BAT 308

PUBLIC SECTOR ACCOUNTING AND AUDITING

LECTURE 3

ACCOUNTING FOR GOVERNMENT PAYROLL

OR SALARIES, WAGES AND PENSIONS

By
Dr. Ibrahim Zubairu (PhD)
Department of Accounting & Finance
Accra Technical University
Introduction
• The accounting for payroll involves all aspects of calculating and paying
compensation to employees, including the payment of withholdings to third
parties. The outcome of this process is documentation of the expenses associated
with all types of compensation, as well as timely payments to employees
• Payroll affects assets and liabilities in the accounting equation because it is a sum
you pay that is subsequently reflected in how much you own and how much you
owe.
• A payroll journal is a detailed record of accounting transactions related to
payroll. Smaller organizations may record their payroll transactions directly in the
general ledger, but larger companies will find that the sheer volume of these
transactions will clog the general ledger.
 Introduction (Cont.)
• A computerized payroll system performs the same functions that manual methods of payroll
do. It stores employee data, such as names, addresses, social security numbers, pay rates
and withholding allowances of each person. It calculates payroll taxes and deductions and
keeps all data up-to-date after each pay period.
• Salaries do not appear directly on a balance sheet, because the balance sheet only covers the
current assets, liabilities and owners equity of the company. Any salaries owed by not yet paid
would appear as a current liability, but any future or projected salaries would not show up at all

• The journal entry is debiting salary expenses and credits the accrued salary. The salary
expense will impact the income statement while accrued salary is the liability on balance sheet.
It represent the liability of the company to its employees.
The Integrated Personnel and Payroll Database (IPPD)

• The Integrated Personnel and Payroll Database (IPPD) is a database system designed
to capture data on Personnel and Payroll.
• The Payroll Management Division is one of the six divisions of the CAGD. It is
headed by a Deputy Controller and an Accountant-General.
• The Division has two Directorates – the Active Payroll Directorate, which has ten
sections and over 160 staff, and the Pension Directorate with two sections and staff
strength of more than 90. Its main responsibility is to process and pay compensation of
employees to active and retired public servants and their beneficiaries under the CAP
30 Pension Scheme as required under the Public Financial Management Act 2016, Act
921 and its Regulations, and the CAP 30 Pension Act.
 IPPD - Payroll Management
• The IPPD unit is the division is responsible for the management of the National
Salary and Pension payroll.
• There are laid down procedures, responsibilities and clear timelines for the
management of the national payroll. It is a shared responsibility between the CAGD
and employer institutions or covered entities. Covered entities have Transaction
Processing Centres which have been connected and given local access to the Payroll
Processing System at the CAGD.
• It is the responsibility of the employer institutions to ensure that the biodata, job
classification and other relevant human resource information of each staff member is
captured or updated on the payroll system. They are also to validate the payment
vouchers before the final payroll run.
 IPPD - Payroll Management (Cont.)
• The Payroll Management Division validates the data inputted at the employer level and
processes the payment by the pay day for each pay period.
• In addition to the main function of running the national payroll, other activities of the
Division include:
• Determination of the means of transmitting employee compensation,
• Publishing dates for payment of salaries and pensions,
• Generation and transmission of monthly salary payment vouchers for validation by
covered entities before final payroll run,
• Preparation of payroll reports for management,
• Monitoring of expenditure on compensation of employees,
• Prescription of procedures and actions required for the retrieval of unearned salaries and
pensions paid out,
 IPPD - Payroll Management (Cont.)

• Processing of deductions from salaries and pensions for payment to both statutory
institutions and other third parties,
• Notification and prescription of sanctions for officers who fail to validate salary
payment vouchers,
• Migration of subvented organisations unto the mechanised payroll.
• The Division ensures the efficiency of the payroll system through controls, such as, the
segregation between data inputting and processing responsibilities, the requirement for
biometric registration of new entrants, the verification of financial clearance for new
entrants, checks by Payroll Quality Assurance Team, and the validation of salary
payment voucher before payments are effected.
Journal Entry for Salary

• Salary is the expense that government paid to the employees in

exchange for employment over a period of time. The government
usually recruit public and civil service employees to work in various
MDAs such as Education, Health, and Security services, CAGD, Audit
Service, public Universities, Judicial Services, Parliamentary Service
and the Local Government Services involving MMDAs and so on. In
exchange for their services, government needs to pay the monthly
salary based on their work complete and level of competency.
 Journal Entry for Salary (Cont.)

• The government needs to pay fixed monthly expenses unless there are bonuses or
increments. The salary is mostly fixed from month to month, however, the
government can increase it once per year to motivate the employee to work harder and
achieve higher targets. Some employees may be promoted to a higher position which
is commensurate with a higher salary as well. In general, the total salary that the
government paid to employees is mostly fixed, it only a small change due to new
recruitments, staff retirements or staff resignation.

