AYERTENA HEALTH SCIENCE &

BUSINESS COLLEGE
The Ethiopian TVET-System

Unit of Competency: - Process Payroll

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 Accounting For the Payroll System in an Ethiopian Context
Course Outlines:
This chapter covers the following topics:

 Overview of payroll
 Payroll Data
 The use of Payroll data
 The most common payroll errors
 Some possible frauds that can be made payroll
 Payroll activities
 Definition of payroll related terms
 Possible Components of Payroll Register
 Procedures involved in Payroll Accounting
 Demonstration Problem
Learning Objectives:
After studying this chapter, you should be able to:
 Understand the importance of payroll and payroll accounting
 Define payroll related terms
 Identify the basic components of Payroll Register
 Prepare payroll sheet
 Compute income taxes and pension contributions as per the rule of a government
 Discuss the objectives of internal control for payroll
 Compute and record the payroll for a pay period
 Describe and record employer payroll taxes
 Identify additional fringe benefits associated with employee compensation
1.1. The Overview of payroll Accounting
 Payroll is the total amount required to pay workers & employees during a week, month or other
period.
 Payroll is a list of employees who get paid by the company.
 Payroll also refers to the total amount of money employer pays to the employees.
 It is usually managed by the accounting or human resources department of a company.
 Small-business payrolls may be handled directly by the owner or an associate
 It starts with preparing a list of employees to be paid and ends with recording those expenses.
 Employees’ are sensitive to payroll errors and irregularities (or discrepancies).
 Maintaining good employee morale requires that the payroll be paid on timely and accurate
basis.

1.2 Payroll Data

Payroll data is the collection of metrics that contribute to the overall business expense of paying people
for work performed at your company. There are more than just base salaries to consider here. Other
payroll metrics include:
• Any contractor or freelance wages outside of official payroll.
• Any bonuses offered throughout the financial year.
• Withheld taxes.
• Benefits paid to employees.
• Communication expenses that contribute to payroll.
• The cost of remaining compliant with payroll regulation.

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1.3 The Use of Payroll Data
 Eliminate Errors and Save Money: Payroll is the largest single cost for almost all
businesses. For many service-based businesses where payroll is the primary cost for
producing a product or service.
 Guide Business Direction: Analyzing payroll data over time can provide more accurate
yearly forecasts, so you are better prepared to manage budgets and cash flow in times of
change or growth.
 Win and Retain Top Performers: Sure enough, many roles within a company may be
interchangeable. But, there are always key roles that are critical to the overall success of the
business.

1.4 The Most Common Payroll Errors

Any area of payroll reporting, data, and management is susceptible to error when you think about it. It
really comes down to the accuracy of your information. If you accidentally mistyped something in the
payroll, it's going to be wrong. The wrong number of hours will mean that everything on that payment
cycle will be inaccurate..
The most common payroll mistakes that companies make:
 Incorrect Tax Forms: Your employee uses their tax form and any other company-issued tax form
to pay their income taxes. Any mistake here will cause problems for the company and the
employee.
 Misclassification of Employees: The classification of employees is a legal matter, not a
company choice. Classifying an employee as an independent contractor will result in a
significant problem because the company will need to pay fines and taxes, as well as interest.
You may have independent contractors working for your company, as well as permanent
employees. Make sure they are classified correctly in payroll.
 Not Updating Tax Rates: Tax rates are subject to change, and it's the company's responsibility
to stay informed and make those changes in payroll.
 Not Tracking Employee Hours Correctly: If there are mistakes in the number of hours the
employee worked, the pay will be off. It's important to have solutions in place that make it easier
for employees and managers to have accurate records of employee hours.
 Errors in Calculating Overtime: Overtime can be a difficult thing to calculate because it may
differ per employee. Salaried employees do not receive overtime, but companies need to be
careful in classifying these employees. Non exempt employees are entitled to overtime when
they work more than 40 hours a week.

1.5 Some possible frauds that can be made payroll

Some of the possible frauds that can be made on the payroll system are the following:
 Adding fictitious employees to the payroll
 Listing terminated employees on the payroll
 Using unauthorized pay rates
 Overstating working hours
 Issuing duplicate payroll checks
 Not deducting employees’ absent time
 Making incorrect totals on the payroll register
Payroll activities involve four functions:
 Hiring employees
 Timekeeping
 Preparing the payroll

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  a paying the payroll.
For an internal control system to work effectively these four functions should be assigned to different
departments or individuals.
Designated persons to check payroll data and clarify discrepancies
 Payroll manager
 Senior finance officer
 Human resource manager
 Chief executive finance officer

