Principles of Accounting II

Chapter 4
Payroll System in Ethiopian Context
1. INTRODUCTION
Accounting systems for payroll and payroll taxes are concerned with the records and reports
associated with the employer-employee relationship. Well designed accounting system has a
mechanism that ensures payroll payments should be in accord with the employment contract duly
signed by both parties based on the prevailing labor laws in that jurisdiction.

All employees of an organization expect and are entitled to receive their remuneration at regular
intervals following the closing of each payroll period. Regardless of the number of employees and
the difficulties in computing the amounts to be paid, the payroll system must be designed to process
the necessary data quickly and assure payment of the correct amount to each employee timely. The
system must also provide adequate safeguards against unauthorized payments to employees and
other misappropriations of funds.
The federal and regional states require employers to keep accurate payroll records that should be
submitted to the appropriate authorities within the time limits prescribed in the respective laws.
Employers should also reimburse the amount withheld from individual employees along with their
own pension contribution within the time frame prescribed there. In addition, these records must be
kept for specified periods of time to make them available for any enquiry that may arise from the
regulatory bodies. Besides, payroll data may be useful in negotiations with labor unions, in settling
employee grievances, and in determining rights to vacations, sick leaves, and retirement pensions.
In this chapter, therefore you are expected to acquaint yourself with major payroll
records/documents by working through all the procedures common to most payroll systems such as
the employee’s earnings record, payroll sheet (or register), and journal entries related to payroll.
Each of these concepts is illustrated and discussed by taking into account the current tax law of the
country. As much as possible the text attempts to give you adequate knowledge about payroll
systems in Ethiopia. However, if you come across any confusion or difficulties you can consult the
authorities in the Ministry of Finance and Economic Cooperation(MoFEC) or Ethiopian Revenue
and Customs Authority(ERCA) in your locality, or refer the relevant proclamations especially;
Proclamation No. 979/2016.

2. OBJECTIVES
The main objective of this chapter is to equip students with the basic concepts and technicalities of
payroll preparation in Ethiopian context. The chapter addresses the underlying concepts using which
a payroll can be prepared. It also illustrates the different computations and procedures made by
payroll accountants while preparing periodic payments of employees in an organization.
More specifically, at the completion of the chapter, students should be able to:
 Explain the importance of payroll and payroll accounting
 Define payroll related terms
 Identify the basic components of Payroll Register
 Prepare payroll sheet
 Compute income taxes and pension contributions as per the rule of a government
 Compute and record the payroll for a pay period
 Describe and record employer payroll taxes
1 Principles of Accounting II, Summarized Lecture Note: Payroll
3. IMPORTANCE OF PAYROLL ACCOUNTING
Accounting for payroll is particularly important because:
i. Payroll often represents the largest expense that a company incurs.
ii. Both federal and state governments require that detailed payroll records be kept, and
iii. Employees are sensitive to payroll errors of irregularities.
To maintain good employee morale, payroll must be paid on a timely and accurate basis.

4. DEFINITION OF PAYROLL RELATED CONCEPTS/TERMINOLOGY

i. Salary and Wages: Salary and wages are usually used interchangeably. However, the term
wages is more correctly used to refer to payments to unskilled labor. It is usually paid based
on the number of hours worked or the number of units produced. Therefore, wages are
usually paid on a weekly basis or when a particular piece of work is completed. On the other
hand, salaries refer 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.
In this context wages and salaries means a payment to an ‘employee’ who works primarily to
an organization and whose activities are under the direct supervision of the employer.
A self-employed person on the other hand, provides his/her services on a fee basis to various
firms

ii. The pay Period: A pay period refers to the length of time covered by each payroll payment.

iii. The Pay Day: The payday is the day on which wages or salaries are paid to employees. This
is usually on the last day of the pay period.

iv. 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.

v. Pay Check; A business can pay payroll by writing a check for 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 be paid by cash at the organization.

