General theory on Accounting for payroll and Salary Deductions

PART I GENERAL THEORY ON ACCOUNTING FOR PAYROLL AND SALARY DEDUCTIONS I-BASIC FEATURES OF PAYROLL AND SALARY DEDUCTIONS 1. Concept, features and the useful of accounting for payroll and salary deductions 1.1. Concept on salary Money is not means of exchange but it is also means of measuring the value of men’s labour. In economic theory, ‘labor’ is any work undertaken in return for a fix payment.’Payroll’ is the amount of the money the labor get in return as their result of work which is used to re-produce their work ability. Anyway, the salary they receive under the form of money is niminal wage, when wage is used to purchase specific goods on the market it is real wage.To caculate the niminal wage accurately it is necessary to base on real wage through the change of price on the market. This is very important because it relates to the salary unit price. Besides, the wage to ensure re-produce working ability also be accounted for production cost as an compulsory cost under the rule of Government State, it includes these types: 1.2. Salary deductions Along with salary, wage, allowances counted for entrprise’s production costs are: 1.2.1.Social insurance fund This fund establisted as a source of capital, aids to the staff in these situations: ill, pregnancy, over the age in work, die, on-the-job accident, occupational disease, lose job, get in risk, lose strength, retire Social insurance come along with labor’s life, it is objective, indispensable, it does not occurs steadily with the time. Social insur ance’s nature is social, economic as well as service. In according to current system, Decision No.912 CP/BHXH dated 07/11/2005 stipulates Social insurance regime, this fund is built by deducting 20% from the payroll fund and daily allowances of the labor in the fiscal year, in there 15% which the hirer paid is counted for production cost of the company and 5% is deducted directly from employees’ salary. Social insurance fund is managed by the Ministry of Labour, War Invalids and Social Affairs. Monthly, at the enterprises, pays for the labor who get ill, pregnancy,…bases on that to make regular and legal vouchers (accounting clerk makes social insurance voucher pay for labor follow the form No.03-LTDL ,accounting voucher regulation).At the end of the month or the quarter the company must to strike a balance to the organization manages social insurance fund. 1.2.2.Health insurance fund Health insurance is the medical aid to the persons who pay in advance for it , help them with one part of the costs for hospital fees, medical examination, medicines,…Health insurance fund forwards to establish a public health care network. Only persons who take part in this fund will receive health insurance. According to the current rule of the financial system health insurance is deducted 3% on the basic payroll fund, in there, 2% is counted for production cost, the rest 1% is deducted from labor’s income. Health insurance fund is delivered to the authorized association under the form of buying health insurance in order to serve and care staff’s health such as: medicine examination, hospital fees…during the time they get ill, give birth,… 1.2.3.Trade union fee Trade union fee is spent for union activities, this fund is established with a specific rate count on the real payroll fund appear in particular month and counted for production cost.Trade union fee is deducted 2%, in there, one part is sent to the top management of company, the rest is remained to spend for enterprise’s activitives Deductions from salaries as social insurance, health insurance, trade union fees along with employees payable form labor cost in the overheads factory costs. Managing caculation, deduction, spending and using of these funds not only important to the overheads factory costs management but ensures right for the labor of the company as well. 2. Payroll funds and payroll regulations 2.1. Payroll funds Payroll fund is all amount of money the company has to pay for its labor, it is managed and used directly by the company according to the labor quantity and the labor quality, it includes these items: * Salary by hour * Salary by products * Salary pay for the labor gets off because of objective causes, appointed to another post, on leave, go on recruite follow the regular system * Regular salary * Allowances for over-time working, extra-shift, work at night… * Function allowances Income of the employees includes salary and other payable (regularly called salary and bonus). Salary and bonus in the company at present follow the Decree No.118 dated on September 15th,2005 and circular letter on the same day signed by Prime minister about correct social insurance policy. Follow that, the Government State manages state-owned enterprise’s