CHAPTER 4: PAYROLL SYSTEM

REVIEW QUESTIONS
1. Discuss the importance of payroll accounting
2. Distinguish between pay period and payday
3. What are the basic records of a payroll accounting system? Describe them
4. Enumerate and explain the basic elements of a payroll sheet of a firm
5. Differentiate payroll taxes expense and withholding taxes
6. What are the four over time sessions according to article 33 of proclamation No. 64/1975
7. What are some of earnings that are not taxable in an Ethiopian context?
8. What is the overall contribution to government pension trust fund from a permanent government
employee's basic salary?
9. How non-government organizations alleviate the problem of social security pensioned
employees?
10. State the required journal entries in relation to a payroll accounting
11. Is there any principal difference between manual and computerized payroll Accounting system?
Why? Explain.

EXERCISES
Exercise 4.1:
Payroll data of a government hotel, Andinet Hotel, for the month of Hamle, 1988 are given below:
Over time in hours
Name Basic Regular Upto 10PM – Rest Holy
Salary Hourly Rate 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, 1988 payroll, to
the government on Nehase 5, 1988.
Exercise 4.2: A permanent employee of a government organization with a basic monthly salary of Br640.00 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 4.3: 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 4.4: Using the following payroll data of Paradise Restaurant, government owned, for the month
of Sene 988:
Employee Name Basic Salary OT Earning
Derbe Reta Br 200.00 Br 50.00
Rahel Amde 400.00 200.00
Michael Girma 300.00 400.00
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 Br 2 and all of her overtime hours were performed
during weekly rest days, how many overtime hours did she work?

Exercise 4.5: SESK Enterprise, a private owned business pays the salary of its employees according to
Ethiopian calendar month. It also withholds tax from employment income of each employee as per the
tax laws and transfer it to the Federal Government of Tax authority. The following partial data relates
to the month of Sene 2005 E.C. for Ato Mekebeb whose monthly basic salary is Br. 4,800.
 The Enterprise expects every worker to work 48 hours per week and during Sene there are four weeks. Ato
Mekebeb has worked as expected during the month of Sene 2005 (No penalty).
 Ato Mekebeb has worked 22 hours of overtime during the month of Sene: 8hours during ‘Meskel’ and the
other fourteen hours before 10P.M during working days. Any overtime payment is compensated as per the
prevailing labor proclamation.
 Ato Mekebeb receives a monthly position allowance of Br. 500, telephone allowance (for personal use) of
Br. 200, and a transport allowance of Br. 1,150. The monthly transportation allowance payable to Ato
Mekebeb is eligible for tax exemption.
 Ato Mekebeb is entitled to receive a monthly house allowance of at 10% of his basic salary.
 Ato Mekebeb has got his one year salary of Br.57, 600 as bonus from his employer for his better
performance in last year.
 Ato Mekebeb receives a monthly commission at 5% on sales achieved by him during each month. Sales of
the current payroll month made by Ato Mekebeb were Br.60, 000.
 Ato Mekebeb has been paid Br.500 per-diem.
 Provident fund contributed by the employee and by the employer to Mekebeb are 7% and 22%, respectively.
 Ato Mekebeb s a member of the enterprise’s credit association and agreed to have a monthly deduction of
Br.300 for credit association savings.
 Ato Mekebeb is a permanent worker.

Required:
1. Determine the overtime earning of Ato Mekebeb for the month of Sene 30, 2005.
2. Determine the gross earnings of of Ato Mekebeb for the month of Sene 30, 2005.
3. Determine the taxable income of of Ato Mekebeb for the month of Sene 30, 2005.
4. Determine the income tax expected from Ato Mekebeb’s earnings for the month of Sene 30, 2005.
5. Determine the total deductions of Ato Mekebeb for the month of Sene 30, 2005.
6. What is the net salary received by Ato Mekebeb on Sene 30, 2005.
 7. Determine monthly tax on Bonus.
8. Determine the total tax on Bonus.
9. Determine the total bonus amount net of tax.
10. Record the necessary Journal entries.

Exercise 4.6: The following data were taken from United Printing Enterprise records for the month Hidar, 2005
E.C. The enterprise’s pay period (month) consists of 160 normal working hours.
Name of Basic Allowance Overtime Hrs. Duration of
S.No Employee Salary Transport Position Worked per month OT work
.
01 Kemal 3200 480 ---- 10 Up to 10 pm
02 Sena 3600 700 1000 8 10 pm to 5 am
03 Geremew 4200 800 1500 6 Weekly rest days
Additional information
 All workers of this enterprise are Permanent ones except Sena.
 Ato Geremew is a member of the credit association in the Enterprise and agreed to have a monthly deduction of
Br. 500 as saving.
 The enterprise permits transportation allowance to employees –Kemal and Geremew because they carry out the
tasks of the business by moving from place to place. However, the transportation allowance provided to Sena is
to cover her expenses to move from work place to home and from home to workplace.
Required: Assume that the Business is a government owned that collects and pays tax to the
Addis Ababa City Administration Tax Authority, answer the following questions:
a. Prepare the Payroll sheet for the month of Hidar 30,2005 E.C for the given Enterprise
b. Prepare Journal entries to record the following:
i. Payment of the Payroll for the month of Hidar
ii. Recording the Payroll tax expense for the month of Hidar
iii. Recording the payment of deduction for the month of Hidar
iv. Recording the payment of Withholding and Payroll Taxes to the Inland Revenue
Administration

United Printing Enterprise

Payroll Sheet/Register
For the month of Hidar 30, 2005

S.No. Name of Basic Allowance Over Gross Taxable Income PCEE PCER Other Gross Net Sign
Employee Salary Taxable Non- time Earning income Tax 7% 9% Dedu Dedu Pay
taxable earning
01 Kemal
02 Sena
03 Geremew
Total

Exercise 4.7: Akaki Textile Factory pays the salary of its employees according to the Ethiopian
Calendar month to the Federal Government Tax Authority. The forth-coming data to the month of
Ginbot, 2005.

S.No. Name of Employee Basic Salary Transport OT-hours Duration of

Allowance Worked OT worked
01 Martha Feleke 4,800 1500 10 up to 10P.M. (Ordinary)
02 Alemu Mekonnen 1920 900 8 10P.M.to 5A.M. (Late hours)
03 Selam Bogale 2,400 6 Weekly rest days
04 Destaw Negash 1,400 400 10 Public Holidays
Additional information:
 The management of the factory usually expects a worker to work 40 hours in a week and during Ginbot
2005 all workers have done as they have been expected. Besides, all workers of this factory are permanent
employees except Alemu Mekonnen;
 Selam Bogale agreed to have a monthly Br. 300 be deducted and paid to the Credit Association of the
factory as a monthly saving.
 The factory permits transportation allowance to employees: Martha Felek, and Destaw Negash because they
carry out he tasks of the business by moving from place to place. However, the transportation allowance
provided to other employee is to cover their expenses to move from home to work and from work to home.

Required:
1. Prepare a payroll register sheet for the factory for the month of Ginbot 2005.
2. Record payment of salary as of Ginbot 30, 2005 using Ck.No. 41 as a source document.
3. Record the payroll taxes expense for the month of Ginbot, 2005. Memorandum No. 10
4. Record the payment of the claim of the credit Association of the factory that arises from Ginbot’s payroll
assuming that the payment was made on Sene1, 2005.
5. Assuming that the withholding taxes and payroll taxes of the month of Ginbot, 2005 have paid on Sene 5,
2005 via CK.No. 50, record the required journal entry.