Payroll Accounting Entries

There are many Payroll Accounting Entries. Payroll accounting involves recording the various transactions related to paying employees for their work. This includes gross wages or salaries, deductions (such as taxes and benefits), and net pay.

1. Recording Gross Wages or Salaries

When payroll is processed, the total wages or salaries for the employees are recorded.

Example: A company processes payroll for the August, with total gross salaries amounting to ₹2,00,000.

Journal Entry:

Explanation:

• Salaries and Wages Account Debit: This entry records the total gross wages or salaries for the employees.
• To Salaries Payable Account Credit: This entry records the amount the company owes to its employees.

2. Recording Payroll Deductions

Various deductions such as income tax, provident fund, and health insurance are taken out of the gross salaries.

Example: The company has the following deductions for August:

• Income Tax: ₹20,000
• Provident Fund: ₹15,000
• Health Insurance: ₹5,000

Journal Entry:

Explanation:

• Salaries Payable Account Debit: This entry reduces the amount owed to employees after deductions.
• Income Tax Payable Account Credit: This entry records the amount withheld for income tax.
• Provident Fund Payable Account Credit: This entry records the provident fund contribution.
• Health Insurance Payable Account Credit: This entry records the health insurance deduction.

3. Recording Net Salary Payment

After accounting for all deductions, the company pays the net salaries to the employees.

Example: The net salary after deductions is ₹1,60,000.

Journal Entry:

Explanation:

• Salaries Payable Account Debit: This entry reduces the liability for salaries.
• Bank/Cash Account Credit: This entry records the payment of net salaries to the employees.

These entries help track the payroll process, ensuring that salaries are recorded accurately and that all deductions and payments are properly accounted for.

4. Recording Employer Contributions

In addition to employee deductions, the employer may also have contributions to make, such as to the Provident Fund (PF) or health insurance.

Example: The company contributes ₹15,000 to the Provident Fund and ₹5,000 to health insurance on behalf of its employees.

Journal Entry:

Explanation:

• Employer Provident Fund Expense (Debit): This entry records the employer’s contribution to the Provident Fund.
• Employer Health Insurance Expense (Debit): This entry records the employer’s contribution to health insurance.
• Provident Fund Payable Account Credit: This entry records the liability for the employer’s Provident Fund contribution.
• Health Insurance Payable Account Credit: This entry records the liability for the employer’s health insurance contribution.

5. Payment of Payroll Taxes

The company is responsible for remitting the payroll taxes it withheld from employees’ salaries.

Example: The company remits ₹20,000 of income tax and ₹15,000 of Provident Fund to the respective authorities.

Journal Entry:

Explanation:

• Income Tax Payable Account Debit: This entry clears the liability for the income tax withheld from employees.
• Provident Fund Payable Account Debit: This entry clears the liability for the Provident Fund contributions.
• Bank Account Credit: This entry records the payment made to the respective authorities.

6. Bonus Payment

If the company pays bonuses to employees, the entry records this expense.

Example: The company pays a bonus of ₹50,000 to its employees.

Journal Entry:

Explanation:

• Bonus Expense Account Debit: This entry records the cost of the bonuses paid to employees.
• Salaries Payable Account Credit: This entry records the liability for the bonus payments.

7. Advance Salary

If the company gives an advance on salary to an employee, the entry reflects this prepayment.

Example: The company advances ₹10,000 to an employee.

Journal Entry:

Explanation:

• Salary Advance Account Debit: This entry records the advance given to the employee.
• Bank/Cash Account Credit: This entry records the outflow of cash or bank balance.

8. Accrued Payroll

If the payroll is accrued at the end of the period but paid later, the entry records the liability.

Example: The company accrues ₹2,00,000 in payroll expenses at the end of August, to be paid in September.

Journal Entry:

Explanation:

• Salaries and Wages Account Debit: This entry records the payroll expense for the month.
• Salaries Payable Account Credit: This entry records the liability for the unpaid salaries.

9. Reimbursement of Expenses

If the company reimburses employees for work-related expenses, the entry accounts for this.

Example: The company reimburses ₹5,000 to an employee for travel expenses.

Journal Entry:

Explanation:

• Travel Expense Account Debit: This entry records the travel expense incurred by the employee.
• Bank/Cash Account Credit: This entry records the reimbursement payment made to the employee.

10. Employee Loan

If the company gives a loan to an employee, the entry reflects this asset.

Example: The company lends ₹20,000 to an employee.

Journal Entry:

Explanation:

• Employee Loan Account Debit: This entry records the loan amount as an asset.
• Bank/Cash Account Credit: This entry records the outflow of cash or bank balance.