Chapter 3

Accounting Principles, Liabilities & Payroll System in an Ethiopian Context

3.1. Basic Accounting Principles

A number of basic accounting principles have been developed through common usage. They
form the basis upon which modern accounting is based. The best-known of these principles are
as follows:

1. Business Entity
A business is considered a separate entity from the owner(s) and should be treated separately.
Any personal transactions of its owner should not be recorded in the business accounting
book unless the owner’s personal transaction involves adding and/or withdrawing resources from
the business.

2. Going Concern
It assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are
recorded based on their original cost and not on market value. Assets are assumed to be held and
used for an indefinite period of time or during its estimated useful life.  And that asset are not
intended to be sold immediately or liquidated.

3. Monetary Unit
The business financial transactions recorded and reported should be in monetary unit, such as US
Dollar, Canadian Dollar, Euro, Birr, etc. Thus, any non-financial or non-monetary information
that cannot be measured in a monetary unit are not recorded in the accounting books, but instead,
a memorandum will be used.

4. Historical Cost
All business resources acquired should be valued and recorded based on the actual cash
equivalent or original cost of acquisition, not the prevailing market value or future value.
Exception to the rule is when the business is in the process of closure and liquidation.

5. Matching
This principle requires that revenue recorded, in a given accounting period, should have an
equivalent expense recorded, in order to show the true profit of the business.

6. Accounting Period
This principle entails a business to complete the whole accounting process over a specific
operating time period. Accounting period may be monthly, quarterly or annually. For annual
accounting period, it may follow a Calendar or Fiscal Year.

7. Accrual
This principle requires that revenue should be recorded in the period it is earned, regardless of
the time the cash is received. The same is true for expense. Expense should be recognized and
recorded at the time it is incurred, regardless of the time that cash is paid. This is to show the true
picture of the business financial performance.

8. Consistency
This principle ensures similar and consistent accounting procedures is used by the business, year
after year, unless change is necessary. Consistency allows reliable comparison of the financial
information between two accounting periods.

9. Materiality

Business transactions that will affect the decision of a user are considered important or material,
thus, must be reported properly. This principle states that errors or mistakes in accounting
procedures, that which involves immaterial or small amount, may not need attention or
correction.

10. Objectivity

This principle states that the recorded amount should have some form of impartial supporting
evidence or documentation. It also states that recording should be performed with independence,
that’s free from bias and prejudice.

3.2. Liability and Its Classification

A liability is an obligation to pay or provide future services for something that has been in turn
provided or agreed upon in the past. There are two main types of liabilities: current liabilities and
long-term liabilities.

A liability is defined by the following characteristics:

 Any type of borrowing from persons or banks for improving a business or personal
income that is payable during short or long time;
 A duty or responsibility to others that entails settlement by future transfer or use of assets,
provision of services, or other transaction yielding an economic benefit, at a specified or
determinable date, on occurrence of a specified event, or on demand;
 A duty or responsibility that obligates the entity to another, leaving it little or no
discretion to avoid settlement; and,
 A transaction or event obligating the entity that has already occurred.

Current liabilities

A current liability is one the company expects to pay in the short term using assets noted on the
present balance sheet. Typical current liabilities include accounts payable, salaries, taxes and
deferred revenues (services or products yet to be delivered but for which money has already been
received).

Long-term liabilities

A long-term liability is one the company expects to pay over the course of more than one year.
Long-term liability is usually formalized through paperwork that lists its terms such as the
principal amount involved, its interest payments, and when it comes due. Typical long-term
liabilities include bank loans, notes payable, bonds payable and mortgages.

3.3. The Importance of Payroll and Payroll Accounting

The term Payroll often refers to any document prepared to pay remuneration to the employee for
the service rendered to an organization in a given period of time. Payroll accounting is an
accounting that is concerned with preparation of payroll and recording and reporting of
remunerations. The payroll accounting of a firm has significance and has to be given emphasis
for the following reasons:
1. Employees are sensitive to payroll errors and irregularities, and maintaining good employee
moral requires that the payroll be paid on a timely, accurate basis.
2. Payroll expenditures are subject to various government regulations.
3. The payment for payroll and related taxes has significant effect on the net income of most
business enterprises.

