How to Do Payroll Accounting: A Step by Step Guide

This step-by-step payroll accounting guide provides you with all the information on how to do it correctly. Find out what types of records are needed, when and where they should be kept, who can access them and more.

All payroll transactions are recorded and tracked in payroll accounting. Paychecks sent to workers, deductions, and taxes withdrawn from employee paychecks, and employers’ portion of benefit payments and taxes are all examples of these transactions.

You’ll need to create a chart of accounts and collect information from your payroll system to get started. With the proper information, you can guarantee that your payroll log entries are accurate and avoid having to make corrections later.

The following are five stages to payroll accounting:

1. Create a chart of accounts.

Making ensuring that amounts are correctly posted to payroll accounts is an important part of recording payroll on your books. You must first create payroll accounts in your chart of accounts list before you can record payroll.

The chart of accounts is a set of accounts that your organization uses to classify the financial transactions it produces.

In most cases, you’ll need to create an expenditure account or a liability account to keep track of salary. A cost incurred as a consequence of conducting business, such as salary costs and health insurance, is referred to as an expense. A liability is a sum of money that you owe to someone else. A cost might become a burden until it is paid, even if only briefly.

Workers’ compensation premiums, for example, are recorded as a cost after the premium period has passed. If the payment is not made at that time, the amount becomes a debt and should be recorded as a liability until the insurance provider is paid.

Remember that any funds withheld from employee paychecks to fulfill their benefit or tax obligations should never be recorded as a corporate expenditure since they aren’t.

The accounts you’ll need to set up on your chart of accounts to monitor all payroll-related actions, as well as a short explanation of each account, are listed below. Some accounts are optional, such as health insurance if it isn’t provided, while others are mandatory, such as federal income tax due, to comply with payroll regulations.

To keep track of payroll, you’ll need to create the following accounts:

• Wage Expense (Gross): Include the amount you pay an employee each pay period before any deductions.
• Expenses for Health Insurance: Include the entire amount you pay to your insurance provider for health insurance (ex. Blue Cross). This may cover medical, vision, and dental insurance; however, if you have a large number of transactions, we suggest having sub-ledger accounts for each insurance type to make tracking simpler.
• 401(k) Matching Expense: If you provide a 401(k) plan to your workers, add in this account the number of contributions you’ve made to match their contributions. This money will be given to the investment firm that is in charge of the company’s 401(k) plan (ex. Fidelity).
• Federal Tax Withholding: The entire amount of income taxes withheld from all employee paychecks should be shown in this account. You will send these amounts to the IRS according to their timeframes. Each pay period, withhold money from employee paychecks and deposit it in this account until you send it to the IRS for payment.
• State Tax Withholding: It performs the same purpose as federal tax withholding, except it only applies to state taxes rather than federal taxes. If your workers must pay local taxes, you should set up a separate account for them as well.
• FICA Tax Payable: This account will accrue deductions from employee paychecks for Social Security and Medicare taxes. These amounts will be sent to the IRS according to the statutory dates.
• SUTA Payable: The state unemployment taxes that you are due for should be included in this account. This money should be kept in this account until it’s time to pay it.
• State Disability Payable: If relevant, this account should contain state disability taxes withheld from workers.
• Workers’ Compensation: You must reflect the amount of workers’ compensation owed in this account.
• Employee Health Insurance Payable: This account will hold the health insurance premiums deducted from employee paychecks. The amount of health insurance paid by the employer will be reduced by this account.
• Employee 401(k) Contribution: This account will gather all employee 401(k) contributions withheld from paychecks. This money will be given to the investment firm that is in charge of the company’s 401(k) plan (e.g., Fidelity).
• Accrued Vacation Pay: If you give paid time off to your workers, you’ll need to keep track of how much time they’ve accrued. You should record the value of accumulated vacation as money owed to the employee if an employee earns a specified amount of vacation hours per pay period. You would have to include all accumulated vacation money in their last paycheck if they resigned or you fired them.

2. Compiling Payroll Reports

You’re ready to enter your payroll accounting journal entries once you’ve constructed your chart of accounts. Of course, a transaction must have happened before you can really submit it to the books. The payroll journal entry is a routine transaction that should be posted after processing payroll so that the record is based on a real event that occurred. Before inputting any data, you’ll need to obtain trustworthy source papers such as a payroll register and other payroll records.

• Payroll Register: This displays a list of all payroll transactions made within a pay period (includes names, pay dates, payment amounts, etc.)
• Bills for health insurance: A monthly invoice from the insurance provider detailing the expenses per employee as well as any administrative fees.
• Payroll tax reports: Include the taxes you owe as well as the taxes you withheld from employee paychecks.

