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Payroll  282.00
Dire Dawa Ploy Tec College
Learning Module 11

TVET PROGRAM TITLE: Accounts and Budget Support Level III

Unit Title Processing Payroll

Unit Code BUF ACB3 M11 1116

NOMINAL
45hrs
DURATION

MODULE This unit describes the performance outcomes, skills and

DESCRIPTION knowledge required to process payroll from provided data using
manual and computerised payroll systems.
LEARNING OUTCOMES:

At the end of this module the trainee will be able to:

1. Record payroll data

2. Prepare payroll
3. Handle payroll enquiries
MODULE CONTENTS
LO1. Record payroll data
1.1 Check payroll data
1.2 Enter employee pay period details
1.3 Calculate payment due to individual employees
LO2. Prepare payroll
2.1 Prepare payroll within designated time lines
2.2 Reconcile total salary/wages for pay period
2.3 Make arrangements for payment
2.4 Obtain authorization of payroll and individual pay advice
2.5 Produce, check and store payroll records
2.6 Follow security procedures for processing payroll
LO3. Handle payroll enquiries
3.1 Respond to payroll enquiries
3.2 Provide information
3.3 Ensure all enquiries outside area of responsibility
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Pr 3.4 Complete additional information

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LEARNING STRATEGIES:

 Lecture- discussion
 Demonstration
Payroll 

Individual/Group Activity
Assignments
ASSESSMENT METHOD:

 Interview/ Written Test

 Demonstration/ Observation
ASSESSMENT CRITERIA
LO1. Record payroll data
1.1 Check payroll data and clarify discrepancies with designated persons
1.2 Enter employee pay period details and any deductions and allowances in
payroll system in accordance with source documents
1.3 Calculate payment due to individual employees to reflect standard pay and
variations in accordance with employee source data
LO2. Prepare payroll
2.1 Prepare payroll within designated time lines in accordance with organizational
policy and procedures
2.2 Reconcile total salary/wages for pay period, check or correct irregularities or refer
to designated persons for resolution
2.3 Make arrangements for payment in accordance with organizational and individual
requirements
2.4 Obtain authorization of payroll and individual pay advice in accordance with
organizational requirements
2.5 Produce, check and store payroll records in accordance with organizational policy
and security procedures
2.6 Follow security procedures for processing payroll and for maintaining payroll
records
LO3. Handle payroll enquiries
3.1 Respond to payroll enquiries in accordance with organizational and
legislative requirements
3.2 Provide information in accordance with organizational and legislative
requirements
3.3 Ensure all enquiries outside area of responsibility and knowledge are referred
to designated persons for resolution
3.4 Complete additional information or follow-up action within designated time
lines in accordance with organizational policy and procedures
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Payroll

What is the history of the word payroll?

 The word 'payroll' originated in the mid-18th century as a compound noun
describing the amount of money employees were paid over a period of time.
'Pay' is derived from the French 'paier' (to pay) and 'roll' from the Old French
'rolle', a rolled-up piece of parchment.

Ethiopian payroll system

1.The Importance of payroll Accounting

 The concept of payroll is often referred to the total amount paid to employees of
a firm as a compensation for the service rendered to a firm in a given period of
time.

Definition of Payroll & related term

 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. Therefore, they are usually paid when a
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or weekly.

Payroll
 The pay period :

 The pay period refers to the length of time covered by each

payroll payment. Payment periods for wageworkers are
usually made on weekly basis. On the other hand, salaried
employee’s pay periods are monthly or semimonthly.
 The pay day:

 The pay day on which wages or salaries are paid to

employees, usually the last day of the pay period, is known
as the payday.

 A basic record of a payroll accounting system includes:

1.A payroll register (or sheet),

2.Individual employees earning records, and

3.Usually, pay checks.

Ethiopian Payroll System

1. Definition and Importance of Payroll Accounting
Payroll refers to the processes followed to pay employees for their work. For large
companies, payroll can be a huge and difficult undertaking. Even small companies can
find payroll challenging because all employers are required by law to maintain certain
payroll records and to calculate payroll in particular ways. And of course, employees
expect this task to be done on time without error.
Payroll costs can be significant in terms of their impact on both current liabilities and
operating expenses. Typical payroll costs include salaries, wages, bonuses, employer
payroll taxes, and employee benefits. Salaries are fixed amounts that are paid monthly,
typically to managerial, sales, and administrative personnel. Wages are based on a rate
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clerks, factory workers, and part-time employees.

