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All business entities have to pay employee’s for the services. An employee is the one who perform services, subject to the supervision and control of another part known as an employer.

Relationship between employee and Employer

The employer has the power to terminate services offered by the employee.

Employer sets the hours of work for the employee’s. The employer provides to the employees with place to work.

Objective of Payroll Accounting

-To provide accurate payment of remuneration to employee promptly

-To provide and maintain the necessary employee and employer record statements and any report relevant to and required by the government agencies and statutory.

-To prevent fraud

-To control salaries and wages expenses

Employees are paid either a wage or a salary. If you see an advert for a job and it mentions that the rate of pay will be pound 8 per hour that is an example of a wage. If on the other hand, an advert refers to an annual amount that is a salary.
Wage is paid daily or weekly depending on hours worked WHILE Salary is paid at the end of every month.

Basic Pay

Is made up of an employee’s remuneration fixed at the time of employment before taking accounts of other benefits.

  • Salary are not linked to weekly or piece rate, they are paid on a monthly basis
  • Wages are associated with employee’s paid weekly, often on the basis of a piece of an hourly rate.

Monetary Benefits

There are certain benefit’s some time are accrue, to employee’s when such benefits are received in monetary form they increase employee’s monetary earning and are part of payroll form e.g. transport allowance, Housing Allowance.

Some of the benefits are exempt from tax and some are not. It is important to distinguish the tax status in order to compute. (Pay as you earn) Tax.

Gross Pay

Is obtaining by the summation of all sources of employee’s and overtime payments. Gross means before deductions.


Payroll accounting is significant influenced by legislation and acted by government. This law affects payroll accounting because they levy taxes based on payroll amounts and their exactly statutory contribution by both employer and employee.


(a) Payee tax (Pay as you earn)

Income tax Act (1973) and financed bills passed each budget session governed payment of individual tax. Is a tax levied on monthly income of individuals.

Monthly income for this purpose will be Gross pay reduced by earning which are not taxable.

(b) NSSF, PPF, PSPF, LAPF NHIF and Others

NSSF Act requires every employee and employer toward the fund. Upon retirement a lump-sum is paid to employee from the fund depending on his contributions;

(i)   Employee contribution (10% at the basic pay)

(ii)   Employer contribution (10% at the basic pay)


PPF 5% to be contributed by the employee and 15%  be contributed by the employer.
PSPF employee and employer contribute 10% each on basic salary.


Salary Advances and Staff Loans

Employees will sometimes want to receive their salary or part of their salary of in advance. At the end of the month an employee’s net pay must be reduced by the salary receive before the month end.

Loans are advances to staff to be received in more than one month. Usually there will be an agreement as to athere at of loan repayment.

Repayment Installments will be reduced from an employee Net pay.

Voluntary Deductions

Employee can choose to contribute towards any organization. Individual. In this case written employee concern and the stated amount will be deducted from the employee’s salary and resettled by the employer to the stated person e.g. Lion Club, Rotary Club, Simba Club etc.


Employer’s are required to maintain records with information of each employee salary and hours worked the rate of pay, Total overtime, entitlement and additions to salary, reductions from salary and employee’s net salary pay.

Employee’s earning statement (Salary slip)

This record contain information on the employee earning and reductions, clearly analyzed and showing how net pay has been arrived at the end of each month this statement is sent to every employee to communicate her earning information of the month. This statement is known as Salary Advice or Salary Slip.

                           SALARY ADVICE OR SALARY SLIP

Name of employee ………………

No ……………

Basic pay
Add; overtime payment xx
           Transport allowance xx
           Rent allowance xx
           Meal allowance xx

             Gross pay
less; Deductions

salary advance/loan xx
Trade union xx
P.A.Y.E xx
xx xxx
 Net pay

Example I

Silunka Company has four persons (all married) and pays the weekly salaries. The detail of the firm is as follow,

Name Weekly

Pays (Tshs)

Deduction per week

Medical Insurance          (Tshs)

Aisha 7500 300
Safina 8000 300
Blandy 7800 400
Pyurity 6200 300

Addition Information

(i)   Each employee pays 5% for income tax per week.

