ACCOUNTING & PAYROLL SERVICE

Accounting and bookkeeping refers to recording of all financial transactions taking place in an organization. Major financial transactions which are expenses, incomes, payments and receipts. Tracking of such transactions is very important to control expenses, ensure timely booking and receipt of income and also proper compliance with GST, Income tax and other laws.

Definition of accounting

Accounting is the process of recording, organizing, and understanding financial information of a business. Accounting can be taken as a big machine in which raw financial information is provided into—records of all business transactions, taxes, projections, etc.—that then tells a story about the financial state of business. Accounting is to get a clear picture of your financial position. It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business 

Need for Accounting

Accounting is need by any business due to following reason:

1. Provide factual information to business about expenses, incomes, payments and receipts.

2. Provide periodic information about profit / loss and financial position of the business, such period is advised to be monthly.

3. Provide timely information about compliance like GST, TDS, income tax etc to make timely payment.

4. Facilitate comparative study, by keeping systematic records and preparation of reports at regular intervals, accounting helps in making a comparison, like comparing expenses, income, bank balance, profits etc month on month.

5. Helpful in raising loans from banks and other financial institutions.

Thus accounting is must for any management for decision making. Also this will help in scaling up business without worrying for the compliance.

Outsourcing vs. in house

This is always a dilemma for business owners as to whether to in house accounting or outsource the same. Following are some factors to be considered for the deciding on the same:

1. In house accounting is always available whereas outsourced one will be available periodically also currently with online outsourcing the owner can contact outsourced accounting over phone or email only. So if you need accountant 100% in your office go for in house.

2. In house accountant are costlier as compared to outsourced one as accountant salary starts from at least Rs. 20 thousand. Whereas outsourced service starts from Rs. 3000/-

3. In house accountant can be used for other purposes also where as outsourced one will not go beyond the agreed scope.

4. Expertise will be a limitation for in house accountant and services from CA is must, however outsourced accounting include CA services in most of the cases.

Therefore business need to decide upon the above basis the requirement and scale of the business.

Payroll Accounting means the company’s financial record of payments made by the employer to the employees, including salaries, incentives, bonuses, etc. The company must prepare an employee’s payroll for all its employees from the time they are hired till retirement/resignation. Processing payroll without delays in accordance with various statutory compliances is a significant activity of a company.

In India, payroll accounting refers to the steps involved in calculating the total remuneration of each employee of the company/organisation. It is an overwhelming process as it consists of calculation of gross salary, bonuses, net salary, daily wages, Provident Fund (PF) payment, professional tax payment, Tax Deduction at Source (TDS), allowances, etc., that are part of each employees’ monthly salary payment. 

Irrespective of the size of the organization, whether small, medium, or large, payroll plays a crucial role in HRM (Human Resource Management) and accounting.

Payroll

‘Payroll’ as a term basically is the list of employees who are entitled to receive compensation from an organization.

Along with the amount that each employee should receive for the time worked or tasks performed, payroll refers to a company’s financial record of payments that are made to the employees by the employer including wages, salaries, bonuses, incentives, etc. 

Payroll Processing

Payroll Processing refers to the complete set of steps involved in calculating the total remuneration of each employee.

The process typically involves three to four stages and tasks such as defining salary structures, gathering employee data, components, deductions, allowances, and setting up the necessary policies with respect to taxes and other adjustments, and then calculating the total salary after adjusting all the company policies.

After the salaries are disbursed, filing, reporting and providing payslips to employees also comes under the entire payroll processing cycle.

In simplest words, if payroll is the amount paid by the employer to employee, payroll processing is the whole methodology to accurately calculate the net pay of the employees as per statutory compliances and company policies.

Payroll calculation

The formula is :

Net Salary = Gross Salary – Gross Deductions 

where,

Gross Salary = Basic Salary + HRA + All types of Allowances + Reimbursements + Arrears + Bonus 

Gross Deductions = Professional Tax + Provident Fund + Income Tax + Insurance + Leave adjustments + Loan repayments (if any)

Important elements of Salary Structure in India:

· CTC

· Gross Salary

· Net Salary

· Allowances

· Prerequisites

· Deductions

· Payslip

· Form-16

· Reimbursements

· Bonus/Incentives/Expenses/One-time payments

· Ad hoc Components

· Company PAN, TAN, PF, ESI, PT, LWF (if applicable) details

· Signatory Details

· Company Bank Details

· Employee Financial Details

· Employee Investment Declarations

· Previous Salary Details

· Annual CTC / Gross of all the employees

Payroll processing / accounting is one of the essential yet complicated business processes. Thus, errors might happen while processing and executing salaries that might hamper the employees’ morale and productivity. Employees rely on the company’s process to get paid without delays, irrespective of the organisation’s size. Payroll plays a crucial role in a company’s Human Resource Management (HRM) and accounting.

