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Basic Payroll Accounting

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This guide is intended for staff who are unfamiliar with payroll and/or accounting processes and those who wish to understand how these processes can be simplified. This step-by-step guide shows you the basics of Payroll Accounting, including: • setting up your Accounting Codes, • using them in Pay Input to allocate wage costs, and • transferring the wage costs to your accounting system
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Content Preview
Basic Payroll Accounting
This guide is intended for staff who are unfamiliar with payroll and/or accounting processes
and those who wish to understand how these processes can be simpli?ed.
This step-by-step guide shows you the basics of Payroll Accounting, including:
• setting up your Accounting Codes,
• using them in Pay Input to allocate wage costs, and
• transferring the wage costs to your accounting system

The illustrations and examples use SmoothPay/Gold Payroll, and MoneyWorks accounting products in
an Australian payroll and accounting environment, however the concepts apply equally to most other
payroll and accounting systems, and countries.
Apart from mistakes or localised usage and abbreviations, UK English is used throughout our
documentation.
Glossary of terms
There are a number of terms that non-accounting people might not be familiar with, so
here's a list of common terms we use to describe various things:
Term
Description
Cost Centre
This is an "Account" in your accounting system's Chart of Accounts
- usually an Expense Account
It is common to use the term Cost Centre instead of Account, as the
term Account can be confused with a "Bank Account" and/or a
Customer Account, or an “Account” from a supplier etc, all of which
are quite different things.
Also, wages are a "cost", so it makes practical sense to call the
account to which it is charged a "cost centre", and avoid the
confusion over all the types of "accounts" you'll come across in
accounting.
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 1 of 14

Term
Description
Holding Account (also,
These are used to "hold" amounts deducted from employee's
Control Account or Suspense
wages, such as PAYG, Union Fees, voluntary super deductions, debt
Account)
repayments etc. and may also be used to "hold" the remaining Net
Pay amount to simplify your accounting entries (we'll cover that
shortly).
These “held” amounts get paid later to the agency to whom the
deduction belongs (e.g. ATO, Union, Super Fund etc).
Holding accounts are typically established as Current Liability (CL)
accounts in your Chart of Accounts (though in reality they can be
pretty much any kind of account at all).
When it comes time to pay the ATO or the Union, simply create a
payment as usual, and charge the amount against the appropriate
Holding Account.
GST is another example of a Holding Account (or accounts). The
content is stripped from transactions, placed automatically into the
appropriate Holding Account, and the total is later paid out to ATO.

Journal entry
Refers to a fully-balanced sequence of debit and credit entries,
which effectively transfers costs to cost centres and credits to
Holding Accounts which will be paid out later on.
There is an example in Costing Transfers, Method 2 below.
Journal entries are also often used to transfer misallocated amounts
from one cost centre to another, or to cater for overhead cost
allocation between departments, and a whole bunch of other
accounting stuff.

Direct Credit (also EFT)
Payment by electronic funds transfer, either manually using the
bank?s website/phone banking or forms, or using an ABA (bank
transaction
) ?le to transfer all payments in a single batch.
These expressions are used interchangeably in most countries.
Accounting Codes
The expression “Accounting Codes” covers all of the cost allocation
codes that might be used, including:
• Cost Centre (Expense account)
• Department (budget group)
• Job
• Activity
Some systems may not provide all of these analysis options, and
you only need to use the one?s that suit your business and
accounting requirements.

Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 2 of 14

Setting up your accounting codes
When you ?rst start using SmoothPay, the best place to start is setting up your Codes
(refer to our Getting Started guide for initial setup steps).
If you?re a MoneyWorks user, then most of this work is automated and avoids tedious re-
typing, by using Con?gure..Accounting..Tools.
Begin by setting up the cost centres (includes holding accounts), job codes, departments
and other accounting settings. Otherwise, you can do this manually as follows:
When you start SmoothPay, the Control Centre is displayed:
Choose the Codes tab, then select Cost Centres from the drop-down list:
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 3 of 14

TIP: Edit these codes to match their equivalents in MoneyWorks, then add any additional codes and
cost centre descriptions you think you might need (this is way quicker than deactivating the default set
of codes and manually adding codes that do the same thing as the sample cost centres provided)
.
Better than that! You can quickly copy all the required cost centres, holding accounts, jobs and
departments directly from MoneyWorks by using SmoothPay?s Con?g..Accounting..Tools.
Note that the ORANGE codes are Holding Accounts - the colour coding makes it easy to see how cost
centres have been set up.
Repeat for Jobs and Departments (if you use them).
WARNING: If you do not set these items correctly, automatic costing transfers and costing ?le
imports will probably fail, in which case you can easily edit/change the codes and re-export the
costing ?le with the correct code information in it.