(ii) All employees contribute 10% monthly for PSPF.


(a)   Prepare the payroll journal for the month of June, 2006 using the headings which will accomplish the purpose.

(b)   Using a general journal as a Memorandum record only, prepare a journal entry to record the payroll.

Payroll Journal (Summary for the Month of June 2006

S/N Name of Employee Basic pay Gross pay Income tax Medical insur. PSPF Net pay
1 Aisha 30,000 30,000 1500 1200 3000 24,300
2 Safina 32,000 32,000 1600 1200 3200 26,000
3 Blandy 31,200 31,200 1560 1600 3120 24,920
4 Pyurity 24,800 24,800 1240 1200 2480 19,880

       TOTALS 118,000 118,000 5900 5200 11,800 95,100

                                     JOURNAL ENTRIES


Salary expenses a/c 118,000

Income Tax payable a/c

Medical Insurance payable

   PSPF   a/c

   Net pay a/c

being recognition of

payable salary

     Profit & loss a/c 118,000

         salary expenses

Payroll Summaries/Journal

Some organization will have several departments or operating units. Usually payroll is prepared along departmental lines. From the information on the salary slip, it should be possible to prepare a payroll summary for the department.


                                                ECA DEPARTMENT

                       PAYROLL SUMMARY /JOURNAL MONTH ENDING………….

Employee’s name Basic pay Gross pay Advance Loan P.A.Y.E NSSF Net pay
Juma 89,000 110,000 40,000              – 8,630 8,900 52,470
Rashid 120,000 135,000                – 60,000 12,380 12,000 50,620
Mary 86,000 120,000                –                – 10,120 8,600 101,280
Frida 150,000 160,000 50,000                – 16,620 15,000 78,380
George 140,000 158,000                – 70,000 16,620 14,000 57,780
TOTALS 585,000 683,000 90,000 130,000 63,970 58,500 340,530

From the Departmental Payroll summaries it should be possible to prepare an organization summary.

This would be a list of departments together with department totals of contents of salary slips.




ECA 585000 683,000 90,000 130,000 63,970 58,500 340,530
HGE 490,000 525,000 90,000 60,000 47,750 44,500 282,760
EGM 229,000 268,000 40,000 70,000 24,850 22,900 110,260
 TOTAL 1,304,000 1,476,000 220,000 260,000 136,570 125,900 733,530


Payroll Accounting involves accounting Principles and techniques covered previously;

In some organization payroll entries passed to the General ledger directly, in this case, the payroll summary act as a special Journal.

But, in most cases, payroll summary is not part of double entry, it only save as a working paper, for preparation of General Journal. Kibasila High School. Payroll summary for all departments will be recorded in general Journal basis/follows:

Dr,   ECA salary Expenses


Dr;   HGE Salary Expenses 525,000
Dr; EGM Salary expenses 268,800
         Cr; Salary Advance
         Cr; Loans
         Cr; PAYE
         CR; NSSF Payable
         CR, Salary Expenses (Payable)

One transaction that needs recording is employer’s contribution to NSSF since it is 10% of each employee’s

Basic pay will be   Tshs. 125, 900

Dr, NSSF Employers Contribution             125,900

Cr, NSSF Payable                                           125,900

At the end of the month

Dr; Salary payable                                   733,530

CR; Cash   A/C                                    733,530

Being payment of salaries to employee’s

DR, NSSF payable                            251,800

Cr, Cash   A/C                               251,800

Remittance to NSSF employee’s and employer contribution

DR, P.Y.E                                          136,570

Cr, Cash                                        136,570

Mode’s of Payment of salaries

  1. i)   Currency (notes & coins)
  2. ii)   By cheques

iii)   Credit transfer to employees bank account.

