INTRODUCTION
Generally, a Payroll Register such as the one that was previously shown is a supplementary memorandum record. As such, you do not post its information directly to the accounts. Instead, you must first record the payroll with a General Journal entry, which is then posted to the accounts.
A sample entry to record the payroll shown below:
A sample entry to record the payroll shown below:
The debits of the entry were taken from the Payroll Register's distribution column totals. They charge the employees' gross earnings to the proper salary expense accounts.
The credits to EI Payable, Employees' Income Taxes Payable, Employees' Hospital Insurance Payable, and CPP Payable record these amounts as current liabilities. The credit to Payroll Payable (also called Salaries Payable, Wages Payable, or Accrued Salaries Payable, etc.) records as a liability the net amount to be paid to the employees.
The credits to EI Payable, Employees' Income Taxes Payable, Employees' Hospital Insurance Payable, and CPP Payable record these amounts as current liabilities. The credit to Payroll Payable (also called Salaries Payable, Wages Payable, or Accrued Salaries Payable, etc.) records as a liability the net amount to be paid to the employees.
THE JOURNAL ENTRY FOR THE PAYROLL
Journalize the payroll transactions in the general journal. The general journal entry to record the payroll is simple, based as it is on the totals of the payroll register. The employees' gross pay is charged to the appropriate expense accounts. For the warehouse and office employees Marcof’s Furniture Company, this account is called Salaries Expense. Depending on the size of a company, the payroll expense account may be separated into different categories for accounting and auditing purposes.
Separate liability accounts are used for each type of deduction made from the employees' earnings. The Salaries and Payable account is credited for the net amount due to the employees, since the accounting entry for the payroll is made before the employees are actually paid.
After the payroll register is completed, a general journal entry is made to record the payroll data. The entry made in Marcof's general journal on January 25 to record the payroll for the period ended January 28 payroll.
Separate liability accounts are used for each type of deduction made from the employees' earnings. The Salaries and Payable account is credited for the net amount due to the employees, since the accounting entry for the payroll is made before the employees are actually paid.
After the payroll register is completed, a general journal entry is made to record the payroll data. The entry made in Marcof's general journal on January 25 to record the payroll for the period ended January 28 payroll.
Paying Employees
Almost all businesses pay the salaries and wages of their employees by cheque. The cancelled cheque provides a record of the payment and the employee's endorsement serves as a receipt. The use of cheques avoids the inconvenience of obtaining the cash and putting it in pay envelopes and eliminates the risk involved in handling large amounts of currency.
Another convenient and safe method of paying employees, which is gaining popularity, is the direct-deposit method. Under this system, the employer sends the employee's net pay to the bank to be deposited in the employee's bank account.
Most employers furnish each employee an earnings statement each payday. The statement gives the employee a record of hours worked, gross pay, deductions, and net pay. If payment is by cheque, the statement often takes the form of a detachable paycheque portion that is removed before the cheque is cashed.
Another convenient and safe method of paying employees, which is gaining popularity, is the direct-deposit method. Under this system, the employer sends the employee's net pay to the bank to be deposited in the employee's bank account.
Most employers furnish each employee an earnings statement each payday. The statement gives the employee a record of hours worked, gross pay, deductions, and net pay. If payment is by cheque, the statement often takes the form of a detachable paycheque portion that is removed before the cheque is cashed.
Payroll Bank Account
A business with many employees will often use a special payroll bank account to pay its employees. When such an account is used, one cheque for the total payroll is drawn on the regular bank account and deposited in the special payroll bank account.
Then individual payroll cheques are drawn on this special account. Because only one cheque for the payroll total is drawn on the regular bank account each payday, use of a special payroll bank account simplifies internal control, especially the reconciliation of the regular bank account. It may be reconciled without considering the payroll cheques outstanding. Many financial institutions offer a payroll service whereby the employees' net pay is transferred electronically into their accounts. The employer simply transfers the net amount of the payroll to the institution along with the employees' names and the accounts to be credited.
When a company uses a special payroll account, it must complete the following steps to pay the employees:
A special Payroll Cheque Register may be used in connection with a payroll bank account. However, most companies do not use such a register. Instead, the payroll cheque numbers are entered in the Payroll Register so that it serves as a Cheque Register.
Then individual payroll cheques are drawn on this special account. Because only one cheque for the payroll total is drawn on the regular bank account each payday, use of a special payroll bank account simplifies internal control, especially the reconciliation of the regular bank account. It may be reconciled without considering the payroll cheques outstanding. Many financial institutions offer a payroll service whereby the employees' net pay is transferred electronically into their accounts. The employer simply transfers the net amount of the payroll to the institution along with the employees' names and the accounts to be credited.
