As a business owner, you know that every dollar matters. That’s why tracking your expenses is so important. Your money was hard-earned, and you should know where it goes.
One of the biggest expense categories for most small businesses is employee wages. In fact, salary expenses can take up to 50% of your total budget.
So if you want to learn how to count those outgoing dollars, you’re in the right place. In this article, we cover one of the basic steps of payroll accounting—the payroll journal entry.
Let’s get into that right now.
What Is a Payroll Journal Entry?
A payroll journal entry is a record of how much you pay your employees and your overall payroll expenses. That way, you can look back and see details about employee compensation, such as when you paid it, how much it was, and where the money went.
Payroll journal entries should be added to your general ledger each time you process payroll. If you handle your own bookkeeping, it’s important to understand how to record a payroll entry to track this major expense.
Even if you have an accountant, it’s good to understand what goes into each entry so you know how to interpret your books.
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What Goes into a Payroll Journal Entry?
Ever balanced a checkbook? Well, recording a payroll journal entry is kind of like that.
Your journal entry will be made up of both debits and credits, and the debits and credits must always be equal to keep the books in balance. This is known as a double entry.
For accounting purposes, a debit is usually used when you want to record a payment you made or are going to make very soon, and it’s on the left side of the ledger.
A credit, on the other hand, appears on the right side. It’s used to record a new debt you owe (a.k.a., a liability) or when money actually leaves your bank account. This might sound a little confusing, so let’s start with an easy example to explain this concept:
Say you owe a supplier $1,000—a liability since it’s owed but not yet paid.
When you pay that money using your cash account, you have to record two things: how much money left your bank account and how much you paid the supplier (accounts payable).
Here’s what that entry will look like.
You decrease your cash account by $1,000 since you spent that money. You also decrease your liability account (also known as a payable account) by $1,000 since you don’t owe that money anymore.
Both debit and credit columns have $1,000, which makes them equal. This helps you check you’ve paid your supplier, which should keep them happy and your relationship strong.
So now that you understand this concept–let’s apply it to a payroll journal entry.
Sample Payroll Journal Entries
In this example, we’re going to look at the entries for payroll transactions for an employee named Sam. Let’s say Sam is your only employee, and her pay date is coming up.
To keep it simple, let’s say you use a bi-weekly pay period, and there is no state income tax. Sam also doesn’t have any voluntary contributions (such as payments to a health insurance or retirement plan).
Pay Stub Data
- Gross wages: $1,923
- Employee FICA tax (Social security and Medicare taxes) payable (7.65%): $147.11
- Federal income tax payable (12%): $230.76
- Net wages (payroll payable): $1,545.13
Entry #1: Recording the Expense
In the first entry, you will record your upcoming expenses and how much you owe (since you haven’t run your payroll yet).
Here’s what the initial payroll entry will look like. (You can follow along using the Payroll Journal Entry Template. Just click "Make a copy.")
Let’s break down each item in this entry.
First, you record Sam’s gross pay by adding it to the expense account with a debit of $1,923. This represents the cost of paying Sam on her next pay stub.
Since you haven’t run payroll yet, the $1,923 of gross wages represents the money you owe. We’ll balance that by adding items to the credit column (i.e., your liabilities).
Sam won’t receive her gross wages since you must withhold a portion of her income for taxes. These withholdings are known as employee deductions. We add these payroll tax expenses to the credits column. We also add in her net pay as well.
The total amount of your credits is:
- $147.11 is owed to the IRS for the employee portion of the FICA tax—which funds Social Security and Medicare programs.
- $230.76 is owed to the IRS for income tax withholding.
- The remaining $1,545.13 is owed to Sam on her next payday.
When you total up the debits and credits, you’ll see that each column has a total of $1,923.
Entry #2: Recording Wages Paid
Okay, so you’ve recorded the expense, but what happens when you run payroll and Sam’s net wages are no longer a liability?
Here’s what that entry looks like.
It means you paid Sam $1,545.13 via cash. And since you paid her, you no longer owe her net wages, so you also decrease your payroll payable liability account by $1,545.13.
But where did her payroll taxes go?
The money you owe the government is still in your liability account since that doesn’t get sent every time you run payroll. Typically, these taxes are deposited on a quarterly basis.
Instead, you’ll create another journal at the end of the quarter when you send Sam’s total withholdings to the government.
Let’s look at a summary of the process we just walked through.
Steps for Recording a Payroll Journal Entry
Now that you know a ton about payroll journal entries, here are the steps to prepare your own:
- Collect your upcoming payroll data.
- Record gross wages as an expense (debit column).
- Record money owed in taxes, net pay and any other payroll deductions as liabilities (credit column).
- Check the initial entry to make sure the credit column equals the debit column.
Then, when you pay your team:
- Record outgoing payments such as wages and tax deposit (credit column).
- Adjust your liability account to reflect payments (debit column).
- Check each entry to make sure the credit column equals the debit column
This may seem like a lot of little steps, and in a way, it is.
When you’re managing a business ledger, paying attention to detail and double-checking your work is important. After all, it’s the tool you use to track your money, and you want to keep it accurate.
That said, you don’t have to create each entry manually. You can use accounting software like QuickBooks to automate some of the steps.
If you want to streamline your payroll processing, Hourly payroll software makes your life easier by automatically calculating and withholding taxes from your paychecks. They even send them to the government for you, so that’s one less thing you have to worry about.
Are There Different Types of Payroll Journal Entries?
Yes, there are three main types of journal entries associated with payroll. They include:
Initial Recordings
Initial recordings are the most common types of entries you or your accountant will create when doing your payroll accounting. These are the entries you saw in the examples that create the expense and then track each payment.
Accrued Wages
At the end of an accounting period, you (or your accountant) will prepare a summary of your general ledger.
To do so, you’ll need to calculate your accrued wages (or wage accruals), which are the total wages you owe but haven’t paid yet. You will record this calculation using an accrued wages entry, which increases the liability account.
Manual Payments
Manual payment entries are simpler than initial recordings since there’s no liability stage. Instead, you have an expense that is paid for with cash (or check) right away—so nothing is technically “owed.” This entry type is only used when you pay employees using cash or check instead of direct deposit.
For instance, you will use manual payment if you terminate an employee in the middle of a pay cycle and use a check to pay what they’ve earned so far.
Keep Track of Your Biggest Expense
Using debits and credits for payroll accounting can seem confusing at first. However, they are useful tools that help you keep track of one of your biggest expenses. Not to mention, you can use them to see which payroll expenses have already been paid for and which ones you still owe.
Now that you know the basics? You can look at your general ledger and understand what’s going on with your payroll entries.