Advanced users may also like to utilise the “Activity” codes, which are provided so that you can have a
really ?ne-grained analysis of employee?s activities, however it serves no function in MoneyWorks or
most other systems, but may be useful for custom exports to billing systems etc.
SmoothPay is happy to customise their software, so please feel free to enquire if you need that
“something special” to make your business processes faster and easier to manage.

Con?guration..Accounting
This is where your initial defaults are set for new employees (so it?s REALY IMPORTANT
that you have these settings correct before you start adding employees), and also where
you establish your accounting defaults and options.
Choose Con?gure..Accounting:
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 4 of 14

Note that you can test communication with MoneyWorks from this screen (via the Tools
options) - it?ll tell you if there are any problems.
For manual import and automatic costing transfers to work, you must have the correct MoneyWorks
document open, the Cost Centre codes, Department codes (if used), and Job Codes (if used) that you
have used in SmoothPay must match their counterparts in MoneyWorks.
You?ll also ?nd a link to the Accounting Guide (speci?cally for MoneyWorks), a companion
document to this one.
Set your holding accounts as required (if they?re not showing up in the lists, go back to
Codes..Cost Centres to correct them, or import the correct holding accounts via the Tools
options).
Set your default cost centre for wages costs, and optionally job and activity if you want to).
These will be applied as standard settings for new employees. Again, if the code you need
isn?t there, go back to Codes..Cost Centres and make corrections).
The Tools options provide a quick way to test your MoneyWorks
connection and to copy account, job and department lists to
SmoothPay:
Here?s an example of how the easy-to-use MoneyWorks integration
makes it easy to copy just the required items from our MoneyWorks
accounts list is achieved:
Choose Con?g..Accounting..Tools, Select cost centres
When you have made your selections, choose OK and they?ll be transferred automatically
to SmoothPay, ready to use. Repeat for Jobs and Departments (if used).
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 5 of 14

Using accounting codes in Pay Input to allocate wage costs
Every entry you make in Pay Input for Time, Leave and Allowances lets you set the Cost
Centre
, Department, Job and Activity. You don?t have to use any or all of these options -
just the ones you need.
You can make as many entries as you need (there?s no practical limit), therefore your
costing analysis can be as extensive (or as simple) as you like.
Note: There are other, ef?cient, methods of getting time and attendance data into SmoothPay.
• You can use the CAT import ?le format to load new employees and timesheets (refer to the CAT
Import (Staff & Time) guide), and/or
• you can import data directly from your timeclock (SmoothPay has built-in support for CS
TimeClocks, Work?owMax etc.), and/or
• you can (and should anyway) establish “Standard Pay” entries that get used automatically anytime
an employee is selected to be paid, otherwise you need to constantly re-enter pay information every
period, and/or
• you can use the built-in Timesheet screen - use Ctrl+T (?+T), then apply speci?c costing
afterwards if you need to.
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 6 of 14

Transferring wage costs to your accounting system
There are a two standard methods of transferring payroll costing information to your
accounting system - select the one that works best for you:
Method 1: Payroll entries as "Payments" (Creditors)
This assumes you're using a cashbook or express version of MoneyWorks, and if you
have only one or two employees it's probably the easiest method for you to use.
An appropriate source for the payments would be the Pay Input Audit report (or each
employee?s payslip). Both these are produced during the Standard Reports step of your
normal pay process.
Step 1. Choose Cash & Banking..New Payment
Step 2. Complete using entries similar to those shown below:
Some explanation of the entries might be in order...
We've charged (DEBITED) the gross cost of wages (the $800.00 entry) to the Wages
EXPENSE account 3290 - you can have multiple cost centres representing the different
areas an employee may work e.g. Kitchen Wages, Laundry Wages, Production Wages and
so on.
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 7 of 14