1.6 Definition of Payroll Related Terms

 Salary or Wages: Salary and wages are usually used interchangeably.
 salary means income paid for professionalism when worked normal or regular hours according
to the agreement
 Wages is an income that the employer paid for contract workers.
 they are usually paid when a particular piece of work is completed or for a period less than a
month
 There are two types of employees
 Permanent employees(constant or regular employees)
 Contract employees(casual or temporary workers)
1. The Pay Period: The length of time covered by each payroll payment. Pay periods for
wageworkers are usually a weekly or biweekly period. That is, wage is paid either weekly or
biweekly. On the other hand, for salaried employees, the pay periods are a month, semi-month,
quarter, semi-annual, or a year.
2. The Pay Day: The day on which wages or salaries are paid to employees. PAY DAY is usually
the last day of the pay period.
3. A Payroll Register (Payroll Sheet): the entire list of employees of a business along with each
employee’s gross earnings, deductions and net pay (or the take home pay) for a particular payroll
period. The basis for the preparation of the payroll register can be the attendance sheets,
punched (clock) cards or time cards.
4. Employee Earnings Record: It is a summary of each employee's earnings, deductions, and net
pay for each payroll period and of cumulative gross earnings during the year. It is a separate
record kept for each employee. The individual employees' earnings record helps the employer
organization to properly summaries and file tax returns.
5. Pay Check: An instrument for paying salary if the firm makes payment via writing a check in
the name of each employee for the net pay or a check for the total net pay.
6. Gross Earnings: The total pay to an employee before deductions for the pay period.
 Gross salary may include such as
 Basic salary  Part-time
 Wages  Allowance
 Overtime  Bonus
 Commission
7. Payroll Taxes: Are taxes levied against the employer on the payroll of a firm. It is the portion of pension or
social security contribution made by the employer. It is an additional payroll related expense to an
employer.
8. Withholding Taxes: These are taxes levied against the earnings of employees of an organization and
withheld by the employer as per the tax laws of the concerned government
9. Payroll Deductions: All the reductions from the gross earnings of an employee such as withholding taxes,
union dues, fines, credit association pays, etc.

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 10. Net Pay: The net earnings after subtracting all the deductions. It is sometimes known as take home pay.
The amount collected by an employee on the payday.
In the above definitions of payroll related terms, the three are considered the basic records of a payroll accounting
system. These are: (1) A payroll sheet, (2) Individual employees' earnings records, and (3) Pay checks. These
records are generated from a payroll system that is operated either manually or using computers
1.4 Components of a Payroll Register
1. Employee Number– numbers assigned to employee for identification purpose. It might be alpha-numeric
character when a relatively large number of employees are included in the payroll register.
2. Name of Employees– full name of each employee included in the list of payroll sheet.
3. Earnings – a benefit in cash or in kind earned by an employee from various sources of employment. It may
include:
A. The basic salary or Regular Earning – a flat monthly salary of an employee that is paid for carrying out
the normal work of employment and subject to change when the employee is promoted.
B. Allowances: money paid monthly to an employee for special reason, which may include:
Position (Acting or Headship) Allowance- a monthly sum paid to an employee for bearing a particular
office responsibility,
E.g. head of a particular Department or Division.
* Its taxable allowance
 Housing (House rent) Allowance
– a monthly allowance given to cover housing costs of the individual employee when the employment
contract requires the employer to provide housing but fails to do so. Its taxable allowance
Hardship or Disturbance Allowance – a sum of money given to an employee to compensate for an
inconvenient circumstance caused by the employer. For instance, unexpected transfer to a different and
distant work area or location.
* Who worked work place is very hazard. Dangerous.
For examples laboratory work on different chemical because chemical is very dangerous.
* It’s also not taxable allowance
Desert (Bad climate) Allowance)
– a monthly Allowance given to an employee because of assignment to a relatively hot region.
* Hot region for examples such as (Gambela, Affar, Hawasa, Tigray, Adama etc)
* Its non taxable allowance.

Transportation (Fuel Allowance) – a monthly Allowance to an employee to cover cost of transportation up

to the work place if the employer has committed itself to provide transportation service.
 Transportation allowance(2) 1, according to the federal government
2, according to the regional state
 According to the federal government up to 800 birr is exempted or free from tax(at sometimes25%
of b/salary)
 But above this taxable.
 According to the regional state up to 600 birr is free from tax or exempted (at sometimes 15% of
b/salary)
 But above this taxable.
 Cash Indemnity Allowance
This is an allowance payable to cashiers to cover the risk of possible cash shortage. Cash indemnity is used to
cover accidental shortage and not intentional shortage. Some banks in our country such as Dashen Bank,
Wegagen Bank, and CBE confer such type of an allowance.

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  Medical Allowance
It is a monthly allowance payable to an employee from his/r employer to cover the costs of medical treatment of the
employee, or is a reimbursement of the actual costs of medical treatment of an employee by his employer.
 Representation Allowance
This is a monthly allowance payable by an employer to his/r employee whose work requires him to entertain
customers and guests in connection with the tasks of undertaking. It also refers to an allowance payable to an
employee who represents his/r employer (undertaking) in different places such as in a workshop, meeting, seminar,
and bazaar for the affairs of the undertaking (employer).

