How does a payroll journal entry work?

Definition

A payroll journal entry is the dated debit-and-credit record that posts one pay run to the books. On the books, this is the posting step that moves wages, withholdings, and take-home pay into their accounts.

A grocery store uses this record to put Friday's pay into the ledger. The run is the event; the entry is what the ledger actually stores.

Accrual books post the wages when the hours are earned, even if payday is later. Cash-basis books may wait until the deposit hits employee banks.

This record is the posting. It is not the list of people that supports it, and it is not the wage line sitting on the Income Statement by itself.

Where it shows up

Balance sheet: Related to accrued wages and tax withholdings it creates.

P&L: Related to the wage cost this entry posts.

Cash flow: Decreases in accrued payroll, reported cash from operating activities decreases.

See also: Payroll Register · Journal Entry · Payroll Expense

When you look at your Income Statement, you will not see a printed line named for this posting. You see the wage cost the entry put there, usually in the keep-the-doors-open block.

A large posting means a heavy pay week. A small one means fewer hours or fewer people on the schedule.

The Balance Sheet also does not list the entry as its own account. Related balances show up as accrued payroll until payday and as payroll tax liability for the withheld tax.

On the Statement of Cash Flows, the payday deposit is the cash event. Cash from operating activities falls when take-home pay and the later tax remittance leave the bank.

Keep the supporting list with the posting the way you keep a bill with an invoice. Anyone proving Friday's wages should be able to open both.

How it works

Hours and pay rates are totaled first. Those totals become the debit to wage cost, or to accrued payroll if the week was already accrued.

Withholdings are split out next. Income tax, Social Security, Medicare, and any benefit take-outs credit their payable lines instead of going out as cash.

How one pay run posts:

• Total hours and rates into gross wages for the debit.
• Split withholdings onto their payable lines.
• Credit cash for take-home pay when deposits go out.
• If the week was already accrued, clear accrued payroll instead of debiting wage cost again.

Take-home pay is the remainder. That amount credits cash when the deposits go out, or stays in accrued payroll if payday has not arrived yet.

Stay with this one run. A year-to-date earnings report is a different file; this page is about the dated posting for a single payday.

If the store already booked a payroll accrual at month-end, Friday's posting should not debit wage cost again for those same hours. It should clear the accrual and record only the new slice.

Current liabilities should then match the unpaid tax and any wages still sitting until the next deposit. Cash should match the take-home total that left the operating bank account.

After posting, every total on the supporting list should have a home in the ledger. A column with no matching account is a sign the entry is incomplete.

Do not invent the numbers in the journal. Copy them from the run's register so the books and the list agree.

Example

Harbor Grocers pays its cashiers and stockers every Friday. This week's earned wages are $6,000, and payday is still two days away.

The store records this week's wages:

Debit: Payroll expense $6,000

Credit: Accrued payroll $6,000

Wage cost hits the Income Statement, and accrued payroll (a liability) goes up by $6,000. Cash has not moved.

The week's shifts now carry $6,000 of staff cost, before employer tax. The Balance Sheet shows the $6,000 owe until Friday.

When the payday file runs, the store clears the $6,000 accrued payroll. Take-home pay leaves cash, and withholdings move into payroll tax liability; this posting's wage cost stays at $6,000.

If two stockers also worked Sunday after month-end, those hours wait for the next week's entry. This week's $6,000 does not pick up next month's shifts.

The supporting list for Friday should still add to $6,000 of wages. Anyone tying the bank file to the ledger starts with that page and this posting.

Common mix-ups

A payroll journal entry is not the payroll register. The register is the list of people and amounts; this entry is what posts those totals to the ledger.

A payroll journal entry is not the same as payday cash. The posting records the wages and the owe; the cash moves later when deposits go out.

A payroll journal entry is not a second wage cost if the week was already accrued. Paying later clears the liability; it does not hit the Income Statement again.

Related terms

• Payroll Register: The per-run report listing each employee's gross pay, deductions, and net pay.
• Gross Wages: Total pay earned by an employee before withholdings.
• Payroll Tax Liability: Withheld and employer payroll taxes owed to tax agencies.
• Payroll Expense: The wage cost of employees recorded on the income statement.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Accrued Payroll: Wages earned by employees but not yet paid at the end of a period.
• Net Pay: The amount actually paid to an employee after withholdings.
• General Ledger: The master record of every account and every posted transaction.