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That being get great guitars we're going to duplicate some tabs to put reports in like we do every time right click in the tab up top so we can duplicate it right click in the duplicate a tab so we can duplicate it back to the tab to the left I count in drop down we want to go into that balance sheet report and then we're going to have to the right I count in drop down or go into the income statement report back to the tab to the left so we can change that date range hit in the drop down I want to custom date range I'm going into two thousand twenty three and the end December thirty first that's the home on this range that we want for that date range then we're going to go to the tab to the right the range looks good here so we're good to go I'm going to go to the first tab and now we're thinking about the processing of payroll so I want to reiterate every time we look at this processing of the payroll although it gets a little bit tedious to do so because I think it's quite important to note that there's multiple different ways that you can be dealing with payroll and obviously payroll is one of those things that will differ from location to location even if you're in one particular country it could change from location to location like in the United States because the state taxes could be different and it's going to add a layer on top of the federal taxes that you have to deal with and if you're in other countries outside of the United States you're going to have your own kind of laws that you have to deal with there in terms of both the accounting that you have to deal with which might include payroll taxes of some shape or form and human resources are often attached to the payroll as well which you have to be in compliance with as well that's kind of ties in with the whole accounting process and I've got the HR accounting side of things as well as the actual bookkeeping side of things both of which can get quite complicated now the two general ways that you can deal with payroll is you could do payroll within the accounting system within zero with the integration of gusto so you can turn on gusto if you hit the drop down here if you hadn't turned it on there'd be gusto here and then you're gonna have a payroll up top and then here's your payroll tab which you can process within gusto so for me personally even if I'm not using gusto I do everything with gusto anyways just because not not that gusto but like I just do things with gusto you know but any case you got your payroll that you can process within the zero system your other option is to process payroll with the help of a third-party payroll processor and in the United States these are becoming more and more common because of the complexities with payroll payrolls become quite complex and therefore and it's tied to human resources oftentimes so sometimes even if you don't have that many employees it could be useful to outsource the payroll to a third-party in which case what do you need to do in zero you need to get the information necessary to get your financial statements correct for reporting purposes internal decision-making purposes and for the United States income tax preparation purposes so a quick look over here on our flowchart remember that employees is basically the same as the vendor cycle this is this is a QuickBooks desktop flowchart but we're just looking at it to look at the normal accounting flow if it wasn't for the laws related to employee ease and withholdings and that kind of stuff paying employees would just be like any other vendor be like paying a contractor you would just pay the cut you shake hands and you pay them after the work is done right but because of all the laws and human resources and whatnot now you have the whole specialized field that has been created through all these laws and regulations and whatnot and on our accounting side one of the major things we have to deal with is the withholdings now if we do withholdings for payroll taxes and possibly other things like health care and and whatnot then that's gonna force us to deviate from a cashed based system to an accrual based system if we're processing the payroll within the zero accounting system because we're gonna have to track all the withholdings that we take out which are gonna be accrual activities that's gonna be a liability that we're gonna have to deal with we're also gonna have to store all this data within our zero system which is tracking everything per employee as well as per paycheck per employee and year-to-date information so we're gonna have a whole lot of other reports that are necessary and they're gonna be necessary to help us also with the preparation of in the United States our tax forms which include generally quarterly tax preparation those being the 941s yearly tax preparations form 940 w2 forms w3 forms and and so on so so again that the system can help us to do that but it puts a lot of more information if you're running it through gusto the other way that you can do this is if you had someone in a third party processing the payroll then you don't need to pull in all the detail you can pull in basically just what you need to create the financial statements and reconcile your bank account so we talked a little bit in prior presentations on how to set up gusto but we're not gonna set it up in our practice problem because it requires a link to the bank accounts so what I'm gonna do is just basically run through a quick payroll problem imagining we have a simplified version of payroll in excel to calculate what the payroll