vi. Gross Earnings: is the total earnings of the employees for a given pay period before
deductions.

vii. Withholding Taxes: are taxes collected from the earnings of employees by the employer
organization as per the regulations of the government. These have to be reimbursed (paid) to
the government because employer organization is only acting as an agent of the government
in collecting these taxes from employees.

viii. Payroll Deductions : are deductions from the gross earnings of an employee such as
employment income taxes, employee pension contribution (withholding taxes), labor union
dues , fines, credit association pays etc.

ix. Net Pay: Net pay is the earning of an employee after all deductions have been made. This is
the take home pay amount collected by an employee on the payday.

2 Principles of Accounting II, Summarized Lecture Note: Payroll

5. POSSIBLE COMPONENTS OF A PAYROLL REGISTER
a) Employee Identification 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 Employee: This column lists names of employees of the organization.
c) Earnings: Money earned by an employee from various sources. This may include.
I. 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.

II. Allowance – Money paid monthly to an employee for special reasons, like:
 Position allowance: - a monthly allowance paid to an employee for bearing 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 / 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.
 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 his/ her workplace if the employer has committed
itself to provide transportation service.

III. 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. In Ethiopia, the hourly rate of overtime work varies
depending on the time period in which the work is performed. Accordingly, a worker
shall be entitled to be paid at a rate of
a) One and One –quarter (1¼) times his ordinary (regular) hourly rate for overtime
work performed before 10:00 P.M in the evening. (6:00AM-10:00 PM)
b) One and one half (1½) times his ordinary (regular) hourly rate for overtime work
performed between 10:00 P.M and six (6:00A.M.) in the morning.
c) Two times the ordinary (regular) hourly rate for overtime work performed on
weekly rest days.
d) Two and one half (2½) times the ordinary (regular) hourly rate for overtime work
performed on a public holiday.

All in all, the gross earnings of an employee may include the basic salary, allowance, overtime and
other earnings like bonus.

3 Principles of Accounting II, Summarized Lecture Note: Payroll

Exercise -1
i. What term is frequently used to refer to the total amount paid to employee for a certain
period?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_________________________________
ii. Distinguish between salaries and wages?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_________________________________
iii. An employee earns Br.60 per hour with one and quarter (1¼) times the regular hourly
rate for all hours in excess of 48 per week. If the employee worked 55 hours during the
current week, what was the gross earnings for the week?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_________________________________

iv. Solomon Tadesse an employee of Ministry of education has basic monthly salary of Br
3,200 and position allowance of 800birr. During the month of Miyaziya, he worked an
over time of 8 hours in the weekend and 6 hours in public holiday. Gemechis Tola, an
employee of the same entity with basic salary of 2,400 however worked 12hours
overtime of which 5 are in midnight whereas the rest up to 10:00pm.
Compute the gross earning of these two employees.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________

d) Deductions: are subtractions made form the earnings of employees required either by the
government or permitted by the employee herself. The following are some of the deductions:

I. Employment Income Tax:- Almost in all countries across the globe, citizens pay tax on
their employment income at different level. 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”.

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 tax schedule is provided hereunder:

4 Principles of Accounting II, Summarized Lecture Note: Payroll

 Taxable Income
From
To On the next Tax Rate
Zero Br. 600 Br.600 0% (Exempted)
601 1,650 1,050 10%
1,651 3,200 1,550 15%
3,201 5,250 2,050 20%
5,251 7,800 2,550 25%
7,801 10,900 3,100 30%
Br. 10,901 and above 35%

We may use the deduction approach as an alternative

Employment Income Income

(per month) Tax Payable

From Birr To Birr

Zero Br. 600 No tax (free from tax)
601 1,650 (10% X EI)-60
1,651 3,200 (15% X EI)-142.5
3,201 5,250 (20% X EI)-302.5
5,251 7,800 (25% X EI)-565
7,801 10,900 (30% X EI)-955
Br. 10, 901 and above (35% X EI)-1500

