Payroll accounting

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1. ACCOUNT EXECUTIVE (PAYROLL ACCOUNTING)

2. UNIT: 01 INTRODUCTION TO ACCOUNTING At the end of this lesson, students should be able to demonstrate appropriate knowledge, and show an understanding of the following: Accounting Conventions Classification of Accounts System of Accounting Rules of Double Entry Accounting System Definition of Accounting Objectives & Scope Accounting Process Accounting Concepts

3. INTRODUCTION & GETTING FAMILIAR Dear participants, welcome to the 30 days training program for Accounts executive. In coming 30 days we will be discussing about various aspects of accounting with a key focus on accounts payable and receivable. So after a short introduction of training program and getting familiar with each-other we will cover below topics: Introduction To Accounting, Basic accounting concepts; and techniques for recording transactions.

4. Accounting is a business language . We can use this language to communicate financial transactions and their results. Accounting is a comprehensive system to collect, analyze, and communicate financial information . Or, “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which in part at least of a financial character and interpreting the results thereof .”

5. OBJECTIVES AND SCOPE OF ACCOUNTING To keep systematic records: Accounting is done to keep systematic record of financial transactions. To ascertain profitability: With the help of accounting, we can evaluate the profits and losses incurred during a specific accounting period. To ascertain the financial position of the business: A balance sheet or a statement of affairs indicates the financial position of a company as on a particular date. To assist in decision-making: To take decisions for the future, one requires accurate financial statements. To fulfil compliance of Law: Business entities such as companies, trusts, and societies are being run and governed according to different legislative acts.

6. ACCOUNTING PROCESS Steps followed in accounting process Collecting and Analyzing Accounting Documents Posting in Journal Posting in Ledger Accounts Preparation of Trial Balance Posting of Adjustment Entries Adjusted Trial Balance Preparation of Financial Statements Post-Closing Entries Post-Closing Trial Balance

7. ACCOUNTING CONCEPTS The most important concepts of accounting are as follows: Business Entity Concept Money Measurement Concept Going Concern Concept Cost Concept Dual Aspects Concept Accounting Period Concept Matching Concept Accrual Concept Objective Evidence Concept The first two accounting concepts, namely, Business Entity Concept and Money Measurement Concept are the fundamental concepts of accounting.

8. ACCOUNTING CONCEPTS Business Entity Concept: According to this concept, the business and the owner of the business are two different entities. Money Measurement Concept : According to this concept, “we can book only those transactions in our accounting record which can be measured in monetary terms. Going Concern Concept: Accounting is based on the assumption that a business unit is a going concern.

9. ACCOUNTING CONCEPTS Cost Concept: As per this concept we book the value of assets on the cost basis, not on the net realizable value or market value. Dual Aspect Concept: D ebit should be always equal to credit.

10. ACCOUNTING CONCEPTS Accounting Period Concept: To determine the profit or loss of a firm, and to ascertain its financial position, profit & loss accounts and balance sheets are prepared at regular intervals of time. Matching Concept: Matching concept is based on the accounting period concept.

11. ACCOUNTING CONCEPTS Accrual Concept: T he revenue generated in the accounting period is considered and the expenditure related to the accounting period is also considered. Objective Evidence Concept: Every financial entry should be supported by some objective evidence.

12. ACCOUNTING CONVENTIONS We will discuss the following accounting conventions in this section: CONVENTION OF CONSISTENCY CONVENTION OF DISCLOSURE CONVENTION OF MATERIALITY CONSERVATION OF PRUDENCE

13. Convention of Materiality  If the disclosure or non-disclosure of an information might influence the decision of the users of financial statements, then that information should be disclosed. Convention of Disclosure  The Companies Act, 1956, prescribed a format in which financial statements must be prepared. Conservation or Prudence  For future events, profits are not anticipated, but provisions for losses are provided as a policy of conservatism. Convention of Consistency To compare the results of different years, it is necessary that accounting rules, principles, conventions and accounting concepts for similar transactions are followed consistently and continuously

