What Is a Payroll Journal Entry? (With Types and Examples)

By Indeed Editorial Team

Published March 29, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A payroll is a list of company employees and the amount they can expect to receive for their work. If you're an accounting professional, you may be responsible for recording earnings and work benefits in a payroll. Understanding what payroll journal entries are and how to prepare them can help you track payments to employees. In this article, we define a payroll journal entry, outline the types, discuss preparing payroll journal entries, present helpful tips, and show examples.

What is a payroll journal entry?

A payroll journal entry is a record of employee earnings for an accounting period. An accountant typically includes these entries in the company's general ledger before its financial statements. This way, they can help ensure accurate financial statements, such as balance sheets and income statements. Here are typical items in a payroll account:

  • Employee earnings, including bonuses and commissions

  • Employer payroll expenses, such as paid holidays, meals, and uniforms

  • Employee taxes, including provincial and territorial taxes

  • Employee payroll deductions, such as health insurance and union dues

Related: What Are Compensation Packages? (Definition and Example)

Types of payroll journal entries

Here are the primary types of payroll journal entries:

Initial payroll entries

Initial payroll entries are the primary line items in payroll accounts. They display gross employee pay, direct employee expenses, and employer payroll taxes. In accounting, gross pay is the total amount an employee earns in an accounting period. As an accounting professional, you typically include gross employee pay and direct employee expenses as debits because the company owes these amounts. In comparison, you can record employee payroll taxes as credits because the company is liable to pay these amounts.

Accrued payroll entries

In payroll accounting, accruals are revenues earned but not yet received or expenses incurred but not yet paid. For example, suppose a company offers a signing bonus that an employee can only receive at the quarter's end. This amount is an accrued compensation. Similarly, if a company has taxes not yet paid but incurred in previous months, it can record them as accrued taxes.

You typically group all accrued payroll taxes when preparing this type of journal entry. Accrued wages and taxes are generally credits to the company's account because they're payable amounts. In comparison, you can record gross pay as a debit because it's an amount a company owes.

Manual payment entries

Manual entries are records showing check or cash payments. Companies often pay manually if an employee received less than agreed compensation in a previous accounting period. Manual payments may also be necessary if a company lays off or terminates an employee and wants to pay outside of the typical paydays. If you make manual payments using a company's payroll account, you can use the same recording format as initial payroll entries. Alternatively, many companies pay by check or cash through the accounts payable bank account.

You can reduce the need for manual checks by becoming more attentive to issues that can cause transaction errors. For example, collaborating with the human resources department to confirm individuals who qualify for salary raises can help you avoid short payments.

Related: How to Be More Detail-Oriented (With Definition and Resume)

How to record payroll journal entries

Here are the steps you can take to prepare journal entries for employee payments:

1. Create payroll account

Opening a payroll bank account is typically the first step toward recording accurate journal entries. A separate account for payroll can improve visibility on employee payments. As of 2022, it's also essential you obtain a payroll program account number from the Canadian Revenue Agency (CRA). Doing this can help the government agency identify your employer's business when remitting payroll deductions.

2. Calculate all taxes

Next, you can find all taxes to determine how much you can legally withhold from employee wages. You can review the government's website on income tax rates for individuals. Because taxes may vary depending on your location, staying updated with the latest tax laws can ensure precise journal entries.

3. Post the gross employee pay and payroll expenses

Payroll expenses are your employer's legal obligations related to payments. Along with salaries and wages, your employers may incur expenses, such as:

  • Employment insurance: This insurance provides temporary financial support to professionals as they look for employment or develop their skill set.

  • Retirement plans: Contributing to the Canada Pension Plan (CPP) is a legal obligation of employers in the country.

  • Workers' compensation insurance: This insurance provides benefits to workers who become injured or ill because of their job.

4. Verify and revise records

After posting expenses and payables, you can check all entries for accuracy. Consider comparing payroll entries with the amount on each payroll report. If all credits equal the total debits, you can conclude that your journal entries are correct.

Tips for journalling payroll entries

Here are the best practices for preparing journal entries for employee payments:

Use accounting software

Accounting software can help simplify the process of recording journal entries and performing calculations. For example, many software programs require you to include only specific tax information to calculate taxes. These software applications can also help you organize and track payroll information. Researching accounting software for handling payroll can help you make an informed selection.

Related: Computer Literacy in the Workplace: What You Need to Know

Calculate the net pay

After recording initial payroll entries, you can calculate employees' net pay to verify the actual amount they can expect to receive. Here's the formula to calculate net pay:

Net pay = gross pay - deductions

Example: An employee at GreenFlow Hills Inc. receives $1,320 as their gross pay per month. They also pay income tax and make health insurance contributions totalling $484 per month. An accountant calculates the employee's net pay as $1,320 - $484, which equals $836 per month.

Related: How to Calculate Net Pay (With Step by Step Instructions)

Collaborate with supervisors

Working with a supervisor or colleague can help simplify the process of recording journal entries. For example, you may require assistance finding a company's expected contribution to the CPP or more information about manual payments. Requesting help when journalling these entries can also save time.

Examples of payroll journal entries

Reviewing the following examples can help you learn more about the various types of payroll journal entries:

Initial payroll entries example

Here's an example of how to record initial payroll entries:

Reedi Green Hills employs professionals to work per hour and makes payments at the end of each week. The sum of all employee wages for the first accounting period equals $104,000, which is also the gross employee pay. Because this amount is a company expense, Reedi Green Hills records it as a debit. Each employee also pays $6,000 in federal income tax, $4,000 in provincial or territorial tax, and $1,500 as a health insurance premium. Because these amounts are accounts payable, Reedi Green Hills records them as credits.

The company's accountants calculate the net pay for all employees as $104,000 - $11,500, which equals $92,500. They also transfer all line items entered on the payroll journal to the company's income statement and balance sheet.

Accrued payroll entries example

Here's an example of how to record accrued payroll entries:

Hilton Brown Inc. pays its employees on the 25th day of each month and settles its accounts on the last day. In March, the company calculates its total wages and salary expenses as $300,000. The company's accountants realize that some employees worked extra hours on the 26th day of the month. Due to the policy of making payments before the month's end, the company decides to accrue these wages and pay them in the following month.

When journalling payroll entries on March 31, the accountants include the wages and salaries as debits because they're company expenses. They also enter the accrued wages and payroll taxes on the credit column because these amounts are payable. Upon verifying all entries, the accountants transfer them to the company's income statement and balance sheet before sharing these reports with upper management.

Manual payroll entries example

Here's an example of how to record manual payroll entries:

Reedi Hills Green pays its employees on the 24th day of each month. After the first accounting period, company supervisors receive less than their agreed pay. The company's accountants decide to create manual checks and make payments through the company's payroll account. When journaling payroll entries, they record all supervisor wages as company expenses on the debit column and taxes and deductions as payables on the credit column.

Please note that none of the companies, organizations, and institutions mentioned in this article are affiliated with Indeed.

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