Generally, two types of payroll entries are made by employers—payroll entries (which account for employee salaries and wages) and employer payroll tax entries (which account for payroll taxes deducted from employees’ pay). Other transactions also may be included, such as union dues, sick and vacation time, and retirement accounts, such as a 401k. All these debits and credits must be considered when making a payroll journal entry. Assuming a company utilises a standard accrual method of accounting, the “matching principle” of accounting will guide you through the process.
Create, using either pen and paper or an accounting software program, headings and columns for your journal entries. These will depend on your company’s needs but usually include date, the account type or name—such as wages/salaries—and credit and debit headings. This method is based on general journal accounting principles and forms the foundation of whatever customised entries you’ll include.
Enter the date, name of account, journal entry number (if not done automatically by your software), and the total gross wages/salary amount under the debit heading. If two or more accounts are affected by a single transaction, create separate lines to specify this “compound entry.” For example, an expense may be incurred in which part of the payment is placed in an accounts receivable account and a portion paid by cash. Create separate lines for other payroll-related expenses, such as contract or freelance expenses.
Include all deductions or withholdings in the credit column, including state and federal taxes, FICA, medical benefits contributions and 401k contributions.
Subtract the credit total from the debit total. This yields the net payroll amount payable (wages and salaries minus withholdings and deductions). For example, if your weekly debits (wages, salaries, freelancers) equal £3,250, and you withhold £1,300 in taxes, FICA, benefit contributions and retirement payments, your total net payroll amount is £1,950. Add this to the credit column.
Record, in a separate journal, all liability payments such as taxes and FICA (which previously appeared as credits) as debits. List the net payroll amount paid as a credit.
Enter, in a separate journal, the net payroll amount payable (debit) and cash (credit amount). Each column will state £1,950, reflecting the issuance of paychecks for net pay of salary and wages for the week. This is the disbursement journal. Update the disbursement journal weekly or monthly and customise it to reflect information you feel is necessary—check numbers, running accrual of payments, benefits or even hours worked.
Do not commingle payroll funds or checks with other company funds. Keep a separate account for auditing and check-tracking purposes.