Payroll costs are a form of expenditure for an employer, and the expenditure must be recorded in the accounting system. Here is an example of a payroll record for a business with only two employees. It employs P Singh and M Chan.
| Employee | Gross pay $ | Pension $ | Income tax $ | Employee's state benefit $ | Net pay $ | Employer's pension $ | Employer's state benefit $ |
|---|---|---|---|---|---|---|---|
| P Singh | 395.00 | 15.00 | 57.92 | 30.85 | 291.23 | 15.00 | 36.71 |
| M Chan | 406.25 | 22.00 | 64.77 | 41.33 | 278.15 | 15.00 | 43.82 |
| Total | 801.25 | 37.00 | 122.69 | 72.18 | 569.38 | 30.00 | 80.53 |
A normal weekly payroll will look something like this, but with a longer list of employees. The payroll shows not just the gross pay, deductions for tax and net pay of the employees. It also shows the additional payroll costs of the employer, and in this example, these consist of:
The totals for each column in the payroll are posted using journal adjustments to the general ledger accounts.
Payroll costs are an expense for the employer, and the expense must be recorded in an expense account in the general ledger.
The net wages or salaries need to be paid to the employees. The various deductions from gross pay need to be paid to the appropriate outside agency to which they are payable, and the employer's state benefit contributions and pension contributions also need to be paid to outside agencies. These payments are likely to occur some days after the employees have been received their net pay so, for a short time, the amounts payable to the outside agencies are unpaid liabilities of the business. Until the money is paid to the agencies, the amounts due to the agencies are payables of the business.
In posting the payroll details to the general ledger:
Posting the payroll to the general ledger should be completed using the following steps:
Step 1
Gross pay - take the total for gross pay and:
Debit - Wages and salaries expense account
Credit - Wages and salaries payable account
Step 2
Additional contributions by the employer (state benefit and pension contributions) - take the total of each type of contribution by the employer to total payroll costs and:
Debit - Wages and salaries expense account
Credit - Wages and salaries payable account
Step 3
Take-home pay for employees
This is paid to the employees immediately, so by the time the payroll is recorded, the payment has already been made. Take the total of net pay (take-home pay) from the payroll, and:
Debit - Wages and salaries payable account
Credit - Bank account
Step 4
Amounts payable to outside agencies
When the payroll details are posted to the general ledger, these payments are unlikely to have been made yet, so the amounts are still payable, and the outside agencies are payables.
FAT/RECORDING FINANCIAL TRANSACTIONS
Take each on the payroll mat represents an amount owing to as outside agency. These are the columnate deductions from employees pily and the column for the employer's state benefit contributions and pension scheme contributions. For each of these totals
Debit - Wages and sataries payable account
Credit - A payable account for the outside agency.
At the end of this process, the balance on the wages and salaries payable account should be nil
These steps are shown in the following T-accounts
$
Bank (net wages and salaries paid) - S
$
Wages and salaries expense account:
Gross pay - X
Employer's state benefit - X
Pension scheme payable - X
Employer' s pension contribution - X
statutory deductions Payables for any other non- - X
- X
The balance on the wages and salaries payable account should be nil.
$
Wages and salaries payable account:
Gross wages and salaries - X
Employer's state benefit - X
Employer's pension contribution - X
$
There is a debit balance on this account, because it is an expense account.
$
$
Wages and salaries payable account:
Income tax deductions - X
Employees' state benefit - X
Employer's state benefit - X
There is a credit balance on this account because it is a liability account, representing a payable of the business.
$
$
Wages and salaries payable account:
Employees' contributions - X
Employer's contributions - X
There is a credit balance on this account because it is a liability account, representing a payable of the business.
The example here does not have any other payables for non-statutory deductions, but if there are any such deductions, such as employee subscriptions to a trade union or donations by employees to a charity, they would be accounted for in a similar way. There would be a debit entry for the deduction in the wages and salaries payable account and a credit entry in the payable account for the external agency (trade union, charity, and so on).
$
Wages and salaries payable account - S
$
Net wages (take-home pay) - X
Payments from the bank account are recorded as credit entries.
Here are the totals from TTC's January payroll:
Total gross pay
$6,172.20
Total employer's state benefit
$488.20
Total income tax
$1,029.96
Total employees' state benefit
$445.20
Total net pay
$4.697.04
Task
Post the above to the relevant general ledger accounts.
For suggested answers, see the 'Answers' section at the end of the book.
Post the following payroll details to the appropriate general ledger accounts using T-accounts, and balance the wages and salaries payable account.
| Employee | Gross pay $ | Pension $ | Income tax $ | Employees' state benefit $ | Net pay $ | Employer's pension $ | Employer's state benefit $ | |
|---|---|---|---|---|---|---|---|---|
| P Singh | 395.00 | 15.00 | 57.92 | 30.85 | 291.23 | 15.00 | 5 | 36.71 |
| M Chan | 406.25 | 22.00 | 64.77 | 41.33 | 278.15 | 15.00 | 43.82 | |
| 801.25 | 37.00 | 122.69 | 72.18 | 569.38 | 30.00 | 80.53 |
For suggested answers, see the 'Answers' section at the end of the book.
Businesses may use a range of methods to pay their employees as follows:
Cash payment
containing their net pay in notes and coins plus payslip each week. This may be cash payment, with an employee receiving their individual pay packet of notes and coins to enable wage packets to be prepared each week, or appropriate when there are relatively few employees and there is little handling perhaps if an employee does not have a bank account.
Cheque payment
with an employee receiving a cheque for their net pay plus payslip, each week or month as appropriate. This may be appropriate when there may be some variation in weekly or monthly pay (perhaps due to overtime or bonus payment) for each employee.
Direct or automated payment
of the net pay into the individual bank account of an employee each week or month as appropriate, with payslip provided separately. This is appropriate for employers who have a significant number of employees and where a business operates automated and computerised systems and processes. This is becoming increasingly common.