Lesson 39 - Beginner accounting course

39. Recording Payroll Transactions in the Ledger

Payroll transactions involve recording employee salaries, deductions, employer taxes, and benefit contributions in the accounting system. These transactions affect multiple accounts, including Salaries Expense, Payroll Tax Expense, Liabilities, and Cash.

Key Payroll Entries

There are three main steps in recording payroll transactions:

1. Recording Employee Salaries and Payroll Deductions

2. Recording Employer Payroll Taxes

3. Paying Salaries and Payroll Liabilities

1. Recording Employee Salaries and Payroll Deductions

When employees earn salaries, the company records gross pay as an expense and deducts amounts for taxes and benefits before issuing net pay.

Explanation:

• Gross salaries of $10,000 are recorded as an expense.

• Employee deductions (taxes, insurance, retirement) are recorded as liabilities.

• The remaining amount ($7,335) is what the employee receives as net pay.

2. Recording Employer Payroll Taxes

In addition to deducting payroll taxes from employees, the company must match certain taxes and pay unemployment taxes.

Explanation:

• The employer must match Social Security and Medicare taxes.

• FUTA and SUTA are paid only by the employer.

• These amounts are recorded as liabilities until paid.

3. Paying Salaries and Payroll Liabilities

When salaries and taxes are actually paid, the liabilities are cleared.

Paying Salaries to Employees

Explanation:

• The company pays employees their net salary by reducing the Salaries Payable account and reducing cash.

Paying Payroll Taxes and Deductions

Explanation:

• The company pays taxes to the government and benefit providers.

• All payroll liabilities are cleared, and cash is reduced accordingly.

Impact on Financial Statements 

Key Takeaways

• Payroll transactions involve recording salaries, taxes, and benefits in the ledger.

• Employers must withhold payroll taxes from employees and also pay additional taxes.

• Proper payroll accounting ensures compliance with tax regulations and accurate financial reporting.