Payroll Accruals, Statutory Deductions and a Board-Approved Bonus
Zomba Manufacturing has a December 2024 gross payroll of MWK 48,000,000. The deductions are PAYE of MWK 9,600,000, employee pension contributions of 5% of gross, and staff loan repayments of MWK 1,200,000. The company also contributes 10% of gross to the pension fund. Net pay of MWK 34,800,000 was paid on 28 December, except for 12 employees whose net pay of MWK 3,600,000 was paid on 5 January 2025. All statutory deductions are due to be remitted by 15 January 2025. On 20 December the board approved a performance bonus of MWK 3,000,000 for the production manager, payable in February 2025; no entry has been made. The payroll clerk recorded only the net pay and the employer pension contribution, arguing that the other amounts are not company money. The year end is 31 December 2024.
1. Calculate the total payroll expense for the year and the liabilities to be recognised at 31 December 2024.
Read the worked answer
Gross wages 48,000,000. Employer pension 10% x 48,000,000 = 4,800,000. Bonus approved before year end = 3,000,000. Total payroll expense = 48,000,000 + 4,800,000 + 3,000,000 = 55,800,000.
Liabilities at 31 December: PAYE 9,600,000; pension payable 2,400,000 employee + 4,800,000 employer = 7,200,000; net wages payable 3,600,000 (unpaid to 12 employees); bonus payable 3,000,000. The staff loan deduction of 1,200,000 reduces the staff loan receivable; it is not an external liability. Total liabilities = 9,600,000 + 7,200,000 + 3,600,000 + 3,000,000 = 23,400,000.
2. Prepare the adjusting journal entries needed at 31 December 2024 to correct the payroll records.
Read the worked answer
The clerk's recorded entries appear to be Dr wages 34,800,000; Cr bank 34,800,000 and Dr pension expense 4,800,000; Cr pension payable 4,800,000. Corrections:
- Record gross wages and deductions: Dr wages 13,200,000; Cr PAYE payable 9,600,000; Cr pension payable 2,400,000; Cr staff loan receivable 1,200,000. (34,800,000 + 13,200,000 = 48,000,000.)
- Correct the unpaid net pay: Dr bank 3,600,000; Cr net wages payable 3,600,000. Only 31,200,000 was actually paid, not 34,800,000.
- Accrue the bonus: Dr bonus expense 3,000,000; Cr bonus payable 3,000,000.
The employer pension entry already recorded is correct. After these entries, wages expense is 48,000,000, pension expense 4,800,000 and bonus expense 3,000,000.
3. Discuss whether the bonus and the unpaid wages should be accrued, and why the payroll clerk's view is incorrect.
Read the worked answer
The bonus was approved by the board on 20 December, before the year end, so a present obligation exists at 31 December; it should be accrued even though payment is in February. The unpaid wages relate to December work and are a liability at year end; the fact that cash has not moved does not remove the obligation. The clerk's view that deductions are not company money is wrong: once the employer withholds PAYE and pension from wages, it holds them as agent for the tax authority and pension fund and must recognise a liability. The staff loan deduction is different: it reduces the employee's debt to the company, so it is not a liability to an outsider. Accrual accounting matches the expense to the period the employees worked.