Exercise-2
i. What is the total amount deducted as income tax for an employee who earns a basic monthly
Salary of Br. 5,080, a monthly non taxable allowance of Br. 300, and an overtime earning of
Br. 800?

ii. Assume Zemenay Debebe is an employee of MoFEC with monthly basic salary of 10,470
and position and transportation allowances of Br. 600 and 800 respectively. During Miyazia
she worked an overtime of 8 hours up to 10pm and 6hours from 10pm to 6 am.
a) Find her taxable income
b) Compute employment income tax that she pay for this month
5 Principles of Accounting II, Summarized Lecture Note: Payroll
 Proclamation No. 979/2016 states that the following are not taxable.
1- Income from employment received by causal 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.
2- 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.
3- Payments made to (an employee) as a compensation or gratitude in relation to:
o Personal injuries suffered by that person
o The death of another person
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 governmental and private organizations in Ethiopia are expected to pay or
contribute 7% of their basic salary to the pension trust fund administered by the government.
This amount is withheld by the employer from each employee on every payroll and later be
reimbursed to the respective government body administering the fund.
The employer should also contribute towards the same fund 11% of the basic salary of every
permanent employee. This is additional expense the employer contributes to the employees’ pension
and usually called as payroll tax by employer.
Therefore, the total contribution to the pension fund is equal to 18% of the basic salary of all of its
permanent employees.

This enables employee to be entitled for the pension pay when retired provided the employee
satisfies the minimum requirements to enjoy the benefits.
Non-governmental not-for profit organization (NGO’s) also have this kind of scheme to benefit
their employees with some modifications. A fund known as provident fund as 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 her/him.

III. Other Deductions

Apart from the above two kinds of deductions, employees may individually authorize additional
deduction such as deductions to pay life insurance premiums, to repay loan from the employer, to
pay for donations to charitable organization, contributions to “Idir” etc.

Exercise-3
1. Identify the federal taxes that most employers are required to withhold from employees?
2. What is the employer share of pension contributions for a permanent employee whose regular
monthly salary of Br. 8,200?

6 Principles of Accounting II, Summarized Lecture Note: Payroll

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. This works only when the payroll system is working manually. In an
electronic payment system, signature may not be required as the transfer is made electronically
directly to the individual accounts.

6. MAJOR ACTIVITIES INVOLVED IN ACCOUNTING FOR PAYROLL

a. Gathering the necessary data-All the relevant information about every employee should be
gathered. This requires reviewing various documents such as attendance sheets and doing
some arithmetic work.
b. Entering the names of employees along with the gathered data such as earnings, deductions
and net pays in the appropriate columns of the payroll register.
c. Totaling and proving the payroll register –the grand total for earnings must be checked if its
equal to the sum of the grand totals of deductions and net pays.
d. The accuracy and authenticity of the information summarized in the payroll should be
verified by a different person from the one who prepared it.
e. The payroll should be approved by an authorized personnel (individual)
f. Paying the payroll either in cash or by writing a check.
g. The payment of the payroll and income taxes withheld from employees (withholding tax
liability) should be recorded in journal entry form.
h. The withholding tax must be paid to the relevant government authority in time (promptly)
and this is recorded in journal entry form.

Exercise-4
i. How is Net Pay computed?

ii. Assume an employee’s regular hourly pay is Br. 40, with a time and a half for every hour
worked in excess of 40 during a week. The following data are available:

Hours worked during current month 178 hrs

Regular monthly salary Br. 6,400
Allowance (transportation) Br. 1,200

Assume that according to the tax law transportation allowance in excess of Br. 800 is subject
to employment income tax. Based on the above data, compute the amount of the
employee’s:
a) Employment income tax,
b) Total deductions, assuming the employee is permanent civil servant.
c) Net pay for the current month;

7 Principles of Accounting II, Summarized Lecture Note: Payroll

7. ILLUSTRATION OF A PAYROLL REGISTER

Yenegew Ghoh Enterprise 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 Megabit, 2010.