14. CLASSIFICATION OF ACCOUNTS Know the classification of accounts Treatment in double entry system of accounts. Broadly, the accounts are classified into three categories: PERSONAL ACCOUNTS REAL ACCOUNTS Tangible accounts Intangible accounts NOMINAL ACCOUNTS

15. Personal Accounts: classified into three categories: Natural Personal Account: An account related to any individual like David, George, Ram, or Shyam is called as a Natural Personal Account. Artificial Personal Account: An account related to any artificial person like M/s ABC Ltd, is called as an Artificial Personal Account. Representative Personal Account: Representative personal account represents a group of account. E.g. salary payable accountand drawing account, etc.

16. REAL ACCOUNTS: Every Business has some assets and every asset has an account. Thus, asset account is called a real account. There are two type of assets:   Tangible assets are touchable assets such as plant, machinery, cash, etc. Intangible assets are non-touchable assets such as goodwill, patent, etc. Accounting treatment for both type of assets is same. NOMINAL ACCOUNTS   This account does not represent any tangible asset, it is called nominal or fictitious account. All kinds of expense account or income accounts etc. come under this category.

17. ACCOUNTING SYSTEMS Single Entry System : Single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. Double Entry System: Double entry system of accounts is a scientific system of accounts followed all over the world without any dispute. Assets = Liabilities If we give something, we also get something in return and vice versa.

18. GOLDEN RULE Classification of Rules Effect accounts Receiver is Debit Personal Accounts Giver is Credit Debit = credit What Comes In Debit Real Accounts What Goes Out Credit Debit = credit Expenses are Debit Nominal Accounts Incomes are Credit Debit = credit

19. UNIT: 02 FINANCIAL ACCOUNTING At the end of this lesson, students should be able to demonstrate appropriate knowledge, and show an understanding of the following: Rules of Journal   Posting in Ledger Accounts Ruling of Accounts

20. RULES OF JOURNAL “The process of recording a transaction in a journal is called journalizing the transactions.” -- Meigs and Meigs and Johnson Journal is a book that is maintained on a daily basis for recording all the financial entries of the day. Passing the entries is called journal entry. Journal entries are passed according to rules of debit and credit of double entry system.

21. POSTING IN A LEDGER Transferring journal entries into a ledger account is called ‘ posting’ The ledger helps us in summarizing journal entries of same nature at single place. For example, if we pass 100 times a journal entry for sale, we can create a sales account only once and post all the sales transaction in that ledger account date-wise.

22. LEDGER FORMAT

23. IMPORTANT POINTS REGARDING LEDGER Each side of a journal entry is posted in the same side of the ledger. It means the debit entry of a journal is posted in the debit side and vice-a-versa.   Balance c/d refers to the balance carried down and balance b/d refers to the balance brought down.   After posting in ledger, balancing of ledger is done. In the column named   The difference of both sides (in this case, it is Rs 5,000) is written in the last row of the credit side as ‘balance c/d’. This balance is called the debit balance of account or vice-a-versa. All expenses and assets represent debit balance. All the income and liabilities represent credit balance including capital account. Debit balance of personal account represents ‘Amount Receivable’ . This comes under the category of assets. For example debtors. Credit balance of personal accounts signifies ‘Amount Payable’ . This comes under liabilities side and represents that we need to pay this amount which is credited due to goods, service, loan, or advance received.  

24. Debit side of real account means stock in hand or any kind of assets. Credit balance of Real account is not possible. Debit balance of nominal account means expenses of organization.   Credit balance of nominal accounts means income earned. Debit balance of cash book means cash in hand. Debit side of Bank book means balance at bank. Credit balance of Bank book indicates ‘Bank Overdraft’. Debit and credit balances of nominal account (Expenses and income will be nil, because these balances get transferred to trading, and profit & loss account to arrive at profit and loss of the company. Balances of real and personal account appear in balance sheet of the company and to be carried forward to next accounting years.