Overtime Payments

Usually employees are required to work 8 hours a day, 40 hours a week or 176 hours a month.

If an employee works more than he mentioned hours about the entitled to overtime payment.

On a normal working day overtime is paid at one and half times the normal rate of pay.

On weekends or Holidays overtime is paid at twice the normal rate of pay.

Formula for overtime Payments;-   (Basic pay x factor x hours of overtime)/(176 hrs)

Example 1

HGK Company employs four people, each of whom is married, whose monthly salaries are;

Sadiki         Tshs 85,000
Zuberi       Tshs 90,000
Rehema     Tshs 96,000
Mgaya       Tshs 120,000

Determine the correct amount of P.A.Y.E and Net Pay for each employee

Additional Information;-

Income Exceeds Tshs 65,000 but not exceeds Tshs.85,000 is Tshs 9500 plus 5% of the Excess of Tshs 65,000

Income Exceeds Tshs 86,000 but not exceeds Tshs.100,000 is Tshs 10,500 plus 6% of the excess of Tshs.86,000

Income Exceeds Tshs 100,000 but not exceeds Tshs.120,000 is Tshs.11,500 plus 15% of the excess of Tshs.100,000.


Payee for SADIKI and Net Pay

= (85,000 – 65,000) x 5% + 9500

=  1000 + 9500

=  10,500

Net Pay = 85,000 – 10,500

= 74,500


PAYE = 240 + 10,500

= 240 + 10,500

= 10,740

Net pay = 90,000 – 10740

= 79,260


PAYE = (96,000 – 86,000) x 6% + 10,500

= 600 + 10, 500

= 11,100

Net pay = 96,000 – 11,100= 84,900


PAYE = (120,000 – 100,000) x 15% + 11,500

= 20,000 x 15% + 11,500

= 3,000 + 11,500

= 14,500

Net Pay = 120,000 – 14,500

= 105,500

Example 2

In the following summary of data obtained from 1 MICU Company’s payroll records some amounts have been intentionally omitted.

Earnings Tshs
I Basic Pay
Ii Overtime 504,000
Iii Gross Pay

V NSSF (on Gross pay) 580,650
Vi Worker association contribution 77,000

Total deduction 2,087,750

Net pay

Account debited

Ix Factory Wages 2,124,500
X Sales salaries
Xi Office Salaries 1,652,000


-Determine amounts omitted in (i) (iii), (iv), (Vii) and x


If 580,650 = 10%

Then x = 10%

x= 580650 x 10

x = 5,806,500

: Gross pay 5,806,500

Basic Pay = Gross pay – Overtime

= 5,806,500 – 504,000

Basic pay =6,310,500

PAYE Tax = Total deduction – Worker Association –(on Gross pay)

= 2,087,750 – 77,000 – 580 650

= 1,430,100

PAYE Tax 1,430,100

Net pay = Gross pay – Total Deduction

= 5,806,500 – 2,087,750

= 3,718,750

(x) Gross pay and NSSF (Employer contribution = Salaries Expenses)

5806 500 + 580,650 = 6,387,150

Salaries Expenses 6,387,150

Sales salaries = Salaries Expenses – Office Salaries – Factory Wages

= 6,387,150 – 1,652,000 – 2,124,500

= 2,610,650


The following are details related to the coming of two Employees during the week ended 28/2/2001.

       Employee Omega Alfa
Piece work rate per unit 240 260
Units produced 400 280
Hours Worked 40 44
Hourly rate of pay 750 820

A 40 hours week is in operation and overtime is paid at time and quarter. If an employee’s piece work earnings fall below his earnings rate at the hourly rate, then the hourly rate then the hourly rate earning are paid. Both employees have the following deductions.

Pension Scheme – 2% of Gross pay.

NSSF – 10% of Gross Pay.

PAYE – 25% of all earning in excess of 150% per week your are required to calculate the Gross and Net wages of each employee showing clearly the amount of each deduction.


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