Training, Teaching and Learning Materials
NEFAS SILK POLY TECHNIC COLLEGE
Learning Guide
ACCOUNTS AND BUDGET SUPPORT LEVEL III
Unit of Competence Process Payroll
Module Title Processing Payroll
LG Code: BUF ACB3 11 0921
TTLM Code: BUF ACB3M 11 0921
Learning Guide
INTRODUCTION
Welcome to the module “Process Payroll”. This learner’s guide was prepared to help
you achieve the required competence in “Accounts and Budget Support Level III”. This
will be the source of information for you to acquire knowledge attitude and skills in this
particular occupation with minimum supervision or help from your trainer.
Summary of Learning Outcomes
1
TTLM Development Manual Date: SEPTEMBER ,2021
Compiled by: Acct department
Training, Teaching and Learning Materials
After completing this learning guide, you should be able to:
Lo1:- Record payroll data
Lo2:- Prepare payroll
Lo3:- Handle payroll enquiries
How to Use this TTLM
o Read through the Learning Guide carefully. It is divided into sections that cover
all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section
to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your
trainer to show you the correct way to do things or talk to more experienced
person for guidance.
o When you are ready, ask your trainer for institutional assessment and provide you
with feedback from your performance.
Lo1:- Record payroll data
I. The Importance of Payroll Accounting
The concept payroll is often referred to the total amount paid to employees of a firm as a
compensation for the service rendered to a firm in a given period of time. The payroll
accounting of a firm has to be given emphases of significance for the following reasons (as stated
in the book entitled “Accounting Principles” by Fees and Warren, Page 297).
1. Employees are sensitive to payroll errors and irregularities, and maintaining good
employees moral requires that the payroll be paid on a timely, accurate basis.
2. Payroll expenditures are subject to various government regulations.
3. The payment for payroll and related taxes has significant effect on the net income of most
business is unquestionable.
Moreover, since the payroll related payment is highly subject to certain fraudulent activities it
is imperative that businesses need to properly design their payroll system so that it safeguards the
company’s assets against unauthorized payments of payroll and the accuracy as well as
2
TTLM Development Manual Date: SEPTEMBER ,2021
Compiled by: Acct department
Training, Teaching and Learning Materials
reliability of the accounting records is assured pertaining to payroll. Some of the possible frauds
that can be made on the payroll system are the following:
Adding fictitious employees to the payroll
Listing terminated employees on the payroll
Using unauthorized pay rates
Overstating working hours
Issuing duplicate payroll checks
Not deducting employees’ absent time
Making incorrect totals on the payroll register
Thus, separation of duties on the functions of payroll activities is essential for strong internal
control over payrolls in order to protect the above-mentioned methods of stealing money from
company. Payroll activities involve four functions: hiring employees, timekeeping, preparing the
payroll, and paying the payroll. For an internal control system to work effectively these four
functions should be assigned to different departments or individuals.
3
TTLM Development Manual Date: SEPTEMBER ,2021
Compiled by: Acct department
Training, Teaching and Learning Materials
OPERATION SHEET 1: Describe team role and scope
Purpose:
This learning outcome aims to provide trainees with the knowledge, skill and attitude teamwork.
Understanding the concept of teamwork helps to make easy the daily work activity.
Equipment, Tools and Materials:
Computer
Projector
White board
White board marker &Duster
Lecture room
Printer
Condition:
Students and trainer’s are legally required to lock the health and safety of trainer. This applies to
all organizations and including voluntary organizations.
Students must provide safe working environment.
Students must not put themselves or others at risk.
Procedure:
Need to establish a team
Identify the team objective
Prepare effective common plan
Apply practicall
4
TTLM Development Manual Date: SEPTEMBER ,2021
Compiled by: Acct department
Training, Teaching and Learning Materials
Lo2:- Prepare payroll
II. Terminology of Payroll Related Terms
Salary or Wages:
Salary and wages are usually used interchangeably. However, the term wages is more
correctly used to refer to payments for manual labor that are paid based on the number of hours
worked or the number of units produced. So, they are usually paid when a particular piece of
work is completed or weekly. On the other hand, compensations to employees on monthly or
annual basis are termed as salaries.
It must be clear that when we say an employee, we refer to an individual who works primarily to
an organization and whose activities are under the direction and supervision of the employer.
Hence, an employee is different from an independent contractor, a self-employed individual who
works on a fee basis to a firm.
The Pay Period: The length of time covered by each payroll payment. Pay period for wage
workers are usually made on weekly or biweekly. On the other hand, salaried employees’ pay
periods are monthly or semimonthly.
The Pay Day: The day, on which wages or salaries are paid to employees, usually the last day of
the pay period, is known as the payday.
