What Is Payroll Accounting? How to Do Payroll Journal Entries

The equal – and opposite – transactions for the first two of these three categories are liability general ledger account credits. Journal entries are used in accrual accounting to record payroll expenses that have been incurred, at the time the expense becomes payable. Unlike cash accounting, which records payments when they are actually made, accrual accounting expenses costs as they are obligated. Under an accrual accounting system, there are several journal entries related to payroll. The date assigned to the journal entry is based on the end of the pay period or on the pay date, depending on what is being recorded.

If you use a good payroll program they will all be done automatically. At the end of an accounting period, you (or your accountant) will prepare a summary of your general ledger. One of the biggest expense categories for most small businesses is employee wages. In fact, salary expenses can take up to 50% of your total budget.

Initially recording payroll entry

When you sell inventory, you have a seemingly infinite number of processes and methods you could use to account for it. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

If you are recording it directly into the general ledger or the payroll journal, then use the same line items already noted for the primary payroll journal entry. These amounts are in addition to the amounts withheld from employees’ paychecks. The credit to FICA Taxes Payable is equal to the amount withheld from the employees’ paychecks. 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.

journal entries for payroll

On December 31, the company must record the cost of work done during the week of December 25–31. In addition, the employees’ holiday and vacation days must be recorded. On payday, December 29, the checks will be distributed to the hourly-paid employees. It’s a good practice to open a separate bank account to be used for payroll.

How to Make Payroll Journal Entries: A Small Business Guide

Subtracting the withholding amounts from the gross wage results in the final line which will show the net wages payable to the employees. Manual payment entries are simpler than initial recordings since there’s no liability stage. A payroll journal entry is a record of how much you pay your employees and your overall payroll expenses. That way, you can look back and see details about employee compensation, such as when you paid it, how much it was, and where the money went. Payroll journal entries are used to record the compensation paid to employees. These entries are then incorporated into an entity’s financial statements through the general ledger.

journal entries for payroll

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. Well, recording a payroll journal entry is kind of like that.

What are payroll journal entries?

However, they are useful tools that help you keep track of one of your biggest expenses. Not to mention, you can use them to see which payroll expenses have already been paid for and which ones you still owe. To create payroll journal entries for these deductions, create a row for each type of tax titled “[tax name] payable.” Record each tax amount as a credit.

  • If you want to streamline your payroll processing, Hourly payroll software makes your life easier by automatically calculating and withholding taxes from your paychecks.
  • You should then record each individual benefit amount in its own row as a credit.
  • Typically, these taxes are deposited on a quarterly basis.
  • Payroll software handles the tax calculations for you, giving you more time to get back to your business.

In this example, we’re going to look at the entries for payroll transactions for an employee named Sam. Let’s say Sam is your only employee, and her pay date is coming up. Because it’s a liability, decrease your Payroll Payable account with a debit.

Employer’s Payroll Taxes and Other Expenses

Your initial payroll entry may not cover all your wages, despite how comprehensive it appears. That’s because – in some cases – you’ll still have wages to pay after an accounting period closes. Therefore, you’ll need to create an accrued payroll entry. For your payroll taxes debit, you’ll record credits for each type of tax you withhold. Such taxes could include federal and state income taxes, FUTA, SUTA, and FICA. The journal entry to record the hourly payroll’s wages and withholdings for the work period of December 18–24 is illustrated in Hourly Payroll Entry #1.

  • The key to doing journal entries is to ensure that the total amount debited and credited is the same so that the general ledger will remain balanced.
  • Not to mention, you can use them to see which payroll expenses have already been paid for and which ones you still owe.
  • Unlike cash accounting, which records payments when they are actually made, accrual accounting expenses costs as they are obligated.

In accordance with accrual accounting and the matching principle, the date used to record the hourly payroll is the last day of the work period. This entry debits the various payroll tax expense accounts such as FICA and unemployment insurance and also credits the related payables. The most basic payroll entry involves crediting cash and debiting wage expenses. The cash account (an asset) decreases, and wages are an expense account that decreases equity.

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. You also deduct FICA taxes, income taxes, the employees’ portion of benefit premiums, and wage garnishments from your workers’ paychecks.

First, you record Sam’s gross pay by adding it to the expense account with a debit of $1,923. This represents the cost of paying Sam on her next pay stub. In the first entry, you will record your upcoming expenses and how much you owe (since you haven’t run your payroll yet).

Since these accounts are both on the right-hand side of the assets equation, it’s mathematically correct to credit one and debit the other in equal amounts. Credit the FICA tax payable, federal income withholding payable, state income withholding payable, and any other withholdings on employee paychecks. Record accrued wages at the end of each accounting period. These entries show the amount of wages you owe to employees that have not yet been paid.

Tax withholdings are hypothetical amounts from federal and state tax withholding tables. Other withholdings are based on agreements with employees and court orders. The next step is to move cash from the operating account to the payroll account in anticipation of all cash payments going out. We’ll move the sum of the above numbers excluding accrued vacation and sick time. And since you paid her, you no longer owe her net wages, so you also decrease your payroll payable liability account by $1,545.13. Your journal entry will be made up of both debits and credits, and the debits and credits must always be equal to keep the books in balance.