Australian Accounting and Bookkeeping

Section 3 Prepare and Process Payroll

Conduct payroll preparation within designated

timelines in accordance with organisational
policy and procedures
The preparation of payroll must be completed within designated
timeline. Payroll must be calculated, submitted for approval, and lodged
so that employees receive their pay at the agreed time.Under most
circumstances the pay week, the period used to calculate wages,
finishes two to three days before the actual pay day. This allows
sufficient time for processing.

For example, if pay day is Thursday, the pay week finishes on Tuesday
so the payroll staff can process the pay on Wednesday before paying on
Thursday. This is particularly important for pays that are paid directly
into the employee’s bank account; actual bank to bank processing can
take 24 hours after the payroll file is uploaded to the organisation’s
bank. If the employees are paid cash or cheque they can be paid
immediately after processing is finished.

Payroll preparation starts with the collection and checking of employee time
sheets. In most cases, the employee’s supervisor or manager is responsible
for checking the time sheet. The time sheet is checked to see the correct
number of hours worked is entered, any special items such as sick or annual
leave claimed as appropriate, and any allowances or deductions such as
meal or travel allowance are legitimate.

Once the time sheets are authorised they are forwarded to the person
responsible for payroll processing. Each employee’s payroll is processed,
calculating the amount earned by establishing the gross pay, adding
allowances and processing deductions, and working out tax withholding
to arrive at each employee’s net pay.

Additional processing, such as superannuation guarantee, can be processed at

this stage. Superannuation guarantee is a mandated employer contribution to
an approved superannuation fund on behalf of an employee. The minimum
contribution is 9.5% of an employee’s ordinary time earnings.

Once the net pay has been established, the bank file can be created,
cheques written, or cash required analysed; depending on the method
used to pay employees.

Given the sensitivity of payroll preparation, and its importance in

maintaining good employer/employee relationships, many organisations
have a payroll policy and supporting procedures to ensure its completion
within designated time frames.

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Policies, procedures, and codes of practice

Companies all have standards or expectations with regard to the work
done by employees. These are generally documented in the form of Key
Performance Indicators (KPIs). Employees must know what work
standards are expected of them and should be involved in setting and
agreeing upon KPIs. KPIs are then used to measure and evaluate
employee performance. Performance reviews should then be utilised to
give employees formal feedback and to address any performance issues
that might occur.

Critical standards that need to be met by employees are honesty,

efficiency, effectiveness, accuracy, and high levels of customer service.
These standards are essential for an employee within the financial services
industry, as they provide the foundations upon which the business grows.
They are a part of the strategic and operational success of the business.

Thus, in order to work effectively and to work toward the achievement

of organisational goals, all employees must understand and implement
organisational procedures and policies related to workplace performance
appropriately.

Policy
A policy is a statement of agreed intent that clearly and unequivocally
describes an organisation’s views with respect to a particular matter. It
describes the principles that provide the direction for the organisation.

It is a set of principles or rules that provide a definite direction for an

organisation and embraces the general goals and acceptable procedures
in its area of influence. Policies assist in defining what must be done wen
particular events occur.

Policies are the rules that can be referred to as a means of maintaining

order, security, consistency, or practices for successfully furthering a goal or
mission. For example, an organisation might have a policy in place that deals
with suppliers when an error is made on invoices. Then, each time that
situation arose, staff members could refer to the policy rather than have to
make decisions based on the circumstances of the individual cases.

Policies are necessary so that people working in the organisation can have a
framework for actions that helps them perform their jobs in the way that is
expected by their employer. It alleviates the problem of people having to
discuss and resolve issues each time a situation arises. The policy provides
the decision-making process and the actions that can be applied in many
cases and as a consequence has efficiency benefits.

For every policy established, an organisation will need to create and

document supporting procedures.

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Procedure
A procedure is a clear step-by-step method for implementing an
organisation’s policy or responsibility. A procedure describes a logical
sequence of activities or processes that are to be followed to complete a
task or function in a correct and consistent manner. It can be a manner of
processing; a way of performing or effecting something or it can be a series
of specific steps to be taken to accomplish a given result or product.

Policies and procedures are usually compiled together to form a manual. A

Policy and Procedures Manual is a compilation of the written records of the
agreed policies and practices of an organisation. The manual should be
maintained in a loose leaf file system so that it can be updated and added
to as policies and practices are reviewed and amended. The manual should
be regularly reviewed and each policy and procedure should have a review
date. The manual should readily be available to all staff.

The accounts section of a business will have clearly documented

procedures outlining and detailing the steps and the specific instructions
that are required before an account payable invoice for example can be
cleared for payment.

