Payroll Journal
A payroll journal is a detailed record of all payroll transactions in an accounting period, which companies maintain to keep track of employees’ wages and salaries, deductions, and employer’s payroll expenses.
In other words, a payroll journal is a financial document where a company records information about its employees’ compensation. This includes their gross wages, withholdings, and net pay, as well as the employer’s payroll tax liabilities.
The payroll journal helps ensure that payroll expenses are correctly recorded in the company’s financial statements and that funds are properly disbursed to employees and taxing authorities. It’s a key tool for managing payroll, tracking expenses, ensuring compliance with tax and labor laws, and auditing payroll processes.
A payroll journal typically includes:
- Employee information: Name, employee ID, job title, department, and other relevant information.
- Pay rate information: This could include hourly rates for hourly employees, salaries for salaried employees, and rates for any overtime, bonuses, or commissions.
- Hours worked: For hourly employees, the payroll journal would include the number of regular and overtime hours worked in each pay period.
- Gross wages: Total earnings before any deductions.
- Deductions: These include taxes (federal, state, local, Social Security, and Medicare in the U.S.), employee contributions to benefits (like health insurance or retirement plans), and any other deductions (like wage garnishments).
- Net pay: This is the amount the employee actually receives after all deductions.
- Employer payroll expenses: These include the employer’s portion of payroll taxes, and costs of employee benefits.
This data can then be used to generate payroll journal entries, which are used to record payroll expenses and liabilities in the company’s general ledger.
Example of a Payroll Journal
Let’s take the example of a small company, “Fresh Start Bakery”, with two employees: John and Mary. Each gets paid $20 per hour and worked 40 hours for the week.
Here’s an example of what a payroll journal entry might look like:
| Employee | Hours Worked | Hourly Rate | Gross Pay | Federal Tax | State Tax | FICA | Net Pay |
|---|---|---|---|---|---|---|---|
| John | 40 | $20 | $800 | $120 | $40 | $61.20 | $578.80 |
| Mary | 40 | $20 | $800 | $120 | $40 | $61.20 | $578.80 |
| Total | 80 | – | $1,600 | $240 | $80 | $122.40 | $1,157.60 |
This payroll journal shows the gross pay, various deductions, and net pay for each employee and for the company as a whole.
In terms of the journal entries to record this payroll, it might look something like this:
- Debit Salaries Expense: $1,600
- Credit Federal Tax Payable: $240
- Credit State Tax Payable: $80
- Credit FICA Taxes Payable: $122.40
- Credit Cash (Net Pay): $1,157.60
This journal entry records the total payroll expense and the various deductions as liabilities (amounts the company owes). The remaining amount (the net pay) is the amount that will actually be paid out to the employees.
The employer would also have to record its own payroll tax expense (equal to the employee’s FICA tax in this simplified example):
- Debit Payroll Tax Expense: $122.40
- Credit FICA Taxes Payable (Employer’s portion): $122.40
These entries would be made for each payroll period (e.g., each week or each month), providing a continuous record of the company’s payroll expenses and liabilities.
