Accounting Instruction, Help, & How To (Financial & Managerial)

Welcome! Grab some coffee and get ready to learn the foundations of accounting using the accounting equation and an Excel-based payroll process simulation. Today’s goal is to walk you through the intricacies of payroll while demystifying key concepts like taxes, benefits, and employer liabilities—all presented in Excel.

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The Accounting Equation Refresher

Let’s recall the accounting equation, the backbone of financial reporting:
$\text{Assets}=\text{Liabilities}+\text{Equity}$
In payroll, cash (an asset) decreases when employees are paid, while expenses increase. Additionally, payroll taxes and withholdings create liabilities owed to the government or other entities.

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The Payroll Process: Overview

Payroll involves more than cutting a check. Here’s the breakdown:

1. Gross Pay: The total earnings before deductions.
2. Withholdings: Federal income tax, Social Security, Medicare, and benefits deductions (e.g., retirement plans).
3. Net Pay: The amount employees take home after deductions.
4. Employer Taxes: Additional costs borne by employers, such as their share of Social Security and Medicare.

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Building the Payroll Process in Excel

Step 1: Employee Register Setup

We begin by creating a register with the following columns:

• Employee Name: Identify each employee.
• Gross Pay: Total earnings for the pay period.
• Deductions: Federal Income Tax (FIT), Social Security, Medicare, and benefits.
• Net Pay: Gross pay minus all deductions.

Here’s how it looks in Excel:

Employee	Gross Pay	Federal Income Tax (15%)	Social Security (6.2%)	Medicare (1.45%)	Benefits (e.g., 3.5%)	Net Pay
Emp 1	$5,000	$750	$310	$73	$175	$3,693
Emp 2	$6,250	$938	$388	$91	$219	$4,616

Excel Tips:

• Use formulas to automate calculations:
  • FIT: =GrossPay * 0.15
  • Social Security: =GrossPay * 0.062
  • Medicare: =GrossPay * 0.0145
  • Benefits: Adjust percentage as needed.

Step 2: Summarize Totals

Aggregate totals to understand the overall payroll cost.

• Gross Pay: Total wages before deductions.
• Net Pay: Total amount paid to employees.
• Liabilities: Taxes withheld (e.g., FIT, Social Security, Medicare).

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Accounting Entries for Payroll

Employee Payroll Entry

Here’s how the journal entry for employee payroll looks:

• Debit Payroll Expense: Gross pay.
• Credit Cash: Net pay.
• Credit Payroll Liabilities: Withholdings (e.g., FIT, Social Security, Medicare).

Example:

• Gross Pay: $11,250
• Net Pay: $8,308
• Liabilities:
  • FIT: $1,688
  • Social Security: $698
  • Medicare: $164

Journal Entry:

Account	Debit	Credit
Payroll Expense	$11,250
Cash		$8,308
Federal Income Tax		$1,688
Social Security Tax		$698
Medicare Tax		$164

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Employer Taxes Entry

Employers are responsible for additional taxes:

• Social Security and Medicare: Match employee contributions.
• Unemployment Taxes (e.g., FUTA in the U.S.): Additional costs based on wages.

Example:

Account	Debit	Credit
Payroll Tax Expense	$862
Social Security Tax		$698
Medicare Tax		$164

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Tips for Small Businesses and Accountants

• Software Choices: Consider using external payroll providers like ADP for compliance and reporting. This reduces clutter in your bookkeeping system.
• Specialization: Decide whether to include payroll services in your offerings.
• Compliance: Keep up with local tax laws, as they vary by jurisdiction.

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Conclusion
Understanding payroll is essential for managing costs, ensuring compliance, and providing accurate financial reports. Use tools like Excel to simplify the process and make informed decisions about payroll management.

For more templates and tutorials, visit AccountingInstruction.com!