The Basics of Payroll Accounting: How to Record Payroll Entries in Your Books

If you’re an employer, you can’t just be on your merry way after paying your employees. You also need to account for payroll expenses in your books. This is where payroll accounting comes into play. To ensure your accounting books are accurate, learn how to record payroll transactions.

What is payroll accounting?

Payroll accounting is the recording of all payroll transactions in your books. As a business owner, you use payroll journal entries to record payroll expenses in your books.

Payroll journal entries fall under the payroll account and are part of your general ledger. Record the following expenses in your payroll account:

Employee compensation: Salaries, wages, paid time off (PTO), bonuses, commissions, and other taxable income reported on Form W-2. Payroll taxes: Federal income, Social Security, Medicare, and applicable state or local income taxes withheld from employee wages. Employer taxes: Employer match of Social Security and Medicare taxes, as well as federal and state unemployment taxes Employer portion of fringe benefits: Health insurance, life insurance, education assistance, etc. Employee deductions for benefits: Health insurance, retirement plan, etc. Other deductions: Child support, spousal support, outstanding tax liabilities, etc.

Payroll accounting helps you keep track of employee compensation and other payroll costs. Accounting for payroll gives you an accurate snapshot of your expenses.

To get a clear picture of your company’s finances and stay compliant, keep your payroll accounting up-to-date.

Debits and credits: Recap

You need to record all payroll transactions in your accounting books. But before you can do that, understand the basics of using debits and credits in accounting. So, let’s go back to the basics.

Debits and credits are equal but opposite entries. For example, if a credit increases an account, you will increase the opposite account with a debit.

Debits increase asset and expense accounts and decrease equity, liability, and revenue accounts. On the other hand, credits increase equity, liability, and revenue accounts and decrease asset and expense accounts. Take a look at how each account type is impacted by debits and credits:

When it comes to payroll accounting, you typically use expense, liability, and asset accounts. Here are a few examples of different types of accounts in payroll accounting:

Gross Wages: Expense Checking: Asset FICA Tax Payable: Liability

Expenses are costs your business incurs during operation. When you pay an employee, you increase the expense account because you are paying them.

Liabilities are amounts you owe. Increase the liability account because, as employees earn wages, you owe more.

Assets are items of value your business owns. As you pay an employee, decrease your asset account to reflect the decrease in cash.

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 always equal each other.

Types of payroll accounting entries

When recording payroll in your books, there are three types of journal entries for payroll accounting that you should know about:

Initial recording Accrued wages Manual payments

You must handle each type of payroll accounting entry differently. Typically, you work with initial recording entries. Let’s take a look at how each payroll entry compares…

Initial recording

Initial recordings, also known as the originating entry, are the

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