• This expense is managed by the CAGD in public sector, but the humane resource
department manage it for a big companies in private sector. For a small company, the
payment process can be handled by the accounting department or the owner himself.
And it is the big part of the expense for most of the organisations be it public or
private which will be presented in their financial statement
 Journal Entry for Salary Expense

• CAGD records salary expenses monthly in their records regardless

of the payment. As we know, the recording in the financial statement
is based on the cash basis, but the adoption IPSAS now makes the
recording on accrual basis, so the revenue and expenses must record
regarding their occurrence. It is not necessary to wait for the cash
payment.
• At the end of the month, the CAGD is required to make journal entry
by debiting salary expenses and credit cash or salary payable.
Journal Entry for Salary Expense (Cont.)

Account Debit Credit

Salary Expense Ȼ
Cash/Salary payable Ȼ

Salary expense will impact the financial statement and similar to other expenses it
will reduce the vote balance MDA concerned. The paying authority will record cash
if they paid the employee on the same date. If the payment is made in the following
month, they can use the salary payable account. The salary payable will be reversed
when company pays cash to the employee.
 Journal Entry for Salary Expense Example

• Company ABC employs many staffs to work in various departments.

Every month they need to spend around Ȼ10,000 on the salary expense.
They usually pay the salary at the end of the same month.
• On 31 January, they pay a salary expense of Ȼ11,000. It increases from
prior month due to new staffs. Please prepare the journal entry for the
January salary expense.
• As the company makes payment at the end of the month, so they can
make journal entry by debiting salary expenses and credit cash of
Ȼ11,000.
 Solution

Account Debit Credit

Salary Expense 11,000
Cash/Salary payable 11,000

The salary expense Ȼ11,000 will appear on the income statement

and cash Ȼ11,000 will deduct from the cash account on balance
sheet.
 Salary Paid in Advance Journal Entry

• Most of the large companie pays employees at the end of the month or even the
beginning of next month. However, the company may pay the employees in
advance if there are any special requests. The company needs to make journal entry
by debiting salary advances and credit cash to employees.

Account Debit Credit

Advance Salary Ȼ
Cash Ȼ
 Salary Paid in Advance Journal Entry (Cont.)

• This transaction will decrease the organisations’ cash when paid to employees and
increase the advance salary which is the current assets on balance sheet. The
company does not record expenses as they do not yet consume the employee work
yet. They need to reverse the advance salary to salary expense at the end of the month
or the time which employee completes the work for company.
• When the employees have completed the work for company, they need to reclass the
advance salary to salary expense for the month by:

Account Debit Credit

Salary Expense Ȼ
Advance Salary Ȼ
 Salary Paid in Advance Journal Entry (Cont.)

• When the company enjoys the benefit from staffs’ employment, so they record expense
into the income statement. Advance salary will be removed from the balance sheet as
well and they do not need to pay the employees again.
Example 2
• Company XYZ always paid salary expenses at the end of the month. However, on 01
April the staffs request to the owner to pay the salary in advance as it is a national
holiday during the month. The employee needs the cash to go on holiday. Management
to decide to pay the April salary on the 1st day of the month to motivate the employees
to work hard for the company. The salary paid is Ȼ12,000. They do not expect to have
any resign during the month.
• As the company pays the employees before providing the service, so they should record
it as advance salary and reverse it to expense at the end of the month.
• On 01 April, they should make a journal entry by debiting advance salary and credit
cash Ȼ12,000.
 Salary Paid in Advance Journal Entry (Cont.)
• On 01 April, they should make a journal entry by debiting advance salary and credit
cash Ȼ12,000.
Account Debit Credit
Advance Salary 12,000
Cash 12,000
• On 30 April, the employees have work for a whole month, so it is the time to record
expenses. Company can make revere the advance account by debiting salary
expense and credit advance salary.
Account Debit Credit
Salary Expense 12,000
Advance Salary 12,000
 Accrued Salary Journal Entry

• Many company pays the current month’s salary in the subsequent month.
Yes, it is just a few days late and the staffs do not mind the practice.
However, it is a problem in accounting that requires recording revenue
and expense in the current month’s financial statement.
• Accountant needs to record salary expense in the current month even the
cash is not yet paid. So we have to record using the accrued salary
expense. It means we estimate the amount of salary paid and record
salary expense verse accrued salary. The estimated amount based on the
prior month adjusted with other information such as resign, new recruit,
increment, and so on.
Accrued Salary Journal Entry (Cont.)

• The company records the transaction by debiting salary expenses and credit accrued
salary.
Account Debit Credit
Salary Expense Ȼ
Accrued Salary Ȼ

• Example 3
• Company EFG usually pays the employee’s current month salary in the next month. However, the
accountant needs to prepare the monthly financial statement. On 02 February, the company make a
payment for January’s salary amount Ȼ15,000.
• Please make the journal entry for January’s salary.
• The company makes payment of January salary in February, however, we need to record the expense in
January to prepare the financial statement.
 Accrued Salary Journal Entry (Cont.)

