Every firm that hires employees must manage payrolls, and payroll journals are important to maintain accuracy.
The human resources department maintains employee and organization information, including payroll. Payroll information includes staff earnings, bonuses, commissions, and benefits.
A payroll journal helps HR professionals, business owners, and executives view financial information apart from other aspects of the organization.
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What is a Payroll Journal?
A payroll journal is a detailed record of accounting transactions related to employee-related compensation, expenses, and deductions.
In simpler terms, it shows the amount an organization pays its employees accurately. An accurate calculation of credits and debits ensures that financial statements are error-free.
It records the financial impact of each payroll cycle. The process involves calculating the total gross pay for each employee, subtracting deductions, and evaluating the final pay.
Payroll journals may also include special entries at the month’s end such as sick leave.
Finally, entries appear in the income statement and the balance sheet, making it the employer’s and employee’s responsibility and obligation.
The following factors that affect monthly salaries are entered in a payroll journal and income statement:
- Employee Compensation Insurance
- Paid vacations/holidays
- Paid sick leave
- Payroll tax
- Employee Deduction
- Employer contributions towards retirements plans such as pension plans or 401(k)
- Profit Sharing Plan
- Other Deductions
Types of Payroll Journal Entries
The main entry types commonly found on payroll journals are as follows:
Initial Payroll Entry
Initial payroll entry is the primary entry in a ledger that is most detailed.
It indicates primary transactions which also account for employment taxes.
This is done for the initial payroll recording which includes gross wages and withholdings such as additional taxes that firms need to pay from employee payments.
Accrued Wages Entry
Accrued wages entry is recorded at the end of each accounting period once wages are paid. It records the number of wages owed to the employees but not paid.
Further, entries in the ledger are adjusted to reflect the final payment. The entry may be avoided if the amount is immaterial.
Manual Payments Entry
This type of payroll journal entry refers to manual payments to employees such as via cheque or cash.
It can occur due to pay adjustments or employment terminations.
How to Prepare a Payroll Journal Entry
Here’s how to prepare an accurate payroll journal entry:
#1: Set up Payroll Accounts
Payroll accounts must be added to the accounts chart which is an organized financial accounts list. These accounts have a list of expenses and liabilities.
This separate payroll account helps track and organize transfers and payments.
A firm may have multiple payroll accounts, but the common ones are:
- Vacations Payable
- Wages Payable
- Gross Wage Expense
- State Income Tax Payable
#2: Calculate Taxes and Deductions
As per LendingClub, 64% of American workers live paycheck to paycheck. This proves that timely and accurate payments are essential to maintain employee morale.
As calculating taxes and deductions highlights the amount to be withheld, employees are required to fill out tax forms.
This indicates the amount to be deducted for each period. These calculations and deductions may also be based on specific locations, so the firm should be well-versed with taxes and local rules when making calculations and deductions.
#3: Post Payroll Expenses
Posting payroll expenses calls for gathering and recording the payroll records maintained in the accounting books.
These expenses may include any payments made during the accounting period such as wages, salaries, or other fringe benefits.
#4: Posting Payables
Payables refer to an amount a firm should pay but hasn’t paid yet, such as liabilities.
Liabilities can increase your credit, so it is crucial to make payments without withholding them.
#5: Confirming Your Records
The final step is to confirm the entries to ensure information accuracy and that nothing is missing.
Compare entries and revise errors with the final payroll report amount. Ensure that debit equals the credits.
Benefits of Payroll Journals
Besides accuracy, maintaining payroll journals also ensures other advantages such as speed and efficiency. Here are some benefits that maintaining payroll journals offer:
#1: Handling Complex Calculations
Small companies might have a low credit and debit balance, while it may not be the same for huge corporations. When maintained and formatted correctly, payroll journals are excellent for handling complex and high-volume calculations.
Calculations may also get difficult with increased department divisions and pay elements and the type and size of the firm.
#2: Time and Cost Savings
Timely payroll journal maintenance helps avoid costly errors. Saving time also helps businesses focus on vital tasks.
Moreover, monitoring daily numbers can take away significant time. Firms may opt for outsourcing payroll management to free up more time.
#3: Proper Management
Payroll journal ensures timely employee payments. This leads to transparent financial management with aspects such as tax filing deadlines.
This also ensures an organization’s compliance with legal and tax laws.
Payroll Journal Best Practices
Here are the best practices to create a reliable payroll journal.
#1: Using Accounting Software
According to research, more than 64% of small businesses use accounting software.
Besides maintaining records manually, automation helps drive more precision into the process. It helps store, organize, and track information and make accurate calculations. With reliable software, you can also plan future records and store specific department information.
Moreover, it offers a detailed analysis of staff data costs and more, leading to a wealth of data.
#2: Maintaining a Spreadsheet
Besides software, teams should also maintain a spreadsheet as a backup.
It organizes and centralizes the entries in one place which makes future references easy. For example, a mistake in the ledger can effortlessly be looked into.
#3: Filing Tax Forms
An organized system for the employees’ tax forms significantly helps prepare accounting payroll journal entries.
Organizing these forms makes it easy for executives to find certain tax forms when deductions are supposed to be calculated.
Payroll Journals – Key Takeaways
Businesses oversee multiple aspects daily. Be it a chain of outlets or a single store, managing the finances well is the foundation of a thriving business.
Studies suggest that 49% of employees begin a job search after two paycheck errors, which makes diligence crucial for companies. Paying employees timely and accurately prevents low morale, poor performance, and reputational or legal difficulties.
This makes payroll accounting an essential function for businesses to thrive.
Professional payroll companies can also help you with this process, so we advise looking for the right agency to partner with for your project.