A basic record of a payroll accounting system includes:
1. A payroll register (or sheet)
2. Individual employees’ earnings records, and
3. Usually, pay checks.
These records are generated from a payroll system that is operated manually or using computers.
A Payroll Register (Sheet): The entire list of employees of a business along with each
employee’s gross earnings, deductions and net pay (or the take home pay) for a particular payroll
period. The basis for the preparation of the payroll register can be the attendance sheets,
punched (clock) cards or time cards.
5
TTLM Development Manual Date: November ,2017
Compiled by: : Yared, Acct department
Training, Teaching and Learning Materials
Employee Earnings Record: It is a summary of each employee’s earnings, deductions, and net
pay for each payroll period and of cumulative gross earnings during the year. It is a separate
record kept for each employee. The individual employees’ earnings record helps the employer
organization to properly summarize and file tax returns.
Pay Check:
Check: An instrument for paying salary if the firm makes payment via writing a check in
the name of each employee for the net pay or a check for the total net pay.
Gross Earnings:
Earnings: - The total pays to an employee before deductions for the pay period.
Payroll Taxes:
Taxes: Are taxes levied against the employer on the payroll of a firm. It is an additional
payroll related expense to an employer.
Withholding Taxes:
Taxes: These are taxes levied against the earnings of employees of an organization
and withheld by the employer per the regulations of the concerned government.
Payroll Dedications:
Dedications: All the reductions from the gross earnings of an employee such as
withholding taxes, union dues, fines, credit association pays, etc.
Net Pay:
Pay: The gross earnings after subtracting all the deductions. An employee sometimes knows
it as take home pay, the amount collected on the payday.
III. Possible Components of a Payroll Register
1. Employee number:
number: Numbers assigned to employees for identification purpose when a
relatively large number of employees are included in the payroll register.
2. Name of employees:
employees: List of the names of employees
3. Earnings:
Earnings: money earned by an employee(s) of a firm from various sources. It may
include:
a. The basic salary or regular earning a flat monthly salary of an employee that is paid for
carrying out the normal work of employment and subject to change when the employee is
promoted.
b. Allowances:
Allowances: Money paid monthly to an employee for special reasons, which may
include.
i. Position Allowance: A monthly sum paid to an employee for bearing a
particular office responsibility, head of a particular department or division.
6
TTLM Development Manual Date: November ,2017
Compiled by: : Yared, Acct department
Training, Teaching and Learning Materials
ii. House allowance: A monthly allowance given to cover housing costs of the
individual employee when the employment contract requires the employer to
provide housing but fails to do so.
iii. Hardship Allowance: A sum of money given to an employee to compensate
for an inconvenient circumstance caused by the employer. For instance,
unexpected transfer to a different and distant work area or location. It is
sometimes known as disturbance allowance.
iv. Desert Allowance: A monthly allowance given to an employee because of
assignment to a relatively hot region.
v. Transportation (fuel) Allowance: A monthly allowance to an employee to
cover cost of transportation up to the work place if the employer has
committed itself to provide transportation service.
c. Overtime Earning
Overtime work is the work performed by an employee beyond the regular working hours or days.
Overtime earning is the amount payable to an employee for overtime work done.
In Ethiopia, in this respect, according to Article 33 or proclamation no. 64/1975 the following is
stated about payment for overtime work.
A worker shall be entitled to be paid at a rate of one and one quarter (1 ¼) times his
ordinary hourly rate for overtime work performed before 10 o’clock in the evening (10
p.m).
A worker shall be paid at the rate of one and one half (1 ½) times his ordinary hourly rate
for overtime work performed between 10 O’clock in the evening (10 p.m.) and six
O’clock in the morning (6 a.m.)
Overtime work performed on the weekly rest days shall be paid at a rate of two (2) times
the ordinary hourly rate of payment.
A worker shall be paid at a rate of two and half (2 ½) times the ordinary hourly rate for
overtime work performed on a public holiday.
7
TTLM Development Manual Date: November ,2017
Compiled by: : Yared, Acct department
Training, Teaching and Learning Materials
Hence the gross earnings of an employee may, therefore, include the basic salary, allowances
and overtime earnings. You may find sometimes other form of earnings such as bonus that is
paid to employees for achieving results better than usual.
4. Deductions
These are subtractions made from the earnings of employees that is because it is required by
government or permitted by the employee himself.
In our country, Ethiopia, some of the deductions against the earnings of employees are:-
a. Employee Income Tax
In Ethiopia every citizen is required to pay something in the form of income tax from his/her
earnings of employment. In this case a progressive income tax system that charges higher rates
for higher earnings is applied on the gross earnings of ach employee
OPERATION SHEET 1: Describe team role and scope
Purpose:
This learning outcome aims to provide trainees with the knowledge, skill and attitude teamwork.
