Question

Please build the answer based on following text:

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

Three expense accounts related to payroll are:

• Employee salaries expense
• Employee benefits expenses
• Employee bonus and commissions expense

All Expense accounts are cleared to zero at period end when closing entries are posted. Payable accounts are cleared to zero when salary checks are issued and received by employees.

Methods one could use to reconcile these accounts:

1. Verifications:

• Verify rate of compensation / salaries against offer letter or other documents
• Hours paid based on time sheet entries. Time sheet entries are reconciled against time worked in different processes to ensure that payment made against are ultimately costed against respective processes/ services/products

2. Reconcile with cost records: Reconcile salary and wage payments made with allocations/assignments to different products/services/processes

3. Reconciles with prior period expenses with adjustment made for any current period changes

4. Reconcile with budgets: Compare actuals against budgets and calculate variances if any. Check reasons for variances and whether they are justified and reconciled

5. Reconcile with last year expenses.

6. If salary/eages are based on production/outputs reconcile with production records

7. If commissions are paid against say sales, reconcile with sales values for the period and upto the period (cumulative)