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
| Date | Account Name | DR | CR |
| 8/30/17 | Gross 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
| Date | Account Name | DR | CR |
| 8/30/17 | Payroll 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.”)