kind of looks like and then also kind of mirror the reports that you might get from a third-party processor like like a paychecks or an ADP I'm not advertising for them but those are the like the bigger ones and and then you can and then how would you take that information and put it into your accounting system so let's just imagine we have a payroll report that we're gonna put together in excel so I'm gonna I'm gonna now I'm gonna create this if you don't want to create it in excel you can just use the excel worksheet here and plug this and imagine that you got this from a third-party payroll processor or this is in essence what would be processed within zero with gusto if you're processing within the system so I'm gonna I'm gonna do this fairly fast I'm gonna right click on the tab here I've highlighted the whole thing I'm gonna format the cells I want to go to currency and I usually like negative numbers to be bracketed and then I'm gonna go no none of that and no dollar sign and we'll have two decimals okay then I'm gonna increase the size of the sheet so I'm gonna hold control and scroll up you can also do it down here I'm at 120% the size and then I'm just gonna make a payroll register type of form so I'm gonna start with the name I'm just gonna put my headers of the register total earnings notice that I or you might call it gross earnings let's say gross it's probably better gross earnings your earnings are gross no they're you're earned you're gross anyway social security social social security and then these are the taxes that are taken out for for the United States let's start with actually federal income tax which we can abbreviate with FIT and then you have social security and Medicare which are the FICA taxes so I'll say social security and then Medicare so that's what we have to base we're mandated on a federal side to withhold in the United States you might have different or similar kind of structures withholdings in other places as well but you know obviously again taxes are gonna be part of accounting that's specific by the location and then I'm gonna make a social security adjustment because I need to tie into my bank register and I have a calculation adjustment to do that and then I'll show you that in a second and then we've got the the the income tax and then we've got the net pay that's gonna give us the net pay and then I'm also gonna have the employee or taxes for social security and Medicare that I'll show you as well so that's gonna be our headers so I'm gonna select this whole thing why is this over here and then I'm also gonna have a social security adjustment again for the employee or taxes so maybe I should pull this down I'm gonna pull this down one gonna pull it down here and then just to note this these are FICA taxes so I'll say this is FICA taxes and I'll select these two and I'm going to to I'm not gonna merge across like this I'm gonna right-click and then format this and then I like to go to alignment and do this center across like that and so those are FICA taxes and I'll make them a different color to note that those are kind of linked together and so let's make that like dark blue and then white something like that I'll make the whole thing bold so it's easier to see and then I'm also gonna copy that and put it here and I actually have an adjustment I should make it go across this whole thing here let's format format this again format sales align center across the three of them like that alright that's better mucho mejor okay and then I'm gonna say let's make these all black and white I'm gonna go up top and say let's make this black and then white and let's center them and then let's check the spelling I'm sure I misspelled something right no really serious I think spell check is broken that never happens so we're gonna say okay and then our two employees let's say our Adam Hamilton I'm not sure if I spelled that right either but that's what it says on Adams W4 form so we anyways we're gonna say there it is now the FIT the federal income tax is the employee federal income tax and it would be dependent on what they gave us on their W4 so I can't just use a flat tax rate this is the main tax which is quite complicated in the United States because I have to look at tables to figure it out based on the information they provide us on like at the W4 so I'm just gonna make up a number here it's not you know it would be totally dependent on what they give us so I'm just gonna make up 720 on the income tax and then the Social Security is a flat tax to some degree in other words I could just say if that's your earnings I'm gonna say this is times 0.062 so I'm gonna say that that should be somewhat straightforward calculation although once Adam hits the cap there is a cap as well on Social Security so then it gets messed up there too so again even though it looks simple right here when you combine all this stuff together it gets quite complex quite quickly especially if you have multiple employees and you've got caps and whatnot and then the Medicare is going to be equal to it's also a flat tax the gross earnings which we're saying his gross earnings are four five eight three point three three and then we'll divide this or times this by point oh one four five because that's the Medicare rate typically and by the way this this number here is 60,000 a year I think divided by 12 no this is going to be 55,000 divided by 12 that's what we're getting this number monthly pay so think we might pay people monthly which is what we're gonna do here for the practice problem or biweekly semi monthly or weekly and then I'm gonna