Payroll accounting is essential for two reasons: financial management and compliance with existing laws. In a nutshell, payroll accounting is done so that a company is able to pay its employees accordingly. Among the tasks under it is making sure that employees receive correct remuneration, deductions are accurate, and that payroll expenditure is not spent on unnecessary costs.
At the same time, every organisation has to adhere to tax laws and other regulations imposed by the government related to employee wages. By means of payroll accounting, you become more capable of reporting wages paid and taxes withheld during internal and external audits.
What payroll accounting does
Basically, payroll accounting involves documenting all transactions related to payroll, including:
- salaries, wages, commissions, bonuses, etc.
- payroll taxes withheld from employees’ paychecks such as income tax, social security, and health insurance
- paycheck deductions (insurance premiums, contributions, and wage garnishments)
- employer’s portion of fringe benefits
All these data are entered in a payroll journal. These entries are made as expenses (when they have already been paid), or liabilities (they are owed but are not yet paid).
How payroll accounting works
Payroll accounting begins with the primary task of gathering accurate records of the time each employee in the company has worked. Knowing the number of hours rendered by the employee serves as the basis of compensation, regardless if workers are paid by the hour or are salaried. With this information, an employee’s monthly payment can be adjusted depending on whether or not they have received any pay deductions or bonuses.
Computing for employee pay can be tedious. Some employees in the company are salaried, so their compensation will begin with a base rate each month. Meanwhile, employees who are paid by the hour may work for a varied number of hours every week (calculating for their wages, including their taxes due, will also vary).
Why you need to understand payroll accounting
You cannot run a business properly if you do not have a proper understanding of payroll accounting. It is mainly because it is your employees that do the groundwork in keeping your business alive.
Understanding the company payroll can be challenging, especially when you are not an accountant, auditor, or HR admin. However, knowing at least the basics of payroll accounting helps you run the business better because:
- You are able to pay your employees accurately. Minimising disputes in salary computations increases employee morale, which leads to greater productivity and retention.
- You realise where your payroll funds go. At times you may notice that a big chunk of your payroll funds is spent on expenditures that don’t serve your employees. You can then decide whether to remove these line items or not. For instance, you have an allocation for clothing allowance, but because of the work-from-home setup, your employees no longer need to spend on uniforms unlike before. Funds for this line item can be spent elsewhere, or become part of another fringe benefit (e.g., meal subsidy or pension).
- You learn to reconcile payroll disputes. It is important that you know how to verify the accuracy of payroll expenses and liabilities. These are issues that, when left unresolved, may result in company losses. When you are able to account for payroll expenses and liabilities, you clear out unnecessary spending and save money that can be better utilised by your business.