Basic Payroll Accounting

Excel employee payroll

If you own a small business, you record your employees’ payroll not only to give them their proper salaries but also to comply with state laws and taxes. This article will teach you how to do basic payroll accounting.

What is Payroll Accounting?

Payroll accounting is the system by which you use journal entries to record payroll expenses in your books. Payroll accounting is not an easy job. Payroll journal entries form part of your payroll account and are essential to your business general ledger as a whole. Expenses entered in the payroll account include gross salaries, wages, other income as well as deductions for taxes.

An Overview of Payroll Liabilities and Expenses

Your payroll transactions are recorded in the journal. Usually, three accounts are affected by payroll transactions: expenses (amounts already paid), liabilities (amounts owed but not yet paid) and assets (normally, cash). Below are some common payroll entries:

  • Gross salaries and wages
  • FICA tax payable
  • Federal income withholding tax payable
  • State income withholding tax payable
  • Payroll payable (wages you owed but haven’t paid yet)
  • Other deductions made (an example of this is retirement contribution)

As you do your payroll transactions, you record debits and credits to your ledger. Debits and credits are made depending on the type of transaction made. The important thing to remember is that your debit should equal your credit.

It is important to have a basic knowledge on which accounts are debited when increased and credited when decreased. In the same way, some accounts are debited when decreased and credited when increased. The table below will give you a basic understanding of the accounts involved in accounting.

 

ACCOUNT NAME INCREASED BY DECREASED BY
Asset Debit Credit
Liability Credit Debit
Owner’s Equity (Capital) Credit Debit
Revenue Credit Debit
Expense Debit Credit

 

It is important to know here that assets, liabilities and owner’s equity are called real accounts or balance sheet accounts. It is because the ending balance computed at the end of the year for these accounts are carried over to the beginning of the year. On the other hand, revenue and expenses are considered nominal accounts because their ending balances are closed at the end of the year. At the start of the accounting period, their beginning balances are zero.

With payroll accounting, you work with expenses, liabilities and assets.

Recording Journal Entries in the Payroll General Ledger

At first glance, payroll accounting can be intimidating because of the process of recording. Keep in mind the table above and follow these steps to learn how to record payroll accounting with ease.

  1. Record payroll expenses.

The primary journal entries in the payroll general ledger are expenses. Expenses include anything payroll-related that you paid during an accounting period. Expenses are already paid amounts and since they increase your expenses, debit your expense account. Debit the wages, salaries and company payroll taxes you paid. This increases your expenses for the period.

  1. Record liabilities (payroll payables)

The second step is to record the amounts you owe but haven’t paid or your liabilities. You gain liabilities because you owe payroll. Liabilities increased through credits. Credit the FICA tax payable, federal income withholding tax payable, payroll payable (wages earned but not yet paid) and other deductions. This increases your liabilities for the period.

  1. Record transition accounting entries

You will have to pay amounts you owe to your employees and remit the taxes to the government. Paying your liabilities will decrease them, therefore debiting the liabilities account. In the same way, your asset or cash decreases as you pay your liabilities. Asset decreases with credit.

Payroll Journal Entry Example

To further understand, below is a concrete example of how a payroll journal entry is made.

For example you have an employee in your payroll. His data are as follows:

  • Gross Salaries and Wages- $500
  • FICA tax payable computed (employee)- $61.20
  • Federal income tax payable as computed- $60
  • State income tax payable as computed- $20

Following the steps above, your firs journal entry would look like this:

Journal Entry #1

Account                                            Debit                                         Credit

Gross Salaries and Wages                     500.00

FICA Tax Payable (Employee)                                                                    61.20

Federal Income Tax Payable                                                                      60.00

State Income Tax Payable                                                                          20.00

Wages Payable                                                                                            358.80

 

Notice how the expense account is debited and your liabilities are credited because both accounts increased.

Journal Entry #2

          Account                                            Debit                                      Credit

Wages Payable                                              358.80

Cash                                                                                                                    358.80

 

This happens when you pay your employees. Your payables decrease so you debit your liabilities account in the same way that your cash decreases therefore crediting your asset account.

Journal Entry #3

When the time comes you have to remit your taxes to the government, the entry is as follows:

Account                                            Debit                                      Credit

FICA Tax Payable (Employee)        61.20

Federal Income Tax Payable          60.00

State Income Tax Payable              20.00

Cash                                                                                                             141.20

 

Notice that all the debits and credits are equal in all the three journal entries.