• The journal entry is debiting salary expenses and credits the accrued
salary.
Account Debit Credit
Salary Expense 15,000
Accrued Salary 15,000

• The salary expense will impact the income statement while accrued salary
is the liability on balance sheet. It represent the liability of the company to
its employees.
 Accrued Salary Journal Entry (Cont.)

• On 02 February, the company making payment to the staffs, it will not impact the
expense again. The journal entry is debiting accrue salary and credit cash Ȼ15,000

Account Debit Credit

Accrued Salary 15,000
Cash 15,000

• Accrued salary will be removed from the balance sheet as the company
pays employees and cash have decreased the same amount.
 Payroll Journal Entries & Initial Payroll Entry

• Payroll Journal Entries

• Payroll journal entries are used to record the compensation paid to employees.
These entries are then incorporated into an entity's financial statements through the
general ledger. The key types of payroll journal entries are noted below.

• Initial Payroll Entry

• The primary payroll journal entry is for the initial recordation of a payroll. This
entry records the gross wages earned by employees, as well as all withholdings from
their pay, and any additional taxes owed to the government by the company.
Accrued Wages Entry & Manual Payments Entry
• Accrued Wages Entry
• There may be an accrued wages entry that is recorded at the end of each
accounting period, and which is intended to record the amount of wages owed to
employees but not yet paid. This entry is then reversed in the following
accounting period, so that the initial recordation entry can take its place. This
entry may be avoided if the amount is immaterial.
• Manual Payments Entry
• A company may occasionally print manual pay cheques to employees, either
because of pay adjustments or employment terminations.

• All of these journal entries are noted in the slides

Primary Payroll Journal Entry

• Primary Payroll Journal Entry

• The primary journal entry for payroll is the summary-level entry that is compiled from
the payroll register, and which is recorded in either the payroll journal or the general
ledger. This entry usually includes debits for the direct labour expense, salaries, and
the company's portion of payroll taxes. There will also be credits to a number of
accounts, each one detailing the liability for payroll taxes that have not been paid, as
well as for the amount of cash already paid to employees for their net pay. The basic
entry (assuming no further breakdown of debits by individual department) is:
 Primary Payroll Journal Entry (Sample)

Debit Credit
Direct labour expense xxx
Salaries expense xxx
Payroll taxes expense xxx
Cash xxx
Withholding taxes payable xxx
Social security taxes payable xxx
Medicare taxes payable xxx
Unemployment taxes payable xxx
State withholding taxes payable xxx
State unemployment taxes payable xxx
Garnishments payable xxx
 Additional Entries for 401(k)

• There may be a number of additional employee deductions

to include in this journal entry. For example, there may be
deductions for 401(k) pension plans, health insurance, life
insurance, vision insurance, and for the repayment of
advances.
• When you later pay the withheld taxes and company portion
of payroll taxes to the IRS, you then use the following entry
to reduce the balance in the cash account, and eliminate the
balances in the liability accounts:
Additional Entries for 401(k) - Sample

Debit Credit
Cash xxx
Withholding taxes payable xxx
Social security taxes payable xxx
Medicare taxes payable xxx
Unemployment taxes payable xxx
State withholding taxes payable xxx
State unemployment taxes payable xxx
Garnishments payable xxx
 Accrued Payroll Journal Entry

• It is quite common to have some amount of unpaid wages at the end of an

accounting period, so you should accrue this expense (if it is material). The accrual
entry, as shown next, is simpler than the comprehensive payroll entry already
shown, because you typically clump all payroll taxes into a single expense account
and offsetting liability account. After recording this entry, reverse it at the beginning
of the following accounting period, and then record the actual payroll expense (as
just described under the "Primary Payroll Journal Entry" section whenever it occurs.
Accrued Payroll Journal Entry - Sample

Debit Credit

Direct labour expense xxx

Salaries expense xxx

Accrued salaries and wages xxx

Accrued payroll taxes xxx

 Manual Pay Cheque Entry

• It is quite common to create a manual check, either because an employee was short-paid
in the preceding payroll, or because the company is laying off or firing an employee,
and so is obligated to pay that person before the next regularly scheduled payroll. This
check may be paid through the corporate accounts payable bank account, rather than its
payroll account, so you may need to make this entry through the accounts payable
system. If you are recording it directly into the general ledger or the payroll journal,
then use the same line items already noted for the primary payroll journal entry.
• The volume of manual pay cheque entries can be reduced by continual attention to the
underlying causes of transaction errors, so there are fewer payroll errors to be rectified
with a manual pay cheque
IPPD
.

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