salary fund by defining by regulations limit of paying salary, regularly called salary unit price There are three types of defining salary unit price as follow: Salary unit price caculated bases on unit of product (or convert product), defined bases on factors such as coeffictient and salary grade limit, product norm, time norm, work norm of the clerk and allowances which follow the rule of Government State. Salary unit price caculated bases on profit in plan. This method is applied in the multiple manufacturing company with detail labor norm, therefore it is difficult to define employees payable in the total costs, the method is caculated as follow: Total labor x Average salary Salary unit price = Total profit Salary unit price caculated on turnover: Total labor x Aaverage salary Salary unit price = Total profit 2.2. Salary system: 2.2.1. Salary by product This is the type of paying salary based upon on the working hours of the labor, hierarchy (title) and salary grade (salary ceefictient). This form mainly applied with indirect labor, stayble job or with direct labor without product norm. Monthly salary = The real days at work in a week x daily wage Monthnly salary x 12 months Weekly salary = 52 weeks Monthly salary Daily wage = The days work in a month Daily wage is the foundation to caculate social insurance, subsidy to pay the employees or on the meeting days, or the days they go on training Daily wages Hour wage = 8 hours Hour wage is the foundation to caculate subsidy for extra-work Simple hour wage = real time at work x unit price Hour wage with bonus included Substantially, this is the combination between Simlpe hour wage form with frequantly bonus form the payroll fund. The amount of bonus depends on the amonunt of finished work. Therefore, this type is more motivate, encourages employees than other ones . Though, this type not yet show the fact of the relation between employee ability and employee effectiveness 2.2.2. Salary by product Employees are paid bases on quantity, quanlity of their products, amount of works they have done and bases on the unit price caculated per work unit. Paying salary by product can be practised in difference ways - Paying salary by products directly to individual: this type is regularly applied to self-contained labor ,direct-working worker with work norm which can check and take over Salary payable = Unit price x finished works Salary by grade (wage by hours, by days) Unit price = Work norm by hour, day or month Or Unit price = Salary by grade x amount of product (wage by hour,by day) - Salary payable for indirect employees : this type is applied to indirect labor whose work have big effect on direct labor’s work, so that, to caculate salary it is necessary lying on quality, capacity, work result of the direct labor Salary unit price of x finished work of Salary = the sub-labor chief-worker - Salary by product of work-group : follows this type the company pays to the individual employee by group (unit, mill, …) then, payroll is distributed to each of the worker in the unit or group bases on basic salary and the real time each one at work. The formula to caculate as follow: Lt Li = x Ti Ki ∑ Ti x Ki In there: -Li: salary payable to worker i -Lt: salary payable to the unit -Ti: real time at work of the worker i -Ki: is the work grade of the worker i - Salary by piece-work: Salary payable to the group or worker is promised for awork norm, product norm under job-work unit price. If worker work in a group his salary will be paid by the mode salary payable to group - Salary by product with bonus included: Beside getting salary pay by direct product, the labor also gets bonus for raise productiveness, save material, higher product quality L x (M+H) Lth = L+ 100 In there: -Lth: salary by product with bonus included -L : salary by direct product -M: percent of salary exceed the set standard -H: percent of product exceed the set standard -Salary by progressive product: with this type, the labor is paid depends on the amount of direct products they have done added with the percent of progressive product which based on the rate of exceeding the set standard 2.2.3. Some other types of salary Beside the above modes, depends on the scale, conditions and features of the business organization then enterprise can applied these type of paying salary: - Salary pay for the final result - Salary by salary group fund - Salary pay by amplitude of set by standard II-CONTENTS OF ACCOUNTING FOR PAYROLL AND SALARY DEDUCTIONS 1. Content of payroll accounting 1.1 .Vouchers in use Form 01- LDTL- Time sheet Form 02- LDTL- Payroll Form 03- LDTL- Leaves paid by social insurance Form 04- LDTL- Social insurance payment voucher Form 05- LDTL- Bonuses payment voucher Form 06- LDTL- Certification of performance Form 07- LDTL- Overtime record Form 08- LDTL- Piece-work engagement contract Form 09- LDTL- Accident investigation report 1.2. Accounts in use ACCOUNT 334- PAYABLE TO EMPLOYEES This account records salaries, wages, social insurance and other payables that are due to the employee, as well as the payment of these liabilities. 