ACCOUNTING FOR PAYROLL AND PAYROLL SYSTEM Human Resource Department (HRD)

Payroll processing is a special-case purchases system in which the organization purchases - Matters involved
labor rather than raw materials or finished goods for resale. The nature of payroll processing, however, o Employee management
creates the need for specialized procedures, for the following reasons: o Training and development
1. A firm can design general purchasing and disbursement procedures that apply to all vendors and o Daily Time record (DTR) – Attendance (Late , Undertime, absences) – some
inventory items. Payroll procedures, however, differ greatly among classes of employees. For uses 12-hour format and 24-hour format
example, different procedures are needed for Sample DTR
1.1 hourly employees,
1.2 salaried employees,
1.3-piece workers, and
1.4 commissioned employees.

Also, payroll processing requires special accounting procedures for employee deductions and
withholdings for taxes that do not apply to trade accounts.

2. General expenditure activities constitute a relatively steady stream of purchasing and disbursing
transactions. Business organizations thus design purchasing systems to deal with their normal level of
activity. Payroll activities, on the other hand, are discrete events in which disbursements to employees
occur weekly, biweekly, or monthly. The task of periodically preparing large numbers of payroll checks
in addition to the normal trade account checks can overload the general purchasing and cash
disbursements system.

But normally it is made by bi-weekly or so called per cut-off. Other establishments like government
paid employees on monthly basis to lessen the work on disbursements.

3. Writing checks to employees requires special controls. Combining payroll and trade transactions can
encourage payroll fraud. But on Actual work it is made on a memorandum letter that instructs the bank
to disbursed such amounts to respective payroll accounts of employees which is another example of
Debit memo. Why? Debit in bank accounts means deduct then after credited to payroll accounts to
employees.

Matters Related to Payroll

1. Government Contributions

• Social Security System (SSS) for private employees or self-employed individual/voluntary

• Philippine Health Insurance corporation (PHIC or Phil health)
o Leave Credits monitoring (Sick leave and Vacation leave)
• Home Development Mutual Fund (HMDF or commonly known as Pag-Ibig) o Payroll Preparation – But why it is mistaken who should be the one responsible
on it? In a proper process and internal control, it should be process first by the
2. Taxation
payroll department or HRD then checking and disbursement on the part of the
• Taxes withheld on compensation monthly accounting especially in terms of computation of the withheld tax
• Involved payroll department in preparation on 2316 and 1601-C BIR Tax forms
PAYROLL SYSTEM Segregation of Duties

The time-keeping function and the personnel function should be separated. The
personnel function provides payroll with pay rate information for authorized hourly
employees. Typically, an organization will offer a range of valid pay rates based on experience,
job classification, seniority, and merit. If the production (time-keeping) department provided
this information, an employee might submit a higher rate and perpetrate a fraud.

For purposes of operational efficiency, the payroll function performs several tasks.
Some of these are in contradiction with basic internal control objectives. For example, the
payroll function has both asset custody (employee paychecks) and record-keeping
responsibility (employee payroll records). This is the equivalent in the general purchases
system of assigning AP and cash disbursement responsibility to the same person. Segregating
key aspects of the payroll transaction between AP and cash disbursement functions return
control to the process. AP reviews the work done by payroll (payroll register) and approves
payment. Cash disbursements then writes the check to cover the total payroll. None of the
employee paychecks is a negotiable instrument until the payroll check is deposited into the
imprest account.

The Physical Payroll System

In this section we examine the physical payroll system. This begins with a very brief review of
manual procedures.2We then move on to review examples of automated and reengineered
payroll systems.
PAYROLL CONTROLS
MANUAL PAYROLL SYSTEM
Transaction Authorization
Figure 6-1 presents a flowchart detailing the previous procedures in the context of a manual
A form of payroll fraud involves submitting time cards for employees who no longer system. The following key tasks are discussed.
work for the firm.
1. Payroll authorization and hours worked enter the payroll department from two different
To prevent this, the personnel action form helps payroll keep the employee records sources: personnel and production.
current. This document describes additions, deletions, and other changes to the employee
2. The payroll department reconciles this information, calculates the payroll, and distributes
file and acts as an important authorization control to ensure that only the time cards of
paychecks to the employees.
current and valid employees are processed.
3. Cost accounting receives information regarding the time spent on each job from
production. This is used for posting to WIP account.