Payroll Accounting

What is Payroll Accounting?

The payroll accounting is an accounting function within the organization that looks into the management, recording, determination, and analysis of the compensation of the employees. They work towards the calculation of taxes and benefits along with the salary given to the employees.

Explanation

The accounting function looks into the reconciliation of employee benefits such as superannuation schemes and gratuity.  It determines the taxes payable by each employee corresponding to the salaries payableSalaries PayableSalary payable refers to the liability of the company towards its employees against the amount of salary of a period that became due but has not been paid yet to them by the company and it is shown in the balance of the company under the head liability.read more by the organization. It also determines the amount which would be deducted on the salaries payable.

These deductions are always in line with the applicable legal laws. The deductions under the US laws are federal withholdings, FICA, state withholdings, employee health insurance costs, 401K, disability taxes of state.

Payroll Accounting

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Examples of Payroll Accounting

Let us take an example of a business that has to pay $1,000 to the employee. The applicable federal income taxesFederal Income TaxesFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more amount to $100, State income taxes amount to $150, and FICA is payable at $50. Help the payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more executive prepare journal entries and record the transaction.

Answer

Here, $1,000 would be recorded as gross salaries under expense accountExpense AccountExpense accounting is the accounting of business costs incurred to generate revenue. Accounting is done against the vouchers created at the time the expenses are incurred.read more of the income statement, and hence it would be shown as credit. As a balancing act, record the FICA, State income taxes, federal income taxes, and salaries payable liability account of the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more as the debit.

Note, whenever there is an increase in a liability accountLiability AccountLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more, it is credited, whereas whenever there is an increase in the expense account, it is debited. The following would be the journal entry, as shown below: –

Payroll Accounting Example 1

Types of Payroll Accounting

There are three basic types. These comprise of accrued wages, manual payments, and initial recordings.

Types of Payroll Accounting

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#1 – Initial Recordings

#2 – Accrued Wages

  • The accrued wages are wages that the business owes to the employees corresponding to the service disbursed by them and are yet to be paid.

#3 – Manual Payments

  • The manual payments are classified as the payments that are made when employees terminate their services to the business, and the payroll executives update this specific line item to record the cleared dues of the employees.

Payroll Accounting Journal Entries

Under payroll accounting, the payroll executive makes entries under expense, liabilities, and assets. The Asset and expense accounts are classified as debitsDebitsDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more when it increases and credit when it decreases. The Liabilities, equities, and revenue accountsRevenue AccountsRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.read more are classified as credits when it increases and debits when there is a decline in their values. The following steps would be performed, as shown below: –

Payroll Accounting Example 1-1

Importance

  • Every big organization consists of a large number of employees.
  • In such organizations, it plays a critical and vital role.
  • This function performs administrative functions that ensure that employees get their dues on time as well as the organization complies with the legal and tax laws.
  • By ensuring proper and transparent financial management, this function ensures that the employees get their correct dues on time.
  • This function monitors the expenditure of payroll and ensures that the organization does not waste too much of its financial resources.
  • All organizations are required to pay taxes to the Internal revenue service on the salaries paid. Hence, this function performs necessary actions to compute the correct tax and report the same to the Internal revenue service.

Advantages

  • Payroll accounting saves a lot of time for an organization.
  • It provides a framework on the computations of correct dues for the employees.
  • The in-house payroll system ensures better control and compliance of the data of employees.
  • The functions ensure that the financial resources are utilized effectively, and the organization has cash on hand once all legal requirements are fulfilled.
  • It ensures that the organizations meet their tax filing deadlines.

Disadvantages

Conclusion

Payroll accounting is an essential function for growth as well as large businesses. They help and manage the salaries, wages, bonuses, and commissions payable to the employees of the business. The department works and determines the number of deductions that are to be withheld from the salary payable as per the applicable legal and labor laws.

The department has three basic types of payroll accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more, which are classified as the initial recordings, manual payments, and accrued wages. The departments may do weekly, biweekly, and monthly basis payments after making applicable deductions.

Recommended Articles

This has been a guide to payroll accounting and its meaning. Here we discuss examples, types, and journal entries of payroll accounting along with advantages and disadvantages. You may learn more about financing from the following articles –