Unit VI – Part 1

Accounting for Salaries

Background
Every business that has employees is required to keep some kind of record of wages and salaries paid. A business
must have correct information about the reported earnings of its employees in order to make proper payment to them
and in order to debit the amounts they have earned to the correct accounts. All businesses are required by law to
keep earnings records for each employee and must be able to prove the correctness of the various required
government deductions and contributions (e.g., taxes, SSS, Philhealth, etc.), which employers and employees pay.
Employees want to be sure that the amounts they receive on payday are the amounts to which they are rightfully
entitled. The summary of the employees’ salary is prepared in a report called payroll register. This is accomplished
depending on the payroll period being followed by the company either in a weekly, semi-monthly or monthly basis.

Recording Salary Expenses

Overview
All business entities normally hire employees to perform its various operations. Salaries of these employees must be
properly computed and paid at a specified time (e.g. weekly, bi-monthly, monthly).
In this section, readers will be introduced on how to journalize transactions affecting payment of employees’ salaries
with corresponding deductions as required by law or due to some other reasons such as loans made by employees
from the company.

Social Security System

Under PD No. 24, “no person shall be employed unless he has a social security number.” It is therefore a
requirement that all employees in the private sector be members of the Social Security System (SSS).
The system provides benefits and services to its members which include the following: salary loans,
educational loans, housing loans, sickness and death benefits, unemployment benefits, disability benefits,
pension benefits and reimbursement of funeral expenses for deceased members. In consideration for all
these benefits, the employee is required to make a monthly contribution in accordance with a contribution
table provided by the SSS. This contribution of the employee is deducted from his salary. The
corresponding contribution of the employer is an operating expense, i.e., SSS Contribution Expense.

Philhealth
The Philippine Medical Care Commission (PMCC) was established to provide hospitalization and other
medical benefits to its members and their dependents. Contributions are made according to a given table.
Similar to SSS, the contribution is shared between the employee and his employer. The contribution of
the employee is deducted from his salary. The contribution of the employer is an operating expense, i.e.,
Philhealth Contribution Expense.

Pag-ibig Fund
The Pag-ibig Fund is a provident savings and housing fund for employees established under P.D. No.
1752. It aims to generate mass savings geared towards financing homes for its members. All private
employees who are members of the SSS and their employers are covered by the fund compulsorily. The
employer and its employees in accordance with the pag-ibig contribution table make contributions to the
Pag-ibig Fund.

Witholding Income Tax

Under the Bureau of Internal Revenue regulations, every employer is required to deduct and withhold
income tax from the salary of its employees in accordance with a withholding tax table. The amount of
income tax to be withheld from the employees will depend on whether the employee is single, married, a
head of the family, a married woman whose husband is also working, and on the number of his qualified
dependents.

Illustration
No. 1
The following is an illustration of how to record salary expense with various deductions:
September 30, 20X1 transaction:
J. Labrador, CPA paid salaries to employees, P32,500. Deductions were made for the following: SSS, P966.75;
Philhealth, P343.75; Pag-ibig, P650 and withholding taxes, P2,850.

Sept. 30 Salaries And Wages Expense 32,500

SSS Premiums Payable 966.75
Philhealth Contributions Payable 343.75
Pag-Ibig Contribution Payable 650.00
Withholding Taxes Payable 2,850.00
Cash 27,689.50
To record payment of salaries for the
period Sept. 1-30

Illustration
No. 2
The following are illustrations of how to record remittances made to different government agencies:
October 10, 20X1 transaction:
Remitted to Bureau of Internal Revenue (BIR) the tax withheld from employees’ salaries for the period Sept. 1-30.
October 10 Withholding Taxes Payable 2,850
Cash 2,850
To record remittance made to BIR.
October 20, 20X1 transaction:
Remitted the amount due to SSS and Philhealth and Pag-ibig computed as follows:

Employer’s share Employees’ share

SSS 3,048.50 966.75

Philhealth 687.50 343.75
Pag-ibig 950.50 650.00
Total 4,686.50 1,960.50
============= ==============

October 20 SSS and Philhealth Contributions Expense 3,736.00

Pag-ibig Contributions expense 950.50
SSS Premiums Payable 966.75
Philhealth Contributions Payable 343.75
Pag-ibig Contributions payable 650.00
Cash 6,647
To record remittances made to SSS, Philhealth,
and Pag-ibig.