This document discusses labour costs and payroll accounting. It defines direct and indirect labour and describes various remuneration methods like salaries, hourly wages, and piecework pay. It also explains how to calculate gross, basic, and net wages and covers employer contributions and common payroll deductions. Accounting entries for recording wages, deductions, and payments are provided. Payroll is managed using salaries and wages journals.

1. Chapter 11 - Labour
Business Accounting – ACC 1644

2. Chapter Outline
1. Classification of labour
i. Direct Labour
ii. Indirect Labour
2. Remuneration Methods
i. Salaries
ii. Hourly Wages
iii. Piecework Pay
iv. Basic, Gross and Net wages
v. Employer’s Contributions
vi. Accounting Entries
3. Payroll Accounting
i. Salaries Journal
ii. Wages Journal

3. Classification of Labour
1. Direct Labour
 Labour cost that can be physically traced to the creation
of a specific product in a “hands-on” sense.
 Assembly line workers in a plant
2. Indirect Labour
 Labour cost that cannot be physically traced to the
creation of a specific product.
 Factory supervision and maintenance wages

4. Remuneration Methods
1. Salaries
 Fixed amount paid to an employee on a monthly basis
 The employees that normally receive salaries include:
 Managerial staff
 Supervisors
 Administrative workers
2. Hourly wages
 Workers are paid a specific rate based on the number of hours
spent at work.
 Hourly wages = Hours worked X Rate of pay per hour

5. Remuneration Methods
3. Piecework pay
 Employees are paid in accordance with the actual number of units that they have produced.
 Piecework pay = Number of units produced X Rate of pay per unit
4. Basic, Gross and Net wages
 Gross wage includes the following:
 Basic wage;
 Overtime;
 Bonus; and
 Alllowances.
 There are two types of overtime that can be calculated for an employee:
 Normal overtime
 Overtime worked after hours during the week and on a Saturday
 It is remunerated at one and a half times the normal rate (1.5)
 Double overtime
 Overtime that is worked on a Sunday or a public holiday
 It is remunerated at two times the normal rate

6. Remuneration Methods
 Employees may be entitled to an annual bonus, as well as various other allowances, which can include:
 A cellphone allowance
 Car allowance
 Travel allowance, etc.
 These allowances would be dependent upon the type of job that the employee is required to do.
 Net Wages
 An employee’s take-home pay after all the deductions have been considered.
 A number of deductions that impact on an employee’s wage, such as:
 Pension;
 Pay-as-you-earn (PAYE);
 Unemployment Insurance Fund (UIF); and
 Medical Aid
 Pension Fund
 Only permanent employees contribute to a pension fund.
 According to the South African Income Tax Act, An employer is allowed to deduct 7,5% from an employee’s basic wage and pay
it over to a specified pension fund.
 The employer also contributes to the pension fund on the employee’s behalf.
 Pension is the first deduction that is made.

7. Remuneration Methods
 PAYE
 The amount that is charged to individuals is stipulated in the tax tables.
 These tables change from year to year.
 PAYE is calculated as a percentage of taxable income.
 Taxable income = Basic wage – Pension fund contributions
 Unemployment Insurance Fund
 Employers are entitled to deduct 1% of an employee’s basic wage and pay it over to the fund.
 The contributions to the UIF are compulsory for the employer and employer.
 The government also contributes to this fund.
 Medical aid fund
 The purpose of a medical aid fund is to subsidise individuals who may encounter unexpected medical expenses.

8. Remuneration Methods
R R
Basic Wages/Salary
Add: Normal Overtime
Add: Double Overtime
Add: Bonus
Add: Allowance
XXX
XXX
XXX
XXX
XXX
Gross Wage
Less: Pension fund
XXX
(XXX)
Taxable income XXX
Less: Other deductions
Pay-As-You-Earn (PAYE)
Unemployment Insurance Fund (UIF)
Medical Aid
XXX
XXX
XXX
(XXX)
Net wage XXX

9. Remuneration Methods
5. Employer’s Contribution
 Employers may contribute to various funds on the employee’s behalf, for
example pension and unemployment insurance.
 Employer’s contributions are not considered when we calculate the
employee’s net salary/wage.
 These contributions are paid directly to the relevant funds.
6. Accounting entries
 There are three main journals entries involved in the recording of
salary/wages.
 These are as follows:
 Recording the employee’s gross wage, net wage and deductions
 Recording the employer’s contributions.
 Recording of the total payments.

10. Remuneration Methods
 Recording the employee’s gross wage, net wage and deductions.
Debit Credit
Wages account (Gross wage) XXX
Wages payable (Net wage) XXX
Pension fund XXX
SARS (PAYE) XXX
Unemployment Insurance Fund XXX
Medical aid fund XXX
 Recording the employer’s contributions
Wages account XXX
Pension fund XXX
Unemployment Insurance Fund (UIF) XXX
Medical aid fund XXX

11. Remuneration Methods
Recording the total payments
Debit Credit
Wages payables XXX
Pension fund (employer plus employee) XXX
SARS (PAYE) XXX
UIF (employer plus employee) XXX
Medical aid fund (employer plus employee) XXX
Bank XXX
Illustrative example (Net wage and accounting entries)

12. Payroll Accounting
 The system used by employers to keep track of their employees’ wages and salaries, bonuses,
fringe benefits, etc.
 Computerized payroll systems comprise software packages that provide an efficient way of
organizing, managing and maintaining data on all employees.
 Salaries Journal
Drafted on a monthly basis and is used to record the gross salary, employee deductions, net
salary, as well as the employer contribution for each salaried employee.
 Wages Journal
Drafted on a weekly basis, not a monthly basis.
It is used to record the basic wages, overtime, employee deductions, net wage as well as the
employer contributions for each employee.
Illustrative example (Salaries journal)
Illustrative example (wages journal)