25. USES OF BOTH THE FORMATS Format-1 is used for academic purpose. Hence, this format is useful to learn the basics and principles of accounting. Format-2 is used by banking and financial organization as well as well as by most of the business organizations.

26. UNIT: 03 SUBSIDIARY BOOKS At the end of this lesson, students should be able to demonstrate appropriate knowledge, and show an understanding of the following: Bills payable book Bank reconciliation   Trial balance   Financial statements Depreciation and its roles     Cash Book Petty Cash Book, Purchase Book & Sale Book. Purchase Return Book  Sale Return Book Bills receivable book

27. CASH BOOK Cash book is a record of all the transactions related to cash. Examples include: expenses paid in cash, revenue collected in cash, payments made to creditors, payments received from debtors, cash deposited in bank, withdrawn of cash for office use, etc.

28. SINGLE COLUMN CASH BOOK Cash book is just like a ledger account. There is no need to open a separate cash account in the ledger. The balance of cash book is directly posted to the trial balance. Since cash account is a real account, ruling is followed, i.e. what comes in – debit, and what goes out – credit. All the received cash is posted in the debit side and all payments and expenses are posted in the credit side of the cash book .

29. DOUBLE COLUMN CASH BOOK Here, we have an additional Discount column on each side of the cash book. The debit side column of discount represents the discount to debtors of the company and the credit side of discount column means the discount received from our suppliers or creditors while making payments. The total of discount column of debit side of cash book is posted in the ledger account of ‘ Discount Allowed to Customers’ account as ‘To Total As Per Cash   Book ’ . Similarly, credit column of cash book is posted in ledger account of ‘Discount Received’ as ‘By total of cash book’ .

30. TRIPLE COLUMN CASH BOOK When one more column of Bank is added in both sides of the double column cash book to post all banking transactions, it is called triple column cash book. All banking transactions are routed through this cash book and there is no need to open a separate bank account in ledger .

31. PETTY CASH BOOK In any organization, there may be many petty transactions incurring for which payments have to be done. Therefore, cash is kept with an employee, who deals with it and makes regular payments out of it. To make it simple and secure, mostly a constant balance is kept with that employee.

32. PURCHASE BOOK Purchase book is prepared to record all the credit purchases of an organization. Purchase book is not a purchase ledger. The features of a sale book are same as a purchase book, except for the fact that it records all the credit sales. SALE BOOK

33. PURCHASE RETURN BOOK Sometimes goods are to be retuned back to the supplier, for various reasons. The most common reason being defective goods or poor quality goods. In this case, a debit note is issued.

34. SALE RETURN BOOK Sometimes customers return the goods if they don’t meet the quality standards promised. In such cases, a credit note is issued to the customer.

35. BILLS RECEIVABLES BOOK Bills are raised by creditors to debtors. The debtors accept them and subsequently return them to the creditors. Bills accepted by debtors are called as ‘Bills Receivables’ in the books of creditors, and ‘Bills Payable’ in the books of debtors.

36. BILLS PAYABLE BOOK Bills payable issues to the supplier of goods or services for payment, and the record is maintained in this book. BANK RECONCILIATION On a particular date, reconciliation of our bank balance with the balance of bank passbook is called bank reconciliation.

37. TRIAL BALANCE Trial balance is a summary of all the debit and credit balances of ledger accounts. The total of debit side and credit side of trial balance should be matched. Trial balance is prepared on the last day of the accounting cycle.

38. FINANCIAL STATEMENTS Financial statements are prepared to ascertain the profit or loss of the business, and to know the financial position of the company. Trading, profit & Loss accounts ascertain the net profit for an accounting period and balance sheet reflects the position of the business.

