Payroll accounting

Payroll accounting is the recording of the compensation of a company’s employees. This typically includes salary, bonuses, wages, commissions, and so on that have been earned by the employees over their tenure in the company. The calculation of payroll is highly influenced by the legal system of the home country.

What is payroll?

Payroll is compensation given by a business to its employees for a set period or on a given date. It also refers to the list of employees who get paid by the company. Payroll is usually maintained by the human resources department or the accounting department. It starts with preparing a list of employees who are supposed to be paid and ends with recording these expenses.

Payroll accounting is one of the most crucial yet complicated business processes. Every business tries their best to carry out this process to the best of its abilities because any mistakes might lead to severe consequences.

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Payroll journal entry

A payroll journal entry is the record of compensation paid to the employees. These entries are later incorporated into an entity’s financial statements through the general ledger. The key types of payroll journal entries are:

Initial recordation: The entry records the gross wages earned by employees, pay withholdings, and taxes.

Accrued wages: This is intended to record the amount owed to the employees but not yet paid. This entry may be avoided if the amount is immaterial.

Manual payments: A business may occasionally issue manual paychecks to its employees because of pay adjustments or employee terminations.

Payroll ledger

Payroll ledger gives a quick view of how the employees are getting paid by a company, how much money is getting deducted from their salaries as taxes and deductions, and how often are the employees getting paid. The financial records are used to make entries in the payroll ledger. A payroll ledger is a standard practice for recordkeeping used all over the world by businesses of different sizes.

A payroll ledger may include payroll accounting details such as:

Payment frequency
Tax withholdings
Business-to-business expenses (e.g. insurance premiums, payroll service charges)
Contribution towards benefits
Deductions
Employee pay totals

Also read: What is materiality accounting & 5 practical examples

Salaries payable

Salaries payable is a type of entry in payroll accounting journals that describes how much a company owes its employees. Salaries payable is recorded when a company owes salary pay to their employees but haven’t made the payments yet.

As employees accrue pay by working, salaries payable keeps getting increased depending on how much money has been earned by the employees. When paychecks are distributed, salaries payable gets decreased by that amount.

Salaries payable are typically recorded by the accounting professionals at the end of a business’s accounting period to provide an accurate reflection of a company’s finances.

Payroll organisation

Here are the 10 tips you should know in order to have a successful payroll organisation:

Determine whether your employees should be salaried or paid on an hourly basis.
Determine how often do you want to pay your employees – monthly, weekly, bimonthly
Classify your workers under full-time employees, interns, independent contractors
Pick the best software that suits your business needs
Simplify your payroll accounting process to save time and money
Keep track of everything
Automate state and federal taxes to avoid mistakes
Factor is raises and benefits, if any
Find out if you need employer ID numbers
Create a budget to avoid any last minute surprises

Also read: What is public accounting & what are the important services offered?

Payroll expense

Payroll expense can be described as the amount of wages and salaries given to employees by a business in exchange for their services. The term also assumes to include the cost of all related payroll taxes such as Medicare, Social security, etc. Additionally it includes the amount businesses pay in taxes to federal, state, and local agencies.

However, the tax withholdings from employee paychecks are not part of payroll expenses since they have already been included in the gross wages. Payroll expense is generally the largest expense incurred by a company, so it is important to manage payroll expenditures effectively and efficiently.

Accrued payroll

Accrued payroll is a sum of wages, salaries, bonuses, and other payroll related expenses that have been earned by a company’s employees. This amount has not been paid yet or recorded in the company’s general ledger accounts. It represents a liability for the employer. The concept of accrued payroll is only used on an accrual basis of payroll accounting.

The accrued payroll is an expense that is yet to be paid out to the employees in the future. It is one of the ways in which a business can track its upcoming expenses in advance without any unexpected surprises.

Also read: 10 Best accounting calculators and how to use of them

How does payroll work?

Let us look at some of the general steps that each business follows in order to manage payroll efficiently,

Step 1: Ensure the paperwork of all the employees is complete and up to date.
Step 2: Set up a payroll schedule based on how often you wish to pay your employees.
Step 3: Calculate gross pay of your employees. Take into consideration if the employees are salaried, hourly workers, or have done overtime.
Step 4: Make necessary deductions including health care plan, social security, taxes, etc.
Step 5: Pay your employees
Step 6: Keep record of the payments made.

Payroll types

There are three basic types of payroll accounting:

Initial Recordings

Under initial recordings, the record of the gross wages earned by the employee is maintained. It also includes the withholdings from the employee salary. The initial recordings also include and account for employment taxes.

Accrued Wages

The accrued wages are the wages that a business owes to the employees in lieu of their services but is yet to make the payments.

Manual Payments

The manual payments are the payments made when employees terminate their services to the business. Accounting officials use this line item to clear out the dues of the employees who have resigned.

Also read: What is fund accounting? Key principles, & responsibilities

Payroll bookkeeper

Payroll bookkeepers are the ones collecting and managing the data. Bookkeeping involves recording, storing, and retrieving financial transactions on a consistent basis. For the most part, bookkeeping is straightforward and transactional. While the role of a payroll bookkeeper may seem slightly different, they play equally important roles when it comes to handling business transactions.