Payroll
 Bonuses are extra amounts paid to
employees for outstanding performance.
Employee benefits include amounts
employers paid on behalf of employees for
health insurance, retirement pensions, and vacation, illness, and family
leaves.
A company’s payroll is important for the following reasons:

 1. Employees are sensitive to payroll errors and irregularities, and maintaining good
employees 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. For the foresaid reasons the need for accurate
system of handling the payroll of a business is unquestionable.
-Payroll accounting is an essential accounting activity of any business those employs
workers. Whether a business employs one worker or hundred thousand, it must
properly account for employees earning and comply the rules and laws that affect the
hiring and paying of employees.
The area of payroll accounting involves calculating the earning of employees and the
related withholding for taxes and other deductions, recording the results of payroll
activities and preparing the payroll tax returns.

2.Payroll Register and its Components

A. Employee Number: Number assigned to employees for identification purpose when

a relatively large number of employees are involved in a payroll register. It could be an
identification card of the employees or a simple serial number.
B. Name of Employees: this column lists names of employees of the organization.
C. Earnings: Money earned by an employee from various sources. This may include.
(1) 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.
(2) Allowances: money paid monthly to an employee for special reasons, like:
i. Position allowance – a monthly allowance paid to an employee for bearing a
particular office responsibility.
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cover housing costs of the individual employee when the
employment contract requires the employer to provide
housing but the employer fails to do so.

Payroll
iii. Hardship allowance/or disturbance allowance – a sum of money given to an
employee to compensate for an inconvenient circumstance caused by the employer. For
example, unexpected transfer to a different and distant work area or location.

iv. Desert allowance – a monthly allowance given to an employee because of

assignment to a relatively hot region.

v. Transportation (fuel) allowance – a monthly allowance to an employee to cover cost

of transportation up to his/her workplace if the employer has committed itself to
provide transportation service.
vi. Cash indemnity allowance: -allowance paid for cashiers to cover the risk of possible
cash shortage.
(3) Overtime Earning: Overtime work is the work performed by an employee beyond
the regular working hours. Overtime earnings are the amount paid to an employee for
overtime work performed.
Article 33 of proclamation No. 1156/2019 discussed the following about how overtime
work should be paid:

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

From office leaving hours Normal One and quarter (1 ½ or 1.5) of the
to 10.00 hours ordinary hour rate
 p.m. in the evening
10.00 P.m. – 6.00 A.m. Late Hours One and half (1 3/4 or 1.75) of the ordinary hour
Evening – Morning
Rest day Rest day Twice (2) of the ordinary hour
Holidays Holidays Two and half (2 ½ or 2.5) of ordinary hours rate.
All in all, the gross earnings of an employee may include the basic salary, allowance and
overtime earnings.
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each employee’s gross earnings. The employer does not
keep these deductions but rather pays (“remits”) them to
another organization or government agency on behalf of

Payroll
employees. Some deductions are required by law; others
are made on a voluntary basis as a service to employees.
Deductions required by law, such as: Salary income tax,
pension contribution etc. Voluntary deductions are
amounts for charitable donations, retirement savings, union dues, medical and dental
plans, life insurance, parking fees, and also may other deduction : -Like court order,
fines, absence …etc.

From the employer’s perspective, payroll deductions create liabilities, not expenses.
They are not expenses because they do not directly increase the employer’s salary and
wage costs. Instead, they simply redirect part of the salary and wage payments to a
government agency or other organization rather than to employees.
Some of the common types of deductions in Ethiopia are discussed here under.

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 No. 979/2016 -Income Tax Proclamation.
The tax rates under Schedule A are presented below

Employment Income(per Employment Income Deduction /

month) Birr Tax Rate adjustment (Br.)
0-600 Exemption 0
601 – 1,650 10% 60
1,651 – 3,200 15% 142.5
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Payroll
3,201 – 5,250
5,251 – 7,800 25% 565
7,801-10,900 30% 955
over 10,900 35% 1,500
Taxable income includes any payment or gains in cash or in kind received from
employment by an individual, including income from former employment, or otherwise,
from prospective employment.

The Council of Ministers Regulation No. 78/2002

Regulations issued pursuant to the income tax proclamation further exempt the
following from income tax.
1. Amounts paid by employers to cover the actual cost of medical treatment of
employees.
2. Allowance in view of means of transportation granted to employees under contract
of employment, i.e., transportation allowance.
3. Hardship allowance (Disturbance allowance).