1.3. Methods of payroll accounting Debit: - Record salaries, wages, bonuses, social insurance and other amounts which have been paid or advanced to the employees - To record deductions of salaries and wages from the employees salary. Credit: To record amounts payable to employees such as salaries, wages, bonus and social insurance. Credit balance: - Shows amount payable to employees such as salaries, wages, bonuses, and otherpayable to employees - This account can have a debit balance which show that the amount paid to employees was greater than what was payable.This account should be kept tract of under two headings: salaries payable and other payables. Major transactions: 1. To record salaries, wages, and other allowances which are payable to employes Dr.241- Construction in progress Dr.622- Direct labor cost Dr.627- Factory overhead costs (6271) Dr.641- Sellling expenses (6411) Dr.642. General and administration expenses (6421) Cr.334- Payable to employees 2. To record bonuses payable to employees Dr.431- Bonus and welfare fund Cr.334- Payable to employees 3. To record social insurance which must be paid to to the employees such as sick leave,pregnancy leave etc Dr.338- Other payable Cr.334- Payable to employees 4. To record annual leave which mist be paid to the employees Dr.627,641,642, or Dr.335- Accrured expenses payable Cr.334- Payable to employees 5. To record deductions from salaries and employees income such as advances, health insurance, indemnity, etc Dr.334- payable to employees Cr.141- Advances,or Cr.338- Other payable Cr.138 - Other receivable 6. To record the personal income taxes which must be paid to the state Dr.334- Payable to employees Cr.333- Taxes and other payable to the state budget 7. To record the payment to the employee Dr.334- Payable to employees Cr.111- Cash on hand Cr.112- Cash in bank 2. Contents of salary deductions accounting 2.1 . Vouchers in use Form 01- LDTL- Time-sheet Form 02- LDTL- Payroll Form 03- LDTL- Social insurance leave slip Form 04- LDTL- Social insurance payment sheet Form 05- LDTL- Bonus payment sheet Form 06- LDTL- Confirmation of finished products or work Form 07-LDTL- Over time record Form 08-LDTL- Lump-sum work contract Form 09- LDTL- Record of working accident examination 2.2. Accounts in use 338- OTHER PAYABLE This account is used to record the changes in other payable (which are not included in account 331 to 336) Content and scope of this account involes the following major transactions: 1. The value of asset surplus for which the reason has not been determinded and the company is awaiting the authorities decision. 2. The value of asset surplus payable to individuals or entities (internal and external) according to the authorities decision. 3. The recognition and payment for social insurance, health insurance and trade union fees. 4. Withholdings from employees’ salaries based on court’s decision (allowance for children when divorced, cour fees, compensation, etc). 5. Amount payable as a result of holding deposites of another entitiy. 6. Dividends payable to joint venture partners. 7. Amount payable for temporary borrowing of materials and /or money. 8. Amount received from consignors or their agents who are involed in the import, export business in order to pay export tax, import tax, duties, turnover tax etc. 9. Other amount payable or receivable. 2.3. Method of accounting for salary deductions Debit - Amount of social insurance which has been paid to an employee. - Trade union fees which have been paid by the entity. - Social insurance, health insuranse, and trade union fees which have been remitted to the authorities. Credit - Recognise social insurance, health insurance and trade union fees as business expenses of the current period. - Health insurance withheld from employees’ salary. - Injection from funds to cover over payment of social insurance and trade fees . Credit balance - Amount of social insurance, health insurance and trade union fees that are payable. This account may have a debit balance when the amount paid to the authorities exceeds the obligation or the company has overpaid social insurance and trade union fees and the over payment has not been reimbursed. Accounts for salary deductions is composed as follow: -Acount 3382- Trade union fees payable: to record recognition and payment for trade union fees -Acount 3383- Social insurance payable: to record recognition and payment for social insurance -Account 3384- Health insurance payable : to record recognition and payment for health insurance according