make an adjustment to Social Security so I can tie out to my amount on our bank reconciliation which we'll talk about later so this is kind of a mess up here but I need to tie out to that number so we're gonna make a little bit of an adjustment so the net pay then is gonna be equal to this minus this minus this minus this minus my adjustment so it's gonna be the 357 357 270 that's gonna be the net check which ties out to 357 270 357 270 so that's the net check that's gonna come out of our checking account these are withholdings that we're gonna have to take from the employee before they even get their money and we're mandated to do that in the United States on the federal side and you might also have state withholdings that are required as well depending on what states you are in and then you might have what's called like voluntary withholdings such as benefit programs like a 401k plan or some medicare that kind of medic medical insurance and that kind of stuff that that would be voluntary withholdings that they can opt into if they so choose these are mandatory all right so then we've got the Social Security also on the employer side we have to pay social our portion of Social Security and medicare so I'm gonna say these are FICA these are gonna I'm gonna say these are in law employer taxes so this so they have to match Social Security and medicare so this is what they're paying over and above and then I'm also gonna make an adjustment because I messed up and on when I did the calculations in the practice problem so then we're gonna say Erica Erica Smith let's say and we'll say that she earned 2400 and her FIT we're just gonna make up an FIT because it would be dependent on tables and her what she told us on the on her W4 but the Social Security somewhat straightforward would be the gross pay times 0.062 that's the employee portion and the medicare is 2400 times 0.0145 generally and then I don't have an adjustment because I didn't mess that one up I don't think and then we're gonna say this equals the sum let's do it this way this equals this number minus the sum let's do it this way this time of these three which is the same thing in essence of this minus this minus this minus this and then I can say all right the Social Security and medicare over here is gonna have to match on the employer side and then there we have that so that looks good okay and then I'm gonna put a box around this I think I did that properly and now let's say that's our only two employees now this is something if we did inside of zero that zero would basically make this data for us so they can help us put and then it would post it automatically to the financial statements but it also has to give this data to the clients in the form of a coupon stub or something like that and it has to track this information on an employee by employee level on a both paycheck by paycheck as well as year to date level to give it to the employee and to populate the forms that we need for reporting purposes 941 940 W2 W3 and so on so again if you if you did this externally all of that stuff would be done by the third-party provider and they might provide us with a report which would look something like this which we would then have to just simply take and put into our system to make our financial statements correct so let's imagine that's the case what would the journal entry look like if it was done internally the journal entry done by gusto within zero if it's done externally the journal entry we would have to put in the system based on this payroll register provided by the third-party payroll provider so that we can get our financial statements correct but not needing all the detail so I can imagine a journal entry for each employee and we can imagine combining the journal entry to one large journal entry so for example let's say that we have well we'll say that this is going to be the date let's I'm gonna add another right-click and insert and I'll just put the date over here this will be date and then I'm gonna say this is going to be for a journal entry and I'm gonna say Adam two tabs and I'll skip one maybe and Erica two tabs skip one total something like that and so we're gonna say the date I'm gonna make this a date field home tab number making it a short date and this is going to be on two let's say one 31 so I say okay to that what in the world that's quite long does it need to be that long ah whatever alright and so then let's make this black and white up top I make I make this whole thing black and white so I go black white let's center this one this one I'm gonna center across these two right clicking format sales center across those two and then I'm gonna format paint that and center this one across these two and then format paint that and center this one across these two alright okay and so then I'm gonna say that we're gonna have the journal entry for Adam is gonna be payroll expense the payroll expense is gonna be the total that Adam earned four thousand five eighty three thirty three but I'm gonna put the cash down well I put it up here the payroll liability meaning we didn't give him four thousand five eighty three we only gave him three thousand five seventy two seventy because we withheld the sum of FIT Social Security Medicare and then this adjustment which is you know the adjustment I had to put in there and then we had cash so he only got cash checking account which is this needs to be a negative I'm gonna put credits as negatives if you don't know debts and credits that's okay but I like to make my credits negative because it's easier and then so the so the difference