Here at CJA we specialize in clients who work on federal government contracts. Below is our discussion of procedures necessary to keep the payroll records reconciled and in compliance with DCAA requirements, and to avoid delays when financial statements are being prepared. Errors in paychecks or a mismatch between the time and paycheck data needs to be fixed in the client’s accounting system before the file is presented to us for periodic review. The process below relates to clients using QuickBooks software, but could apply to other accounting software.

 
ENTERING TIME
Your time card system should be set up to display all possible labor categories that are used to bill and record time.  Managers should be able to guide the employee’s understanding of their selections and when to use certain labor categories. Distinctions between direct labor, overhead labor, bid and proposal labor, and general and administrative time should be made available, as well. Use of holiday, sick leave, PTO, training, bereavement, jury duty and other fringe labor categories should be outlined in the company’s employee manual. All time card categories should be captured at the same level of detail in the QuickBooks accounting system time entry module.

 
ENTERING PAYCHECKS
From the QuickBooks time entry data you will create the individual QuickBooks employee paychecks.  This is where the employee’s wages are split into the various labor expense accounts.  Time pulled from the time module into the paycheck must stay in agreement. Voluntary benefit deductions, taxes, and company paid 401K and other fringe benefits may also be recorded in the paycheck.  Since net pay actually received and net pay calculated by QuickBooks must match exactly, any variance between the two should be recorded in a comp time or payroll variance account.  For example, if the time card displays 85 hours of time worked and the payroll service company was instructed to pay for 80 hours, the five hours underpaid becomes a company liability to be paid later. If a mistake is noticed in the payroll company’s report, the “incorrect” paycheck must still be recorded in QuickBooks for the same net pay as was issued.  A rerun of that payroll cycle requires careful re-posting of the affected paycheck in order to keep the QuickBooks paycheck in agreement with the payroll company records. You may contact our office for assistance if this occurs.

 
ENTER PAYROLL CASH REQUIREMENTS
Creation of paychecks in QuickBooks will post net pay to the payroll clearing account and the taxes and voluntary deductions into their respective liability accounts. Clients should use care when recording the movement of money electronically passed to the payroll service company.  Payroll clearing, tax liabilities, and company tax expenses should be tagged according to each company’s payroll items set up. Each payroll cycle is complete when there is a zero balance in all the tax liability and payroll clearing accounts. Careful recording of the remittance of retirement and other fringe benefits to the third-party companies should also yield a zero balance in those liability accounts.

 
LABOR DISTRIBUTION REPORT
As part of our procedures for the compilation of financial statements, we include a review of the Time Sheet History and Labor Distribution reports. We look for the accurate matching of time worked by labor category and by job against the paychecks issued for the same period. These custom reports are found in the Memorized Reports section of the client’s QuickBooks file if we set up your accounting system to be compliant with DCAA requirements. Clients may access these reports at any time and test for accurate matching.

 
HANDLING CORRECTIONS
If the company makes subsequent changes to the time worked, jobs charged or labor categories selected, the change must be recorded in the original employee timesheet, the QuickBooks time entry and the QuickBooks paycheck.  Changing one but not the others causes the Time and Labor Distribution reports to become out of sync and puts the company at risk for non-compliance with DCAA requirements. Taking the time during each payroll cycle to follow all the above steps makes for a smoother payroll reconciliation and compilation process and removes one possible area of delay at a time when our clients are eager for their completed financial statements.

 
Contributed by Susan W.