PART I
1. Payroll refers to the process of managing and processing employee compensation,
including wages, salaries, bonuses, and deductions. It involves calculating and
distributing payments to employees in a timely and accurate manner. Payroll is a
critical function for businesses, as it directly impacts employees' livelihoods and is
subject to various legal and regulatory requirements.
Payroll accounting, on the other hand, is a specific aspect of accounting that focuses on
recording and managing financial transactions related to payroll. This includes tracking
employee earnings, withholding taxes and other deductions, and ensuring compliance
with tax laws and labor regulations. Payroll accounting also involves recording employer
contributions to benefits such as retirement plans and healthcare.
2. The payroll accounting of a firm must be given emphasis for the following reasons.
A. Employees are sensitive to payroll errors and irregularities, and maintaining
good employee morale requires that the payroll be paid on a timely, accurate
basis.
B. Payroll expenditures are subject to various government regulations.
C. The payment for payroll and related taxes has a significant effect on the net
income of most business enterprises.
3.. A) Wage: Compensation paid to an employee on an hourly basis for the work performed.
Wages are typically associated with hourly employment and are calculated by multiplying the
hourly rate by the number of hours worked.
Salary: A fixed amount of compensation paid to an employee on a regular basis, regardless of
the number of hours worked. Salary is often expressed as an annual amount and is commonly
associated with salaried or exempt employees.
B) 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 PAY DAY.
C) Pay period The Pay Period It is the length of time covered by each payroll payment. Pay
periods for wage workers are usually made on weekly or bi-weekly. On the other hand, salaried
employees’ pay periods are monthly or semi-month.
D) A Payroll Register (Sheet) It is the entire list of employees of a business along with each
employee’s gross earnings, deductions, and net pay for a particular payroll period. The basis for
the preparation of the payroll register can be the attendance sheets, punched (clock) cards or
timecards.
PART II
1. Given Information:
- Regular hourly pay: Br. 30
- Overtime pay rate: Time and a half for hours worked in excess of 48 hours per week
- Hours worked during the current month: 204 hrs
- Regular monthly salary: Br. 5760
- Allowance (transportation): Br. 700
- Transportation allowance subject to employment income tax (amount above Br. 400)
Calculations:
I. Employment Income Tax:
. Calculate Overtime Pay:
- Regular hours (48 hours): 48 hrs * Br. 30/hr = Br. 1440
- Overtime hours: 204 hrs - 48 hrs = 156 hrs
- Overtime pay: 156 hrs * (Br. 30/hr * 1.5) = Br. 7020
. Calculate Total Earnings:
- Regular monthly salary: Br. 5760
- Allowance (transportation): Br. 700
- Overtime pay: Br. 7020
- Total Earnings: Br. 5760 + Br. 700 + Br. 7020 = Br. 13480
. Calculate Taxable Allowance:
- Transportation allowance subject to tax: Br. 700 - Br. 400 = Br. 300
. Calculate Employment Income Tax:
- Assuming a tax rate Let's say 10%
- Employment Income Tax: Br. 300 * 10% = Br. 30
ii. Total Deductions (for a permanent civil servant):
- Employment Income Tax: Br. 30 (as calculated above)
iii. Net Pay for the Current Month:
- Total Earnings: Br. 13480
- Deductions (Employment Income Tax): Br. 30
- Net Pay: Br. 13480 - Br. 30 = Br. 13450
2. Certainly, let's calculate the total deductions and net pay for each employee, assuming
an overtime rate of 5% and a withholding tax rate of 10% and tax rate is 5%
Employee A01 - Alemu Tolossa:
Basic Salary: Birr 6500
Overtime Hours: 0
Position Allowance: Birr 550 (taxable)
Monthly Deduction: Birr 500 (credit association)
Total Earnings=Basic Salary+Position Allowance=Birr 6500+Birr 550=7050birr
Total Deductions=Monthly Deduction+Withholding Tax=(7050-500) ×10%= 655
Net Pay=Total Earnings−Total Deductions= 7050-655= 6395
Payroll tax= 7050*5%= 352.5
Employee M02 - Myron Zewde:
Basic Salary: Birr 4800
Overtime Hours: 10(10*5%=0.5)
Position Allowance: Birr 500 (taxable)
Total Earnings=Basic Salary+Overtime Pay+Position Allowance=4800+0.5+500=5300.5
Total Deductions=Withholding Tax=5300.5*10%= 530.05
Net Pay=Total Earnings−Total Deductions=5300.5-530.03= 4770.47
Payroll tax = 5300.5*5%= 265.025
Employee Y03 - Yemisratch Fanta:
Basic Salary: Birr 3790
Overtime Hours: 5(5*5%=0.25
Total Earnings=Basic Salary+Overtime Pay=3790+0.25= 3790.25
Total Deductions=Withholding Tax= 3790.25*10%= 379.025
Net Pay=Total Earnings−Total Deductions= 3411.225
Payroll tax= 3790.25*5%= 189.5125
Employee Z04 - Zibrikrik Ayele:
Basic Salary: Birr 2565
Total Earnings=Basic Salary= 2565
Total Deductions=Withholding Tax= 2565*10%= 256.5
Net Pay=Total Earnings−Total Deductions= 2308.5
Payroll tax= 2565*5%= 128.25
Withholding taxes are summation of all = 705+530.05+379.025+256.5= 1870.575
Payroll tax = gross earning * tax rate
Assume tax rate is 5% so the summation will become.
352.5+265.025+189.5125+128.25= 935.29
3. Debit: Withholding Taxes Payable
Credit: Cash or Bank Account