Industry codes of practice

Industry codes of practice provide documented guidance and advise on
how to achieve predetermined minimum industry standards and
legislative compliance. They are usually developed in consultation with
representatives from industry, worker and employers, special interest
groups and government agencies. Whilst a code of practice is not law
and does not have the same legal enforcement as legislation, it should
be adhered to unless there is an alternative course of action that
achieved the same or better standards.

Company codes of practice

An organisation’s codes of practice will vary according to your particular
workplace. The code is a document that tells the reader what the
service/organisation undertakes to do. Codes reflect the beliefs, or
philosophy if the service/organisation. They tell the workers and clients
what the service values are and what actors need to be taken procedures
describe the steps that need to be taken to make the codes work.

Written codes of practice are a clear, concise set of guidelines outlining

how that service/organisation intends to operate. They tell employees
what management expects will happen in certain situations to support
the service’s mission/philosophy. The codes state what practices should
be implemented so that work is done efficiently and consistently.
Written codes should be available for all employees to access readily so
that if they are unsure of how to act, they can consult the code.

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Codes are like policies and are developed to help you in several ways:

• Hurried or spur-of-the-moment decisions are more likely to be avoided

• Actions are guided so employee stress is lessened
• Consistency in the way things are done by everyone on staff is increased
• Consistency in duties is carried on even though staff might leave
• Decisions can be made without consulting everyone else

Generally, they can help the staff team by:

• Empowering individuals who are able to make decisions with confidence

as they are based on written documentation
• Protecting staff who make decisions and act on established policies
• Helping teamwork and cooperation by collectively establishing common
goals, procedures and understanding

Good codes of practice that are practical, clear and relevant can support a
company to work efficiently and reflect the professional code of ethics.

Calculate, record and reconcile employee in

accordance with legislative requirements
In addition to normal wages or salary, employees receive special employee
entitlements such as leave. Employee entitlements vary, depending on
industry, but are usually set by an award or workplace agreement. Awards
and workplace agreements are underpinned by the National Employment
Standards (NES). Employee entitlements include:

Annual leave
In most cases, permanent employees receive four weeks annual leave
for each year of service. Organisations encourage employees to take
leave in the year it is accumulated, or as soon as possible thereafter.
This reduces the organisation’s leave liability (the amount of
accumulated annual leave owed to employees) and helps ensure the
employee’s continued health and wellbeing.

Under some awards and agreements, annual leave attracts a 17.5% annual
leave loading. If the employee receives annual leave loading, the tax table
used to calculate tax on earnings has different withholding amounts for
those who receive annual leave loading and those who do not.

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Long service leave

Long service leave is available to employees who have been employed
for a significant period. In general, employees who have been employed
for 10 years are entitled to two months long service leave, while those
employed for 15 years have accumulated 13 weeks.

Under some awards, pro-rata long service leave is owed to employees

who cease employment after more than seven years’ service.

Parental leave
Expectant mothers can claim up to 12 months unpaid leave commencing
six weeks before the due date. Expectant fathers can claim 12 months
unpaid leave from the actual birth date. Normally the expectant parent
must have been employed for a minimum of 12 months before they can
claim parental leave. Employees who claim parental leave are protected
from losing other entitlements while on parental leave. Some awards
and workplace agreements provide for paid parental leave.

The Australian Government introduced a paid parental leave scheme in

January 2011. Under the scheme employers are provided with funds to
make payments to eligible employees for a maximum of 18 weeks. This
scheme is in addition to other liabilities for parental leave under the
relevant award or agreement.

Sick leave
Awards and workplace agreements cater for sick leave for permanent
employees. The arrangements vary but typically cater for up to 10 days
per year. Unused sick leave generally can be accumulated. In some
cases, a number of non-continuous days can be claimed without a
doctor’s certificate.

Study leave
Study leave, paid or unpaid, can be granted to individual employees who
enrol in an approved program. Study leave is normally subject to an
agreement between the employer and employee.

Workers compensation
All workers are covered by workers compensation, a scheme that means
there is no loss of income for an injury sustained while at work.

Employers are generally required to be members of a complying workers

compensation scheme, although some government agencies are exempt
under the scheme and are self-insured.

Employee entitlements place an extra burden on the payroll processing

staff in extra recording and reporting.

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Annual leave and sick leave needs to be monitored, both in the

accumulation and claiming. In computerised systems sick and annual
leave entitlements are automatically incremented each pay period.
Manual systems are harder to maintain. Traditionally, leave entitlements
were granted on employment anniversaries but the expectation now is
for entitlements to be calculated each pay period.