Serial No. Name of Employee Basic Transportation Overtime Duration of

Salary Allowance Worked(hr) OT Work
01 Abraham Getu Br. 10,400 1,200 4 6:00-10:00p.m
02 Bekuma Jirra 9,600 - 8 Sunday(8:30-5:30)
03 Meymuna Hunduma 8,000 - - -
04 Tewodros Alemayhu 7,200 - - -
05 Ahmed Mohammed 4,800 - 6 Public Holiday

Additional Information
 According to the employment contract every employee works 40 hours in a week as regular
working hours. During Megabit there are four weeks. There were no absentees during the
month
 All employees are permanent except Tewodros and Ahmed
 Bekuma agreed to contribute monthly Br. 480 from his salary as a monthly saving in
the credit association of the enterprise.
 Transportation allowance which is above br. 800 is taxable

Required
1) Prepare a payroll register (sheet) for the enterprise for the month of Megabit,2010.
2) Record the payment of salary as of Megabit 30, 2010 using check stub No. 0123.
3) Compute and record the payroll tax expense for the employer
4) Record the reimbursement of the claim of the credit association of the enterprise on
Miazia 1, 2010. Use check stub No. 0124.
5) Record the payment of the withholding taxes and pension contribution to the concerned
government body on Miazia 7, 2010.

Computation of Earnings, Deductions, and Net Pay

Gross Earnings = Basic salary + Allowance + Overtime Earning

Since basic salary and allowances are direct, first let’s calculate overtime earning of the three
employees who has worked overtime during the month

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

1. ABRAHAN:

 OT Earning = 4 hours X br.10,400 X 1.25

160 hours = br. 325.00

NB Every employee is expected to work 160 hours per month (i.e. 40 hours x 4 weeks)
8 Principles of Accounting II, Summarized Lecture Note: Payroll
  You should compute the regular hourly rate first:
Regular Hourly Rate = Monthly salary (Basic Salary)
Total Hours worked in the Month
= br. 10,400
160 Hours

Therefore, the regular hourly payment = br. 65

The regular hourly payment must be multiplied by the appropriate OT rate as follows:
Br. (65 x 1.25) x 4 hours ………….. br. 325

2. BEKUMA:
 OT Earning = 8 hours X br.9,600 x 2 ………br. 960.00
160hrs
3. AHMED:

 OT Earnings = 6 hours X br. 4,800 x 2.5 .……br. 450.00

160 hours
Now we can determine the gross earning of each employee as follows:
GROSS EARNINGS

Gross Earnings = Basic salary + Allowance + OT Earnings

1. ABRAHAM:
 Gross Earning = br. 10,400 + br. 1,000 + br. 325 = br. 11,925.00
 Remember taxable income in this case is br. 11,125.00 because of the transportation
allowance br. 1,200, br. 800 is not subject to taxation.
2. BEKUMA:
 Gross Earning = br. 9,600 + br. 960 = br. 10,560
 The Gross Total Earnings of Bekuma consists of the br 9,600 basic salary plus the
overtime earnings of br. 960, which is br. 10,560.

3. MEYMUNA:
 Gross Total Earnings = br. 8,000, which is only the basic salary

4. TEWODROS:
 Gross Total Earnings = br 7,200, which is the basic salary alone.

5. AHMED:
 Gross Total Earnings = br. 4,800 +450.00 = br. 5,250.00

9 Principles of Accounting II, Summarized Lecture Note: Payroll

DEDUCTIONS AND NET PAY

1. ABRAHAM:
 Gross Total Earnings ----------------------------------------- br. 11,925.00
 Gross Taxable Income (br. 11,925-br.800) --------------- 11,125.00