3.3.1 Definition of Payroll Related Terms

1. Salary or Wages: Salary and wages are usually used interchangeably. However, the term
wages is more correctly used to refer to payments for manual labor that are paid based on the
number of hours worked or the number of units produced. So, they are usually paid when a
particular piece of work is completed or for a period less than a month. On the other hand,
compensations to employees on monthly or annual basis are termed as salaries. It must be clear
that when we say an employee, we refer to an individual who works primarily to an organization
and whose activities are under the direction and supervision of the employer.
Hence, an employee is different from an independent contractor, a self-employed individual who
works on a fee basis to a firm.
2. The Pay Period: The length of time covered by each payroll payment. Pay periods for wage
workers 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, quarter, semi-
annual, or a year.
3. 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.
4. 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.
5. 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.
6. 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.
7. Gross Earnings: The total pay to an employee before deductions for the pay period.
8. 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.
9. 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
10. Payroll Deductions: All the reductions from the gross earnings of an employee such as
withholding taxes, union dues, fines, credit association pays, etc.
11. 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.

3.3.2 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: basic salary, allowances, overtime earnings, bonus and the like.

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 Allowance - a monthly sum paid to an employee for bearing a particular
office responsibility, e.g. head of a particular Department or Division.
 House Allowance – a monthly allowance given to cover housing costs of the
individual employee when the employment contract requires the employer to provide
housing.
 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.
 Desert Allowance – a monthly allowance given to an employee because of
assignment to a relatively hot region. It is sometimes known as Hardship 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
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 one and one quarter (1¼) times his ordinary
hourly rate for overtime work performed before 10 o'clock in the evening after the normal
working hour.
II. A worker shall be paid at the rate of one and one half (1½) times his ordinary hourly rate for
overtime work performed between 10 o’clock in the evening (10 p.m.) and 6 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 times the
ordinary hourly rate of payment.
IV. A worker shall be paid at a rate of two and half times the ordinary hourly rate for overtime
work performed on a public holiday.

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: employee income tax,
pension contribution, fines and other voluntary deductions.

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. According to
proclamation No. /2016 that has become into effect beginning Hamle 1, 2008 E.C. exempts the
first Br 600 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:

The New Employee Income Tax Rates

No. Salary Range (ETB) Tax Rate Deduction
(ETB)
1 0 – 600 Birr Non-Taxable -
2 601 – 1,650 Birr 10% 60 Birr
3 1,651 – 3,200 Birr 15% 142.50 Birr
4 3,201 – 5,250 Birr 20% 302.50 Birr
5 5,251 – 7,800 Birr 25% 565 Birr
6 7,801 – 10,900 Birr 30% 955 Birr
7 Over 10,900 Birr 35% 1,500 Birr

Generally, taxable income from employment includes salaries, wages, allowances, director’s fees
and other personal emoluments, all payments in cash and benefits in kind. The following
categories of payments in cash or benefits in kind are exempted from taxation.
a. Income from employment received by casual employees
 b. Income from employment received by diplomatic and consular representatives; and other
persons employed in any Embassy
c. Payments made to a person as compensation or gratitude in relation to personal injuries; or
the death of another person.
d. Medical Allowance
e. Transportation Allowance
f. Hardship Allowance
g. Per-diem Allowance (Daily Allowance)
h. Traveling Expenses
i. Income of persons employed for domestic duties

B. Pension Contribution
Permanent employees of an organization the employees of which are governed by the existing
regulations of the Ethiopian public servants as well as employees of non-government
organizations are expected to pay or contribute 7% of their basic (monthly) salary to the required
authority. 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 body since July 2014.

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 expense to the employer organization (i.e. 11% of the total basic salary of all permanent
employees) since July 2014.

For military forces (police and national defense members), while employees (the military and
police officers) expected to pay or contribute 7% of their basic (monthly) salary, the employer
contributes 25% of the basic salary of every permanent military force since July 2014.

Consequently, the total contribution to the pension Trust Fund of the Ethiopian government is
equal to 18% 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). Whereas, 32% of the total
basic salary of all permanent employees (military forces) of an organization (i.e. 7% comes from
the employees and the 25% 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.

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.

3.3.3 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.

3.3.4 Demonstration Problem

Ethio-Relief Agency pays the salary of its employees according to the Ethiopian Calendar
month. The forth coming data relates to the month of Hidar, 2008.
S. Basic OT Hrs BS Per
Name of Employee Allowance Duration of OT Work
No. Salary Worked Hour
01 Senait Bahiru 3,200 100 10 6 AM to 10 PM 20
02 Petros Challa 1,600 -- 8 10 PM to 6 AM 10
03 Abdu Mohammed 2,400 -- 6 Weekly Rest Days 15
04 Leilla Jemal 1,920 50 -- -- 12
05 Kirkos Woldu 1,280 50 10 Public Holidays 8
10 Weekly Rest Days
06 Aster Wolde 8,000 2,000 50
4 Public Holidays

Additional Information:
Note that management of the agency usually expects an employee to work 160 hours in a month
and during Hidar 2008 all employees have worked as they have been expected. Besides, all
workers of this agency are permanent employees except Petros Chala and the monthly allowance
of Kirkos Wolde 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, 2008.
C. Record the payment of salary as of Hidar 30, 2008 using Ck. No. 41 as a source documents.
D. Record the payroll expense for the month of Hidar, 2008. 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, 2008.
F. Record the payments of withholding taxes and pension contribution of the month of Hidar, 2008
assuming that they have been paid on Tahsas 5, 2008 via Ck. No. 50.

