measures for Payroll

Since payroll involves significant amount of money, it is important for business entities
to establish internal control measures that would ensure that payroll disbursements are
made only to legitimate employees and for correct amounts.

The key to good internal control over payroll is proper segregation of duties.
The entity should ensure that incompatible duties are not handled by the same person.
The responsibilities of maintaining personnel records, preparation of payroll,
accounting and distribution of pay check should be handled by different personnel.
This is to discourage a person to commit fraud because he knows that his work will be
reviewed and checked by another person.

Some companies make use of technology to track employee’s daily time

record which is linked to their payroll system. Thus, absences, tardiness and under
time can be readily integrated in the payroll computation.
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

Moreover, all cash disbursements for payroll should be based on a recognized

liability. Also, all amounts related to payroll should be recorded at the proper amounts
in the proper period and in the proper classification. Lastly, access to personnel and
payroll records, forms and other documents should be restricted to authorized
personnel only to prevent unauthorized record alterations that would result to
misappropriation of cash and unauthorized payroll payments.

Application

Presented below are employees’ data which are needed in the preparation of
Ayos Company’s payroll for the month of August 2020.
Employee Position Gross Pay
001 Manager P35,000.00
002 Accountant 28,000.00
003 Cashier 20,000.00
004 Office Clerk 14,500.00 005 Admin Aide 6,000.00

Required: Prepare the following:

1. Payroll register for the month of August 2020.

2. Schedule of SSS and EC Contributions for the month of August 2020.
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

3. Schedule of Philhealth Contributions for the month of August 2020.

4. Schedule of Pag-ibig Contributions for the month of August 2020.

 5. Payroll
entries:
5.1. To record salaries expense for the month of August 2020.
Mary Cris L. Luzada, CPA, MSA
ACC 111 – Financial Accounting & Reporting
Payroll Accounting

5.2. To record employers’ payroll expenses related to contributions.

5.3 To record disbursement of payroll.

5.4 To record remittances to respective agencies.