Journal entry for payroll: A guide 

When it comes to running a business, there is no more important expense than that of your employees. They are the backbone of your company, and keeping up with payroll not only ensures their satisfaction but also guarantees that your accounts are properly balanced. As Aurum Solutions CEO, Tiago Veiga, recently told Tech Round: “In order to give customers the best and most innovative solutions, you need to ensure that your team is happy and working to optimum levels.”

This is why payroll journal entries are a vital part of the overall ecosystem of a healthy, flourishing business. Payroll journal entries help to document each payroll expense and provide transparency and accuracy in your financial records. Doing this ensures both good financial management and happy employees. 

In this guide, we’ll cover the basics of payroll journal entries, detail what goes into them, explore common challenges, and explain how regular reconciliation can help prevent costly errors.

What is a payroll journal entry?

A payroll journal entry is an accounting record that tracks the wages and compensation paid to employees, as well as any associated taxes, deductions, and benefits. This entry is typically documented in a company’s general ledger, providing a snapshot of payroll expenses for accurate financial reporting. 

Depending on a company’s structure, payroll entries can be recorded by employee, by department, or for the entire organisation in a single entry each month. What works may ultimately vary from company to company, but the key thing is that these entries are logged accurately and regularly. 

What is included in a payroll journal entry?

A payroll journal entry goes beyond just an employee’s gross pay. It includes a range of costs that impact multiple accounts within the organisation. Here’s a breakdown of the key components:

• Gross wages. The total compensation before deductions, covering salaries and hourly wages. This expense is recorded as a debit under the “wages expense” account.
  
  
• Employer National Insurance Contribution (NIC). This is an additional expense to the employer, calculated as a percentage of the employee's earnings. This amount is credited to the “Employer NIC Payable” account, reflecting the company’s liability.
  
  
• Payroll taxes. Payroll taxes include employee deductions for national insurance. Each tax is recorded as a credit under specific “tax payable” accounts, indicating the company’s responsibility to remit these amounts to the government.
  
  
• Benefits. This category covers any employer-provided benefits such as private health care, retirement contributions, or stock options. Each benefit has a corresponding credit entry in a “benefits payable” account, as these amounts represent the company’s liabilities.
  
  
• Payroll deductions. Payroll deductions include voluntary deductions for items like retirement contributions, insurance premiums, and loan repayments. These deductions are credited under separate “employee deductions payable” accounts, as they reduce the cash paid to the employee but still need to be accounted for in the payroll process.

What complications can occur with payroll journal entries?

While payroll journal entries can be streamlined with automation, certain complexities can still remain. Customisation and flexibility in some automation tools can be limited, this may lead to crucial information going missing. Here are some common challenges:

• New starters, Finance teams must accurately add new employees to the payroll in a timely manner. This includes collecting information from documents like the P45 and ensuring any pension contributions align with the company’s policies, such as contributions beginning only after a probation period.
  
  
• Employee offboarding. When an employee leaves, finance teams need to make adjustments based on any unused vacation days, impacting the final paycheck and associated journal entries.
  
  
• Company loan schemes. If employees participate in company-sponsored loan programs (e.g. seasonal public transport tickets or cycle-to-work schemes), these deductions must be accurately reflected in payroll journal entries to avoid mismanagement of company funds, and know when an employee has completed their contributions.

How can reconciliation support payroll journal entries?

Since payroll represents a significant business expense, reconciliation plays a crucial role in verifying that payroll journal entries are accurate and that all accounts balance out to zero after pay cheques are paid. For instance, if a company has a debit of £10,000 for employee pension contributions, this should be cancelled out to reach £0 after payments are made. Any imbalance in the reconciliation process signals a potential issue, such as:

• Data entry errors. Miskeying numbers can result in discrepancies that only reconciliation can catch.
  
  
• Duplicate payments. If one finance professional sends payments and another unknowingly repeats the process, reconciliation can help catch these duplicate transactions.
  
  
• Incorrect statutory payment allocations. Mistakes like company payments of statutory amounts that should be covered by the government (e.g. maternity pay) can go unnoticed without reconciliation.

Conclusion

Payroll journal entries are essential for maintaining accuracy in a company’s financial records and ensuring employees are compensated correctly. Given the complexity of payroll with its many components and potential for errors, regular reconciliation is equally important. Through reconciliation, companies can identify and correct errors promptly, protecting their financial health and legal standing. 

Balancing payroll costs is not only about paying employees but also about managing expenses wisely to benefit the entire organisation. This is why opting for an automated reconciliation software like Aurum can save you time, help to ensure payroll journal entries are reconciled correctly, and employees are kept happy.