A few accounting terms should be defined here for those who may not have much background in accounting.
First, we will define some general accounting terms as necessary background, then proceed to some terms and concepts that are specific to the Payroll system.
Accounting is the keeping of financial records of a business concern. An account is one category or group of records that is kept. For example, all records of business carried on with a particular customer comprise that customer's account.
The terms debit and credit are frequently used in connection with accounts. Debit (abbreviated DR) can be an item of debit as recorded in an account. It is a type of entry in an account. Credit (abbreviated CR) is another type of entry in an account.
The term transaction is an instance of doing business or an exchange.
The word transaction is abbreviated as TRX.
When transactions are entered into the computer to record them, they are usually entered into a temporary Transaction File. The transactions in the Transaction File can be changed or deleted easily. After the correctness of the transactions has been verified, they may be posted to become part of more permanent data files, similar to the way that, in bookkeeping, transactions are posted from a journal (book of daily transactions) to a ledger (a final book of accounts).
The general ledger is a collection of accounts into which all financial transactions are distributed after being classified. The G/L account number serves to identify three integrated parts of each account. These include a main account number, profit center number, and department number. Each part may incorporate as many as eight alphanumeric characters. But the TOTAL number cannot exceed fifteen (15). This includes any combination of the three parts equaling a TOTAL of fifteen characters or less. The format of the account number is defined by the user via the Company Setup application in the Util_setup pull down window from the Elliott Main menu bar.
The basic concept of Payroll is one of flow and exchange. An employee works for an employer. In exchange, the employee receives pay or wages. There may be bonuses (a reward for good service or exceptional production) and/or commissions (a way of rewarding sales people for the volume of sales they generate).
Employees are usually categorized as salaried or hourly. The salaried worker is usually paid a fixed fee for a period of work: a week, two weeks, half a month, a month, a quarter (of a year). In addition, the salaried employee may receive bonuses and sales commissions.
The hourly worker does not necessarily get the same fixed wage per week. The hourly worker's pay is determined by the number of hours worked times a regular rate of pay. For hours over a certain limit (for example, 40 hours per week) the hourly worker may get a higher overtime rate of pay. For working on Sundays or holidays, the employee may receive a special, higher rate of pay. An employee may also receive a high rate of pay for working a different shift.
Employees in restaurants may receive meals and tips as part of their compensation. In the Elliott Payroll system, data about the various types of employee compensation salary, hourly pay, overtime, special pay, holiday pay, sick pay, bonuses, and commissions are kept on file in a record for the employee. This file of records containing employee data is known as the Employee File and is a vital part of the Payroll system.
Unfortunately, in the opinion of the employee, the employee does not get to keep all the wages earned. There are also taxes to be taken out of the employee's pay: federal, state and city taxes.
Federal Withholding Tax (FWT) is taken from an employee's pay in amounts that depend on the level of earnings, marital status, and the number of exemptions claimed.
Federal Insurance Contribution Act (FICA) taxes, also known as the Social Security taxes and Medicare, are based on fixed percentages of the employee's pay, up to a maximum limit of earnings that can be taxed for each. The employer contributes to FICA a share that is, in most instances, equal to the employee's share.
The employer is also responsible for paying Federal Unemployment Insurance referred to in the Payroll system as FUI tax, but also referred to by the IRS and others as Federal Unemployment Tax Act (FUTA). In states where there is a State Unemployment Insurance program, the Federal Unemployment Insurance tax is reduced to a smaller percentage in view of amounts being paid to the state.
State taxes include State Withholding Tax (SWT), the State Unemployment Insurance (SUI), and various other state taxes, for example, State Disability Insurance (SDI) in many states. Also, many cities have a City Withholding Tax (CWT).
In addition to taxes, the employee may have a number of non‑governmental deductions taken from his pay.
Such deductions may include contributions to pension plans or other savings accounts, purchase of savings bonds, union dues deduction, medical insurance premiums, loan repayments, and garnishments (legal liens upon a portion of an employee's pay to satisfy some debt).
The general flow of the Payroll system is to maintain data files of employee data, tax data, deductions data, allow transactions to be entered that will result in payroll transactions, calculate pay, and print pay checks, update or make current the data files and produce various periodic, quarterly, and end of year reports.
General Ledger Account Distributions
The PR Account File Maintenance application is used to enter all General Ledger accounts used by the package. The Employee File, Payroll Setup, State/City Tax Code File, and Deduction/Earning Code File applications further define the use of these accounts by the package. You should look at the screen formats of these applications for reference in the following discussion.