Accountants need bookkeepers to meticulously keep all the data ready for interpretation and analysis. Both accountants and bookkeepers work in tandem to help businesses make smart financial decisions. Payroll bookkeepers are the ones who provide a snapshot of all business finances of a company.

Payroll tax accountant

A payroll tax accountant is responsible for processing salary payments to employees. Their major responsibilities include calculating salaries, updating payroll accounting systems with employee related information, preparing internal and external tax reports, conducting internal tax audits, etc. A payroll accountant usually possesses a degree in accounting along with in-depth knowledge of applicable laws.

Their day-to-day role may include addressing payroll enquiries from employees, issuing timely paychecks, maintaining payroll files, updating payroll systems, and many more. A payroll accountant is someone who is detail-oriented and well proficient in processing salaries in a timely manner on a regular basis.

Also read: Expanded accounting equation | Key principles

Payroll calculations

The payroll calculations involve the determination of gross pay, followed by tax deductions to arrive at net pay. The calculation of payroll is a highly regimented process. The payroll calculation must be done meticulously to ensure there are no mistakes in the amount of net pay calculation.

1. How to do payroll accounting?

There are seven step to follow to do payroll accounting with ease:

Set up payroll accounts in your chart of accounts. It includes a mixture of expenses and liabilities.
Calculate taxes and other deductions to find out how much should be withheld from the employee wages.
Gather payroll reports to get a breakdown of payroll transactions.
Record payroll expenses in your books.
Record payables are the record of entry for the amount that you owe but haven’t paid to the employees yet
Double-check your records for accuracy
Transition accounting periods so that paid liabilities are no longer payables.

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2. How to record payroll taxes in QuickBooks?

Recording a payroll tax in QuickBooks for a prior tax period:

From the left Menu, select Taxes
Select Payroll tax
Select Enter Prior Tax History
Select Add Payment
Enter the required payment information
Select OK

Recording a payroll tax that is currently due:

From the left Menu, select Taxes
Select Payroll tax
Select Pay Taxes
On the Pay Taxes page, select Record payment for the tax you want to pay.
For the Payment Date, select Other and enter the actual date the payment was made.
Enter the cheque number.
Select Approve and print

Also read: Economic profit – How to calculate economic profit

3. How to record payroll journal entries?

A journal entry is best described as the record of credits and debits. If you are using automatic payroll software, then there is no need to make entries as it automatically creates entries when an invoice is generated. However, in the case of a manual accounting software, the entries have to be made often.

While recording payroll, Gross Wage Expense will be debited and liability accounts and cash accounts will be credited. Gross wages will appear on the profit and loss or income statement whereas the liability and cash account will appear in the balance sheet.

Payroll journal entry example

Payroll transactions are recorded in a general ledger and can be either used in a manual accounting system or in accounting software. Let’s take an example to understand this in detail.

XYZ Corp has one employee Jane Smith who is paid on a weekly basis. The below payroll journal entry example shows her gross wages, payment withholdings, and XYZ company’s cost.

Date	Account Names	Debit	Credit
11/10	Wage expense	720.00
	FICA taxes Payable		55.08
	Federal Income Tax Payable		58.00
	State Income Tax Payable		21.00
	Health Insurance Payable		50.00
	Wages Payable		535.92

Also read: Fair value accounting – Basics on fair value accounting

Payroll journal entry template

Journal entry #1

The first entry must show your employee’s gross wages, payroll taxes withheld, deductions, and net pay.

Date	Account Names	Debit	Credit
	Wage expense	XXX
	FICA taxes Payable
	Federal Income Tax Payable
	State Income Tax Payable
	Health Insurance Payable
	Wages Payable

Journal entry #2

Make a second entry when you give a paycheck to your employee.

Date	Account Names	Debit	Credit
	Payroll payable
	Cash

Journal entry #3

Third entry is made when you need to pay employer taxes and remit withheld taxes.

Date	Account Names	Debit	Credit
	Wage expense	XXX
	FICA taxes Payable
	Federal Income Tax Payable
	State Income Tax Payable
	Health Insurance Payable
	Wages Payable

Also read: Tax accounting – Basics on tax accounting & 5 key principles

Payroll chart

A payroll chart or a chart of accounts provides a complete listing of each type of account. It provides a logical structure used to easily record all sorts of information and to add or remove accounts. It is like a map of all your financial transactions that help you guide through your past and future spends. A payroll chart makes it easier to understand what transactions are being recorded in each of your accounts.

A properly created payroll chart is also helpful in following proper accounting standards which aid in making better business decisions in the future.

Also read: Total cost formula – How to calculate total cost?

Payroll for dummies

Payroll can be complicated for beginners, and there’s little room for error. To make payroll accounting easy to understand one should look at the following payroll systems. The below payroll system ranked higher in terms of ease-of-use and user reviews. These are the three most easy to use payroll for dummies.

Rippling is a cloud-based platform designed to help users take care of their company’s payroll, benefits, and onboarding.
Zenefits is a core HR suite that helps streamline onboarding, benefits, payroll, etc.
Netchex is a cloud-based platform used by companies of all sizes to manage the entire employee lifecycle.

Megha Goel

Megha is a content writer with sharp technical skills, owing to her past experience in networking and telecom domains. She focuses on various topics including productivity, remote work, people management, technology, market trends, and workspace collaboration.