A. Computations of Earnings, Deductions and Net Pays

OVERTIME EARNING:
Overtime Earning = OT Hrs Worked @ (Ordinary Hourly Rate @ OT Rate)
1. SENAYIT BAHIRU
 10 hrs @(20 @1.25) = Br 250
2. PETROS CHALLA
 8 hrs @ (10 @1.5) = Br 120
3. ABDU MOHAMMED
 6 hrs @ (15@ 2) = Br 180
4. LEILLA JEMAL do not have an OT
5. KIRKOS WOLDU
 10 hrs @(8 @2.5) = Br 200
6. ASTER WOLDE
 10 hrs @(50@2) = Br 1,000
 4 hrs @([email protected]) = Br 500
o Total amount of OT = 1,500
GROSS EARNINGS:
Gross Earnings = Basic Salary + Allowance + OT Earning
1. SENAYIT BAHIRU
 Br 3,200 + 100 + 250 = Br 3,550
2. PETROS CHALLA
 Br 1,600 + 0 + 120 = Br 1,720
3. ABDU MOHAMMED
 Br 2,400+ 0 + 180 = Br 2,580
4. LEILLA JEMAL
 Br 1,920 + 50 + 0 = Br 1,970
5. KIRKOS WOLDU
 Br 1,280 + 50 + 200 = Br 1,530
6. ASTER WOLDE
 Br 8,000 + 2,000 + 1,380 = Br 11,380

DEDUCTIONS AND NET PAY:

1. SENAYIT BAHIRU
Gross Income (Gross Earning) = Br 3,550 and Taxable Income = Br 3,550
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
1,050 x 10% = 105
1,550 x 15% = 232.50 OR 3,550 X 20% - 302.50 = Br 407.50
350 x 20% = 70
3,550 407.50
 Pensions Contribution = Basic Salary @ 7% = Br 3,200 x 7% = Br 224.00
Net Pay:
Gross Taxable Income........................................... 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. PETROS CHALLA
Gross Income = Br 1,720 and Taxable Income = Br 1,720
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
1,050 x 10% = 105 OR 1,720 X 15% - 60 = Br 115.50
70 x 15% = 10.50
1,720 115.50
 Pensions Contribution = Br 0.00, he is a Contractual worker
Net Pay:
Gross Taxable Income......................................Br 1,720.00
Less: Deductions
Employee Income Tax ..............115.50
Pension Contribution....................0.00
Voluntary Contribution ................0.00
Total Deduction.................................... 115.50
Net Pay ..........................................................Br 1,604.50

3. ABDU MOHAMMED
Gross Income = Br 2,580 and Taxable Income = Br 2,580
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
1,050 x 10% = 105 OR 2,580 X 15% - 142.50 = Br 244.50
930 x 15% = 139.50
 2,580 244.50
 Pensions Contribution = Br 2,400 x 7% = Br 168.00
 Voluntary Contribution = Br 200.00 payable to Credit Association
Net Pay:
Gross Taxable Income........................................ Br 2,580.00
Less: Deductions
Employee Income Tax ............ 244.50
Pension Contribution...............168.00
Voluntary Contribution ...........200.00
Total Deduction................................... 612.50
Net Pay .............................................................Br 1,967.50

4. LEILLA JEMAL
Gross Income = Br 1,970 and Taxable Income = Br 1,970
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
1,050 x 10% = 105 OR 1,970 X 15% - 142.50 = Br 153
320 x 15% = 48
1970 153
 Pensions Contribution = Br 1,920 x 7% = Br 134.40
Net Pay:
Gross Taxable Income ........................................ Br 1,970.00
Less: Deductions
Employee Income Tax............ 153.00
Pension Contribution ..............134.40
Voluntary Contribution........... 0.00
Total Deduction........................................ 287.40
Net Pay............................................................... Br 1,682.60

5. KIRKOS WOLDU
Gross Income = Br 1,530 and Taxable Income = Br 1,530 – 50 = Br 1,480
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
880 x 10% = 88 OR 1,480 X 10% - 60 = Br 88
1,480 88
 Pensions Contribution = Br 1,280 @ 7% =Br 89.60
Net Pay:
Gross Taxable Income.......................................... 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