4. Amounts paid by employee in reimbursement of traveling expenses incurred on

duty.
ii. Pension Contribution
Permanent employees of a governmental organization in Ethiopia are expected
to pay or contribute 7% of their basic salary to the governments’ pension trust
fund.
This amount is withheld by the employer from each employee on every payroll
and later be paid to the respective government body.
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.
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comes from the employer.
For militaries, the employer (government)
contributes 18% and the employee contributes 6%

Payroll
of his/her basic salary towards his/her pension trust
fund.
This enables a permanent employee of a
government organization to be entitled to the
pension pay when retired provided that the employee satisfies the minimum
requirements to enjoy the benefits.
Businesses and non-governmental and not-for-profit organizations (NGO’s) also
have this kind of scheme to benefit their employees with some modifications.
A fund known as provident fund is established and both the employer and the
employee contribute towards this fund monthly. When an employee retires or
leaves employment, a lump sum amount is paid to him/her.

iii. Other Deductions

 A part 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 “idir” and etc.

Net Pay
 Net pay represents the excess of gross earnings over total deductions of an
employee.

Signature
The payroll sheet should have a column for signature of the employee to be taken
when the employee collects the net pay.
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Payroll

3.1Illustration of Payroll Accounting

Omo Nada Enterprise is a government agency recently organized around Jimma and its
surroundings 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 December, 2020.
Overtim
Serial Transportation e
Duration of OT Work
No. Name of Employee Basic Salary Allowance worked(
hr)

01 Abraham Getu Br. 7,720 800 4 6:00-10:00 P.M

02 Abdi Tufa 10,200 ____ 8 Sunday(8:30 – 5:30)

Additional Information:
-The management of the enterprise usually expects a worker to work 40 hours in a
week and during December there are four weeks.
-There were no absentees during the month
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-Abdi agreed to contribute monthly Br. 800 from his salary
as a monthly saving in the credit association of the
enterprise.

Payroll
-Required: 1. Compute the following for each
employees
A. Gross earning
B. Taxable income
C. Tax to be paid
D. Pension contribution
E. Total deduction
F. Net pay (net employment income)

2. Record the payment of salary as of Dec. 30, 2001

3. Record the payment of the claim of the credit association of their enterprise on Jan.
1, 2021.
4. Record the payment of the withholding taxes and pension contribution to the
concerned government body on Jan. 5, 2021.

Computation of Earnings, Deductions, and Net Pay

A. Overtime Earning
Overtime earning = OT hrs worked x (ordinary hourly rate x relevant OT rate)
1. Abraham: -OT Earning = 4 hours x Br. 7,720 x 1.5 = Br. 289.5 160 hours
NB. Every employee is expected to work 160 hours per month
(I.e. 40 hours x 4 weeks)
 You should compute the regular hourly rate first:
-Regular Hourly Rate = Monthly salary (Basic salary)

 Total Hours worked in the Month

= Br. 7,720
160 Hours
 Therefore, the regular hourly payment = Br. 48.25
The regular hourly payment must be multiplied by the appropriate OT rate as follows:
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Pr Br. (48.25 x 1.5) x 4 hours …………………… Br.289.5

ocessing B. Gross Earnings

Payroll 1. Abraham :
 Gross Earnings = Br. 7,720 + Br. 800 + Br. 289. 5 = 8,809. 5
 Remember taxable income in this case is Br. 8009.5 because the transportation
allowance of Br. 800 is not subject to taxation.
2. Abdi Tufa:
 Gross Earnings = Br. 10,200 + Br. 1,020 = Br. 11,220
 The Gross Total Earnings of Abdi consists of the Br.10, 200 basic salary plus the
overtime earnings of Br. 1020 which is Br. 11,220.
C. Deductions and Net Pay
1. Abraham:

Gross Total Earnings ……

Gross Taxable
 
Income (Br.8, 809.5 – Br.
 A. Employee Income Income
Tax: 800) ………..
 i. Progressive tax 8,00
 Income tax = taxable income method Income Tax Rate 9.5
*tax rat – adjustment 0
600 Exemption
Earning
0-600

601 – 1,650 1,050 10% 105

1,651 – 3,200 1,550 15% 232.5

3,201 – 5,250 2,050 20% 410

5,251 – 7,800 2,550 25% 637.5

7,801-8,009.5 209.5 30% 62.85

Total ii. Deduction method 1,447.85

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ii. Pension Contribution:

Payroll Basic salary x 7%

= Br. 7,720 x 0.07 ……………………………………540
 Total Deduction (Br. 1,447.85 + Br. 540) ……… 1,987.85

2. Abdi :
 Gross Total Earnings ………………………………

Br. 11,220
i. Progressive method
Income
Earning Income tax
Tax Rate

0-600 600 Exemption 0

601 – 1,650 1,050 10% 105

1,651 – 3,200 1,550 15% 232.5

3,201 – 5,250 2,050 20% 410

5,251 – 7,800 2,550 25% 637.5

7,801-10,900 3100 30% 930

10,900-
320 35% 112
11,220

Total 11,220 2,427

Deduction method
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 (Br. 10,200 x 0.07)
………………………………………………… Br. 714
 Credit Association

Payroll
……………………………………………………… 800.00
Total Deductions (2,427 + 714+ 800)…………………..………. Br.
3,941

NET PAY:
Net pay = Gross Total Earnings – Total Deductions

1. ABRAHAM:
Net pay = Br. 8,809.5– Br. 1,987.85
Net pay = Br.6, 821.65

2. Abdi:
Proving the Payroll:
Total Earnings:
Basic salary (7,720+10,200) ----------------------------------------Br. 17,920
Allowances ---------------------------------------------------------800.00
Overtime (289. 5 +1020) ---------------------------------------------1,309.5
Grand Total --------------------------------------------------Br. 20,029.5

Deductions:
---------------Br.
Employee Income taxes (1,447.85 +2,427)
3,874.85

Pension Contributions (540+714) -------------------------- 1,254

Other Deductions ---------------------------------------- 800.00

Total Deductions ------------------------------- Br. 5,928.85

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Pr Total Net Pay (Br.6, 821.65+

ocessing 7,279)
----------------------------------
Br. 14,100.65

Payroll Total Deductions plus Net pay

--------------------------------
Br. 20,095.5

Journal Entries Related to Accounting

for Payroll
2. Recording the payment of salary:
Dec. 30, 2020 Salary Expense ……………… 20,095.5

Cash…………………………………… 14,100.65

Pension Contribution Payable …………… 1,254

…………
Employees Income Tax Payable
3,874.85

Payment for Credit Association …………. 800.00

Also, on this same date, the Enterprise (as an employer) has to contribute 11% of the
basic salary of every permanent employee to the government’s pension trust fund.
Therefore, total basic salaries of permanent employees x 11%

The following journal entry, therefore, is recorded on Dec. 30, 2020.

Dec. 30, 2020 Pension Contribution Expense ………………1,971.2
Pension Contribution Payable ………………1,971.2
 3. Recording the payment of deduction from Abdi salary to the Credit Association:
Jan. 5, 2021 Payable to Credit Association ………..800.00
Cash ……………………....…………………800.00
 4. Recording the payment of employees’ income tax withheld and the 10% pension
contribution to the government body:
On Jan. 5, Pension Contribution Payable (1,254+ 1,971.2)….3, 225.2
2021
Employee Income Tax Payable ………………... 3,874.85

Cash ………………………………………. 7,100.05

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Payroll

Payroll Register (sheet) For the Month of December, 2021 E.C.

Earnings Deductions
Sig
Net
Ser.  Name Gross Ea Inc Pensio Total De nat
Pay
No. of Employee
Basic salary
Allowances Over Ti
rning
ome n Other Dedu
duc.
ure
me
Tax Contr. c.

Abrah 2
22.8 952. 94.6 858.
1 am 730 200 65.42 9.
1 81 2 19
Getu 2

4
Bekum ___ 461. 660.
2 1020 102 1122 120.8 0.
a Jirra _ 6 4
8

Meym
2
una ___ ___ 1192. 140 389
3 5300 5300 1
Hundu _ _ 5 4.5 5.5
2
ma

Tweod _
ros ___ ___ _ ___ 176. 129
4 1470 1470 176.5
Alema _ _ _ _ 5 3.5
yehu _
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Payroll
5 ___
_  
_
Yetim ___   _ 108. 930.
950 103
wor _ 8 10 _  35 71
_ 00. Br. 2215. Br. 7638.
00 58 30

k 9.06
Kebed Br. Br.
e 200 9.06 8.35

Grand Br. 9470.00 .00 Br. 9883.87
Br. 1663.07

213.
Total 87
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Pr Prepared by _____________________ Checked by

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____________________ Approved by
__________________

Payroll
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Payroll