How to Do Payroll Accounting: A Step-by-Step Guide for Employers

Several withholdings and deductions are taken out of an employee’s gross pay. The benefits you offer, your industry, and other factors affect which accounts you need to record payroll. The most used entry is the initial recording, also known as the originating entry. It’s the first entry you record to show a transaction has occurred. These entries include your employees’ gross earnings and withholdings. In these initial entries, you also record any employment taxes you owe.

Throughout her career, Heather has worked to help hundreds of small business owners in managing many aspects of their business, from bookkeeping to accounting to HR. Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry. Her experience has allowed her to learn first hand what the payroll needs payroll accounting examples are for small business owners. The accrued payroll account houses any net payroll amounts (payable to employees) that have been expensed but have not yet been paid. In this case, you would credit a liability account, or payable, until you’re ready to pay. An employer may have both liabilities and expenses for the same employee, due to paid time off.

Journal Entry to Record $10,000 in Payroll Expense

Only a portion of Ella’s paycheck would be expensed the seven days she worked through Nov. 30. If you don’t have a payroll system, check out our guide to doing payroll in excel. We have an easy to use template that makes processing payroll manually much simpler. It’s important to keep in mind that preparing payroll in Excel can be difficult if the business has more than a handful of employees. Download your free payroll chart of accounts list for future reference.

• Recording these costs can give small business owners an accurate picture of their expenses.
• By contrast, some employers may have additional accounts to add, like a fitness credit or education reimbursement.
• Small businesses rarely record this liability in their books.
• However, if you use a manual accounting system, you will need to create journal entries.
• For instance, a small business with one or two employees may not offer 401(k) matching or even health insurance.

Calculate taxes and other deductions based on compensation. Taxes and other deductions are based on the forms your employees fill out. The forms will tell you how much of an employee’s wages you should deduct each pay period. Calculations will also depend on your state and sometimes your city or county. Familiarize yourself with any local tax laws that could require additional payroll deductions.

What is a payroll journal entry?

For example, say an employee has 24 hours of PTO and has already taken eight hours off. Those eight hours have already been paid out and are an expense. The remaining 16 hours are still owed to the employee and are, therefore, a liability to the company. For instance, a small business with one or two employees may not offer 401(k) matching or even health insurance.

One final stage in payroll accounting is to do a payroll reconciliation. It also helps you to ensure that you are within budget throughout the year. We gave you some tips in prior steps to help check yourself along the way, but a payroll reconciliation is a more in-depth approach. A journal entry is best described as the recording of debits and credits. It generally includes an effective date, a debit amount, and a credit amount.

Journal Entry to Record Accrued Vacation

Recording these costs can give small business owners an accurate picture of their expenses. You may find that hiring an accountant or bookkeeper to record these transactions can help you spend more time working on your business. Businesses should stay up to date on their payroll accounting, both for their financial knowledge and to stay compliant with government regulations. If your business is ever audited, you need records of your taxes and employee compensation. One way to record payroll is to use a series of journal entries.

Recall our previous example of employees getting paid on January 17, from work they did January 2-15. On January 17, once employee wages are fully paid, those liabilities become expenses. Typically, employees work for a period of time before you pay them for their work. Until the money comes out of your business’s account, that payroll is a liability.

What is payroll accounting?

Until you pay employees, those wages are a liability because it’s money you owe. When recording payroll, you’ll generally debit Gross Wage Expense, credit all of the liability accounts, and credit the cash account. Gross Wages will appear on your Profit and Loss or Income Statement, and the liability and cash accounts will be included on your Balance Sheet.