6. ASTER WOLDE
Gross Income = Br 1,970 and Taxable Income = Br 1,970
Deductions:
 Employee Income Tax:
Taxable Income Tax
600 x 0% = 0
1,050 x 10% = 105 OR 11,500 X 35% - 1,500 = Br 2525
1,550 x 15% = 232.50
2050 x 20% = 410
2,550 x 25% = 637.50
3,100 x 30% = 930
600 x 35% = 180
11,500 2495
 Pensions Contribution = Br 1,920 x 7% = Br 134.40

B. Preparing a payroll register (or Sheet)

ETHIO-RELIEF AGENCY
Payroll Register (Sheet)
For Month of Hidar 2007
Pay Day: Hidar 30, 2007
Earnings Deductions
Ser. Name of
Basic Over- Gross Income Pension Other Net Pay
No. Employee Allow. Gross Ded.
Salary time Earning Tax Ded. Ded.
01 Senayet B. 3,200 100 250 3,550 407.50 224.00 - 631.50 2,918.50
02 Petros Ch. 1,600 - 120 1,720 115.50 - - 115.50 1,604.50
03 Abdu M. 2,400 - 180 2,580 244.50 168.00 200 592.50 1,987.50
04 Leila J. 1,920 50 - 1,970 153 134.4 - 287.40 1,682.60
05 Kirkos W. 1,280 50 200 1,530 88 89.6 - 177.60 1,352.40
06 Aster W. 8,000 2,000 1,380 11380 2,483 560 3,043 8,337
Totals 18400 2200 2130 22730 3491.5 1176 200 4,847.50 17,882.50

C. Recording the Payment of Salary on Hidar 30, 2008.

Salary Expense ......................................................22,730

Employee Income Tax Payable ......................................

3,491.50
Pension Contribution Payable....................................... 1,176.00
Credit Association Payable ........................................... 200.00
Cash........................................................................... 17,882.50

D. Recording the Payroll Tax Expense for Hidar, 2007

Ethio-Relief Agency incurred payroll expense of Br 1,848 during Hidar, 2008. This is
determined as the product of the basic salary of all permanent employees at 11%. This is because
the agency has to contribute 11% of the basic salary of every permanent employee to the
government pension trust fund. Thus:
 Payroll Expense = Total Basic Salary of all permanent Employees @ 11%
 Payroll Expense = 16,800 @ 11% = Br 1,848
By the amount of Br 1,848 the agency's expense i.e. payroll expense and pension contributions
payable increase. Therefore, the following journal entry is made as of Hidar 30, 1998:
Payroll Expense ............................................... 1,848
Pension Contribution Payable.................................. 1,848
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 expenses of the month
Look at the account balances before payment:
Employee Income Tax Payable Pension Contribution Payable
3,491.50 1,176.00
1,848.00
3,024.00

From the above accounts you can see that the agency has a total liability of Br 6,515.50. That is
the sum of Br 3,491.50 Employee Income Tax payable and Br 3,024 Pension Contribution
payable. Note also that the total pension contribution payable is equal to 18% of the basic salary
of all permanent employees. That is, Br 16,800 x 18% = Br 3,024. Then, the payment is recorded
as follows:
Employee Income Tax Payable .................... 3,491.50
Pension Contribution Payable...................... 3,024
Cash.............................................................. 6,515.50
After the payment of these liabilities have been posted, the above two accounts will have zero
balances.

ASSIGNMENT
Exercise 3.1: Payroll data of a government hotel, Andinet Hotel, for the month of Hamle, 2007
are given below:

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, 2007 payroll, to
the government on Nehase 5, 2007.

Exercise 3.2: A permanent employee of a government organization with a basic monthly salary
of birr 640.00 and monthly Allowance of birr 100.00 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 3.3: 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 3.4: Using the following payroll data of Paradise Restaurant, government owned, for
the month of Sene 2007:
Employee Name Basic Salary OT Earning
Derbe Reta Br 2,000.00 Br 500.00
Rahel Amde 4,000.00 200.00
Michael Girma 3,000.00 400.00

1. Compute the (a) Income tax deduction from each employee; (b) Pension contribution by each
employee; and (c) Employer’s payroll tax expense
2. Prepare journal entries to record the (a) Payment of salary to employees; (b) Employer’s
payroll tax expense; and (c) Payment of the deductions and payroll taxes to the government
at the beginning of the following month
3. Assuming that the ordinary hourly rate of Rahel is birr 20 and all of her overtime hours were
performed during weekly rest days, how many overtime hours did she work?