Question

Explain the payroll entries.

What is the employee responsible for paying that is withheld from his or her pay?

What is net pay and gross pay?

What does the employer need to pay?

What is social security?

What is medicare?

How do we calculate the interest for notes payable?

When do we record it?

Answer 1

The withholdings from an employee is due to following:

• Social Security tax - The US income tax requires the employer to withhold certain payroll tax from their employees gross salaries, wages & bonus on their payday which is then required to be remitted by employer alongwith its own contribution to the federal govt.
• Medicare Tax- Same as above employer withhold certain amount from employees pay alongwith its own contribution to be remitted to federal govt. The combination of both social security tax and medicare tax is referred to as FICA tax.
• Federal Income Tax- The amount to be deducted depends on the employee's salary, wages as well as on their personal information ( whether to be taxes as a married or single income tax rates).
• Court Order withholdings- The courts may ask the employer to withhold employee salary at times when the employee is at default in paying certain debts or paying child support.
• State Income Tax- in certain and in most states payroll accounting involve a state income tax which is required to be withhold by employer based on their salaries, wages etc.
• Other withholdings- It may includes following which may be voluntary and shall be deducted on the direction of employee a) Union Dues b) charitable dues c) insurance premiums d) US saving Bond purchase e) payment owned for the purchase of company merchandise.

What is Net Pay and Gross Pay?

Net pay is the amount actually being received by employee on their pay day after all necessary deductions deducted by employer as and when required. while the gross pay is the total amount of salaried compensation or the amount of wages and overtime earned by an employee during the pay period and also include bonus and commissions.

It can be calculated as follows:

Gross pay - taxes - other deductions = Net pay

What does Employer need to pay?

• Paying salary to its employees on timely basis
• Paying out the employer share of payroll taxes which includes medicare taxes, social security taxes, federal unemployment taxes , state unemployment taxes etc on timely manner to federal government.

What is Social Security?

In the United States, Social Security is the commonly used term for Federal OLD- Age Survivors, and Disability Insurance(OASDI) program. It is funded primarily through payroll taxes deducted from all employees salaries upto an amount specifically determined by law. These funds are actually created to support the old age and disabled people.

What is medicare?

Medicare is a national insurance program which provide health insurance to old age people aged 65 years or more and also to people with disability status as determined by the Social Security administration.

How do we calculate interest on notes payable?

• Access the information provided- check the principal amount and he interest let say the principal amount is $1000 and interest rate is 10% so the annual interest charge for the note shall be $1000*0.10=$100
• Calculate the interest for the period- To get the full cost we need to multiply te annual cost by te number of years specified in the noted payable for example: $100*5(Total years)=$500

How do we record it?

Cash Dr.

To Notes Payable

(To record notes payable and maturity date)

Interest Expense Dr.

To Interest Payable

(To record accrued Interest)

Interest expense Dr.

Interest payable Dr.

Notes payable Dr.

To Cash   

(To record repayment of interest and note)