to regulations Major transaction: - Monthly withholding of social insurance, health insurance and trade union fee Dr.241-Construction in progress Dr.622-Direct labor costs Dr.627-Factory overheadcosts Dr.642-General and administration expenses Cr.338-Other payable (3382-Trade union fees 3383- social insurance,3384-health insurance). - Caculate health insurance deducted from employees’ salaries. Dr.334-Payable to employees Cr.338-Other payable (3384) - Submit social insurance health insurance and trade union fees to authorities Dr.338-Opther payable Cr.111-Cash on hand Cr.112-Cash in bank - Caculate social insurance payable to employees Dr.338-Other payable (3382,3383) Cr.334-Payable to employees - To record spending out of the company’s social insurance and trade union fund Dr.338-Other payable(3382,3383) Cr.111-Cash on hand Cr112-cash in bank - To record a refund due to excessive payments made for social insurance and trade union fund which have been returned Dr.111-Cash on hand Dr.112-Cash in bank Cr.338-Other payable (3382,3383) (Appendix) PART II THE REALITY OF PAYROLL AND DUCTIONS FROM EMPLOYEES’ SALARY IN SONG HONG CONSTRUCTION DEVELOPMENT AND IMPORT-EXPORT COMPANY I- OVERVIEW OF SONG HONG CONSTRUCTION DEVELOPMENT AND IMPORT-EXPORT COMPANY 1. The formation and the development of the company * NAME: Song Hong construction development and import-export company - ABBREVIATION: SHODEX * ADDRESS : 4th, 164 Lo Duc str, Hai Ba Trung dist, Ha Noi city * HEADQUARTERS: Song Hong construction corporation * FORM OF BUSINESS ORGANIZATION : stated-owned enterprise * SCOPE OF ACTIVITIES: construction and import-export * STAFF: 210, in there, officers: 30 Song Hong construction development and import-export company is state-owned enterprise, at the beginning it was a branch of construction and import-export company under Song Hong construction corporation. SHODEX at the time was a wholesaler, specialized in selling: aluminum, concrete, enameled tile, … for Song Hong Construction Corporation. The company did business mainly with Song Hong Aluminum joint-stock company, construction materials and concrete industry company. From the year 2001-2002, catching up with the national development and market demands the company officially expanded into the construction business. SHODEX has executed civil and industry construction projects. 2. Functions and primary mission of the company SHODEX business activity goals in 2003-2004-2005 are showed through figures on the table below: SONG HONG SONG HONG CONSTRUCTION DEVELOPMENT AND IMPORT-EXPORT COMPANY SHODEX business activity goals in 2003-2004-2005 Type of currency :VND No  Indicators  2003  2004  2005   1 2 3 4 5 6  Revenue from sales Pretax income Source of capital Staff Payroll fund Average wage per man  98.984.097.628 411.323.887 36.308.376.290 190 4.617.798.074 13.47.567  103.392.547.430 2.411.788.691 47.064.710.688 200 6.893.704.500 18.720.000  105.760.439.633 2.453.641.967 52.923.136.231 210 7.238.312.102 34.417.230   (Source: Accounting Department) According to SHODEX’s business activity goals, turnover of the company in the year 2003-2004-2005 has increased highly and steadily. Other figures such as pretax income , payroll fund … have gone up. These achievements have resulted from Board of management’s role in improving its management system as modernly and plainly, meets the company’s requirements and suits to current business activities. SHODEX’s main activities in fields such as civil, industry, transportation, investment nd development business and import-export business. Therefore, SHODEX’s main fields of activities in legal document are: * Executes construction projects such as: civil, industry, transportation, water supply and drainage, irrigation system, infrastructer projects * Executes power transmission lines, purchases and develops house * Transportation business, construction materials, unload material building and other goods * Hotel, restaurant and tourism business and other tourism services * Exploits ore for smelting , manufactures agriculture and forestry products * Import-export construction materials and equipment, foodstuff, other type of goods which permitted for exploiting and manufacturing One of the main business activities of SHOEX is executes construction such as:trasportation, industry, civil ۩ The main features of its executing process To have the construction projects well-done the company must applicate technology in executing the projects. Each project has its own way of executing but the technology process of SHODEX’s construction products can be generalized in these stages: Preparing stage: in this stage the company takes over floor-space and prepares all the factors which obeyed the execution design, makes plan for materials , equipments, sets up execution technology ,prepares manpower