is that which is the paycheck or in other words he earned that he got paid that the difference is the withholdings that we took from him which he in theory is the one paying to the government even though we are the tax collector in essence the government's forcing us to be the tax collector taking his money to pay the government alright I can also think about that as Erica so I'm gonna do the same journal entry but the Erica over here so I'm gonna say Erica had net pay of two thousand four hundred but we took from Erica the negative sum of FIT Social Security Medicare because the government made us do it's not our fault Erica and so the negative sum of this the plug is the one eight five six forty so in other words she earned that she got that we took this from her we don't get to keep that we have to pay it to the government on her behalf because the government has made us their little lapdog tax collector through coercion so if we then sum up the totals here we sum up the totals and we sum this up equals the sum of these these and this we can't think of this as if it's just one large one employee in other words we can think of one journal entry for every for both of them for all of our employees we can think of the payroll as one payroll transaction if we combine all the accounts together and so when we put it into our accounting system what's the impact on the accounting system well it's the total so so it's so we could think okay the gross earnings are are this these two let's actually sum this up that'd be good let's insert I'm gonna insert something and put the total here total equals the sum of these two and I'll just summit a cross how about them apples those are some good apples all right so then we're gonna say so then the total is this for both of them and then we took from both of them a total of these one five five four twenty three and our and and so there and so then the net check for both of them is the five four two nine so we could just do one journal entry now we have to be careful to do one journal entry because it's gonna show up on our checking account so we want to be able to reconcile so if I just to put one journal entry in place it's gonna be a little bit more difficult to reconcile but you could you know do that and it would be and that would be one way to work but there's a one other thing that happens that we have to deal with on 131 23 and that's the employer taxes which we have not yet paid but we've incurred them based on the employee earnings and so that would be payroll taxes which are the sum of these and the and then the payroll liability actually we and we could do this like employee by employee if we wanted to which would be but we don't need to do that let's just do the total I'll put it out here the sum of these and so there we have it so so when we so when I put this in and so there's no there's no cash involved with this transaction because we have not yet paid it we will pay it in the future so note like when I put this into my system then I could do it as a lump total of all the payroll together because I don't need all the detail but you might want to put it in check by check because it might make it easier to reconcile and then this transaction is doesn't have cash in affected as well so we can enter that as like a journal entry into the system now notice that if you're a bookkeeper you might try to do this on a cashed based system you might say hey look can I can I run my zero system on a cashed based system and allow the third-party processor to process these paychecks and you kind of can right because if you're in the United States for example you can have the third-party processor process the paychecks and then and then you can you can enter them or you can wait till the paychecks actually clear the bank right when they clear the bank there's gonna be the net checks that come through and just record the net checks when they go through the bank which is you're gonna see on our side in the bank feeds as payroll expense right if we do that we're what are we missing we're missing the breakout of payroll liabilities the accrual components however once we pay the payroll liabilities then we'll be back it's just a timing difference we'll be back in play so so you might if you have a small business and you're trying to run the payroll just to get your taxes calculated for payroll and for your federal income taxes at the end of the year you might be able to do just a year-end adjustment you might be able to work with a third-party processor have them deal with all the payroll stuff the 941s the 940s and so on you do your zero automating zero waiting till the payrolls clear the bank and just recording them on a cashed based system to payroll noting that's not perfect because you're missing the accrual components but then at the end of the year working with a tax preparer and or CPA firm that can take the payroll reports as of your end and make a year-end adjustment to properly record the payroll as of the end of the year so that you can do whatever you need to do including do your income taxes with it okay that said I'm gonna enter it into our system as two checks right these are the two checks that are gonna clear the system and then we'll enter a payroll liability with a journal entry to kind of mirror what we have here alright so let's go back on over and finally just make our two checks so I'm gonna call it a plus button and I'm just gonna say it's a money out form so spend money form and I'm gonna enter it's gonna go out of the checking account also note that if you're dealing with a third-party