Follow us on LinkedIn
Companies and businesses employ several employees who perform tasks to achieve organizational goals. In exchange, employees receive salaries, wages, and other benefits. For companies, these payments are expenses that fall under the payroll system. Companies record these expenses using payroll journal entries.
What is a Payroll Journal Entry?
The term payroll refers to expenses companies incur due to their employees for a specific period. As mentioned above, these usually include salaries and wages. However, it may also consist of other items paid by the employer, such as contributions to pension schemes. Since these items relate to employees and their work, they fall under the payroll expense for the company.
A payroll journal entry is the accounting entry used to enter such items into accounting systems. This journal entry occurs at the end of each financial period when companies incur the salaries expense. In accounting, payroll journal entries must abide by the accrual principle. Consequently, companies must record the payroll expenses as soon as it becomes payable.
How to record Payroll Journal Entries?
Companies don’t record payroll expenses using a single entry. Usually, the salaries and wages become payable after a specific period. However, companies do not make the payment on the same day. For most companies, this payment occurs some days after. The gap between these two divides the accounting for payroll into different stages.
The first stage of payroll journal entries is to record the expense. Companies recognize the payroll expense when it becomes payable. Consequently, they also record a liability in the payroll payable account. The journal entry for this stage is as follows.
| Dr | Payroll expense |
| Cr | Payroll payable |
In practice, companies pay various expenses on an employee’s behalf. On top of that, some of these payments may also include deductions from the amount payable to employees. These payments then occur to other parties. Companies segregate each into different accounts and create a liability for them accordingly.
The next stage of the payroll journal entries occurs when companies settle the amounts payable to various parties. This stage involves removing the liability created earlier and recognizing a reduction in assets due to the payments made. Usually, the journal entry looks as follows.
| Dr | Payroll payable |
| Cr | Cash or bank |
Example
A company, Red Co., incurs salaries and wages expenses of $50,000 during a financial period. On top of that, the company also deducted additional taxes worth $10,000 from employees’ payments. Red Co. records this expense as follows.
| Dr | Salaries and wages | $60,000 |
| Cr | Salaries and wages payable | $50,000 |
| Cr | Employee taxes payable | $10,000 |
Five days later, Red Co. settled employee payments through its bank account. The company records the transaction as follows.
| Dr | Salaries and wages payable | $50,000 |
| Cr | Bank | $50,000 |
Some days later, Red Co. also settled the tax payment made to the relevant tax body through its bank account. The company records the transaction as follows.
| Dr | Employee taxes payable | $10,000 |
| Cr | Bank | $10,000 |
Conclusion
Payroll journal entries refer to the accounting entries used to record employee-related expenses. Usually, it includes salaries, wages and other benefits. Companies process these journal entries in two stages. At first, companies recognize a liability when the salaries and wages become payable. Later, they record the payment to employees.
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
Tesla appears overvalued when compared with traditional carmakers. Less appreciated is the huge valuation gap that has opened up relative to its closest electric-vehicle peer.
(Bloomberg) -- President Joe Biden’s son, Hunter, pleaded not guilty Tuesday to federal gun charges that conservatives hope are only the opening salvo in a legal drama they plan to put at the center of an impeachment effort as well as the 2024 election.
The disgraced FTX founder faces life in prison if convicted on all counts.
Russia has weaponized energy. Canada has the wherewithal to respond but so far lacks the will
The Omaha-based railroad company said it disqualified certain workers in order to ensure safety.