When checks are printed and posted, automatic credits and debits are created in the Payroll Distribution File for the accounts entered in the above‑mentioned applications.
What was actually paid to the employee is a credit to the cash checking account in Payroll Setup.
A debit is made to the wage account of the Employee in the Employee File. This debit is for the regular, overtime, special pay, and supplemental pay. Vacation, holiday and sick pay expenses are debited to the General Ledger accounts in the following way: the main account number is the main account number of Payroll Setup; the sub‑account is the sub‑account of the employee's wage of the Employee File. If the main account number for any one of these is 9's, then the employee's wage account will be used in its entirety.
Any additional earnings (using earnings codes from the Deduction/Earnings Code File) paid to the employee are debits to the account corresponding to the earning codes used (except for meals and tips, if the employer is a restaurant). If the sub‑account number for this account is all 9's, then the actual sub‑account used will be the sub‑account of the employee's wage account mentioned above. These earnings may be temporary earnings (entered in the Time Transaction Processing application) or permanent (entered in the Employee File). The codes and their accounts are contained in the Deduction/Earnings Code File and are entered through the maintenance application for this file. Any EIC pay to the employee becomes a debit to the EIC advance account of Payroll Setup.
This covers the expenses for regular, overtime, special, vacation, holiday, and sick pay as well as temporary or permanent taxable or non‑taxable earnings and supplemental pay. This is Total Wages earned.
Deductions from this amount (total wages earned) are posted as credits to the Payroll Distribution File. These are temporary or permanent deductions, which are credited in a similar manner to the earnings explained above. They may include liabilities such as a fixed savings account amount or one-time deductions such as fines or penalties. Credits are also posted for Federal withholding (FWT), State withholding (SWT), City withholding (CWT) and other state tax (OST ‑ e.g., state disability insurance).
The accounts are entered in Payroll Setup and in the State/City Tax Code File Maintenance application. These liabilities (credits) are counter‑balanced against the total earnings of the employee.
Union liabilities are credited to the employee's union liability account (of the Employee File) and counter‑balanced against total wages earned.
Savings bond deductions, loans, and garnishes are credited against the account in Payroll Setup and counter‑balanced against total wages earned.
Social Security for the employee is credited to the Employee Social Security Liability account in Payroll Setup. This is the amount actually withheld from the employee's check for Social Security and counter‑balanced against the total wages for the employee.
Employer Social Security is credited to the employer Social Security liability account in Payroll Setup. This is the employer's payable contribution to Social Security. The expense is recognized immediately by debiting the employer Social Security expense account in Payroll Setup plus the profit center of the employee's wage account (explained above). Thus, profit center accountability may be traced for the employer's Social Security expenses. If the expense account main number is zero, the automatic posting for employer Social Security will not take place.
Medicare for the employee is credited to the Employee Medicare Liability account in Payroll Setup. This is the amount actually withheld from the employee's check for Medicare and counter‑balanced against the total wages for the employee.
Employer Medicare is credited to the employer Medicare liability account of Payroll Setup. This is the employer's payable contribution to Medicare. The expense is recognized immediately by debiting the employer Medicare expense account of Payroll Setup plus the profit center of the employee's wage account (explained above). Thus, profit center accountability may be traced for the employer's Medicare expenses. If the expense account main number is zero, the automatic posting for employer Medicare will not take place.
Federal Unemployment Insurance contributions are handled in a manner similar to employer Social Security and Medicare with the liability being credited to the FUI liability account in Payroll Setup and the debit posted to the main account for FUI expense in Payroll Setup plus the profit center of the employee's wage account. Again, no automatic posting will take place if the expense account number is zero.
State unemployment contributions (SUI) are credited to the state unemployment insurance liability account of the State/City Tax Code File application. Expenses are recognized automatically by debiting the main account of the SUI expense account of the State/City Tax Code file application plus the profit center of the employee's wage account. No automatic posting will take place if the SUI expense account is zero.
Any Worker's Compensation Premium calculated as due on the employee's wages or hours are credited to the Worker's Compensation liability account of the State/City Tax Code File application.
Premium expense is debited to the account made up of the main Worker's Compensation expense account of State/City Tax Code File, plus the profit center of the employee's wage account. No automatic posting of the Worker's Compensation Premium will be done if the Worker's Compensation expense account is zero.
Tips, Meals, and Allowances
Tips, meals, and allowances are not directly accounted for by the package as far as distribution to General Ledger. Indirectly, they affect the way certain tax calculations are performed.