Employee Income Tax

Earnings X Income Tax Rate = Income Tax

0-600 br. 600 0 br. 00.00

601-1,650 on 1,050 10% 105.00
1,651-3,200. on 1,550 15% 232.50
3,201 – 5,250 on 2,050 20% 410.00
5,251 – 7,800 on 2,550 25% 637.50
7,801 – 10,900 on 3,100 30% 930.00
> 10,900 on 225 35% 78.75
TOTAL br. 11,125--------------- Br. 2,393.75

Total Deductions:
Income tax on br. 11,125 taxable income…………………………..br. 2,393.75
Pension Contribution ( br. 10,400 x 0.07) 728.00
 Total Deduction (br. 2,393.75 + br. 728.00) br. 3,121.75

NB the income tax would be computed using the short-cut method as follows:
= (Taxable Income x 35%) – br.1,500
= (br. 11,125 x 0.35) – br. 1,500 = br. 2,393.75

2. BEKUMA:
 Gross Total Earning …….. br. 10,560.
 Employee Income tax

Earnings X Income Tax Rate = Income Tax

0-600 br. 600 0 br. 00.00

601-1,650 on 1,050 10% 105.00
1,651-3,200. on 1,550 15% 232.50
3,201 – 5,250 on 2,050 20% 410.00
5,251 – 7,800 on 2,550 25% 637.50
7,801 – 10,560 on 2,760 30% 828.00
TOTAL br. 10,560--------------- Br. 2,213.00

TOTALE Deductions
 Tax on br. 10,560 .................………………. br. 2,213.00
 Pension Contribution (br. 9,600x0.07) ………… 672.00
 Credit Association ............................. 480.00
 Total Deductions ............................... br. 3,365.00
10 Principles of Accounting II, Summarized Lecture Note: Payroll
3. MEYMUNA:
 Gross Total Earnings ................... 8,000.00
 Employer Income Tax

Earnings X Income Tax Rate = Income Tax

0-600 br. 600 0 br. 00.00

601-1,650 on 1,050 10% 105.00
1,651-3,200. on 1,550 15% 232.50
3,201 – 5,250 on 2,050 20% 410.00
5,251 – 7,800 on 2,550 25% 637.50
7,801 – 8,000 on 200 30% 60.00
TOTAL br. 8,000--------------- Br. 1,445.00

Total Deductions:
 Income Tax on br. 8,000.00 …………….. br. 1,445.00
 Pension contribution (br. 8,000x0.07)....... 560.00
 Total Deductions ------------------------------ br. 2,005.00

4. Tewodros:
-----------------------------------------------------Gross Total Earnings br. 7,200.00
-----------------------------------------------------Gross Taxable Income 7,200.00
Employee Income Tax:

Earnings X Income Tax Rate = Income Tax

0-600 br. 600 0 br. 00.00

601-1,650 on 1,050 10% 105.00
1,651-3,200. on 1,550 15% 232.50
3,201 – 5,250 on 2,050 20% 410.00
5,251 – 7,200 on 1,950 25% 487.50
TOTAL br. 7,200--------------- Br. 1,235.00

Total Deduction is only the tax which is ----------------- br. 1,235.00

NB. No Pension contribution because he is not permanent employee of the organization.

Therefore, total deduction is the same as Employee Income Tax, br. 1,235.00

11 Principles of Accounting II, Summarized Lecture Note: Payroll

 5. AHMED:
-------------------------------------------------------------- Gross Total Earnings br. 5,250.00
Employee Income Tax:

Earnings X Income Tax Rate = Income Tax

0-600 br. 600 0 br. 00.00

601-1,650 on 1,050 10% 105.00
1,651-3,200. on 1,550 15% 232.50
3,201 – 5,250 on 2,050 20% 410.00
TOTAL br. 5,250--------------- Br. 747.50

