CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - Accounting Entries for Payroll - Notes ^{5 / 18}

What is payroll?

This is the wages and salaries paid to employees of a company. 

Let us look at at the elements included in payroll and the accounting entries that go with them.

• Gross and Net Earnings

• Gross Pay 

  This is the total amount earned by the employee without any deductions.

• Net Pay 

  This is the amount paid to the employee after the employer makes deductions for income tax and certain statutory and voluntary amounts.

  Calculation of net pay

  Gross Pay
  Less Income tax payable on behalf of employee (statutory deduction)
  Less Social security payable by employee (statutory deduction)
  Less Pension contribution payable by employee
  Less Charitable donations made by employee

• Total Labour Costs to the Employer 

  This is the employee's gross pay plus any additional payroll taxes and pension contributions that the employer has to bear.

  Total expenses that are deducted from the statement of profit or loss =

  Gross wages + Employer social security payments + Employer pension contributions

Example

An employee is paid at the rate of $20 per hour.

Tax and other deductions amount to 25% for weekly income in excess of $240. 

Employer payroll taxes are 10% of gross wages. 

If an employee works 46 hours in a week, what are the employee's gross pay, net pay and the total amounts that will have to be paid by the employer to the tax authorities?

• Solution

Accounting for labour costs

Labour costs may be accounted for using a Wages Control account

1. Step 1

   Dr   Wages control account with the gross wages
   Cr   Wages control account with the gross wages

2. Step 2

   Dr   Wages control account with the additional employer's costs
   Cr   Wages control account with the additional employer's costs

3. Step 3 (the payment of net wages to the employee)

   Dr  Wages control account with the net wages
   Cr  Cash with the net wages

4. Step 4 (the payment of deductions to the state)

   Dr  Wages control account with employee deductions
   Cr  Cash with employee deductions

5. Step 5 (the payment of other amounts to the state)

   Dr  Wages control account with other amounts due
   Cr  Cash with other amounts due

Example

Record the following transactions in the Wages Control account and the Wages account

1. On 31 March, the gross wages are calculated as $90,000; deductions for employee's taxes are $16,000; deductions for employees pensions are $6,000.

2. On 31 March, the employer's payroll tax is calculated as $8,000 and the employer's pension contributions as $10,000.

3. On 1 April, the employees are paid the amounts due.

4. On 15 April, the tax authorities are paid the amounts due.

5. On 20 April, the pensions fund is paid the amounts due.

Wages Control Account

Wages Account

The carried down balance at the end of March is brought forward and April's amount will be added to that and so on, to accumulate the total wages cost for the year.