In this 1st part of our series on payroll accounting, we explain what payroll journal entries are, along with the 3 main types of entries that are used for payroll accounting.
Payroll is an extremely important process involved in running any company that has paid employees. Payroll involves many intricate details, and also follows many compliance rules, guidelines, and labour laws. While there are many different payroll programs and software out there that can be used to properly track each employee, their wage, benefits, vacation, and taxes, it is still up to the company to ensure they are compliant and following the payroll laws. There are many expenses as well as liabilities that result from paying employees their wages, and each one of those expenses and liabilities must be appropriately recorded in the accounting software of the company; this is payroll accounting.
In this article we will explain what payroll journal entries are, along with the 3 main types of entries that are used for payroll accounting. For the rest of the series, we will clarify what is involved for recording payroll journal entries, and how the 3 different methods of payroll processing affect the accounting of payroll journal entries.
Payroll Journal Entries
Payroll journal entries are used to record the compensation paid to employees, along with any owing amounts such as vacation, taxes, Canada Pension Plan (CPP), and Employment Insurance (EI). The payroll entries are posted in the general ledger of the accounting software of a company. The general ledger is the master accounting document that provides a complete record of all the financial transactions of a business. There are 3 main types of payroll journal entries:
1. Initial Entries – This is the entry recorded to note that a transaction has occurred. These entries would include the gross earning and any source deductions. These would also include employment taxes owed such as income tax, CPP, and EI that must be remitted to the Canada Revenue Agency (CRA).
2. Accrued Wages – These are wages that are owed to employees that haven’t been paid yet for the current accounting period and are created at the end of the accounting period. This is to ensure there is a proper reflection of the company’s financials. The accounting period is an established period of time during which accounting functions are performed throughout the year, such as preparing financial statements, and are usually decided by management.
3. Manual Payments – These only occur occasionally and are only used when an adjustment needs to be made to an employee’s pay. This could include an employee leaving the company or a mistake that was made during payroll.
Here are the 3 methods of payroll processing that are used to complete the company’s payroll. Depending on the payroll method used, there are differences in the accounting process for the payroll journal entries. These will be further explained in the next 3 parts of this series.
1. Manual – Manually processing payroll involves using the CRA’s Payroll Deductions Online Calculator. With this method, payroll journal entries need to be manually input into accounting software or recorded in a spreadsheet if the company is not using accounting software.
2. Accounting Software – Uses a payroll software provided through accounting software, such as QuickBooks or Sage 50. This requires an initial set up of the accounts required for payroll, then the journal entries will be automatically posted each time payroll is processed.
3. 3rd Party Company – This is when payroll is processed by an external payroll company. They make sure everything from employee pay stubs, government remittances, to T4s are taken care of, and send the required journal entries to be entered in the accounting software.
Accounting for Payroll
As we can see from the details provided above, it is very important that a company’s payroll records are being properly accounted for. Payroll accounting is an essential step in completing payroll, as there are many steps afterwards that involve the company’s financials and can have repercussions such as penalties when remittances are not completed properly. There are many aspects of payroll that must be properly entered into accounting software, which goes above and beyond simply calculating employees’ wages.
Next up in this series, Part 2 will explain what is involved in recording payroll journal entries.
Download this resource Payroll Accounting: Part 1 – Payroll Journal Entries.