This article explains recording the journal entries for payroll accounting.
While payroll and accounting are both considered dull topics for many people, they are essential for running a business. Rather than avoiding the assumed drudgery of this information, why not read up on some of the important details on both topics at the same time, which will only benefit your business. Understanding vital operations in your business is anything but dull, it’s exciting!
There are many different ways that payroll can be processed within a company. Depending on how a business processes their payroll, the accounting method used to record the necessary payroll information (journal entries) will also vary, which will be explained in Part 3 of this series. In this article we will explain some important information about recording the payroll journal entries in accounting software.
For more information on payroll journal entries, check out Part 1 in this series!
Recording Payroll Journal Entries
Payroll journal entries need to be added in accounting software by recording the entries in the general ledger. If a business is not using accounting software, the journal entries could be manually recorded in a spreadsheet that is tracking (accounting) the company’s financials. It is important to note that this manual method of accounting has the most room for error and it can be very easy to make mistakes with formulas in the spreadsheet or forget to record essential data. This method would also provide a higher likelihood of forgetting or missing payroll remittances, which have penalties and interest that can be charged by the CRA.
Here is a general overview of what would be required to complete payroll accounting to show how heavily involved the journal entries are:
Set up chart of accounts – Before being able to record the journal entries in the accounting software for payroll accounting, the accounts would need to be created in the chart of accounts. The chart of accounts is a master list of every account that exists within the accounting software, and each one is assigned an account type that is divided into assets, liabilities (current or long term), equity, revenue, and expenses. Here is an example of the accounts used for payroll accounting in a chart of accounts:
Gather payroll reports/information – Generally the following information will be required from each payroll period to complete the payroll accounting:
- Net pay
- Gross pay
- Income tax deducted
- CPP (employee vs. employer portion)
- EI (employee vs. employer portion)
- Vacation pay or days used
- Vacation pay or time accrued
- Benefit fees (employee vs. employer)
Record all payroll journal entries – This is where the 3 different types of journal entries would be recorded in the general ledger including the initial entry, accrued wages, and manual payments. Each of these entries are described in Part 1 of this series.
Here is a general example of what an initial payroll journal entry could look like:
Manual Payroll with Manual Accounting
As explained above, there is a great deal of detail that goes into recording payroll journal entries whether you are using accounting software or using the manual method of accounting in a spreadsheet. While manual accounting can be a good low-cost solution for small businesses, it is important to take different aspects into consideration such as the time that will be spent calculating and recording the payroll journal entries, more room for error, and the legal requirements of processing the payroll such as what information must be provided on a paystub for employees. The questions left to answer are what methods of payroll processing are there, and how will they affect the payroll accounting for the journal entries?
Check out Part 3 in this series which explains the differences created from the 3 different methods of payroll processing for the payroll journal entries entered in the accounting software.
Download this resource Payroll Accounting: Part 2 – Recording Payroll Journal Entries.