39. DEPRECIATION Depreciation reduces the value of assets on a residual basis. It also reduces the profits of the current year. Method of Depreciation Depreciation can be calculated using any of the following methods, however the most popular methods remain (a) Straight Line Method and (b) Written Down Value Method. Straight Line Method Written Down Value Method Annuity Method Insurance Policy Method Machine Hour Rate Method Depletion Method Revaluation Method Depreciation Fund Method

40. UNIT: 04 PAYROLL ACCOUNTING

41. At the end of this lesson, students should be able to demonstrate appropriate knowledge, and show an understanding of the following: Understanding salary slip and its components What is payroll and how payroll calculations are done? Statutory compliances in Indian payroll management system Payroll accounting How to do step by step payroll accounting in tally Working with HR department Obtaining information & record from HR Initial/basic steps to create payroll Rules and regulations governing pay roll Filing of accounting records Storage of accounts records

42. 4.1 UNDERSTANDING SALARY SLIP AND ITS COMPONENTS Every month, your finance department will send you a salary slip once the salary gets paid out. For most people, the importance of salary slip is only when they apply for a loan or a new credit card. Otherwise, the confusing terms and figures seem like a puzzle you don't want to solve. But here’s why you might want to understand your salary slip better. Choose smartly from competing offers when you are looking to switch jobs Optimize tax liability by making full use of the deductions available Understand what percentage of your salary is forced savings (EPF, ESI etc.)

43. 4.1 UNDERSTANDING SALARY SLIP AND ITS COMPONENTS

44. 4.2 WHAT IS PAYROLL AND HOW PAYROLL CALCULATIONS ARE DONE? Payroll processing consists of calculation of payments to employees for their work in the company – whether it is based on time or productivity, calculation of benefits, and statutory deductions. Payroll needs to be processed by each company periodically. It may be processed weekly, bimonthly, monthly or daily (for daily wage workers). Payroll processing involves accurate  payroll calculations , disbursal, payslip generation, and managing payroll taxes and record keeping compliance. All these activities cannot be rushed into and must be performed using a  payroll software  to ensure that employees do not get erroneous paychecks and all statutory compliances are met.

45. 4.2 WHAT IS PAYROLL AND HOW PAYROLL CALCULATIONS ARE DONE? HRA  – House Rent Allowance Exemption is possible based on the defined criterion, if expenditure on rent is actually incurred. HRA is taxable if residing in self-occupied house property. TRAVEL ALLOWANCE  – Tax free upto 800/-pm as per current rules. LEAVE TRAVEL ALLOWANCE:  Exemption available only in respect of two journeys performed in a block of 4 calendar years. CHILDREN EDUCATION ALLOWANCE  – Exempt up to Rs. 100 per month per child for a maximum of 2 children MEDICAL ALLOWANCE  – Taxable (medical reimbursement is tax-free upto 15,000). INVESTMENTS:  Investments in approved fixed deposit schemes, Equity oriented MF, PPF (Public Provident Funds), life insurance premiums, Company Provident Fund etc. 12B:  Declaration of income from previous employer, other income, and commissions can be made on form 12B for proper TDS calculation for salaried employees. Considering Employee Benefits For Payroll Calculations The employees of the company get many payroll benefits in addition to their regular salary. Most of the benefits that employees get impact tax calculations. Some such benefits are: FLEXI ALLOWANCE BASKET:  The salary packages these days include a basket of flexible allowances to minimize the tax outgo. For example the employees can choose medical reimbursements and leave travel concession components that are exempt under limits prescribed by the Act. PERQUISITES:  Perquisites are also the privileges given to employees by the employer over and above the regular income of the employees.

46. 4.3 STATUTORY COMPLIANCES IN INDIAN PAYROLL MANAGEMENT SYSTEM Statutory compliance, in HR, refers to the legal framework within which organizations must operate, in the treatment of their employees. Every country has several hundreds of federal and state labour laws that companies need  to align with. This list is forever being added to. A lot of your company’s effort and money goes into ensuring compliance to these laws which could deal with a range of issues; from the payment of minimum wages to maternity benefits or professional taxes. Therefore, dealing with statutory compliance requires for companies to be well-versed with the various labor regulations in their country of operation.