3. Keep track of your payroll journal entries.

The recording of debits and credits is best defined as a journal entry. An effective date, a debit amount, and a credit amount are usually included. If you use QuickBooks, you won’t have to submit journal entries very frequently since QuickBooks performs it for you “behind the scenes” when you produce a client invoice or pay a payment.

You will, however, need to write journal entries if you utilize a manual accounting system.

Generally, you’ll debit Gross Wage Expense, credit all liability accounts, and credit the cash account when recording payroll. The obligation and cash accounts will be featured on your Balance Sheet, and gross wages will show on your Profit and Loss or Income Statement.

Making a journal entry

You won’t always be able to pay for a cost when you schedule it. When you expense an employee’s gross earnings, for example, you may not be prepared to refund payroll tax charges like FICA (Social Security & Medicare).

You’d credit a liability account, or payable, in this situation, until you’re ready to pay.

When you’re ready to pay the tax agency, whether every two weeks or once a month, debit the FICA Tax payable account to clear the account of the amount you’ll be paying and credit Cash since money will be going out.

Recording Accrued Vacation in a Journal

You’ll need to account for any earned vacation when recording payroll. Assume that an employee receives 10 vacation days per year and is compensated monthly. The number of vacation hours this employee would accumulate each pay period would be calculated as follows:

Eight hours multiplied by ten vacation days is 80 hours.

(amount of vacation time accrued per year)

3.08 hours / 80 hours / 26 weeks (pay periods per year)

(amount of vacation time accrued)

You must utilize a diary entry to record your trip. Here’s an example of a journal post we’d make for a $30-per-hour employee.

$30 multiplied by 3.08 hours is $92.40.

Recording Accrued Sick Pay in the Journal

You’ll need to keep track of the amount of sick pay an employee has earned on the books in the same way you maintain track of vacation pay. You can figure out how much sick pay an employee will get each pay period (as we did in the above-accrued vacation pay example).

Assume that this employee has accrued one hour of sick pay at a rate of $30 per hour.

Payroll that has been accrued

Any net payroll sums (payable to workers) that have been expensed but not yet paid are kept in the accumulated payroll account.

Assume Ella is paid $100 per day for tasks accomplished Monday through Friday every two weeks (10 working days).

$100 each day multiplied by ten days equals $1,000.

Her next paycheck will be on Friday, Dec. 3, 2021, for work she did from Nov. 22 to Dec. 3. The problem is that most companies shut their books at the end of each month – in this instance, November 30. Only a fraction of Ella’s compensation would be deducted for the seven days she worked from November 1 to November 30.

$100 each day multiplied by seven days equals $700.

When it comes time to close the books for November, you or your bookkeeper will need to record $700 as a credit to be paid in your accumulated payroll account. When you pay the entire $1,000 sum on Dec. 3, the account will be debited for $700, clearing the balance.

4. Transfer Payroll Journal Entries to General Ledger

After you’ve completed typing your journal entries, double-check them for correctness before publishing them to the general ledger; many systems won’t allow you to undo the entry.

Compare the figures to the information from your payroll system. Is there a link between the total gross wage cost entry and the total payroll expenditure for the period? Make certain that your debits and credits are equivalent (basic accounting systems should confirm this).

If you have the resources, it’s a good idea to appoint at least one or two more workers as secondary reviewers—ideally, someone from accounting or someone who won’t have a conflict of interest. This will guarantee that your journal entries are double-checked before posting; it might also be useful if you’re gone on a day when payroll journal entries are due.

5. Payroll to General Ledger Reconciliation

Payroll reconciliation is the last step in payroll accounting. A payroll reconciliation is a procedure for ensuring that your general ledger payroll accounts correctly reflect the transactions that happened in the payroll system. It also assists you in staying on track with your budget throughout the year. We offered you some pointers in the previous phases to help you keep track of your progress, but a payroll reconciliation is a more comprehensive method.

Most businesses do it at least once a month and certainly towards the end of the year. Regularly doing monthly reconciliations ensures that you have enough time to write a corrective journal entry before the month’s books are closed, making future payroll audits and research much simpler to follow.

Final Thoughts

You’re not alone if you’re feeling overwhelmed by the various components of learning how to conduct payroll accounting. It’s critical to choose a good accounting platform that makes recording transactions a breeze. When an audit comes up or you merely need to create an income or cash flow statement at the end of the year, you’ll thank yourself.

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Frequently Asked Questions

How do you calculate payroll in accounting?

The formula for calculating payroll is first you need to determine what the gross pay rate is, then you need to divide it by a certain number based on how many hours your employees work.