One method of calculating sick or carer’s leave is to divide the number of

hours worked by 26. For example, if an employee works 38 hours per week
they will also accumulate 1.46 hours sick leave if they receive 10 days sick
leave per annum. This can be calculated and added to a sick leave accrual
account for the employee, or calculated when leave is taken, in most cases,
an accrual for each employee is the easiest to maintain.

Similarly, annual leave (assuming the employee receives four weeks

annual leave per year) can be calculated by dividing the hours worked
by 13. For example, for each 38 hours worked, 2.92 hours of annual
leave can be added to the leave accrual for the employee.

A spreadsheet is a good method for managing leave if a manual payroll

system is used. It is vital to maintain back-ups of any tool used to maintain
leave, especially if the accrual amount is not shown on each pay advice.

The Fair Work Ombudsman provides several recordkeeping templates on

its website.

An example of a template used to track annual leave, including leave accrual:

Leave accrual Details of leave taken
Leave taken Amount paid Leave
Hours
Date Amount Date balance
accrued From To
paid paid
12/05/15 2.92 140.16
19/05/15 2.92 143.08
26/05/15 2.92 20/05/15 25/5/15 875.00 26/05/15 108.00
2/06/15 2.92 110.92
9/06/15 2.92 113.84
(Adapted from www.fairwork.gov.au)

Recordkeeping
The ATO expects employers to keep the following records regarding
payments to employees:

• Tax file number declarations and withholding declarations

• Withholding variation notices
• Worker payment records
• PAYG payment summaries annual reports superannuation records
• Records of fringe benefits provided

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The Department of Families, Housing, Community Services, and Indigenous

Affairs expects employers to keep written records of amounts received and
paid to employees under the Paid Parental leave scheme. The Australian
Government Child Support Agency expects the employer to keep
appropriate records of child support payments deducted and remitted.

Legislative requirements
There are many aspects of legislative requirements that apply to
organisations in relation to payroll. Most organisations expect staff
involved in payroll functions to be conversant with such legislation. The
following concepts are legislations relating to payroll.

ATO regulations cover Australian Business Number (ABN),

employment declarations, and TFN declarations. The ABN is a unique 11
digit identifier which:

• Enables an organisation to claim Good and Services Tax (GST) credits

• Enables an organisation to claim fuel tax credits it qualifies for
• If not quoted to businesses an organisation deals with, may result in
amounts being withheld from payments under pay as you go (PAYG)
withholding
• Allows businesses to easily confirm details for ordering and invoicing

If an organisation has a GST turnover of $75000 or more (or $150000

or more for not-for-profit entities) it must register for GST and will need
an ABN to do this. If an organisation has a lower GST turnover
registration is optional.

Regulations relating to Business Activity Statement (BAS) agents

(anyone who provides a business activity statement service for a fee or
other reward) are required to comply with the Tax Practitioners Board
(TPB) including registration and adherence to the Code of Professional
Conduct. The Code of Professional Conduct is a legislated code that
sets out the professional and ethical standards required of registered tax
agents and BAS agents. It outlines the duties that agents owe to their
clients, the TPB and other agents. The Code consists of a list of 14 core
principles which are grouped into five categories:

Honesty and integrity

• You must act honestly and with integrity.

• You must comply with the taxation laws in the conduct of your personal
affairs.

• If you receive money or other property from or on behalf of a client and

you hold the money or other property on trust you must account to your
client for the money or other property.

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Independence
• You must act lawfully in the best interests of your client.

• You must have in place adequate arrangements to manage conflicts of

interest that may arise in relation to the activities that you might
undertake in the capacity of a registered tax agent or BAS agent.

Confidentiality
• Unless you have a legal duty to do so, you must not disclose any information
relating to a client’s affairs to a third party without client’s permission.

Competence
• You must ensure that a tax agent service you provide, or that is provided
on your behalf, is provided competently.

• You must maintain knowledge and skills relevant to the tax agent
services that you provide.

• You must take reasonable care in ascertaining a client’s state of affairs, to the
extent that ascertaining the state if those affairs is relevant to a statement you
are making or an activity you are undertaking on behalf of the client.

• You must take reasonable care to ensure that taxation laws are applied
correctly to the circumstances in relation to which you are providing
advice to a client.

Other responsibilities
• You must not knowingly obstruct the proper administration of the
taxation laws.

• You must advise your client of their rights and obligations under the taxation
laws that are materially related to the tax agent services you provide.