Total Deduction is only the tax which is …………… br. 747.50

 Pension contribution should not be computed for Ahmed because he is not permanent employee of
the enterprise. Thus, the only deduction from his earnings is the employee income tax.
NB. It is also possible to compute income tax using the short-cut method:

NET PAY:

Net pay = Gross Total Earnings – Total Deductions

1. ABRAHAM:
Net pay = br.11, 925.00 – br. 3,121.75
Net pay = br. 8,803.25

2. BEKUMA:
Net pay = br. 10,560.00 – br. 3,365.00
Net pay = br. 7,195.00
NB. Bekuma is saving br. 480.00 that is why his deduction is above Abraham

3. MEYMUNA:
Net pay = br. 8,000 – br. 2,005.00
Net pay = br. 5,995.00

4. TEWODROS:
Net pay = br. 7,200 – br. 1,235.00
Net pay = br. 5,965.00

5. AHMED:
Net pay = br. 5,250.00 –br. 747.50
Net pay = br. 4,502.50

12 Principles of Accounting II, Summarized Lecture Note: Payroll

PROVING THE PAYROLL:
Total Earnings:
Basic salary --------------------------------- br.40, 000.00
Allowances --------------------------------- 1,200.00
Overtime ---------------------------------- 1,735.00
Grand Total ---------------------- br. 42,935.00

Deductions:
Employee Income Taxes ---------------- br. 8,034.25
Pension contributions ------------------ - 1,960.00
Other Deductions ---------------------- 480.00
Total Deductions --------------- br. 10,474.25

Net pay Total ----------------------------------- br. 32,460.75

Total Deductions plus Net pay --------------- br. 42,935.00

The payroll register (or sheet) for Yenegew Ghoh Enterprise prepared for the Month of Megabit,
2010 is shown below.
Yenegew Ghoh Enterprise
Payroll Register (Sheet)
For the Month of Megabit,2010

Earning Deductions
Ser. Name of Basic Over Gross Income Pensio Other Total Net Pay Sig
No Employee Salary Allowance Time Earning Tax n Deduc. Deduc. n.
s Contr.
01 Abraham 10,400 1,200 325 11925 2393.75 728 - 3121.75 8803.25
Getu
02 Bekuma 9,600 - 960 10560 2213 672 480 3365 7195
Jirra
03 Meymuna 8,000 - - 8000 1445 560 - 2005 5995
Hunduma
04 Tewodros 7,200 - - 7200 1235 - - 1235 5965
A.
05 Ahmed M 4,800 - 450 5250 747.50 - - 747.50 4502.50

Totals
40,000 1,200 1735 42,935 8,034.25 1960 480 10474.25 32460.75

Prepared by Accountant Checked by Finance Head Approved by Manager

13 Principles of Accounting II, Summarized Lecture Note: Payroll

Journal Entries Related to Accounting For Payroll
Recording the payment of salary :

Megabit 30. Salary Expense ……………………42,935.00

Cash ……………………………………………. 32,460.75
Pension contribution payable ………………….. 1,960.00
Employees Income Tax payable ………………… 8,034.25
Payment for Credit Association ………………… 480.00

Also, on this same date, the company (as an employer) has to contribute 11% of the basic salary of
permanent employee to the government’s pension trust fund.

Therefore, totals basic salary of permanent employees x 11%=

(10,400 +9,600 +8,000) x 11 % = br. 3,080.00

The following journal entry, therefore, is recorded on Megabit 30, 1996.

Pension cont. Expense/payroll tax …………….. 3,080.00

Pension contribution payable ………….. 3,080.00

Recording the payment deduction form Bekuma’s salary to the credit Association:

Miyazia 7. Payable to credit Association ………….480.00

Cash ……………………………………….. 480.00

Recording the payment of employees’ income tax withheld and the 18% pension contribution of the
government body:

Miazia 7 pension contribution payable ………………….. 5,040.00

Employee Income tax payable …………………. 8,034.25
Cash ………………………………. 13,074.25

14 Principles of Accounting II, Summarized Lecture Note: Payroll

Additional Exercises
Please attempt each of the following exercise before you seat for the final exam

Exercise -1
JIMMA RULAR DEVE’T enterprise, a government owned business, pays is employees salaries
according to the Ethiopian calendar Month. The following data relate to the month of Meskerem,
2010 E. C.

