B2: 1.05 Payroll journals

On this page we shall look at how payroll costs can be recorded using a series of journals to ensure that (a) the total expense and (b) the associated liabilities and payments are recorded correctly.

There are a number of approaches available when writing payroll journals but we shall follow the approach and ledger accounts that the AAT tend to use when examining students in their Foundation courses.

[Please note that the steps described below may be carried out in a different order]

Step 1 Record the payroll cost (or wages expense)

First, we will record the total cost of the payroll as both an expense and as a liability. If, for example, the payroll cost was £20,000 the journal would be as follows:

Account	Debit	Credit
Wages expense	£20,000
Wages control		£20,000

[NB. Many businesses split the debit to the Wages Expense account shown above between different accounts, such as Production Wages Expense, Administration Wages Expense and so on as doing so can provide useful information]

Step 2 Move the amount payable to HMRC out of the Wages Control account

Next, we will calculate the total amount payable to HMRC and move it out of the Wages Control account and into a separate HMRC account. If for example, the amount due to HMRC was £5,000 the journal would be as follows:

Account	Debit	Credit
Wages control	£5,000
HM Revenue & Customs		£5,000

Step 3 Move the amount payable to Pension Funds out of the Wages Control account

Next, we will move the total amount of pension contributions (i.e. employer’s and employees’) out of the Wages Control account and into a Pension Fund account. If the total is £1,000 the journal would be:

Account	Debit	Credit
Wages control	£1,000
Pension fund		£1,000

Step 4 Move any amounts left in the Wages Control account that are not payable to employees to an appropriate account

Next, we consider whether there are any deductions such as union subscriptions, charitable donations, gym memberships and so on included in the payroll cost for the period. If so, we will move this amount out of the Wages Control account and move these costs into more appropriate liability accounts (the aim is that only net wages owed to employees should be left in the Wages Control account). Let’s say that there are union subscriptions for the payroll period of £500. The journal would be as follows:

Account	Debit	Credit
Wages control	£500
Union subscription		£500

Following steps 1 to 4 our ledger accounts should record the following:

1. The cost of the payroll for the period in the Wages Expense account
2. The amount payable as net wages for the period in the Wages Control account
3. The amount payable to HMRC in respect of income tax, national insurance and student loan deductions in the HMRC account
4. Any amounts payable to other organisations in suitably named ledger accounts (e.g. a Court Orders account for any deductions made under an attachment of earnings order)

Step 5 Recording payments of the liabilities

In due course, a business will pay all of the above liabilities and the payments will be recorded in payments side of the Cash Book and then posted to the debit side of the liabilities accounts (i.e. the Wages Control account, the HMRC account, the Pension Fund account and so on). Examiners, however, often ask students to prepare a journal or journals to record some or all of the payments.

Let’s say, for example, that a business pays net wages of £13,500 and £1,000 to a pension fund from its bank account. The journals to record these payments would be as follows:

Account	Debit	Credit
Wages control	£13,500
Bank		£13,500

Account	Debit	Credit
Pension fund	£1,000
Bank		£1,000

Payments to HMRC and to other organisations such as Unions would be made in the same way; that is, credit the bank account with the amount paid and debit the ledger account containing the liability being cleared by the payment.

In the next part of this section we will go through a worked example to illustrate the calculations and journals required when recording payroll transactions