• You must maintain the professional indemnity insurance that the Board
requires you to maintain.

• You must respond to requests and directions from the Board in a timely,
responsible and reasonable manner.

Reconcile total payments for pay period, and

review and correct irregularities or refer them
to designated persons for resolution
Payments relating to payroll need to be checked and posted to the
accounting system.

The Chart of Accounts should include accounts related to employment,

such as wages and withholding liability.

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Simple Chart of Accounts:

Assets (1000-1999)
1000-Cash in Banks The Chart of Accounts shown
has child accounts under
1010-Petty Cash Fund
salaries and wages for different
1020-Accounts Receivable
areas within the organisation,
1030-Inventory allowing wage costs to be more
1040-Materials and Supplies closely monitored. Each
1210-Land organisation will have its own
1220-Buildings Chart of Accounts, designed to
1230-Tools and Equipment capture costs based on its own
1240-Vehicles requirements.
1250-Furniture and Fixtures
Liabilities (2000-2999)
2010-Accounts Payable
2020-GST Payable
2030-PAYG Payable
2110-Miscellaneous Accruals
Capital Accounts (3000-3999)
3010-Owner Equity
Sales (Revenue) Accounts (4000-4999)
4010-Retail Sales
4020-Wholesale Sales
4030-Sales-Service
Cost of Sales (5000-5999)
5010-Cost of Goods Sold
Expenses (6000-6999)
6010-Salaries and Wages
6011-Production Wages
6012-Administration Wages
6013-Sundry Wages
6014-Maintenance Wages
6020-Contract Labour
6030-Power
6040-Telephone
6050-Rent
6060-Office Supplies
6070-Postage
6080-Maintenance Expense
6090-Insurance
6100-Interest
6110-Depreciation
6120-Travel Expense
6130-Advertising

Posting payroll to the accounting system

Payroll payments can be posted to the Payroll Journal. A Payroll
Journal is a special journal that groups and records payroll transactions.
It keeps all payroll transactions in one place and saves time when
summarising payroll activity. It also means less frequent posting to the
General Ledger because only period totals need to be entered.

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Payroll Journal
Payroll distribution to General Ledger Accounts

6011 6012 6013 6014 2030 1000

Employee Date Cheque
(Dr) (Dr) (Dr) (Dr) (Cr) (Cr)
B Smith 19/05/15 950.00 171.00 779.00 235987

R Brown 19/05/15 950.00 171.00 779.00 235688

P Green 19/05/15 550.00 61.00 489.00 235689

M White 19/05/15 250.00 400.00 104.00 546.00 235690

T Green 19/05/15 950.00 171.00 779.00 235691

R Jones 19/05/15 750.00 200.00 171.00 779.00 235692

19/05/15 3450.00 950.00 400.00 200.00 849.00 4151.00

Post Ref PJ-05-15 ok ok ok ok ok ok

The total wages can be reconciled against the amount credited to the PAYG payable account
and the cash at bank account. In this example, a cheque has been used to pay each employee
and the details recorded. The example applies equally for cash payments and direct credit to
bank account, except a single cheque or transaction will apply.

A posting reference shows the Payroll Journal has been summarised and posted to the General
Ledger. If an irregularity cannot be resolved it should be referred to the immediate supervisor or
other person with authority over payroll matters.

Obtain authorisation of payroll and individual pay advice in

accordance with organisational requirements
Payments can be made to employees by cash, cheque, or electronic funds transfer to the
employee’s bank account.

If payment is by a method other than cash, that is cheque or funds transfer, it must be agreed
before payment is made. Under some awards and agreements, employees who are paid by cheque
are given time during the working hours to cash or deposit the cheque.

Cash payroll, particular in large organisations, poses a serious security threat. Under these
circumstances, it is usual to outsource the preparation and delivery of pay packets to security
firms. Payment to employees can then be made from a secure environment, including an
armoured vehicle.

Cheques are becoming increasingly less common. Cheques provide a relatively secure method of
payment but are inconvenient and subject to bank charges and government stamp duty, making
them expensive. Employees do not like cheque payments because they have to take the cheque to
the bank and wait for the cheque to clear before they can draw on the cheque’s proceeds.

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Electronic funds transfer is now the most popular way to pay employees.
Electronic funds transfer is easy for the employer organisation to
manage, relatively inexpensive (depending on the organisation’s
arrangements with its bank), quick, and secure. Employees like
electronic transfer because their wages are available immediately after
the transfer is complete.

In some cases, there can be 24 hours delay between the organisation’s

bank processing the wages file supplied by the employer and the funds
being received by the employee’s bank. This depends on the bank used by
each, although banks have worked to reduce the problem. If both employer
and employee use the same bank, the transaction can be instantaneous.