Understanding the concept of teamwork helps to make easy the daily work activity.
Equipment, Tools and Materials:
Computer
Projector
White board
White board marker &Duster
Lecture room
Printer
Condition:
Students and trainer’s are legally required to lock the health and safety of trainer. This applies to
all organizations and including voluntary organizations.
Students must provide safe working environment.
Students must not put themselves or others at risk.
Procedure:
Need to establish a team
Identify the team objective
Prepare effective common plan
Apply practicall
8
TTLM Development Manual Date: November ,2017
Compiled by: : Yared, Acct department
Training, Teaching and Learning Materials
Lo3:- Handle payroll enquiries
According to the amended income tax proclamation no. 286/2002 the tax on income from
employment over one hundred fifty (Br 150) shall be charged, levied and collected according to
the following income tax rates.
Rates of Tax (%) on every Short cut
Taxable Monthly additional Income Adjustment/Deduction
In Birr/
≤150 Exempt 0
151-650 10% 15.00
651-1400 15% 47.50
1401-2350 20% 117.50
2351-3550 25% 235.00
3551-5000 30% 412.50
>5000 35% 662.5
Generally, taxable income from employment includes salaries, wages, allowances, director’s fees
and other personal employment, all payments in cash and benefits in kind.
However, according to income tax amendment proclamation no. 30/1992 issued on October
12,1992 stated that the following categories of payments in cash or benefits in kind are exempted
from taxation.
Medical costs incurred by employer for treatment of employees.
Transportation allowances paid by employer to its employees.
Reimbursement by employer of traveling expenses incurred on duty by employees.
Traveling expenses paid to transport employees from else where to place of employment
and to return them upon completion of employment.
b. Pension Contributions
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
Permanent employees of an organization, the employees of which are governed by the existing
regulations of the Ethiopian public servants are expected to pay or contribute 4% of their basic
(monthly) salary to the government pension trust fund. This amount should be withheld by the
employer from the basic salary of each employee on every payroll and later be paid to the
respective government body.
On the other hand, the employer is also expected to contribute towards the same fund 6% of the
basic salary of every permanent employee of it. It is this total amount we called earlier as
payroll taxes expense to the employer organization (i.e., 6% of the total basic salary of all
permanent employee).
Consequently, the total contribution to the pension trust fund of the Ethiopian government is
equal to 10% of the total basic salary of all permanent employees of an organization to be
entitled to the pension pay given that the employee has satisfied the minimum requirements to
enjoy this benefit when retired.
Non-government organizations are also using this kind of scheme to benefit their employees with
some modifications. This is made in some NGO’s by keeping a fund known as provident fund.
Both the employees and the employer contribute towards this fund monthly. Ultimately, when as
employee retired or drawn out of work a lump sum amount is given at once.
c. Other Deductions
Apart from the above two kinds of deductions from employees earnings, employees may
individually authorize additional deductions such as deductions to pay health or life insurance
premiums; to repay loans from the employer or credit association; to pay for donations to
charitable organization; etc.
Each of the major other deductions may be put in special column in the payroll register.
Ultimately, the sum of the employees’ income tax, pension contributions and other deductions
given the total deductions from the gross earnings of employees.
5. The Net Pay
This amount is held in one column of the payroll register representing the excess of gross
earnings over the total deductions of an employee. The column “Net Pay” total tells the grand
total deductions made from the earnings of employees.
6. Signature
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
Unless some other document is used, the payroll sheet may be designed to allow a column for
signature of the employees after collection of the net pay. In general, a payroll register should at
least show the earnings, deductions and the net pays along with the name of employees.
Demonstration Problem
ABC Company pays the salary of its employees according to the Ethiopia calendar of Hidar
1996.
Basic
Basic Monthly OT hours Duration of OT Salary Per
S.No Name of Salary Allowance worked work Hour
Employee
1 SenaitBahru 680 ---- 8 10 P.M. to5a.m 4.25
2 PetrosChala 1800 --- 10 Weekly rest days 11.25
3 Abdu Mohammed 1280 200 --- -------------- ---
4 Leila Jemal 1900 300 6 10 P.M to 5 A.M. 11.875
5 KirkosWoldie 2400 100 10 Public Holiday 15
N.B.
N.B.
Note that management of the agency usually expects a worker to work 40 hours in a week and
during Hidar, 1996 all workers have done as they have been expected. Besides, all workers of
this agency are permanent employees except PetrosChala; the monthly allowance of
KirkosWoldie is not taxable; Abdu Mohammed agreed to have a monthly Br. 200 be deducted
and paid to the credit association of the agency as a monthly saving.
Instructions:
Instructions:
Based on the above information
1. Prepare a payroll register (or sheet) for the company for the month of Hidar, 1996.
2. Record the payment of salary and accrued liabilities as of Hidar 30, 1996 using Ck. no.
1641 as a source document.
