How Do You Book a Payroll Journal Entry?

By October 27, 2017Journal Entries

Payroll is probably one of the most common journal entries – and one of the most common for pitfalls and errors.

This blog is about going back to the basics in accounting, and the objective of the post is to walk you through the correct way to book a payroll journal entry.

There are a few different ways to “group” these payroll journal entries. Some companies will post entries for individual employees, while others do it by department. If the former is the case, it’s important to store this information in a private folder so that it is not accessible to everyone in the accounting team. How you choose to group these entries really depends on which format your payroll provider uses to report on the information, or if your business has strict requirements around it.

The details:

Journal:  Payroll

Frequency: Each pay period, or each reporting period (i.e. monthly)

FloQast folder location (learn more about FloQast folders): ‘Payroll Liabilities’ if payroll provider produces reports by department or, in a new FloQast instance specific to payroll if the underlying reporting is by individual and therefore too sensitive to share with the whole Accounting team

 

The dr.’s and cr.’s

DateAccount NameDRCR
8/30/17Gross wage expense – Dept A $500,000
Gross wage expense – Dept B $150,000
Bonus expense – Dept B $33,000
Commission expense – Dept A $12,000
Payroll tax expense (employer portion) – Dept A $46,000
Payroll tax expense (employer portion) – Dept B $16,470
Benefit contra expense – employee contributions $2,050
FSA clearing – employee withholdings $5,000
Payroll accrual/clearing $750,420

Memo: To record the payroll journal entry for Aug 2017

 

DateAccount NameDRCR
8/30/17Payroll accrual/clearing $745,420
Cash out $745,420

Memo: To record cash paid for net pay, employee tax withholdings, and employer taxes

 

What if my account is now out of balance?

  • Make sure there aren’t additional earnings codes this period, like “additional earnings,” or “correct / adjustment pays”
  • Make sure there aren’t new withholdings like 401k or Flex spending that need to be added to the payroll journal template

Reconciliation (click here for 3 best practice Excel reconciliation templates)

  • Reconcile your cash balance
  • Reconcile your payroll clearing – tax adjustments or pay dates that cross into the next period might be proper reconciling items. Look at next month’s bank account transactions!
  • Reconcile your benefit clearing accounts

Common pitfalls

  • You might think to debit wage expense and employer tax expense for the cash that goes out. Be careful!  This understates wages and overstates employer tax expense

How auditors audit

  • Auditors will probably perform analytics on your income statement. “Why did wage expense go down one quarter for a specific department?”  “Why were commissions so high this month?”  If your payroll journal is designed properly, you’ll have no problem answering these questions!  (“Reduction in headcount.”  “Sales increased.”)
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