What Is Payroll Accounting? | How to Do Payroll Accounting Journal Entries
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Payroll Accounting for Small Business Owners

Learn how to do payroll accounting for your small business.

If you have employees at your small business, you handle payroll regularly. You must also record payroll expenses in your accounting books. For accurate and compliant books, you need to know how to do payroll accounting.

What is payroll accounting?

As a small business owner, you use payroll journal entries to record payroll expenses in your books. Payroll journal entries fall under the payroll account and are a part of your small business general ledger. Expenses entered in the payroll account include gross wages, salaries, and other earnings as well as payroll taxes.

Types of payroll accounting journal entries

There are three types of payroll accounting entries:

  • Initial recordings
  • Accrued wages
  • Manual payments

Each type of payroll entry is handled differently. Usually, you work with initial recording entries.

Initial recordings are the primary entries for payroll accounting. For these entries, record the gross wages your employees earn and all withholdings. Also, include employment taxes you owe to the government.

Accrued wages are recorded at the end of each accounting period. These entries show the amount of wages you owe to employees that have not yet been paid. Later, when you pay those wages, you reverse the entries. Initial recording entries take the place of accrued wages.

Manual payments will come up occasionally in payroll accounting. Use these entries when you manually cut a check for pay adjustments or employee terminations.

Payroll liabilities and expenses

You need to record all payroll transactions in your journal. The entries are expenses (amounts already paid), liabilities (amounts owed but not yet paid), and assets (cash). Here are some common payroll entries:

  • Gross wages and salaries
  • FICA tax payable
  • Federal income withholding payable
  • State income withholding payable
  • Payroll payable (wages you owe but haven’t paid yet)
  • Other deductions and withholdings (e.g., retirement contributions)

As you do your payroll accounting, record debits and credits in the ledger. Whether you debit or credit a payroll entry depends on the type of transaction made. The debits and credits in your books should equal each other.

Some accounts are increased by debits and decreased by credits. Other accounts are increased by credits and decreased by debits. Use this chart to see how each account is affected by debits and credits:

debits and credits

With payroll accounting, you work with expenses, liabilities, and assets.

Expenses (amounts you already paid) are increased by debits. You want to increase the expense account because when you pay an employee, you gain an expense.

Liabilities (amounts you owe) are increased by credits. You want to increase the liability account because as employees earn wages, you owe more. Payables are liabilities.

Assets (items of value) are decreased by credits. You want to decrease the asset account because when you pay an employee, you lose cash (an asset).

Keep these concepts in mind as you learn how to account for payroll. If you are unsure of whether to debit or credit an entry, refer to the chart above.

How to record the payroll general ledger

At first glance, payroll accounting can be intimidating. But, if you follow these steps to record payroll journal entries, you can learn payroll accounting with ease.

Step 1: Record payroll expenses

First, make your primary journal entries in the payroll general ledger. These entries will be payroll expenses. Expenses include anything payroll-related that you paid during the accounting period.

Because they are paid amounts, you increase the expense account. Expenses increase with debits. Debit the wages, salaries, and company payroll taxes you paid. This increases your expenses for the accounting period.

Step 2: Record payables ( payroll liabilities)

Next, record entries for amounts you owe but have not yet paid. These amounts are liabilities, or payables.

Because you owe payroll amounts, you gain liabilities. Liabilities increase with credits. Credit the FICA tax payable, federal income withholding payable, state income withholding payable, payroll payable (wages earned but not paid), and any other withholdings on employee paychecks. This increases your payroll liabilities.

Step 3: Transition accounting periods

Eventually, you will pay amounts you owe to employees and the government. When you pay liabilities, the transactions are no longer payables. You must make more entries to reduce the cash account and eliminate the liability account balance.

Since you get rid of payables, decrease the liability account. Liabilities decrease with debits. Debit the payable entries in your books.

As you pay amounts owed, you lose cash, which is an asset. Assets decrease with credits. Credit an asset account, like the cash account. Now, your books should balance.

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Payroll journal entry example

To better understand basic payroll accounting systems, look at the following payroll journal entry example.

You have one employee on payroll. Your first journal entry occurs at the end of the pay period. The primary journal entry for this payroll includes these entries:

Journal Entry #1

Account Debit Credit
Gross Wages X
FICA Tax Payable (Employee) X
Federal Income Tax Payable X
State Income Tax Payable X
Payroll Payable (Net Wages) X

The expenses include gross wages, which are debited. The liabilities include FICA tax payable, federal income tax payable, state income tax payable, and payroll payable. The liabilities are credited.

So, if the employee made $800 in gross wages, this would be your payroll general ledger:

Journal Entry #1

Account Debit Credit
Gross Wages 800
FICA Tax Payable (Employee) 61.20
Federal Income Tax Payable 60
State Income Tax Payable 20
Wages Payable 658.80

The next journal entry you make happens when you give the employee their paycheck. When you pay the employee, you no longer owe wages, so your liabilities decrease. You also lose cash because you paid the employee.

In other words, payroll payable and cash decrease. Wages payable, a liability, decreases with a debit. Cash, an asset, decreases with a credit.

Journal Entry #2

Account Debit Credit
Wages Payable 658.80
Cash 658.80

Eventually, you need to pay employer taxes and remit withheld taxes. You need to make journal entries when this happens. To enter these transactions, simply reverse the payable entries with a debit and decrease the cash account with a credit.

Journal Entry #3

Account Debit Credit
FICA Tax Withholdings Payable 61.20
Federal Income Tax Payable 60
State Income Tax Payable 20
FICA Tax (Employer Portion) Payable 61.20
Federal Unemployment Payable 6
State Unemployment Payable 20
Cash 228.40

Notice that the left side is equal to the right side on all three journals. The debits and credits must add up to the same amount for accurate payroll accounting entries.

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