S.No Employee Name Basic Salary

A01 Alemu Tolossa Birr 3500
M02 Myron Zewde 2800
Y03 Yemisratch Fanta 1790
Z04 Zibrikrik Ayele 1565

Additional information
 All workers are expected to work 40 hours per week and during Meskerem there are 4
weeks. The workers have done as they are expected.
 Myron Zewde has worked 10 hours of overtime during Meskerem: 3 hours during ‘Meskel’
and the other 7 hours before 10 p.m.
 Yemisratch Fanta has also worked 5 hours of overtime: 2 hours during weekly rest days
and 3 hours between 10 p.m – 6 a.m.
 Alemu and Myron received a monthly position allowance of br.350 and br 300 respectively
which are both taxable
 Alemu Tolossa agreed to have a monthly deduction of br.250 for credit association.
 All workers are permant except Zibrikrik Ayele.

Required :
1. Compute the total deductions and net pay for each employee.
2. Compute (calculate) the total:
a) Withholding Taxes
b) Payroll Taxes
c) Record the payment of salary as of Meskerem 30, 2010.
3. Pass the entry to pay the withholding taxes to the appropriate government unit.

Exercise -2

ABA JIFAR Trading Co. is a private business enterprise. The company pays the salary of its
employees according to the Ethiopian calendar month. The following data relates to the month of
Hidar, 2010.

Serial No. Name Basic Salary

A 101 Ayselech Yihenew Br. 6912
P 102 Genet Aychesh 10560
S 103 Seletene Beka 9216
Z 104 Ziyad Jemal 8640

15 Principles of Accounting II, Summarized Lecture Note: Payroll

Additional information

 The organization expects every worker to work 48 hours in a week and during Hidar
there are four weeks and all workers have done as they have been expected.
 Ato , Ayselech and W/r, Genet are entitled to get a monthly transport allowance of
birr 1,400 and br. 1,000 respectively.
 According to the tax rule, tax should be paid on transportation allowance of br. 800
 All workers are permanent except Ziyad Jemal, and they are entitled to a total of 15%
provident fund of which 10 % from the employer and 5 % from the employee.
 Ato Seletene Beka and W/t Genet Aychesh have worked 10 hours of overtime each
on public holidays.

Required: based on the information given above:

1. Compute the income tax for each employee.
2. Compute the total deductions for each employee.
3. Determine the net pay (take-home-pay) fro each employee.
4. Compute the total with holding tax for the month.
5. Compute the total payroll tax expense.
6. pass the journal entry to record the payment of salary as of Hidar 30,2010

Exercise -3
The following data relates to the payroll of the employees of a privately owned business
organization known as “AL- AZAR Retail Enterprise”, for the month of Miazia, 2010 E.C.

Serial Basic Salary Overtime

No. Name Hours Duration
01 Aleme T. Br. 4300 4 Up to 10 PM
02 Banchayehu S. 960 12 b/n 10 PM to 6 AM
03 Chemdessa N. 1450 8 Weekly rest days
04 Deniel T. 632 10 Public holiday
05 Leilena A 2000 - -
Additional information
 The management of the business organization usually expects a worker to work 48
hours in a week.
 There were no absentees during Miazia.

Required:
1. Prepare a payroll sheet for the month of Miazia
2. Record the payment of salary as of Ginbot 1,2010
3. Record the recognition of the payroll tax expense as of Ginbot 1,2010.
4. Record the payment of withholding taxes to the proper government units as of Ginbot
15,2010

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16 Principles of Accounting II, Summarized Lecture Note: Payroll