3. Record the payroll taxes expense for the month of Hidar, 1996.
4. Record the payment of the claim of the credit association of the company,and other
payroll related liabilities to the concerned authorities(withholding taxes,and payroll taxes)
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
that arouse from Hidar’s payroll assuming that the payment was made on Hidar’s 1, 1996
via Ck. no.1650
Solution
Over time earning = OT hours worked X(hourly rate x OT rate)
Hourly rate=basic
rate=basic salary
No.hrs.per month
= basic salary
160hrs
SenaitBahru------------------------- (8(4.25X1.5)) =51
PetrosChala-------------------------- (10(11.25X2)) =225
Leila Jemal --------------------------- (6(11.875X1.25)) =89
KirkosWoldie------------------------- (10(15X2.5)) =375
Gross earnings
Basic salary + Allowance+ OT earnings = Gross earnings
SenaitBahru-----------680 + -------- + 51 =735
PetrosChala------------- 1800 + --------- +225 = 2025
Abdu Mohammed-----1280 +200 +-------- = 1480
Leila Jemal -------------- 1900 + 300 + 89 = 2289
KirkosWoldie------------2400 + 100 + 375 = 2875
Deductions & net pay
Exercise - 1
Ethiopia for Better, a governmental organization pays salary of its employees according to the
Ethiopian calendar month. The following data relates the month of Tkimt, 1996 E.C.
Basic
Name of Basic OT hours Duration of OT Monthly Salary Per
S.No. Employee Salary Worked work Allowance Hour
1 TizitaDagne 640 10 Weekly rest days 100 4
2 MamoRegassa 1280 7 Public holiday --- 8
3 Ali Temam 1920 9 10 P.m. –5 A.m 150 12
4 BerihuGebre 320 --- --- --- 2
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
5 NigistAbebe 3520 12 Up to 10 P.m 300 22
Additional Information:
Information:
An employee is expected to work 176 hours in a month and during Tkimt, 1996 all
employees have done as they have been expected.
All employees are permanent employees except AtoMamoRegassa
The monthly allowance of Ato Ali Temam is not taxable
TizitaDagne agreed to have a monthly Br 150 be deducted and paid to the organization’s
credit association as a monthly saving
Instructions: Based on the above Information
1. Prepare a payroll register (or sheet) for the organization for the month of Tikimt, 1996
E.C.
2. Record the payment of salary and the accrued liabilities as of Tikimt 30, 1996 E.C. using
check no. 03391
3. Record the payroll taxes expense for the month of Tikimt, 1996
4. Record the payment of the claim of the credit association of the company,and other
payroll related liabilities to the concerned authorities(withholding taxes,and payroll taxes)
that arouse from Tikimt’s payroll assuming that the payment was made on Tikmit’s 1,
1996 via Ck. no.0339
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
Exercise – 2
Admin.
No Employees Basic Salary Overtime Allowa.
1. AyeleLema 270 --- ---
2. AzebMebrahtu 340 50 ---
3. Belay Nega 420 180 50
4. BirzafDebesay 510 60 ---
5. DendirTenkir 600 120 100
6. KidaneBeyene 285 75 ---
7. FekaduZewdie 380 --- 50
8. Getachew Desta 400 --- 100
9. Solomon Hailu 310 75 70
10. Zena Melaku 135 70 ---
Additional Information:
Information:
a) The payroll register of RAL Co. more or less is the same as the payroll register
shown in the illustration. The exceptions are the deduction columns. The
deduction columns are the following: Income tax, Idir fund, union fees, pension
fund and total deductions.
b) All employees are to pay Idir fees of:
1. Birr 2 for all employees whose basic salary is up to Birr 500,000
2. Birr 3 for all employees whose basic salary is above Birr 500
c) All employees are required to pay union fees of 1% of their basic salary (assume
that all employees are members of the Labour Union).
d) Ato Belay Nega, AtoDendirTenkir, AtoFekaduZewdie and Ato Zena Melaku
contribute 5% of their basic salary to the Credit association of the company
Instruction:
Instruction:
1.Prepare the payroll register for the month of Tir, 1996
2.Prepare a journal entry to record the payment of salary and the accrued liabilities for the
month of Tir, 1996
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
Training, Teaching and Learning Materials
3. Record the payroll taxes expense for the month of Tir, 1996
4. Record the payment of the claim of the credit association of the company, and other
payroll related liabilities to the concerned authorities (withholding taxes, and payroll
taxes) that arouse from Tir’s payroll assuming that the payment was made on Tir 1, 1996
via Ck. no.1050
TTLM Development Manual Date: November ,2020
Compiled by Accounting and Business department
