Question

Please build the answer based on following text from studying book:

Expense Accounts. Expenses are costs incurred by an organization in the process of earning revenue during a given period of time. Typical expense accounts related to payroll would include such items as wages, salaries, employer payroll expenses, and group insurance benefit expenses. Payroll expenses have a direct impact on the profitability of an organization.

In an expense account, debit entries increase the expense balance and credit entries decrease the expense balance. Amounts in the expense accounts are cleared to zero (or restarted at zero) at the fiscal year-end. This is the same way the employees’ totals in the payroll register are cleared to zero at the taxation year-end.

Expense accounts include expenses incurred by an organization in the process of earning revenue during a given time period. The salary expense account details the debits (for example, employee salaries and wages) and credits (for example, accrual reversals, recalls and cancelled pays) posted on the journal entries for the period. Entries are posted to the General Ledger at the organization or department total level, rather than with the individual employee details.

Since expense accounts continue to build over time and are not cleared until the end of the fiscal period, the most common reconciliation methods used for these accounts are:
- reasonableness
- year-over-year comparison

A reasonableness test requires an individual to examine the General Ledger account in detail and to ensure that all the postings are in balance and seem valid.

By examining the payroll register or other reports providing details of the total amount posted to an account, it should be analyzed whether the amount shown in the account is correct. Recalled pays, cancelled cheques and manual cheques should be recorded as they occur so that accounts reflect the most current data.

Cost accounting plays a significant role in expense account reconciliation as well. An organization that uses cost accounting will charge expenses to a department, a project or a contract, according to their internal requirements. If an employee is transferred from one department or branch to another, and the paperwork is not processed when the change is effective, the employee’s salary, and any associated employer expenses, will be expensed incorrectly. A journal entry will be required to move the expenses to the correct accounts.

As expense accounts normally have a debit balance, to reduce the expense you credit the account and to increase the expense you debit the account.

A year-over-year comparison would compare each expense account for a certain time frame to determine if there have been material changes.

Question :

List three expense accounts related to payroll. Describe when you would expect the account to be cleared to zero. Explain the methods you could use to reconcile these accounts.

Answer 1

A.The three expense accounts related to payroll are Employee salaries expense, Employee benefits expenses, Employee bonus and commissions expense

B. The pay roll expenses account are cleared to zero in the following manner: A special pay roll checking account and payroll cheques are used. After pay roll register has been completed a cheque is written on the company general checking account payable to payroll for the total net pay. This cheque is deposited in a special payroll checking account against which payroll cheques are written for each employees net pay. This amount is reduced to zero as soon as all employees have cashed their pay roll cheques.

C. Methods used for reconciliation of payroll accounts are:

• reconcilling against budget set
• reconcilling with entries in the payroll register regarding the attendance of the worker
• ensuring making entries to distribute payroll to the appropriate cost accounts.
• Verification of the compensation rate for each employee documented against an offer letter or other source document