What is Payroll Accounting? Payroll Journal Entry Guide 2021

Whether you are paying one employee or dozens of employees, you need to make a payroll journal entry. For these entries, record the gross wages your employees earn and all withholdings. Also, include employment taxes you owe to the government.

This journal entry will eliminate the liability of $30,000 that the company XYZ has recorded in the prior period in form of a cash payment of $30,000. Likewise, on January 2, total assets and total liabilities decrease by $30,000 in this journal entry. Payroll liabilities, or payables , are amounts you currently owe, pertaining to your business’s payroll.

Salary Paid Journal Entry

Debit the wages, salaries, and company payroll taxes you paid. This journal entry is made to eliminate the liability (salaries payable) that has been recorded in the prior month as well as to record the cash outflow of the company. Likewise, there is no expense account in this journal entry as the company has already recorded salaries expense in form of the accrued expense in the prior month already. However, some companies may have the policy to pay the salaries to its employees at the beginning of next month of the work instead.

One is for the accrued salaries at the end of the month of work as in the journal entry above and another one is when the payment is made. As mentioned, some companies may make the salary payment at the beginning of the next month instead. Accrued wages for a certain period are recorded at the end of your accounting period. As the name suggests, these are wages that you owe your employees—wages you haven’t yet paid. After you pay these wages, you’ll make reversed entries in your ledger to account for this payment. The purpose of payroll accounting is to keep track of employee compensation and related payroll costs.

Step 4: Send direct deposit payments

You notice there are already figures in Accounts Payable, and the new record is placed directly underneath the January 5 record. On this transaction, Accounts Receivable has a debit of $1,200. The record is statement sections placed on the debit side of the Accounts Receivable T-account underneath the January 10 record. The record is placed on the credit side of the Service Revenue T-account underneath the January 17 record.

If your business is ever audited, you need records of your taxes and employee compensation. One way to record payroll is to use a series of journal entries. This journal entry is to eliminate the $15,000 of liabilities that the company ABC has recorded in the December 31 adjusting entry. In other words, it is to settle the salaries payable that the company owes its employees for work they have done in December 2019.

Manually enter payroll paychecks in QuickBooks Online

Nowadays, employers are quoting the Salary on a CTC basis (Cost to the Company basis). So, the Salary amount debited in the above journal entry includes the employer contribution. So, we need not debit this employer PF contribution as expense separately. Now that we know the fundamentals of recording the journal entry, we can jump into how to record the Salary paid journal entry. Salary Paid journal entry is to record the expense and payment. Recall that the paychecks issued on December 29 covered the work done by hourly employees only through December 24.

When you pay an employee, you increase the expense account because you are paying them. Payroll accounting helps you keep track of employee compensation and other payroll costs. Accounting for payroll gives you an accurate snapshot of your expenses.

Payroll Accounting (Explanation)

In the journal entry, Dividends has a debit balance of $100. This is posted to the Dividends T-account on the debit side. You will notice that the transactions from January 3, January 9, and January 12 are listed already in this T-account. The next transaction figure of $100 is added directly below the January 12 record on the credit side. Notice that for this entry, the rules for recording journal entries have been followed. Independent contractors are often referred to as non-employees.

In the first entry, you will record your upcoming expenses and how much you owe (since you haven’t run your payroll yet). Your money was hard-earned, and you should know where it goes. Watch this video to review how to record payroll and taxes. This is posted to the Cash T-account on the credit side beneath the January 18 transaction. This is placed on the debit side of the Salaries Expense T-account.

Accounting Treatment for Salary Payment

They even send them to the government for you, so that’s one less thing you have to worry about. For accounting purposes, a debit is usually used when you want to record a payment you made or are going to make very soon, and it’s on the left side of the ledger. This will go on the debit side of the Supplies T-account.

• You will notice that the transactions from January 3, January 9, and January 12 are listed already in this T-account.
• Independent contractors are often referred to as non-employees.
• As mentioned, some companies may make the salary payment at the beginning of the next month instead.
• There may be a number of additional employee deductions to include in this journal entry.

It might feel like there are a hundred kinds of payroll taxes. From Social Security and Medicare to state and federal unemployment taxes, the list goes on and on. As a business owner, it’s your job to pay your share of the taxes and manage tax withholdings from employee paychecks. And until all those taxes are deposited to their final destinations, they’re payroll liabilities. The most used entry is the initial recording, also known as the originating entry. It’s the first entry you record to show a transaction has occurred.

Cash is labeled account number 101 because it is an asset account type. The date of January 3, 2019, is in the far left column, and a description of the transaction follows in the next column. Cash had a debit of $20,000 in the journal entry, so $20,000 is transferred to the general ledger in the debit column. The balance in this account is currently $20,000, because no other transactions have affected this account yet. In this section of payroll accounting we focus on the gross amounts earned by the employees of a company. Accrued salary will be removed from the balance sheet as the company pays employees and cash have decreased the same amount.