Electronic funds transfer is heavily reliant on the bank’s computer and

communication systems, including the internet. Should either fail, it can
deny employees access to their funds.

Make arrangements for payments in accordance

with organisational and legislative requirements
Payroll should be authorised by the appropriate person in the
organisation before payment is made to employees in accordance with
organisational requirements. Authorising is necessary as it is with any
expense to maintain a clear audit trail.

An important facet of the payroll process is the production and issuing of

pay slips to employees. This can be incorporated in the authorisation
process; a person with the appropriate authority can check each pay slip,
verifying details before signing off (indicating the pay details are correct).

Under the Workplace Relations Act and the Workplace Relations

Regulations, employers must include the following information on an
employee’s pay slip:

• The name of the employer and employee

• The date (e.g. 5/04/15) and the period of payment (e.g. 22/03/15 to
4/04/15)
• The gross and net amounts of payment
• Any deductions made, including the amount and purpose of the
deduction and the name and number of the fund or account into which
the deductions were paid
• Any allowances, bonuses, incentive-based payments or other separately
identifiable entitlements paid
• For employees paid an hourly rate-the ordinary hourly rate of pay, number
of hours worked at that rate and the amount of payment at that rate
• For employees paid at an annual rate-the rate as at the latest date to
which the payment relates

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• Any overtime or penalty rates paid (e.g. weekend work), or loadings

(e.g. shift work)
• If employers are required to make superannuation contributions for the
benefit of the employee (excluding those made to defined benefits
superannuation funds):
– The amount of each superannuation contribution the employer makes or
is liable to make during the period to which the pay slip relates
– The name of the superannuation fund

Employers must issue a written payslip (either electronic or on paper) to

each employee within one day of the payment of wages. If electronic
pay slips are issued to employees, they must comply with the same
requirements as for paper pay slips. Pay slips issued for the purposes of
satisfying time and wages recordkeeping obligations must be kept for at
least seven years.

XYZ com ABN xxx xxx xxx

Pay slip
Employee:
Date:
Period: to
Ordinary rate: Salary:
Employer superannuation:
Fund: Amount:
Earnings and allowance:
description hours rate
Ordinary time
Overtime
Overtime 1 ½
Overtime 2
Shift or other loading
Bonus
Other payments
Gross payment:
Deductions
Taxation
Other deductions
Total deductions
Net payment

Produce, review and store payroll records in

accordance with organisational policy and
security procedures
One advantage of a computerised system over a manual payroll system
is the ability of a computerised system to generate reports that can be
used to summarise and check payroll functions. Employers are required
to keep accurate and complete payroll records for all their employees,
including time worked and wages paid, in addition to issuing pay slips to
their employees. Much of the information an employer is required to
keep is that provided on pay slips.

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Employee records must be in a form that is readily accessible to a Fair

Work Inspector. The records must be in a legible form and in English,
plain simple English is preferred. The records must not be altered unless
correcting a mistake and not be false or misleading to the employer’s
knowledge. Records must be kept for seven years.

Employee records should be treated in confidence. They can only be

accessed by the employer, the employee, or authorised payroll staff.
Employers are obligated to make copies of payroll records available to
an employee or former employee.

Fair Work Inspectors and other authorised inspectors (such as from a

trade union) can access employees records to determine if there has
been a contravention of relevant workplace legislation.

Under the Fair Work Act and Regulations the following records should be kept:

• General employment records

• Pay records
• Hours of work records
• Leave records
• Superannuation guarantee contribution records
• Individual flexibility arrangement records
• Guarantee of annual earnings records
• Termination records
• Transfer of business records

Where there has been a transfer of business, under the Act, the old
employer is required to transfer the records pertaining to a transferring
employee to the new employer.

Payroll records must be kept in a secure environment. Computer systems

used to store payroll should be password protected so only authorised
employees can access payroll records. Manual payroll or accounting
records should be stored in a secure cabinet. It is a good idea to keep the
payroll department separate (if possible) and locked if unattended.

Manual systems rely on information stored in journals to provide payroll

records. The employer accesses employee details, such as the tax file
number declaration forms, from the filing system. The employee file,
along with the relevant payroll journal, forms the basis of payroll
records in a manual system.

Computerised systems offer greater flexibility. Reports can be generated

providing details about certain aspects of payroll, such as PAYG liability,
SAG (superannuation guarantee) liability, leave taken, leave accrued
etc. These reports can be produced on demand.

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