 Milk Allowance
Milk allowance is free milk provided by an employer to his/r employees during working hours. Such an allowance
is mostly provided to those employees who work in production department of manufacturing companies. Artistic
Printing Enterprise and National Alcohol & Liquor Factory are good examples that provide such an allowance
to their employees who work in production section

 Telephone Allowance
This is an allowance payable by an employer to his/r employee to cover the telephone expenses, which may include
a cell phone and/or sim-card, of the employee. Such an allowance may be provided to the employee in cash or in
the form of mobile card (in-kind).
 Foreign Allowance paid by the government
Foreign allowance paid by government is an allowance payable outside Ethiopia by the government of Ethiopia to a
citizen of Ethiopia for rendering service outside Ethiopia
 Education Allowance
This is a benefit accruing to an employee when the employer covers educational expenses (such as tuition fee) of
his employee. It is customary that such an allowance is avail for permanent employees who serve the employer for
a minimum of a certain period.
Educational expenses of an employee (worker) may initially be paid by the employer to the employee or may
initially be incurred by the employee and later be reimbursed by the employer.
Educational allowance is a common practice in some governmental and private organizations in Ethiopia.
Commercial Bank of Ethiopia (CBE), Ethio-Telecom, Ethiopian Electric Power Corporation (EEPCO),
governmental universities, Dashen Bank S.C., and MIDROC Ethiopia are good examples of undertakings that cover
the educational expenses of their employees.

 Per-Diem
Per-diem may be defined as a payment by an employer to his/r employee for expenses incurred by the employee
wholly, necessarily and exclusively for carrying out the duties of the employer, which will be undertaken by the
employee by travelling a certain distance from his/r normal working place.
Those expenses may include expenditure for meals, lodging (room), traveling (transportation) and similar other
incidental.
Per-diem is common in most governmental and private organizations in Ethiopia such as Ethio-Telecom, CBE,
National Alcohol and Liquor Factory, and EEPCO.
ALLOWANCE
Full Taxable
 -Position allowance
 -House allowance
 -City compensatory allowance
 -Cash indemnity allowance
 -Meal allowance
 -Signature allowance

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Partially Taxable
 -Transportation
 -Provident fund
 Medical allowance
Full Exempted
 Milk allowance
 Hardship allowance
 Desert allowance
 Telephone allowance
 Education allowance
 Uniform allowance
 Medical allowance
C. Overtime Earnings
Overtime work is the work performed by an employee beyond the regular working hours or days. Overtime earning
is the amount payable to an employee for overtime work done. In Ethiopia, in this respect, according to Article 33
of proclamation No.64/1975 the following is discussed about payment for overtime work.
I. A worker shall be entitled to be paid at a rate of (at evening) (1.25) or one and one quarter (1 ¼) times his
ordinary hourly rate for overtime work performed before 10 O'clock in the evening (10 p.m.). (From 6:00 am
to 4:00 pm)
II. A worker shall be paid at the rate of (at the night) 1.5 or one and one half (1 ½) times his ordinary hourly
rate for overtime work performed between 10 O’clock in the evening (10 p.m.) and six O’clock in the
morning (6 a.m.)
III. Overtime work performed on the weekly rest days shall be paid at a rate of two (2) times the ordinary hourly
rate of payment.
IV. A worker shall be paid at a rate of two and half (2 1/2) times the ordinary hourly rate for overtime work
performed on a public holiday.
Hence, the gross earnings of an employee may, therefore, include the basic salary, allowances and overtime
earnings. You may find sometimes other form of earnings such as Bonus that is paid to employees for achieving
results better than usual.
 For examples
Tarecha is the permanent employees of SHSBC his basic salary is birr 6000 and mister Tarecha has worked
overtime 12hours on public holiday. Mister Tarecha 40hr worked per week.
Required
Task1.1 compute overtime for mister Tarecha??
O.T=6000/160hr*12hr*2.5=1125
4. Deductions
These are amounts to be subtracted from the earnings of employees because they are required by government
(mandatory deductions) or permitted by the employee himself (voluntary deductions. Mandatory deductions
include employment income tax and pension contribution. In our country, some of the deductions against the
earnings of employees are:

A. Employee Income Tax

In Ethiopia every citizen is required to pay something in the form of income tax from his/her earning of
employment. In this case, a progressive income tax system that charges higher rates for higher earnings is applied
on the gross earnings of each employee save the first 150 Birr. According to proclamation No. 286/1994 that has
become into effect beginning Hamle 1, 1994 E.C. exempts the first Br 150 of the earnings of an employee from
income tax. The money on which a person does not have to pay income tax is an exemption. According to the new
proclamation, employee income tax has to be computed based on Schedule “A” as follows:

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 Employment Income per Month Range Tax Per Month
TB Over Birr To Birr of TEI Tax Rate
1st 0 600 0 Exempt (0%)
2nd 601 1,650 60 10%
3rd 1,651 3,200 142.5 15%
4th 3,201 5,250 302.5 20%
5th 5,251 7,800 565 25%
th
6 7,801 10,900 955 30%
7th 10,900 **** 1,500 35%

