Chapter Three

Ethiopian Payroll Accounting

Outline:
1. Importance of payroll accounting
2. Terms related to payroll
3. Components of payroll register
4. Illustration (Computation of Earnings, Deductions and
Net Pay)
Importance of payroll accounting

 Provides safeguard to ensure that payments are in

accordance with management’s general plans and its specific
authorizations.
 Provide adequate safeguards against unauthorized
payments to employees and other misappropriations of
funds.
 Used to meet government requirements
 Represent the largest expense incurred by the organizations
Employees are sensitive to payroll errors or irregularities.
Terms related to payroll

 Salary and Wages

 The Pay Period
 The Pay Day
 A Payroll Register (sheet)
 Pay Check
 Gross Earnings
 Payroll Deductions
Net Pay
Salary and Wages
1. Salary and wages are usually used interchangeably. However, the term
wages is more correctly used to refer to payments to unskilled-manual
labor.
It is usually paid based on the number of hours worked or the number of units
produced. Therefore, wages are usually paid when a particular piece of work is
completed or weekly.
2. Salaries refers to payments to employees who render managerial,
administrative or similar services, and they are usually paid to skilled labor on
a monthly or yearly basis.
The Pay Period -A pay period refers to the length of time
covered by each payroll payment.
The Pay Day: The pay day- is the day on which wages or salaries are paid
to employees. This is usually on the last day of the pay period.
A Payroll Register (sheet): is the list of employees of a business along with
each employee’s gross earnings; deductions and net pay (take home pay)
for a particular pay period. The payroll register (sheet) is prepared based on
attendance sheets, punched (clock) cards or time cards.
• Pay Check: A business can pay payroll by writing a
check for the amount of the net pay. A check is
prepared in the name of each employee and handed
to employees. Alternatively a check for the total net
pay can be prepared for employees to the paid by
cash at the organization.
• Gross Earnings: are the total income from all sources
earned before taxes have been deducted.
• Payroll Deductions: are deductions from the
gross earnings of an employee such as
employment income taxes (with-holding taxes),
labor union dues, fines, credit association pays
etc.
• Net Pay: Net Pay is the earning of an employee
after all deductions have been deducted. This is
the take home pay amount collected by an
employee on the payday.
Components of payroll register

 Employee Number
 Name of Employees
 Earnings - a. Basic Salary
- b. Allowances - Position allowance
- Hardship allowance
- Desert allowance
- Transportation (fuel) allowance
- c. Overtime Earning
1. Employee Number: Number assigned to employees for
identification purpose when a relatively large number of
employees are involved in a payroll register.
2. Name of Employees
3. Earnings: Money earned by an employee from various
sources,. This may include.
a. Basic Salary- a flat monthly salary of an employee 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 reasons, like:
 Position allowance- a monthly paid to an employee of
earning a particular office responsibility.
 Housing allowance- a monthly allowance given to cover
housing costs of the individual employee when the
employment contract requires the employer to provide
housing but the employer fails to do so.
 Hardship allowance- a sum of money given to an
employee to compensate for an inconvenient circumstance
caused by the employer. For instance, unexpected transfer
to aw different and distant work area or location.
 Desert allowance- a monthly allowance given to an
employee because of assignment to a relatively hot
region.
 Transportation (fuel) allowance- a monthly allowance
to an employee to cover cost of transportation up to her
workplace if the employer has committed itself to provide
transportation service.
C. Overtime Earning: Overtime work is the work performed
by an employee beyond the regular working hours.
Whereas Overtime earnings are the amount paid to an
employee for overtime work performed.
 Article 33 of proclamation No. 64/1975 discussed the following
about how overtime work should be paid:

A worker shall be entitled to be paid at a rate of;

1. One and one-quarter (1 ¼) times his ordinary hourly rate for
overtime work performed before 10:00 P.M in the evening.
2. One and one half (1 ½) times his ordinary hourly rate for
overtime work performed between 10:00 P.M and six (6:00
A.M) in the morning.
3. Two times the ordinary hourly rate for overtime work
performed on weekly rest days
4. Two and one half (2 ½) times the ordinary hourly rate for
overtime work performed on a public holiday.
D. Deduction: are subtractions made from the earnings
of employees required by the government or permitted
by the employee himself.
i. Employment Income Tax: Every citizen is required to
pay employee tax to the government in almost all
countries.
In Ethiopia also, income tax is charged on the gross
earnings of the employee at the rates indicated under
schedule A of the Proclamation N. 286/2002- Income tax
proclamation.
 Deduction – a. Employment Income Tax
Employment Income Income
(per month) Tax rate Deduction