processor you might set up another checking account just for payroll because sometimes it's easier to deal with payroll when when you only have one account that deals with it that means you transfer money out of the checking account into payroll just to process the payroll and that way all of your payroll transactions are in one checking account which can make it easier if there's like an issue but we're not gonna do that so we're gonna say this is gonna be Adam Hamilton we're just gonna set them up as a contact because we're doing the payroll outside imagine it's a third-party payroll processor we're gonna say that the date is gonna be Jan 31st Jan 31 and then I'm not gonna have any item we're gonna say description I'll say payroll and it's going to be then the amount of the 4583.33 that's gonna go to payroll expense so payroll tax payroll wages payable worse that we don't just have payroll expense which maybe they called it wages wages and salaries there we have it let's put it into that one I'll use the account that they provided us with and that's gonna be for the 4583 and then we're gonna have pay payroll liability so I'm gonna say one that's gonna be I'm pulling this numbers over here payroll 101063 so negative 1010.63 bringing the amount down and this is gonna be payroll this is gonna be payroll wages payable payroll taxes expense federal payroll liability let's do that one that looks good and then the other and then we're also gonna have and then the net check it's gonna be the 3572 so if I look at this again we're gonna say okay does that make sense we got a net check that went out 3572 he earned 4583 we took from him the 101063 so basically payroll is gonna go up by that he's only checked is gonna be for that amount and the liability is gonna be that is that what we have here I think so let's save and add another and do the same for Erica let's say Erica Smith and this is also happening on Jan not June Jan 31st and we're gonna say that this is just gonna be payroll quantity one amount here for her is gonna be 2400 to 400 wages and the other side I'm doing this fast because we're running long on time here one and we're gonna say the other side is going to 543 6543.60 payroll federal payroll liability and then the difference is going to the paycheck which is going to be the 229 for something is not right here okay so yeah this needs to be negative negative negative okay so there we have it so now we're at that looks good so that looks good so let's save that I'm gonna save it and then we'll check out our financials balance sheet update we should have a decrease to the checking account for that for those amounts and then the other side is gonna go into we had that we'll score the payroll expense update the income statement we've got wages so there's the two amounts that went into the wages for total of the 698333 so that totals the amount here that looks good and then we had liabilities if I go back to my balance sheet federal liabilities that totals up to these two here or here the one five I have to add this one the 1554 23 there and there and then I just need to do a journal entry for our portion of the payroll liabilities and then we'll be tied out so let's go back on over and do one more poor favo or and so I'm gonna go to you have to go to the reports here so we'll go into the accounting reports and I'll do this with a journal say journal report and then I'm going to say we want to add a new journal and the new journal is going to be payroll tax the date is gonna be Jan 31st and we're not gonna auto reverse it no tax we're gonna say description payroll and then the account is gonna be payroll tax payroll tax not the payroll but payroll tax expense now and that's going to be for the amount of our portion which was the 474 23 so let's say 474.23 and then the other side's gonna go to payroll federal payroll liability again and there it is so this is our tax portion I think that's good let's post it we recommend you only okay what ever balance sheet let's update it no effect on cash that time but now the payroll liabilities at the 202846 which should match out the their portion of the payroll taxes which is this plus the employer portion 202846 and then we have on the income statement we've got the oh I have to update it gotta work on up-to-dated stuff we got the wages and then we've got the payroll expenses notice the payroll expenses only include our portion of the payroll tax expenses I mean only include the employer portion why don't they include the employee portion of payroll taxes because they aren't in theory our taxes they are the taxes of the employee which we are just being used as the as the poor pathetic tax collector the government is forcing us to to collect on their behalf so that means that their payroll taxes are being expensed but they're in the form of gross wages that often confuses people so there we have it so let's let's open up a trial balance and see where we stand at this point in time because we're running long on time here we're gonna go into the accounting reports and type in trial balance trial balance and let's do the range change up top hitting the custom range 2023 end of the year updated so if your numbers tie up to these numbers great if not then then try to change the range and see if it's a date range issue you would think the accounts impacted from the last time we checked our numbers last presentation would be the check-in account that we changed we changed the liability account here for the payroll liability and we changed some income statement accounts including the wages and the payroll tax expense