Generally, taxable income from employment includes salaries, wages, allowances, director’s fees and other
personal emoluments, all payments in cash and benefits in kind. However, as per Art 13 of Proclamation No.
286/2002 and Art 3 of Regulation No. 78/2002,
Old Tax Rates
According to the amended income tax proclamation no. 286/1994 the tax on income from employment over one
hundred fifty (Br 150) shall be charged, levied and collected according to the following income tax rates.
Taxable Monthly Rates of Tax (%) on every additional Income Short cut Adjustment/Deduction In Birr/
≤150 Exempt 0
151-650 10% 15.00
651-1400 15% 47.50
1401-2350 20% 117.50
2351-3550 25% 235.00
3551-5000 30% 412.50
>5000 35% 662.5

B. Pension Contribution
Permanent employees of an organization the employees of which are governed by the existing regulations of the
Ethiopian public servants are expected to pay or contribute 7% of their basic (monthly) salary to the government
pension Trust Fund. This amount should be withheld by the employer from the basic salary of each employee on
every payroll and later be paid to the respective government body.
On the other hand, the employer is also expected to contribute towards the same fund 11% of the basic salary of
every permanent employee of it. It is this total amount that we called earlier as payroll taxes expense to the
employer organization (i.e. 11% of the total basic salary of all permanent employees). For military forces (police
and national defiance members), the employer contributes 25 % of the basic salary of every permanent military
force.
Consequently, the total contribution to the pension Trust Fund of the Ethiopian government is equal to 10% of the
total basic salary of all permanent employees of an organization (i.e. 7% comes from the employees and the 11%
comes from the employer). This enables a permanent employee of an organization to be entitled to the pension pay
given that the employee has satisfied the minimum requirements to enjoy this benefit when retired.
Non-government organizations are also using this kind scheme to benefit their employees with some modifications.
This is made in some NGO'S by keeping a fund known as Provident Fund. Both the employees and the employer
contribute towards this fund monthly. Ultimately, when an employee is retired or drawn out of work a lump sum
amount is given at once.
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For examples dr.Marara Gudina is a permanent employees of A.A university .his b/salary is birr 10000 on the
month of January.
Required
Task3.1 computes total pension contribution for Dr. Marara Gudina??/
P.C=10000*7%=700 paid by employees
P.C=10000*11%=1100paid by employer
Total P.C=700+1100
1800paid to pension fund company only for the month of January
C. Other Deductions (Voluntary Deductions)
Apart from the above two kinds of deductions from employees earnings, employees may individually authorize
additional deductions such as deductions to pay health or life insurance premiums; to repay loans from the
employer or credit association; to pay for donations to charitable organizations; etc. Each of the major other
deductions may be put in special column in the payroll register. Ultimately, the sum of the employees’ income tax,
pension contributions and other deductions gives the total deductions from the gross earnings of an employee.
The column “Total Deductions” shows the total amount to be deducted from the earnings of employees.
5. The Net Pay
This amount is held in one column of the payroll register representing the excess of gross earnings over the total
deductions of an employee. The column 'Net Pay' total tells the excess of grand total earnings over grand total
deductions made from the earnings of employees. It is the grand total take- home pay.
6. Signature
Unless some other document is used, the payroll sheet may be designed to allow a column for signature of the
employees after collection of the net pay. In general, a payroll register should at least show the earnings, deductions
and the net pays along with the names of employees.
1.4. Major Procedures or Activities Involved in Accounting for Payroll
1. Gathering the Necessary Data. All the relevant information about every employee should be gathered. This
activity requires reviewing various documents and to do some arithmetic work.
2. Including the names of employees along with the gathered data such as earnings, deductions and net pays in the
appropriate columns of the payroll register.
3. Totaling and proving the payroll register. It must be proved that the grand total earnings equal the sum of the
grand totals of deductions and net pays in the register.
4. The accuracy and authenticity of the information summarized in the payroll should be verified by a different
person from the one who compiles it.
5. The payroll is approved by the authorized personnel.
6. Paying the payroll either in cash (this may be after cashing a check issued for the total net pay of the
payroll) or issuing a check for every individual employee for the net amount payable to each employee.
7. Recording the payment of the payroll and recognition of the withholding tax liabilities.
8. Recording the payroll taxes expense of the employer.
9. Paying and recording withholding and payroll tax liabilities to the concerned authority, in our case to Inland
Revenue Administration, on time.
1.5. Demonstration Problem-1
Ethio Relief Agency pays the salary of its employees according to the Ethiopian Calendar month. The forth
coming data relates to the month of Hider, 2018.
Name of Basic Allow OT Hrs Duration of BS per
S.No. Employee Salary ance worked OT work hour
01 SenaitBahiru 3,200 100 10 6 AM to 10 PM 20
02 PetrosChalla 1,600 __ 8 10 PM to 6 AM 10
03 Abdu Mohammed 2,400 __ 6 Weekly Rest Days 15
04 LeillaJemal 1,920 50 __ __ 12
05 KirkosWolde 1,280 50 10 Public Holidays 8
 Additional Information:

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Note that management of the agency usually expects an employee to work 40 hours in a week and during Hidar2018
all employees have worked as they have been expected. Besides, all workers of this agency are permanent employees
except PetrosChala and the monthly allowance of KirkosWolde is not taxable; Abdu Mohammed agreed to have Br
200 be deducted from his earning and paid to the Credit Association of the Agency as a monthly saving.
Instructions: Based on the above information:
A. Compute of earnings, deductions and net Pays
B. Prepare a payroll register (or Sheet) for the agency for the month of Hidar, 2018
C. Record the payment of salary as of Hidar 30, 2018 using Ck. No. 41 as a source documents
D. Record the payroll tax expense for the month of Hidar, 2018. Memorandum No.006
E. Record the payment of the claim of the credit Association of the agency that arose from Hidar's payroll assuming
that the payment was made on Tahsas 1, 2018
F. Record the payments of withholding taxes and payroll taxes of the month of Hidar, 2018 assuming that they have
been paid on Tahsas 5, 2018 via Ck. No. 50

 Solution:
A. Computations of Earnings, Deductions and Net Pays
 Overtime Earning: Gross Earnings:
Overtime Earning = OT Hrs Worked @ (Ordinary Hourly Gross Earnings = Basic Salary + Allowance + OT Earning
Rate @ OT Rate) 1. SenayitBahiru
 Br. 3,200 + 100 + 250 = Br. 3,550
1. SenayitBahiru
 10 hrs. @ (20 @ 1.25) = Br 250 2. PetrosChalla
 Br. 1,600 + 0 + 120 = Br. 1,720
 E.g.20=BS/160(8x5x4)=3,200/160
3. Abdu Mohammed
2. PetrosChalla
 Br 2,400+ 0 + 180 = Br 2,580
 8 hrs @ (10 @ 1.5) = Br 120
4. LeillaJemal
3. Abdu Mohammed
 Br 1,920 + 50 + 0 = Br 1,970
 6 hrs @ (15 @ 2) = Br 180
5. KirkosWolde
4. KirkosWolde
 Br 1,280 + 50 + 200 = Br 1,530
 10 hrs @ (8 @ 2.5) = Br 200
Deductions and Net Pay:
1. SenayitBahiru
 Gross Income (Gross Earning) = Br 3,550 and Taxable Income = Br 3,550
Deductions:
 Employee Income Tax = 3,550 x 20% - 302.5 = Br. 407.5
 Pensions Contribution = Basic Salary @ 7% = Br 3,200 x 7% = Br.224
Net Pay:
Gross Earning .......................................................
Br 3,550.00
Less: Deductions
Employee Income Tax ........... 407.50
Pension Contribution ............. 224.00
Voluntary Contribution .......... 0.00
Total Deduction ............................ 631.50
Net Pay ................................................................
Br 2,918.50
2. PetrosChalla
Gross Income = Br 1,720& Taxable Income = Br 1,720
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Deductions: Net Pay:
 Employee Income Tax: Gross Earning .......................................................
Br 1,720.00
1,720 x 15% - 142.5 = Br. 115.5 Less: Deductions
 Pensions Contribution = Br 0.00, he is a Employee Income Tax ............ 115.50
Contractual worker Pension Contribution .............. 0.00
Voluntary Contribution ........... 0.00
Total Deduction............................ 115.50
Net Pay ................................................................
Br 1,604.50
3. Abdu Mohammed
GE = Br 2,580& Taxable Income = Br 2,580 Net Pay:
Deductions: Gross Earning .......................................................
Br 2,580.00
 EIT = 2,580 x 15% - 142.5 = Br. 244.5 Less: Deductions
 P = Br 2,400 x 7% = Br 168.00 Employee Income Tax ............ 244.50
 Vol. Con. = Br 200 Pension Contribution .............. 168.00
Voluntary Contribution........... 200.00
Total Deduction ........................... 612.50
Net Pay................................................................
Br 1,967.50
4. LeillaJemal
Gross Income = Br 1,970 and Taxable Income = Br 1,970 Net Pay:
Deductions: Gross Earning.......................................................
Br 1,970.00
 Employee Income Tax: Less: Deductions
1,970x 15% - 142.5 = Br. 153 Employee Income Tax............153.00
 Pensions Contribution = Br. 1,920 x 7% = Br Pension Contribution.............134.40
134.40 Voluntary Contribution .......... 0.00
Total Deduction ........................... Br287.40
Net Pay................................................................
Br 1,682.60