When a company uses a special payroll account, it must complete the following steps to pay the employees:
- Record the information shown on the payroll Register in the usual manner with a General Journal entry similar to the one previously illustrated. This entry causes the sum of the employees' net pay to be credited to the liability account (Salaries Payable).
- Have a single cheque written that is payable to Payroll Bank account for the total amount of the payroll and enter the payment in the General Journal. This requires a debit to Salaries Payable and a credit to Cash.
- Have the cheque deposited in the payroll bank account. This transfers an amount of money equal to the payroll total from the regular bank account to the special payroll bank account.
- Have individual payroll cheques drawn on the special payroll bank account and delivered to the employees. As soon as all employees cash their cheques, the funds in the special account will be exhausted.
- Typically, companies will arrange for the bank to charge all service costs to the regular bank account.
A special Payroll Cheque Register may be used in connection with a payroll bank account. However, most companies do not use such a register. Instead, the payroll cheque numbers are entered in the Payroll Register so that it serves as a Cheque Register.
PAYING BY CHEQUE
Employees should not be paid in cash. Instead, a cheque may be drawn on the firm's regular chequing account, or a special bank account may be opened on which only payroll cheques are written.
Cheques Written on a Regular Chequing Account.
When employees are paid by cheques drawn on the firm's regular chequing account, an individual cheque is prepared for each worker. The cheque number is entered in the Cheque Number column of the payroll register on the same line as the employee's other information. Information about the employee's gross earnings, deductions, and net pay is usually shown on the stub of the payroll cheque. The employee detaches the stub and keeps it as a record of his or her payroll data for the period.
When the payroll cheque is issued to the employee for the net earnings after all deductions, an entry is made in the general journal. The effect of the payment is to decrease the Salaries Payable account and to decrease the Cash account.
Cheques Written on a Separate Payroll Account
Many firms prefer that payroll cheques not be written on the regular chequing account. Instead, a separate payroll bank account is maintained. One cheque is drawn on the regular bank account for the total amount of net wages and salaries payable and is deposited in the payroll bank account. This cheque is entered in the general journal as a debit to Salaries Payable and a credit to Cash.
Individual cheques totaling this amount are immediately issued from the payroll bank account to the employees.
The major benefit of using a separate payroll account if there are many employees is that it simplifies the bank reconciliation at the end of the month. There may be many payroll cheques outstanding, especially if employees are paid at the end of the month, complicating the reconciliation of the regular account if that account is used for writing payroll cheques. A separate payroll account eliminates this complication. In addition, a special payroll account makes it easier to quickly determine each month if there are outstanding payroll cheques.
Cheques Written on a Regular Chequing Account.
When employees are paid by cheques drawn on the firm's regular chequing account, an individual cheque is prepared for each worker. The cheque number is entered in the Cheque Number column of the payroll register on the same line as the employee's other information. Information about the employee's gross earnings, deductions, and net pay is usually shown on the stub of the payroll cheque. The employee detaches the stub and keeps it as a record of his or her payroll data for the period.
When the payroll cheque is issued to the employee for the net earnings after all deductions, an entry is made in the general journal. The effect of the payment is to decrease the Salaries Payable account and to decrease the Cash account.
Cheques Written on a Separate Payroll Account
Many firms prefer that payroll cheques not be written on the regular chequing account. Instead, a separate payroll bank account is maintained. One cheque is drawn on the regular bank account for the total amount of net wages and salaries payable and is deposited in the payroll bank account. This cheque is entered in the general journal as a debit to Salaries Payable and a credit to Cash.
Individual cheques totaling this amount are immediately issued from the payroll bank account to the employees.
The major benefit of using a separate payroll account if there are many employees is that it simplifies the bank reconciliation at the end of the month. There may be many payroll cheques outstanding, especially if employees are paid at the end of the month, complicating the reconciliation of the regular account if that account is used for writing payroll cheques. A separate payroll account eliminates this complication. In addition, a special payroll account makes it easier to quickly determine each month if there are outstanding payroll cheques.
PAYING BY DIRECT DEPOSIT
An increasingly popular method of paying employees is the direct-deposit method. Under this method, a firm has its bank transfer the net pay of each employee from the employer's own account to the employee's personal chequing account at the employee's bank. The transfer is often made by "electronic transfer" rather than through the issuance of a cheque or other paper document. On the date of the deposit, the employee receives a statement showing his or her earnings, deductions, and net pay for the period and the date on which the net pay was deposited.