## **Learning Outcomes**

After reading this article, you will be able to calculate gross pay and net pay for employees on various pay structures. You will identify, distinguish, and apply statutory and non-statutory payroll deductions, interpret payslips, and prepare basic wages analysis. You will also learn to record payroll costs and deductions in the accounting system and explain the significance of gross-to-net calculations in business reporting.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand how wages, salaries, and deductions are calculated, analysed, and accounted for. In your revision, focus on:

- Calculating gross pay for hourly, salaried, and output (piecework) workers
- Identifying and applying statutory versus non-statutory payroll deductions
- Understanding the required content and function of payslips
- Analysing and recording net pay and payroll costs in accounting records
- Producing payroll summaries for management analysis and control

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the difference between gross pay and net pay? Give an example of a statutory and a non-statutory deduction.
2. Which deductions must every employer apply by law, and which are optional for the employee?
3. What information must be included on an employee's payslip?
4. Identify which accounts are affected when recording gross pay, deductions, and the payment of net pay in the books.

## **Introduction**

Payroll calculations are a regular and significant part of business record-keeping. Businesses must pay employees correctly and on time, provide complete payslips, and ensure statutory obligations, such as tax and state benefit deductions, are met. Accurately processing payments from gross pay to net pay, and recording payroll costs for management and reporting, are essential skills for ACCA FA1 candidates.

> **Key Term: gross pay**
> The total amount earned by an employee before any deductions.
>
> **Key Term: net pay**
> The amount paid to an employee after all deductions; also called 'take-home pay'.

## GROSS PAY CALCULATION

Determining gross pay is the first step in payroll accounting. It includes all pay before deductions.

### Types of Employee Pay Structures

- **Hourly paid:** Pay is based on the number of hours worked times the hourly rate.
- **Salaried:** Employee receives a fixed annual amount, split equally across pay periods.
- **Piecework:** Employee is paid for each unit produced or task completed.
- **Bonuses, overtime, commission:** Extra payments added to basic pay.

### **Worked Example 1.1**

**A production worker earns \$12 per hour and works 36 basic hours plus 5 hours overtime at 'time and a half.' What is the total gross pay for the week?**

> **Answer:**
> Basic pay: 36 × \$12 = \$432  
> Overtime rate: \$12 × 1.5 = \$18  
> Overtime pay: 5 × \$18 = \$90  
> Gross pay: \$432 + \$90 = \$522

## PAYROLL DEDUCTIONS

Once gross pay is calculated, deductions reduce this figure to net pay. Deductions can be _statutory_ (required by law) or _non-statutory_ (voluntary).

> **Key Term: statutory deductions**
> Payroll deductions that employers must make under the law, such as income tax and social security or state benefit contributions.
>
> **Key Term: non-statutory deductions**
> Payroll deductions that are optional and require written employee authorisation, such as pension contributions, union dues, or charitable donations.

### Statutory Deductions

Employers are legally required to withhold and remit these amounts on behalf of employees:

- Income tax (according to personal tax codes or thresholds)
- Social security / national insurance contributions

### Non-Statutory Deductions

Applied only with the employee's consent:

- Employee pension contributions
- Trade union or professional membership fees
- Voluntary savings, charity donations, or other agreed schemes

### **Worked Example 1.2**

**An employee’s gross pay is \$1,200. The employer deducts \$180 income tax, \$70 national insurance, \$25 union subscription, and \$10 charity donation. Calculate total deductions and net pay.**

> **Answer:**
> Statutory deductions: \$180 (tax) + \$70 (NI) = \$250  
> Non-statutory deductions: \$25 + \$10 = \$35  
> Total deductions: \$250 + \$35 = \$285  
> Net pay: \$1,200 – \$285 = \$915

### **Exam Warning**

> Statutory deductions are required even if an employee objects. Non-statutory deductions require the employee’s written agreement. If you mix these up, you may select the wrong figures when calculating net pay in your exam.

## PAYSLIP REQUIREMENTS

Every employee must receive a payslip when paid. It summarises gross pay, all deductions, and net pay.

> **Key Term: payslip**
> A summary document issued to an employee with each payment, showing gross pay, all deductions, and net pay.

Payslips generally show:

- Employee's name and period covered
- Gross earnings (including overtime or bonuses)
- Each deduction, with details
- Net pay (amount payable to the employee)

### **Worked Example 1.3**

**A monthly payslip shows:  
Gross pay \$2,100; income tax \$270; social insurance \$110; employee pension \$65; union \$5. What is the employee’s take-home pay?**

> **Answer:**
> Total deductions: \$270 + \$110 + \$65 + \$5 = \$450  
> Net pay: \$2,100 – \$450 = \$1,650

## ACCOUNTING FOR PAYROLL COSTS

Employers often incur payroll costs above the gross pay, such as their own state benefit and pension contributions.

> **Key Term: wages analysis**
> The breakdown and examination of wage and salary costs by type, deduction, and department for internal monitoring, reporting, and control.

For accounting:

- **Gross pay** and **employer contributions** are business expenses
- **Net pay** and deducted amounts are treated as liabilities until paid

### **Worked Example 1.4**

**A business pays weekly: gross pay \$900, employer insurance \$50, employee deductions \$220 (tax, insurance, etc). What is the total cost to the business? What amounts are disbursed?**

> **Answer:**
> Total payroll expense: \$900 (gross) + \$50 (employer insurance) = \$950  
> Payments: \$680 (net pay to employees), \$220 (to tax and insurance authorities)

### **Worked Example 1.5**

**A monthly payroll summary for three staff:  
Gross wages \$5,100  
Employer pension \$135  
Statutory deductions \$950  
Non-statutory deductions \$30  
Show journal entries in the books.**

> **Answer:**
> Debit Wages Expense: \$5,100 + \$135 = \$5,235  
> Credit Bank (net pay): \$4,255  
> Credit Tax/Pension/Deduction payables: \$950 + \$30 + \$135 = \$1,115

## WAGES ANALYSIS AND CONTROL

Analysis of gross pay, deductions, and net pay provides management with information to:

- Check accuracy of payments and deductions
- Monitor payroll costs by period or department
- Prepare required financial and regulatory reports
- Permit timely payment of deductions to relevant bodies

## **Summary**

Gross to net calculations start by establishing gross pay, applying statutory and non-statutory deductions, issuing a payslip, and recording amounts within the accounting system. Clear wages analysis supports compliance and gives management information for control and planning.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- How to calculate gross pay for hourly, salaried, and piecework staff
- Distinction between statutory and non-statutory deductions
- Calculation of net pay and use of payslips
- Recording and analysing payroll costs and deductions in accounting
- Producing clear wages analysis for control and reporting

## **Key Terms and Concepts**

- gross pay
- net pay
- statutory deductions
- non-statutory deductions
- payslip
- wages analysis

Gross to net calculations - Net pay and wages analysis