5. KirkosWolde
Gross Income = Br 1,530 and Taxable Income = Br 1,530 – 50 = Br 1,480
Deductions:
 Employee Income Tax =1,480 x 10% - 60 = Br 88.00
 Pensions Contribution = Br 1,280 @ 7% =Br 89.60
Net Pay:
Gross Earning........................................ ..................
Br 1,530.00
Less: Deductions
Employee Income Tax ........... ..88.00
Pension Contribution .............. 89.60
Voluntary Contribution .......... 0.00
Total Deduction ........................... 177.60
Net Pay ................................................................
Br 1,352.40
B. Preparing a Payroll Register (or Sheet)
ETHIO RELIEF AGENCY
Payroll Register (Sheet)
For Month of Hidar2018
Pay Day: Hidar 30, 2018
Seri. Name of Earnings Gross Deductions Gross Net Pay
No Employee Basic Allow. Over- Earning Income Pension Other Ded.
Salary time Tax Ded. Ded.
01 Senayet B. 3,200.00 100.00 250.00 3,550.00 407.50 224.00 __ 631.50 2,918.50
02 Petros Ch. 1,600.00 __ 120.00 1,720.00 115.50 __ __ 115.50 1,604.50
03 Abdu M. 2,400.00 __ 180.00 2,580.00 244.50 168.00 200 612.50 1,967.50
04 Leila J. 1,920.00 50.00 __ 1,970.00 153.00 134.40 __ 287.40 1,682.60
05 Kirkos W. 1,280.00 50.00 200.00 1,530.00 88.00 89.60 __ 177.60 1,352.40
Totals 10,400.00 200.00 750.00 11,350.00 1,008.50 616.00 200.00 1,824.50 9,525.50

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Proving the Payroll:
Total Earnings:
Basic Salary .......................................................................... Br 10,400.00
Allowance ............................................................................. 200.00
Overtime ............................................................................... 750.00
Total Earnings ....................................................................... Br 11,350.00
Deductions:
Employee Income Tax ............................................................ Br 1,008.50
Pension Contribution .............................................................. 616.00
Other deductions ..................................................................... 200.00
Total Deductions ..................................................................... Br 1,824.50
Total Net Pays ......................................................................... 9,525.50
Total Deductions & Net pay ................................................. Br 11, 350.00
C. Recording the Payment of Salary on Hidar 30, 1998
Salary Expense ............................................................................... 11,350
Employee Income Tax Payable ...................................................... 1,008.50
Pension Contribution Payable ........................................................ 616
Credit Association Payable................................................................ 200
Cash ................................................................................................ 9,525.50
Ck. No. 41
D. Recording the Payroll Tax Expense for Hidar, 2018
Ethio - Relief Agency incurred payroll tax expense of Br 528 during Hidar, 2018. This is determined as the product
of the basic salary of all permanent employees and 11%. This is because the agency has to contribute 6% of the
basic salary of every permanent employee to the government pension trust fund. Thus,
 Payroll Tax Expense = Total Basic Salary of all Permanent Employees @ 11%
 Payroll Tax Expense = (3,200 + 2,400 + 1,920 + 1,280) @ 11% = Br 1,144
By the amount of Br 528 the agency's expense, payroll taxes expense, and pension contributions payable increase.
Therefore, the following journal entry is made as of Hidar 30, 2018:
Payroll Tax Expense ................................................................ 1,144
Pension Contribution Payable........................................................ 1,144
Memorandum No. 006
The source document is an internal office memorandum that indicates the incurrence of this expense.
E. Recording The Payment Of The Claim Of The Credit Association
Credit Association Payable ........................................ 200
Cash ............................................................................ 200
F. Recording the payments of withholding taxes and payroll taxes of the month
Look at the account balances before payment:
EmployeeIncome Tax Payable Pension Contribution Payable
1,744 (2) 616
1,144
1,860.00
From the above accounts you can see that the agency has a total liability of Br 2,639. That is the sum of Br 1,008.50
Employee Income Tax payable and Br 1860.00 Pension Contribution payable (616 + 880.00 = 1,144). Note also that
the total pension contribution payable is equal to 17 % of the basic salary of all permanent employees. That is, Br
10,400.00 x 17 % = Br 1,860.00. Then, the payment is recorded as follows:
Employee Income Tax Payable .................................. 1,744
Pension Contribution Payable .................................... 1,860.00
Cash ........................................................................... 3,604
Ck. No. 50
After the payment of these liabilities have been posted, the above two accounts will have zero balances.

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 1.7 Demonstration Problem-2

Assume that Burayu Boez Factory the Federal Government Tax Authority, pays the salary of its employees during
May 30.
The forth-coming data relates to the month of Hidar, 2014.
Employee Name of Basic salary Overtime Duration of Basic salary
ID No. Employee hours overtime work per hours
01 Martha Feleke 4,800 10 6AM Up to 10 PM 30
02 Alemu Mekonnen 1,920 8 10 PM to 5 AM 12
03 Semia Mohammed 2,160 10 Public Holidays 13.50
04 Selamu Bogale 2,400 6 Weekly rest days 15
Additional Information: Management of the factory usually expects a worker to work 40 hours in a week and
during Hidar, 2014. All workers have done as they have been expected.
Instructions
Task1:-Compute Earning, Deduction and Net Pay for the company for the month of Hidar30, 2014.
Task2:-Prepare payroll sheet (register) for the company for the month of Hidar30, 2014.
Task3:-Prepare or pass the necessary Journal entries for the month of Hidar, 2014.
1.8 Demonstration Problem-3
Rehobot is a government agency recently organized to rehabilitate street children. It has five employees whose
salaries are paid according to the Ethiopian calendar month.
The following data relates to the month of May,2006.
S.No Name of Employee Basic Salary Transp. Overtime Duration of overtime
Allow. Worked(hr) work
1 Jemal Kedir Br.730 Br.200 4 6:00-10:00Pm
2 Naol Solomon Br.1020 ------ 8 Sunday(8:30-5:30)
3 Sara Mohameed Br. 5300 ------ ----- -------
4 Bereket Siheon Br. 1470 ------ ----- -------
5 Oliyad Kasahun Br.950 ------ 6 Public Holiday