Pre-Payroll Activities

The pre-payroll activities involve the following steps:

Step 1: Onboarding employees

The first step of payroll processing is onboarding employees and preparing the list of employees to be paid salaries. 

Step 2: Defining payroll policy

Companies should define their payroll policies and get them approved by the management for processing standard payroll execution. Every company has their own approach to employee engagement, philosophy and work culture. A company needs to define the below policies for standardising payroll processing:

· Pay policy.

· Employee benefits policy.

· Leave and attendance policy.

· Salary components, including deductions.

· Pay schedule policy.

Step 3: Gather employee inputs

Employee inputs like bank account details, PAN, address, income tax declarations, proof of investment, etc., are essential for payroll processing. Usually, the companies collect these inputs from employees at the time of their joining/onboarding by the concerned department/team. Each department/team will collect and maintain employee inputs necessary for processing payroll, such as:

The finance team maintains information about every employee’s variable pay, bonus, commission, deductions, payments, income tax declarations, etc.

The HR team maintains every employee’s information about the leave, attendance, overtime work hours, loss of pay reports, employee exit date, salary revision, etc.

The admin team maintains information about employee-related bills, transportation bills, reimbursement of expenses, etc.

Step 4: Validate employee inputs

After the inputs are compiled from the information provided by the employees and different teams, the validity of their details must be checked for accuracy and correctness before using it for the actual payroll process. All active employees must be considered for validating data, and former employees must not be included in salary and compliance payments. Validation of employee inputs eliminate the risk of committing mistakes in the payroll processing, and the consequences faced while rectifying them.

Actual Payroll Activities

The actual payroll activity involves mainly only one step, which is as follows:

Step 5: Calculation of payroll

The validated inputs of employees should be fed into the system maintained by the company for processing payroll to calculate every employee‘s paycheck. This results in the net salary payment of each employee after adjusting the necessary deductions and taxes due. Net salary is usually arrived at by deducting the gross deductions from an employee’s gross salary. The payroll calculations are done using spreadsheets or through payroll software. 

Step 6: Accounting

The salaries paid to employees must be recorded as they are the biggest expenses for a company. Payroll accounting involves maintaining the company accounts with regard to employees’ salaries.

Step 7: Pay employee salaries

The company must first ensure that its bank account has sufficient funds to make the salary transfers to its employees. The companies will send the salary bank advice statement to the concerned bank directing it to disburse salaries from the salary bank account. However, the company can automate this salary payment process to employees through software with an in-built direct deposit feature. The companies must also distribute payslips to each employee either individually or through automated software.

Step 8: Compliance and reporting 

During payroll processing, all statutory deductions of an employee such as TDS, PF, Employees State Insurance (ESI) and professional tax are deducted. These payments should be made to the appropriate government departments within the respective due dates. The deductions must be reported to the government departments by filing the respective forms prescribed by each department.

Statutory Compliances for Payroll Management

In India, companies have to follow the legal regulations in their payroll management while disbursing salaries to their employees. There are many statutory requirements that Indian companies must adhere to, and they must ensure compliance with these legal regulations. If companies fail to adhere to these statutory compliances, they will have to face heavy penalties.

Thus, detailed knowledge of legal expertise and compliance is required to minimise the risk associated with the non-compliance of statutory requirements. The general statutory compliances that every company has to follow for their payroll management in India are:

ESI fund and PF funds

Professional tax

TDS (Tax Deduction at Source)

Gratuity

Payroll Processing Methods

Spreadsheets

Many companies that are at their initial stage of operations make use of spreadsheet-based payroll management. It is convenient to use spreadsheets because they will have only a handful of employees to manage at the initial stage. Spreadsheet-based payroll management involves calculations using standard templates that contain set mathematical formulas for the salary and compliance payment computations. 

Though it is cost-effective, it is not suitable for companies when they expand and have more employees or for medium and large-sized companies. Additionally, the opportunity cost is very high when using a traditional system over automated methods. It is also difficult to reconcile and verify the values to avoid any errors in this method.

Outsourcing 

Payroll outsourcing means entrusting the company’s payroll execution to an outside or third-party agency. Many companies that do not have dedicated personnel for payroll management opt for outsourcing. Based on the company’s payroll cycle, they provide the outsourced agency with salary information and other data such as leaves, attendance, reimbursement details, etc., of their employees every month. The outsourced agency calculates dues and is also responsible for complying with statutory compliances.

Automation 

Many payroll automation software and tools are available that carry out payroll computations and reduce manual efforts while increasing efficiency. Automated payroll software solves the challenges faced while using spreadsheets or outsourcing it. It eliminates the risk of mathematical or clerical errors. However, the software needs to be updated with the latest compliance laws.