Wages and salaries are often one of the largest expenses of a businesses, and with numerous ways employees could defraud the company and steal money, such as setting up bogus employees on the payroll and extracting ?extra salary?, it is an area that needs to be tightly controlled by the directors.
So how are wages recorded? The first part of any payroll system is the recording of hours worked in order to calculate each of the employees? gross salary.? Where the employees work a fixed hour week this should not cause too many problems, however it is still important to ensure that each employee actually worked the contracted amount of hours for that pay period. If the employees work a variable amount of hours per week then time sheets are even more important. In addition, each time sheet should be signed off by a manager or director as evidence the employee worked the amount of hours claimed. This is an important control that should be used in every business since you, as the business owner, don?t want to be paying employees for work that they have not actually done.
Manual time sheets are not only a pain to complete for the employee but they can be difficult to administer. The legibility of some employees? handwriting may be in question and there is the chance that numbers could be misread by the payroll department which could lead to all sorts of problems and adjustments. A good way around this is to use a computerised system or a clocking in and clocking out machine. The clocking in and clocking out machine is possibly the best way to ensure the hours on each time sheet or clock card are correct since it is stamped by the machine, but employees may think they are not trusted with such a strict system. Whilst a clocking in machine will verify the employees are on site it cannot verify they are actually working, therefore managers and supervisors are still required whether the clocking in machine is used or not.
At the end of each pay period the time sheets need to be collated, authorised as accurate by the manager and then sent to the payroll department for processing. Processing involves inputting all the data to calculate the gross pay each employee should receive. Whilst payroll can be calculated manually it is a laborious task that is prone to human error, which may result in many issues and problems that need to be sorted out, which will end up costing the business money. The best way to process the payroll is to use a computerised program, and whilst there are many companies that sell these programs they are all the same.
These payroll systems calculate the gross salary for each employee, the amount of tax and national insurance due for each employee and the employer?s national insurance contribution. In addition there will be an option to print off numerous reports for management control purposes. The key thing to remember is that the data will only be as good as the person who enters it on to the payroll system, therefore the payroll department employees needs proper training in both timesheet management and the payroll system to ensure the payroll is correct. Once the payroll has been processed and all the reports run it is important to pass them to a director for authorisation. The director should review the payroll and make sure it looks reasonable. If there are any questions or apparent discrepancies, such as new employees appearing, large bonus payments, excessive overtime hours etc. the director should investigate and discover why and that the extra salary is bonafide before signing the payroll and authorising it for payment.
If the company does not have the appropriate staff to process the payroll it can be outsourced to a third party payroll bureau. These are organisation that specialise in processing the payroll of several companies. They are advantageous in that the staff are highly trained and very experienced in processing, however there are disadvantages in that the company loses control over the payroll, the employees of the bureau don?t know the business and will purely process the data provided therefore it needs to be fully accurate with no discrepancies (the reasonableness check is lost) and since the payroll is a sensitive area you, as the business owner, may not want a third party knowing about your company?s payroll although there will be confidentiality agreements in place.
Recording hours, processing the payroll and ensuring that the employees are paid is only a small part of the overall payroll system of a company. With wages and salaries being such a large expense of the company it is important to ensure the payroll costs are properly included in the financial records of the company for management purposes. The best way to control the wages is by way of a wages and salary control account.
So how do the accounts department ensure that wages and salaries are accurately recorded in the financial accounting system? There are some payroll packages that can link up to accounting packages and automatically post all the entries to the accounting system as the payroll is prepared. Whilst these appear to be a great idea, and they are when they work properly, they are not fool proof and could lead to all manner of problems, especially when there are errors in processing the payroll that need to be subsequently corrected. Because of this it is advisable to keep the payroll processing system and the accounts system totally independent and manually post the payroll to the accounting system.
The wages and salary reports need to be obtained from the payroll department. From these reports the gross wages and employer?s national insurance contributions need to be debited to the profit and loss account with the subsequent credit being posted to the wages control account, this posting should take place before the wages are paid over. When the net wages are paid to the employees the wages control account is debited and the bank is credited. When the tax and national insurance is paid over to the tax authorities the wages control account is debited and the bank is credited.
Maintaining a control account may appear a longwinded way that duplicates postings, however it is the best method of keeping control of the wages. Whilst there will be timing differences between recording the transaction and payment they should always net off to zero, so if they don?t there is a problem somewhere along the line and this can be identified and rectified before it gets too out of control.
In order to reduce the chance of fraud in the wages system each company should try and ensure there is a segregation of duties, i.e. the payroll department and the accounts department consist of different employees. This situation is not always possible in small businesses and the accounts department may process the payroll, authorise the bank to pay the employees and post the payroll to the financial accounts. In these situations it is important that the directors maintain close supervision over the whole process and that they review and authorise at every appropriate stage to prevent fraud and errors.
Source: http://www.ministryaccounting.com/how-to-account-for-wages-and-salaries
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