As a small business owner, payroll is one of your biggest expenses. You need to make sure you run payroll and record it in your books correctly every time. Check your general ledger entries with payroll reconciliation for accurate accounting and payroll records.
Payroll entries in the general ledger
Payroll transactions involve different accounts in your books, including expense and liability accounts. Every time you run payroll, you must record it in the general ledger.
Usually, you record the following kinds of payroll transactions in the ledger:
- Salary and wage expenses
- Employer liabilities
- Employee liabilities (withholdings and deductions)
The entries in your ledger should match the information on the payroll register. When you do payroll reconciliation, you verify that both records are identical.
What is payroll reconciliation?
Each pay period, your payroll must balance with your ledger’s payroll expense account. The payroll reconciliation process helps you keep accurate accounting records, which are necessary for tax filing and measuring financial health. You check that the transactions in your books equal the payroll register.
When you reconcile payroll, ensure you record the correct amount for each employee. And, look to see if each transaction was recorded in the correct ledger account.
Check that all the accounts affected by a paycheck agree with the gross earnings. This includes payroll expenses as well as withholdings and employer liabilities.
Let’s say an employee earns $2,000 during a payroll period. The employee does not receive the entire amount they earn. Some of the money goes towards taxes and other withholdings.
This employee receives $1,600 after withholdings. The remaining money goes towards Social Security, Medicare, income taxes, and insurance deductions.
You must ensure you recorded all payroll accounting transactions accurately in your books. Expenses and liabilities need to be debited and credited correctly. And, you need to be sure that the calculations are right.
How to do payroll reconciliation
There are several things to remember when reconciling payroll to general ledger entries. You should reconcile payroll before submitting payroll and giving employees their checks. It’s much harder to fix errors after you pay employees. Reconcile payroll at least two days before payday.
When you reconcile payroll, check that these details are correct:
- Withholdings and deductions
- Employer taxes
- Hours worked, including overtime, vacation time, sick days, etc.
- Wages and salaries
Make sure the numbers you recorded are reasonable. Look at past payrolls to see if the current pay period is similar. If there is a large difference, learn the cause. Then, make sure each transaction you entered is correct.
How to reconcile payroll
The reconciliation of payroll doesn’t have to be difficult for small business owners. Use the following steps to reconcile payroll.
1. Print out your payroll register
The payroll register summarizes each employee’s wages and deductions for the pay period.
2. Match each hourly employee’s time card to the pay register
Confirm that you entered the hours for each employee correctly. The hours entered should match the employee’s time card. Don’t forget to differentiate regular and overtime hours, as well as vacation and sick time.
3. Make sure the pay rates and salaries for each employee are correct
Account for overtime pay, double time, and unpaid time that would normally be paid. Also, make sure all pay rates are current, such as if you gave an employee a raise last pay period.
4. Check that you took all deductions out of employee paychecks
Make sure any new deductions were taken out, like if you get a wage garnishment for an employee. Also, check if you were supposed to change or stop deducting any amounts.
5. Make entries in the general ledger according to your payroll register
You can make one payroll entry showing the payroll sum for the period. Here is how you will record debits and credits in the general ledger:
- Record salary and wage costs as a payroll expense with a debit.
- List the total for each type of wage deduction with a credit.
- Add an entry for employer liabilities with a debit.
- Include an entry for employee liabilities with a credit.
Make sure the payroll expenses match entries you made in your books and checks you issued. If the information matches, there are no mistakes with your payroll. After you reconcile payroll, submit payroll and pay your employees.
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This article has been updated from its original publication date of September 8, 2017.This is not intended as legal advice; for more information, please click here.