47. 4.4 PAYROLL ACCOUNTING Payroll Accounting is the method of accounting for payroll. Payroll is the aggregate expenditure on wages and salaries incurred by a business in an accounting period. It can also refer to a listing of employees giving details of their pay. The analysis of payroll is shown below: Payroll Gross Pay Employer tax Net pay Employee tax Deductions Employer tax Payroll Accounting

48. As an example of payroll accounting, if gross pay is 2,000, employee tax is 500, and other deductions are 100, then the net pay due do the employee is 1,400. The payroll accounting journal entries would be as follows: Account Debit Credit Gross Wages 2,000 Employee tax control 500 Other deductions control 100 Net pay control 1,400 Total 2,000 2,000 Payroll Accounting – Gross pay

49. Journal entry for Salary: -      Let us take example: -   Basic + Dearness allowance=1200000   House rent allowance = 150000   Transport allowance = 75000   Other Allowance = 25000    ESI contribution (employer + employee) =45000(30000+15000)   PF contribution (employer + employee) = 100000(50000+50000)   TDS = 25000                                                          Journal Entry will be: -            Salary A/C    Dr                        1450000(1200000+150000+75000+25000)       ESI contribution A/C Dr              45000       PF Contribution A/C Dr               100000                              To Salary Payable A/C                1425000                              To ESI contribution payable A/C 45000                              To PF contribution payable A/C    100000                              To TDS payable A/C                    25000   (Being salary paid for the month of march)

50. Note:- Debit: Salary is expense to the company, so as per nominal account rule (Salary A/C) “Debit all expense or loss" (Expense Account)   Debit: ESI contribution is expense to the company, so as per nominal account rule (ESI contribution) “Debit all expense or loss"(Expense Account)   Debit: PF Contiribution is expense to the company, so as per nominal account rule (PF Contribution A/C)“Debit all expense or loss"(Expense Account)   Credit: Salary payable is liability to company, so as per personal account rule (Salary Payable A/C) "Credit the giver account"(Current Liabilities)   Credit: ESI contribution payable is current liability and the same need to be paid to ESI department with in due date, so as per personal account rule (ESI contribution payable A/C) "Credit the giver account"(Current Liabilities)   Credit: PF contribution payable is current liability and the same need to be paid to PF department with in due date, so as per personal account rule (PF contribution payable A/C) "Credit the giver account"(Current Liabilities)   Credit: TDS payable is liability and the same need to be paid to income tax department, so as per personal account rule (TDS payable A/C) "Credit the giver account"(Current Liabilities)

51. 4.5 HOW TO DO STEP BY STEP PAYROLL ACCOUNTING IN TALLY (EXAMPLE ERP 9) To start the company Go to gateway of tally > Company info > Create company fill the details of company and press YES Press F11>Features >Accounting Features F1 Set maintain payroll to YES Set more than one payroll cost category to YES allow you to maintain more than one cost category

52. 4.5 HOW TO DO STEP BY STEP PAYROLL ACCOUNTING IN TALLY (EXAMPLE ERP 9)

53. Go to gateway of Tally>F12>payroll configuration

54. Create group : Employee cost under indirect Expenses: Note the creation of this group helps in quickly ascertaining the total cost incurred toward employees as salaries: Got to gateway of tally > Accounts Info > group > create to view the group creation. Screen. Ensure that the group creation screen display as shown.

55. Create attendance /production type: Absent under primary Go to gateway of tally > payroll info > attendance production type > create name :absent under : primary attendance type : leave without pay period type : days display automatically Note: Tally display period type as days because attendance usually accounted for on the basis of the lowest period.