Additional Information
1. The mgt of the agency usually expects a worker 40 hours in a week and during May there are four weeks.
2. There were no absentees during the month
3. All employees are permanent except Bereket Siheon and Oliyad Kasahun
4. Naol agreed to contribute monthly Br.300 from his salary as a monthly saving in the credit association of the
agency.
Required
1. Prepare Payroll register (sheet) for the agency for the month of May, 2013.
2. Record the payment of salary as of May 30, 2013 using check stub No.0123.
3. Record the payment of the claim of the credit Association of their agency on May 1, 2013 use check stub
No.0124.
4. Record the payment of the withholding taxes and pension contribution to the concerned government body on
May 7, 2013.
5. Compute and recognize the total payroll tax expense for the month of May, 2013

1.9 Demonstration Problem-4

The following data are taken from ABC Textile Plc for the month of Hidar, 2013:
Employee’s Name Basic Salary Over Time Allowance
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Gadisa Hunde 17410 no 3000/position and 2000/House
Jemal Kasahun 2500 12hrs Public Holiday
Hagos Ahimed 8484 12hrs Evening 40% of Basic Salary/Hard Ship
10hrs Night
Obang Ujulu 4616 18hrs Weekend No
Additional Information:
1. All Employees are permanent and all worked 40 hours per week.
2. During Sane, 2011 E.C all workers have done as they have been expected.
3. Obang Ujulu monthly pay Br 1100.00 from his salary for Credit Association.
4. Assuming that pension contribution 7% from Employee and 11% from Employer.
Required:
1. Prepare Payroll Register Sheet.
2. Prepare necessary journal entry for preparation of payroll and payments of deductions to concern

1.7 Demonstration Problem-5

The following data elated XY- Company worked each is expected to work 160hours per month.
Details about salary overtime and other deduction for the month or December 2014 are given below.
No Name Basic salary Over time Over time Pension
hour duration contribution
1 Kibebushtilhun - 10 6:00am-10:00pm 364
2 GetehunAbebe - 15 10፡00pm-5፡00am 406
3 Gidaymola - 9 Weekly rest day 476
4 Wages Temessgen - - - 553
Task .1, prepare payable registration sheet under tax and pension contribution law currently in force in
Ethiopia?
Task .2; show all necessary journal entries to require on December 31, 2014?
Task .3;show the journal entries to record the payment of withholding tax?
1.8 Demonstration Problem-6
Tec. IT Company engaged with IT activities having five employees who have different professions. Their names
and other important information regarding their payroll data for the month of April 2013 are presented as follows:
No Name BS OT GE IT PC TD NP Sign
1 TirusewBeamlak 2,067.50
2 NigatuTsehay 2,379.00
3 GeletawTemesgen 943.50
4 YemariamAbat 155.40
5 NitsuhAdamu
Total

Additional Information
 Tirusew and Nigatu have paid the same Income Tax for the month.
 Tiruswe’s pension contribution is 22.64% of her income tax.
 The total (employer’s and employee’s) pension contribution of Nitsuh is equal to that of Yemariam’s
pension contribution.
 Geletaw’s pension contribution is 28.74% of his income tax.

Required
A. Finalize the incomplete payroll register given above
B. If salary is paid in May next month, Journalize:
3. Salary and other benefits
4. Payment of payables
5. Payroll tax or company pension contributions
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Bonus
Bonus pay may refer to payments to managers and other employees, usually based on their monthly basic salaries,
as a thank you when businesses are making attractive profit because of better or best performances by the manager
and other employees.
Bonus is taxable on receipt basis by adding it on the monthly taxable employment incomes of the bonus period, i.e.
taking in account the payroll months that the bonus covers.

Example. Ato Yared is the manager of ABC Company with a monthly taxable income of $5000, has got $24,000
as a year bonus from his employer for his better performance in the last year.
The following steps may be followed to determine the amount of employment income tax on bonus and bonus net
of tax to receive by the employee.
Step 1 Determine bonus per month by dividing the amount of bonus by the number of months the
bonus covers.
Bonus per month = $24,000/12 months = $2,000 per month
Step 2 Add the result of step 1 on the monthly employment income of the employee and calculate the tax on the
total monthly employment income to determine how much tax would have been paid the employee on a monthly
basis.
Taxable income $5,000
Bonus per month $2,000
Total employment income per month $7,000
Employment income tax per month on both taxable income and bonus.
Tax = $7,000*.25-565= $1,185
Step 3. Calculate employment income tax per month on monthly employment income during the
bonus period excluding bonus in order to determine the tax actually paid per month during the bonus period.
Tax = $5,000*.20-302.50 = $697.50
Step 4. Determine monthly taxes on bonus by deducting tax on taxable income from tax on both
taxable income and bonus. The difference represents additional tax to be paid by the employee on his
monthly bonus benefit.
Tax on bonus per month = $1,185-697.50 = $487.50
Step 5 Multiply the result of step 4 by the number of months that the bonus covers.
Tax on bonus per year = $487.50*12 months = $5,850
Step 6 Determine the amount of bonus net of tax by deducting the total tax on bonus from the total
bonus amount.
Bonus net of tax = $24,000- 5,850 = $18,150

