Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.
Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.
Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.
Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.
Federal Income Taxes Withheld
This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.
Federal Insurance Contributions Act (FICA) Taxes Payable
The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.
Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.
[box] Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees. [/box]
The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).
Payroll Accounting Journal Entries
Account Dr. Cr. Calculation: Payroll xxxx Federal Income Taxes Withheld xxxx FICA Taxes Payable xxxx Union Dues Withheld xxxx Bond Withholdings xxxx Accrued Payroll xxxx
Distribution: Accrued Payroll xxxx Cash xxxx
Payroll Accountant Duties
There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:
1) Compute gross pay (hourly or salary)
2) Compute the total amount of deductions (FICA, taxes, etc.)
3) Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.
4) Authorize the amount of payments due to employees.
5) Distribute the payroll once authorized.
6) Issue reports to upper management concerning labor-cost data.
Accounting Payroll System
In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.
But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.
Originally posted by Jim Wilkinson on July 24, 2013.