56. Create pay head for house rent allowance : Name : Conveyance allowance Pay head type :earning for employees Under : employee cost Appears in payslip : yes Name to appears in payslip :  Conveyance Use for gratuity : No Calculation type : Flat rate Calculation period : Month Rounding method normal rounding Limit : 1

57. Create pay head House rent Allowance Name : House Rent Allowance Pay head Type : earning for employee Under : Employee Cost Appears in Payslip: YES Name to appear in payslip :HRA Use of gratuity : No Calculation Type : As computer Value Calculation period : Month Rounding method normal rounding Limit : 1

58. Create Pay Head Variable Pay Name : Variable Pay Pay head Type : earning for employee Under : Employee cost Appears in Pay slip : YEs Name to appear in Pay slip : incentive use for Gratuity : No Calculation Type : as under defined value

59. 4.6 WORKING WITH HR DEPARTMENT The importance of a strong relationship between HR and Finance: Most people see a fundamental difference between Human Resources and Finance; after all they represent different components of business. People (HR) vs. Money (Finance). This assumption couldn’t be more wrong. While Finance views HR as an unnecessary cost, HR thinks finance is out to squeeze every penny they can find. Bottom line is both departments function as gears powering a larger machine. Individually each department provides services to the company, many of which overlap. When HR and finance function cooperatively the company moves into a new era of efficiency, production, customer satisfaction and most important, profit.

60. 4.7 OBTEINING INFORMATION & RECORD FROM HR What is Payroll and how it has been processed? Payroll is the salary processing system. Payroll is divided into two parts-Monthly and Annual Monthly payroll includes the following : Basic salary Dearness Allowance HRA Conveyance/Petrol Medical Education Telephone Special allowance Other Perks Deductions

61. 4.8 INITIAL/BASIC STEPS TO CREATE PAYROLL An employee data base (i.e.) a Master List to created which contains all the details of the employees like, Date of Joining, Education, Work Experience, Personal details (DOB, Contact info), Salary break up details Attendance/ Leave record details

62. 4.8 INITIAL/BASIC STEPS TO CREATE PAYROLL Other Related Inputs for Payroll The salary break up details of all the existing employees Employee Bank account No./PAN No.if any Attendance of all employees:: LOP details Salary Revision ( w.e.f that particular month) New Recruits (To be calculated form the date of Joining) Full and final Settlements (If any are to be calculated separately not with payroll) Additions-Arrears if anything to be paid, Reimbursements Deductions- Provident Fund, ESI, Professional Tax, Income Tax, LIC LOP, Loans/Advances, Other recoveries, Miscellaneous TDS

63. 4.9 RULES AND REGULATIONS GOVERNING PAY ROLL Indian Factories Act 1948 Shops and Commercial Establishments Act 1961 Beedi and Cigar Workers (Condition of Employment) Act 1966. Plantation Labour Act 1951 Motar Transport Workers Act 1961 Building & Other Construction Workers ( Regulation of Employment and Conditions of Service) Act 1996 Inter-State-Migrant Workers (Regulation of Employment & Conditions of Service) Act 1979 Mines Act Contract Labour (A & R) Act EPF & MP Act ESI Act

64. FILING OF ACCOUNTING RECORDS All accounting records must be filed in such a manner so that they can be traced any time without wasting extra time. Before the accounts records are filed’ following points must be kept in mind:- All records and vouchers must be filed date wise. Separate files must be kept for different types of vouchers, sales invoices, receipts, purchase invoices etc. Proper serial numbers should be given on all the vouchers. All bank statements, party’s statements should be filed in separate files. Separate files must be maintained relating to different tax matters

65.   STORAGE OF ACCOUNTS RECORDS All the accounts records must be kept in good bindings. Good quality of paper should be used for all vouchers, sales bills, delivery challans etc. Good quality of files must be used to keep all the vouchers, sales bills, purchase bills etc. Proper care should be taken to protect these records from rats and other insects. Filing of all records must be done in good manner. All the supporting documents must be properly attached with vouchers. In case of accounting data lying in computer, proper backup should be taken in floppies or pen drives. Hard copy of all computer records must be taken. There should be a responsible person who can look after all records properly and he/she should be responsible to keep the records in proper way. Proper and separate store room should be given to accounts department to keep their records.