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Reimbursement for Over Compensation

vstall
edited October 2010 in General Payroll Topics
Haven't posted a question in a very long time - but I need some help regarding a reimbursement for over compensation.

An employee was paid incorrectly (direct deposit) and wants to return the money and have a new check cut for the correct hours and pay. Here is my question - when I receive a check or cash for the amount he was paid originally, I do not know what accounting string I would use when turning this into A/R for depositing.

I would void the original check and all accounts that were hit originally would become a wash. Any help would be greatly appreciated.

Comments

  • I'm not sure I understand exactly what you're asking. Treat them as two separate transactions. Void the original payment. Issue the manual check. Accounting-wise, they aren't related.
  • Right, 2 separate transactions - but surely I don't want the money turned over to A/R to be considered revenue?
  • Unless I'm not understanding something, your A/R staff just needs to post the money to a liability account instead of a revenue account.
  • The accounting folks should be professionals enough to understand that the refund cash/check should be tossed into the payroll account as if it was being returned from the bank. I don't think you necessarily need to do their job for them. If they can't comprehend and accurately handle this sort of thing, I'd have bigger concerns than just a few hundred bucks from a single check!
  • AshDenver, I am in agreement with your statement.

    When submitting the check to A/R, I believe they should debit the operating cash account and credit the payroll account. Just wanted to be sure I was thinking correctly, since I have to code all transactions and they only input what is given to them. :roll:

    Thanks to all for helping.
  • Ummmm - Cash in is a debit -
    By "payroll account" do you mean "Payroll cash" or "Payroll expense"?

    If you are reversing the original payment, keep it simple - reverse the entire thing - even if just on the books -

    The original payroll entry would be
    Debit Wages Expense
    Debit Payroll tax expense
    Debit any other expenses related to payroll
    Credit tax withholding payable
    Credit employer's taxes payable
    Credit other payroll deductions payable
    Credit other expenses related to payroll payable
    Credit wages payable

    The payment would be
    Debit wages payable
    Credit cash (payroll or operating?)

    the refund would be
    Debit Cash (payroll or operating?)
    Credit wages payable

    which would also reverse the first entry

    then redo first entry correctly.

    When you take the money back, you have to also change everything else that is based on the total wages. Refund of overpayment is best done on a gross pay basis. Otherwise it gets really messy.

    I prefer the "reverse and redo from scratch" method over the "let's see how much we can screw this up by trying to book the net change for each affected account" method.
  • Oh - looking back - it looks like you are doing "Reverse and start over" - OK =
    Put the cash back into the account it came out of when it went to the direct deposit. That would be the debit.
    The credit would be the other account that was involved in the transfer to the bank (payroll payable?)

    If this was done directly to the operating cash account - when you void the original check without depositing the cash, you create a receivable from the employee - That is the account that would be credited when the cash comes in. This is one reason why it is a good idea to have a separate payroll checking account - When you get all done with the correction, you should have the correct amount of cash left over in the payroll account which can then be transferred back to operating. This makes it easier to tell whether a mistake was made during the correction. Payroll checking should always have a zero balance or have a balance equal to the outstanding payroll checks - with direct deposit, zero is the norm. The cash is just in there long enough to be sent to the bank.
  • I meant "Payroll cash".

    OK - debit payroll cash --- Operating cash is not involved until you return the money to operating after everything else is fixed.

    Here is the full series with some made up numbers:
    a. original payroll
    Debit Wages expense
    1,300
    Credit Various liabilities
    300
    Credit payroll payable
    1,000

    b. transfer to payroll cash
    Debit payroll cash
    1,000
    Credit operating cash
    1,000

    c. payment
    Debit payroll payable
    1,000
    Credit payroll cash
    1,000

    d. Reverse original payroll
    Debit Payroll payable
    1,000
    Debit various liabilities
    300
    Credit Wages Expense
    1,300

    At this point the only payroll account with a non-zero balance is payroll payable which has a debit (receivable) balance of $1,000. (do the "T" accounts)

    e. Book the correct payroll amounts
    Debit Wages expense
    1,050
    Credit Various liabilities
    250
    Credit payroll payable
    800

    f. Issue the new check for the employee
    Debit Wages Payable
    800
    Credit Payroll Cash
    800

    g. Collect repayment from employee
    Debit Payroll cash
    1,000
    Credit wages payable
    1,000

    This leaves you with a debit balance of 1050 in wages expense, a credit balance in liabilities of $250 (where you want them) and a debit balance of $200 in payroll cash. The final entry is to transfer the $200 balance in payroll cash back to operating cash
    h.
    Debit Cash
    200
    Credit payroll cash
    200

    and now everything is where it belongs.
  • Using David's control (which is a good idea) that all deposits go to the general cash account, the difference would be an additional transaction between transactions f and g (call it either "f sharp" or "g flat") that would pull the $800 for the check from the cash account
    Debit Payroll cash
    800
    Credit cash
    800

    transaction g would debit cash rather than payroll cash
    Debit Cash
    1000
    Credit wages payable
    1000

    and transaction h would be eliminated.
  • I still loves me some T-accounts. :lol: :P
  • I still loves me some T-accounts.
    Me too - would have done them here except the format does not hold up well and it would have been really confusing. :roll:
  • David,

    I wish my boss thougth more like you. I was just told yesterday that I will be starting to take on most of the AR responsibilities along with all of HR and Payroll. Fun times!!
  • David,

    I wish my boss thougth more like you. I was just told yesterday that I will be starting to take on most of the AR responsibilities along with all of HR and Payroll. Fun times!!