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Worksheet
Exercise 1.1:
Payroll data of a government hotel, Andinet Hotel, for the month of Hamle, 2012 are given below:
Over time in hours
Name Basic Regular Upto 10PM – Rest Holy
Salary HourlyRate Allowance 10PM 6AM Days Days
Abera Br 600 Br 3 Br 200 10 – 4 –
Abebu 420 2.10 – 20 10 – 5
Belete 980 4.90 100 – 5 – 8
Additional information: Abebu is contractual employee and the allowance to Abera is free of income tax.
Required:
1. Prepare payroll register
2. Record on page 10 of a two column general journal:
a) The payment of salary on Hamle 30,
b) The recognition of payroll tax expense, and
c) The payment of the amounts owed, in connection with the month Hamle, 2012 payroll, to the government
on Nehase 5, 2012.
Exercise 1.2:
A permanent employee of a government organization with a basic monthly salary of Br. 640.00 and monthly
Allowance of Br100.00 has worked 20 overtime hours during days in the weekends of the current month. This
employee usually works 160 hours in a month to earn his basic salary. Based on the above information answer the
following questions:
1. What is the ordinary hourly rate of this employee?
2. How much is the gross earnings of this employee?
3. Determine the amount of employee income tax and pension contribution!!
Exercise 1.3:
W/t Kedija, the employee of CMN Agency, government owned, has worked 10 hours, 8 hours and 12 hours, during the
holidays, after mid night on working days and weekends respectively in a given month. In the same month, she has
earned a regular monthly salary of 1,120 BIRR as the result of working 140 regular working hours. Determine her
gross overtime earnings for the month.
Exercise 1.4:
Using the following payroll data of Paradise Restaurant, government owned, for the month of Sene2012:
Employee Name Basic Salary OT Earning
DerbeReta Br 200.00 Br 50.00
RahelAmde 400.00 200.00
Michael Girma 300.00 400.00
1. Compute the c. Employer’s payroll tax expense
a. Income tax deduction from each employee;
b. Pension contribution by each employee; and 2. Prepare journal entries to record the
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 a. Payment of salary to employees; c. Payment of the deductions and payroll taxes to
b. Employer’s payroll tax expense; and the government at the beginning of the
following month
3. Assuming that the ordinary hourly rate of Rahel is Br 2.50 and all of her overtime hours were performed during
weekly rest days, how many overtime hours did she work?

Exercise 1.5
S.No Employee Name Basic salary Overtime worked Allowance

01 RozaYohannes 7,500 1500 Position

1,250 Transport
1,000 House
02 Haile Selam 2,827 5hrs Holy day (2.5 30% BS Hard ship
03 YohanisAbera 5,052 4hrs Evening(1.25 40% BS Hard ship
2hrs Night (1.5)
04 NuguseYidego 1,455 12hrs Weekend (2)

Additional information
1. All employees are permanent Except Nuguse Yide go and worked 40hrs per week
2. During Ginbot 2007 all workers have done as they have been expected
3. Yohanis Abera monthly pay birr 750 from his basic salary for credit Association
4. Assuming that pension contribution 7% of employee and 11% of Employer.
Required
a. Prepare payroll register sheet
b. Prepared journal entries for Preparation payroll and payment of deduction to concerned party

Exercise 1.6
S.No Employee Basic Representatio Fuel OT hours Duration of OT
Name salary nal allowance Allowance worked works rate
01 Tola 5,500 750 200 litters ---- --- --
02 Chala 3,500 350 150 litters 6hrs Weekend 2
03 Bontu 850 --- --- 10hrs 10pm to 6am 1.5
04 Kena 2,800 150 100 litters 6hrs Holiday 2.5
05 Hordofa 1,500 --- 50 litters 6hrs Holiday 2.5
Additional information
1. The managements of the company except all employees to work 40hrs per week and all employees have
worked as they have expected.
2. Bontu is a causal employee
3. Tola and Chala contribute 10% of their basic salary to credit Association as monthly
saving whereas Kena contribute 5% of his basic salary
4. Up to 1000 birr fuel allowance is exempted from tax and the swelling price of one litters is

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 birr20
5. Assuming that pension contribution 6% of employee and 9% of Employer.
Required
a. Prepare payroll register sheet
b. Pass the necessary journal entry

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