Your Costing Report will show the breakdown of all cost centres used in your pay inputs
for all staff for the whole pay period. If you have only one Wages cost centre then that's the
only one you'll ever need to use.
We've CREDITED the PAYG deduction (the -300.00 entry) to the PAYG Holding account -
it'll be paid out to ATO when it's time, and to do that you'll create a payment to ATO and
charge the total due against the PAYG Holding account - which neatly offsets the credits
you've been putting there each pay period.
Any other deductions would be credited (that's a -minus entry) to appropriate Holding
Accounts that you might have set up (they're very handy, because you can easily see at a
glance what your liability is for money you are holding for other agencies).
The net pay in this example is $500, and is the amount the employee will receive in their
bank account (or cheque or cash).
Method 2: Payroll entries as "Journal" entries, followed
by one or more "Payment" entries

This will work with whatever accounting system you're using, and is the default method by
which SmoothPay Payroll expresses costing information, especially where automation of
the process is used.
This method is recommended, as it greatly simpli?es the number of accounting entries
required, especially if you have more than one employee and multiple cost centres,
departments, jobs etc.
Again, this example is illustrated using the Cashbook version of MoneyWorks, though the
process is similar for other products.
TIP for MoneyWorks users: SmoothPay automatically generates a costing analysis ?le in a format
suitable for import (Express or above) or direct transfer (Gold or above) to MoneyWorks - please refer
to the MoneyWorks Integration guide for details on how to set this up.
The Journal
Step 1. Choose Cash & Banking..New Payment
Step 2. Complete using entries similar to those shown below:
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 8 of 14

Note that in this example we have selected "JOURNAL" as the transaction type. This
ensures your entries a fully balanced - just like the Costing Report you get from
SmoothPay.
As in the previous example, we've charged the gross cost of wages (the $800.00 entry) to
the Wages EXPENSE account 3290 - you can have multiple cost centres representing the
different areas an employee may work e.g. Kitchen Wages, Laundry Wages, Production
Wages and so on.
Your Costing Report will show the breakdown of all cost centres used in your pay inputs
for all staff for the whole pay period. If you have only one Wages cost centre then that's the
only one you'll ever need to use.
We've CREDITED the PAYG deduction (the -300.00 entry) to the PAYG Holding account -
it'll be paid out to ATO when it's time, and to do that you'll create a payment to ATO and
charge the total due against the PAYG Holding account - which neatly offsets the credits
you've been putting there each pay period.
Any other deductions would be credited (that's a -minus entry) to appropriate Holding
Accounts that you might have set up (they're very handy, because you can easily see at a
glance what your liability is for money you are holding for other agencies).
We have also CREDITED the net pay amount (-500.00) to the Net Pay Holding Account
which we've set up in our MoneyWorks chart of accounts as a Current Liability (CL)
account, same as the PAYG Holding account.
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 9 of 14

The result - costs charged where they need to go, and amounts to be paid-out sitting in
Holding Accounts, ready to be paid.
The Payments
Net Pay Holding
Net Pay amounts are usually paid by Direct Credit (EFT), though staff may request cash or
cheque payment as well.
The Net Pay ?gure will show up on your bank statement - cost it against the Net Pay
Holding Account.
If you have told SmoothPay to withhold other deductions (such as Rent, Debt Repayment
etc) and that those deduction amounts are to be direct credited to an agency every pay
period, then the bank statement entry will include the payments, and you'll need to charge
them against the appropriate Holding Account (we suggest you use the Net pay Holding
Account for all such deductions, as they?ll automatically be included in your ABA ?le, and
therefore appear in the summarised cost entry on your bank statement
)
If any staff require payment by cheque, then they too should be charged directly to Net
Pay Holding Account.
Cash? Draw a cash cheque and charge it against the Net pay Holding Account.
Your Net pay Holding Account should now have a zero balance, as you've disbursed all
the funds it contained.
PAYG and other withheld amounts
These are usually paid each month, or sometimes quarterly.
Simply create the payment and charge it against the appropriate Holding Account.
The following example shows the entry of direct credited net pays from the bank
statement:
Smoothpay/Gold Payroll - www.smoothpaygold.com
Page 10 of 14

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