Over Birr To Birr

Exempt (Free from Tax) -
0 600
601 1,650 10% 60
1,651 3,200 15% 142.50
3,201 5,250 20% 302.50
5,251 7,800 25% 565
7,801 10,900 30% 955
Over 10,900 35% 1,500
ii. Pension Contribution: Permanent employees a
governmental organization in Ethiopia is expected
to pay or contribute 7% of their basic salary to the
governments’ pension trust fund.
• The employer is also expected to contribute
towards this same fund 11% of the basic salary
of every permanent government employee.
• Therefore, the total contribution to the pension
fund of the Ethiopian government is equal to
18% of the basic salary of all of its permanent
employees.
iii. Other Deductions: Apart from the above two kinds of
deductions, employees may individually authorize
additional deductions such as deductions to pay life
insurance premiums, to repay loan from the employer, to
pay for donation to charitable organization, contributions
to "ldir" etc.
E. Net Pay: Net pay represents the excess of gross
earnings over total deductions of an employee.
F. Signature: The payroll sheet should have a column for
signature of the employee to be taken when the
employee collects the net pay.
Proclamation No. 286/2002 states that the following are not
taxable:
 Income from employment received by casual employees who
are not regularly employed provided that they do not work for
more than one month for the same employer in any twelve
months period.
 Pension contribution, provident fund and all forms of
retirement benefits contributed by employers in an amount that
doesn’t exceed 15% of the monthly salary of the employee.
 Payments made to---- (an employee) as a compensation or
gratitude in relation to:
- Personal injuries suffered by that person
- The death of another person
The council of ministers regulation
No. 78/2002
further exempt the following from
income tax:
 Amounts paid by employers to cover the actual cost
of medical treatment of employees.
Allowance in view of means of transportation granted
to employees under contract of employment, i.e.,
transportation allowance.
Hardship allowance
Amounts paid by employee in reimbursement of
traveling expenses incurred on duty.
 Illustration

Godanaye 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
Yekatit, 2012.
Serial No. Employee Name Basic Transportation Overtime Duration of OT work
salary Allowance worked (hr)

01 Aregash Shewa Br. 730 200 4 6:00-10:00 P.M

02 Paulos Chala 1020 8 Sunday(8:30-5:30)

03 Mohammed Modesir 5300

04 Tensay Belay 1470

05 Haile Olango 950 6 Public Holiday
Additional Information
• The management of the agency usually expects a
worker to work 240 hours in a month.
• There were no absentees during the month
• All employees are permanent except Tenssay and
Haile
Paulos agreed to contribute monthly Br. 300 from his
salary as a monthly saving in the credit association of
the agency.
Required
• Prepare a payroll register (sheet) for the agency for the
month of Yekatit, 2009.
• Record the payment of salary as of yekatit 30,2009 using
check stub No. 0123.
• Record the payment of the claim of the credit Association of
their agency on Megabit 1, 2009 use check stub No. 0124.
• Record the payment of the withholding taxes and pension
contribution to the concerned government body on Megabit
7, 2009.
• Compute and recognize the total payroll tax expense for the
month of Yekatit, 2009.
 Computation of Earnings, Deductions and Net Pay

Gross Earnings= Basic salary + Allowance+ Overtime earning

a. Overtime Earning:

Overtime earning = OT hrs worked X (ordinary hourly rate X relevant OT rate)

1. AREGASH: OT Earning = 4 hours X br. 730 x 1.25 = br. 15.21

240hours

2. PAULOS: OT Earning = 8 hours X br. 1020 x 2 = br. 68

240hours

3. HAILE: OT Earning = 6 hours X br. 950 x 2.5 = br. 59.4

240hours
b. Gross Earnings:
Gross Earnings = Basic salary + Allowance + OT Earnings

1. AGEGASH: Gross Earnings = br. 730 + br. 200 + br. 15.21 = br. 945.21

2. PAULOS: Gross Earning = br. 1020 + br. 68 = br. 1088

3. MOHAMMED: Gross Earnings = br. 5300, which include the basic

salary alone

4. TENSAY: Gross Earnings = br. 1470, which is the basic salary.

5. HAILE: Gross Earnings = br. 950 + 59.4 = br. 1009.4

c. Deductions:

1. AREGASH: -Gross Total Earnings = br. 945.21

-Gross Taxable Income (br. 945.21 – br. 200) = Br745.21

Employee Income Tax = (Taxable Income x 10%) – br. 60

= (br. 745.21 x 0.1) – br. 60 = br. 14.52

Pension contribution = basic salary × 7%

= 730 × 0.07= 51.1

 Total Deduction = br. 14,52 + br. 51.1= br. 65.62

2. PAULOS: Gross Earning = br. 1088.

Employee Income Tax = (10% X Taxable Income) – 60

= (10% X 1,088) – 60 = Birr 48.8

Pension contribution = Basic salary x 7%

= 1,020 × 0.07 = Birr71.4

Credit Association = Birr300

 Total Deduction = br.48.8+br.71.4+br.300= Birr 420.2

3. MOHAMMED: Gross Total Earning= br. 5300

Employee Income Tax = (25% X Taxable Income) – 565

= (25% X 5300) – 565 = Birr760

Pension contribution: = Basic salary x 7%

= br. 5300 x 0.07= Birr 371

 Total Deductions = 760+371= Birr 1131

4. TENSAY: Gross Earnings = br. 1,470

Employee Income Tax: = (10% X Taxable Income) – 60

= (10% X 1,470) – 60 = Birr 176.5

Pension contribution:
NB: No pension contributions because she is not permanent employee
of the organization.

 Therefore, total deduction is the same as Employee Income Tax, br.

176.50.
5. HAILE: Gross Total Earnings = br. 1009.40

Employee Income Tax: = (10% X Taxable Income) – 60

= (10% X 1,009.40) – 60 = Birr 40.94

Pension contribution:
NB: Pension contribution should not be computed for Haile
because he is not permanent employee of the agency.
Thus, the only deduction from Haile’s earnings is the
employee income tax.
d. NET PAY:

Net pay = Gross Earnings – Total Deductions

1. AREGASH: Net pay = br. 945.21 – br. 65.62 = br. 879.59

2. PAULOS: Net pay = br. 1,088 – Birr 487.10 = br. 600.90

3. MOHAMMED: Net pay = br. 5,300 – Br. 1,563.5 = br. 3736.50

4. TENSAY: Net pay = br. 1,470 – br. 176.50 = br. 1293.50

5. HAILE: Net pay = br. 1009.40– Br40.94= br. 968.46

 The payroll register (or sheet) for Godanaye Rehabilitation Agency prepared for the Month of Yekatit, 2009 is shown below.
Payroll Register (sheet)
For the month of Yekatit, 2009

Ser. Name of Earnings Deductions

No. Employee Gross Total Sign
Basic Allo- Over Income Pension Other
Earning Deduc. Net Pay .
salary wance Time Tax Contr. Deduc.

01 Aregash Shewa
730 200 15.21 945.21 14.52 51.10 ___ 65.62 879.59
02 Paulos Chala
1,020 ___ 68 1,088 48.8 71.40 300 420.2 667.80
03 Mohammed Mudesir
5,300 ___ ___ 5,300 760 371 ___ 1,131 4169

04 Tensay Belay
1,470 ___ ___ 1,470 176.5 ___ ___ 176.5 1293.5
05 Haile Olango
950 ___ 59.40 1009.4 48.94 ___ ___ 48.94 968.46
Total 9,470 200 142.61 9,812.61 1048.76 493.5 300 1842.12 7,970.49

Prepared by_______________Checked by________________Approved by___________

The journal entry to record payment of salary:

Yekatit 30 Salary expense---------------------------9,812.61

2009 Cash---------------------------------------------7,970.49
Income tax payable---------------------------1,048.76
Pension payable----------------------------------493.50
Payable to credit association ------------------300.00
(To recording the payment of salary on Yekatit 30, 2009)

The payroll tax expense of Godanaye Rehabilitation Agency will be:

Payroll tax expense = Basic salary of permanent employees X 11%
(for pension cont’n) = (730 + 1,020 + 5,300 + 1,470+950) X 11%
= 9,470 X 11%
= 1,041.7
The journal entry to record the payroll tax expense will be:
Yekatit 30 Payroll tax expense-----------------1,041.7
2009 p/tax payable------------------------1,041.7

To record the payment of cash to hope enterprise:

Megabit 5 Payable to credit association -------300
2009 Cash---------------------------------------300

Payment of withholding and payroll tax on Megabit 6, 2009:

The balance of income tax payable ---------------------------1,048.76
The balance of pension payable (493.50 + 1,041.7) ------ 1,535.20
Total liability to be paid to Inland Revenue ----------------- 2,583.96
And pension agency
The journal entry to record the payment of withholding taxes and
payroll tax will be:
Megabit 6 Income tax payable---------------------------1,048.76
2009 Pension payable-------------------------------1,535.20
Cash-------------------------------------------------2,583.96
THANK YOU!!