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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.
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 primary entries for payroll accounting.
It’s the first entry you record to show a transaction.
For these entries, record the gross wages your employees earn and all withholdings. Also, include
employment taxes you owe to the government.
Accrued wages
Record accrued wages at the end of each accounting period. These entries show the amount of
wages you owe to employees that have not yet been paid. After you pay the wages, reverse the
entries in your ledger to account for the payment.
Manual payments
Manual payments come up occasionally in payroll accounting. Use these entries when you have to
adjust an employee’s pay or for employee terminations.
Journal entry # 1
Say you have one employee on payroll. Your first entry shows your employee’s gross wages, payroll
taxes withheld, deductions, and net pay. It includes the following:
• Gross wages
• Employee FICA tax payable
• Federal income tax payable
• State income tax payable
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• Employee health insurance payable
• Payroll payable (aka the employee’s net wages)
Gross wages are an expense, which increases with a debit. The rest of the accounts are liabilities.
Credit your liabilities. Here’s how your first journal entry would look:
Keep in mind that your debits (left side) should equal your credits (right side). If they don’t balance,
double-check your totals and look for accounting mistakes.
Journal entry # 2
Make a second journal entry when you give your employee their pay check. When you pay the
employee, you no longer owe wages, so your liabilities decrease. And, your cash decreases because
you paid the employee.
Because it’s a liability, decrease your Payroll Payable account with a debit. And, decrease your Cash
account (an asset) with a credit.
Journal entry # 3
Eventually, you need to pay employer taxes and remit withheld taxes. This is where a third
accounting entry for payroll comes in.
Reverse the payable entries with a debit and decrease your Cash account with a credit.
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The amount you credit your cash account is the total amount you must remit for federal and state
taxes.
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