What Is Payroll Accounting? How to Do Payroll Journal Entries

Salary paid in advance is also known as prepaid salary (it is a prepaid expense). It is the amount of salary paid by an entity in advance but the corresponding work-effort equivalent to the advance salary paid is yet to be received from the employee. Some withholdings and the employer’s portion of FICA were remitted on payday; others are not due until a later date. Some withholdings, such as health insurance, were recorded as reductions of the company’s expenses in Hourly Payroll Entry #1.

Use these entries when you have to adjust an employee’s pay or for employee terminations. However, the above salary payable formula may not apply to every entity. Entities must calculate the salary expense for every employee separately. After that, they must aggregate those amounts to reach salary payable.

Accounting Treatment for Salary Payment

In this entry, we will clear out the accrued wages and show the reduction in cash. Each journal entry has debits and credits that must add up to the same number. Accounts on the left side of the equation increase when debited and decrease when credited, and vice versa for accounts on the right side.

You decrease your cash account by $1,000 since you spent that money. You also decrease your liability account (also known as a payable account) by $1,000 since you don’t owe that money anymore. So if you want to learn how to count those outgoing dollars, you’re in the right place. In this article, we cover one of the basic steps of payroll accounting—the payroll journal entry. ABC is a construction company that employs many workers and is paid based on their hour’s work. At the end of the year, company prepares the financial statement.

Adjusting entry for accrued salaries explained

Despite the cash flows being on a different date, entities must record salary payable. Although named “salary” payable, the account may also contain various other employee-related expenses. These may include basic salaries, overtime, bonuses, benefits, and other allowances. Your employees complete time tickets as unfinished goods move through the different manufacturing departments. The time tickets are a log of the hours each direct labor employee worked on the production line.

The journal entry is debiting wage expense and credit wage payable. The wages expense account allows companies to record all wage-related costs. It records items such as wages expenses, taxes, benefits, etc. Usually, the accounting for this account involves creating an expense while crediting the relevant compensation account. In most cases, the credit side will be a payable account under the accruals concept in accounting. The journal entry for wages expense involves recording various items in the account.

Payroll accounting example

Don’t be intimidated by the amount of entries needed for this step. If you use a good payroll program they will all be done automatically. We recommend that you complete your salary journals at the end of each pay period. In Cash Based Accounting, transactions are only recorded when money moves in the company, i.e., net cash flow when money comes in, or money goes out. 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.

However, when entities close their accounts and prepare financial statements, they must report salary payable. Since the liability gets settled within a few days, it will fall under current liabilities on the balance sheet. The related salaries expense will get reported on the income statement.

Entry #2: Recording Wages Paid

At the end of each month, Kite Co. must record a salary expense and payable. Therefore, the company must use the following journal entries. Entities usually pay off salary expenses after the end of the month.

• Hence, accrued salaries payable must be recorded in the books to account for the salaries earned by employees but yet to be paid as of the end of the accounting period.
• Professional Tax is a tax levied by the governments in the respective states on all persons earning income.
• When ABC make payment in the first week of new year, they have to reverse the wage payale from the balance sheet a long side with cash.

The company can credit both its own and the employees’ FICA taxes to the same liability account since both are payable at the same time to the same agency. When these liabilities are paid, the employer debits each of the liability accounts and credits Cash. Payroll accounting is the recording of all payroll transactions in your books. As a business owner, you use payroll journal entries to record payroll expenses in your books. Tracking wages expense is crucial for businesses because it helps them monitor labor costs. Similarly, it also helps with managerial decisions and analysis.