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How to Prepare a Payroll Journal Entry + Examples

payroll accounting examples

Accounting for payroll gives you an accurate snapshot of your expenses. If you’re overwhelmed with the many aspects of learning how to do payroll accounting, you’re not alone. It’s important to choose a quality accounting program that will make documenting transactions easier. You’ll thank yourself when an audit arises or you just need to prepare an income or cash flow statement at year-end. One final stage in payroll accounting is to do a payroll reconciliation. A payroll reconciliation is a process you follow to ensure your payroll accounts within the general ledger accurately reflect the transactions that occurred in the payroll system.

Double Entry Bookkeeping

You will record this calculation using an accrued wages entry, which increases the liability account. Since you haven’t run payroll yet, the $1,923 of gross wages represents the money you owe. We’ll balance that by adding items payroll accounting examples to the credit column (i.e., your liabilities). First, you record Sam’s gross pay by adding it to the expense account with a debit of $1,923. So now that you understand this concept–let’s apply it to a payroll journal entry.

Pay the Employee the Net Pay

Fringe benefits are payments in kind by a business to an employee in addition to their normal remuneration wages or salary for their work. For example, a business provides an employee with a fringe benefit when they allow the employee to use a business vehicle to commute to and from work. In the example above, the other deductions can refer to many types of deduction such as pension contributions, healthcare schemes, union subscriptions. Any difference on this account should be reconciled by the payroll accounting team, as it means an employee has either been underpaid or overpaid.

What Are Examples of Payroll Liabilities?

  • If the amount paid to an independent contractor (nonemployee compensation) during a calendar year is $600 or greater, the company must issue IRS Form 1099-NEC.
  • This document is automatically created by all payroll software packages.
  • To calculate payroll, identify employee wages, complete essential paperwork, calculate gross pay and deductions, set up charts of accounts and pay taxes.
  • Either can get you the same results, but using accounting software is, by and large, the easier, more efficient way of getting there.
  • Second, payroll accounting provides an accurate and objective view of the overall employee cost.

This information is used to create financial journal entries recorded on a GL for financial reporting and business-related purposes. It may also include additional information, such as PTO balances. The primary payroll journal entry is for the initial recordation of a payroll. This entry records the gross wages earned by employees, as well as all withholdings from their pay, and any additional taxes owed to the government by the company. Let’s continue with our example of the payroll for the hourly-paid employees. We’ll assume that the distributor’s accounting month and accounting year both end on Saturday, December 31.

The matching principle requires the company to report all of its December expenses (not simply its cash payments) on its December financial statements. This means the company must report on its income statement the hourly wages and other payroll expenses that the company incurred (and the employees earned) through December 31. Compensation for employees that is in addition to salaries and wages. Generally, the cost of fringe benefits should be expensed when they are earned by the employee, not in the period in which they are paid. Payroll liabilities, or payables , are amounts you currently owe, pertaining to your business’s payroll. If you’re using a payroll journal, you enter payables as credits because you are increasing the amount you owe.

Keeping track of your organization’s spending is fundamental to managing resources successfully. Accrued wages are wages owed by an organization but haven’t yet been paid. Toward the end of an accounting period, your accountant should clean up these entries as the organization begins paying them back to reflect the change. You can add, remove, or change payment amounts as employees join or leave the business, as compensation changes, if employees move and the taxes applied to their paychecks change, or if tax rates change. Recall that the paychecks issued on December 29 covered the work done by hourly employees only through December 24. On December 31, the company must record the cost of work done during the week of December 25–31.

On payday, December 29, the checks will be distributed to the hourly-paid employees. Eventually, you need to pay employer taxes and remit withheld taxes. Next, record entries for amounts you owe but have not yet paid. After you get the information to record payroll entries in accounting, head on over to your books to get cracking.

payroll accounting examples

Double-check your records

Beginning in 2013, there is a Medicare surtax of 0.9% that is applied to an employee’s wages and salaries in excess of specified amounts. The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position. It’s a fact of business—if a company has employees, it has to account for payroll and fringe benefits. If you want to streamline your payroll processing, Hourly payroll software makes your life easier by automatically calculating and withholding taxes from your paychecks. They even send them to the government for you, so that’s one less thing you have to worry about.

How To Do Payroll Accounting With the Help of Payroll Software

To begin with, let me point out the difference between accounts payable that we discussed in the previous accounting lesson and payroll. Let me start out by saying payroll is one area of small business accounting that I recommend getting professional help or using payroll software. Payroll accounting for small business owners involves both expense and liabilities accounts such as FICA Taxes Payable, Federal and State Income Tax Payable, Health Insurance Premiums Payable, etc. Payroll is also required to inform the relevant social security and Medicare bodies of their employees’ salaries, so that if contributions are means tested, they can be adjusted accordingly.

payroll accounting examples

Paychecks are then put into envelopes and sealed before being delivered to employees. Use IRS tax tables to determine the amount of taxes to be withheld from employee gross pay. This step is handled automatically, if you are using payroll software. Salaried employees require no change in wages paid for each payroll, but you must collect and summarize information about the hours worked by non-exempt employees.

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