Payroll
From gross to net
Payroll converts gross pay into net pay by deducting statutory and voluntary items. Gross pay includes basic salary, overtime, bonuses, and taxable benefits. Deductions typically include income tax (often via a cumulative or pay-as-you-earn system), employee social security contributions, pension contributions, and court orders. The employer separately owes employer contributions and must remit collected taxes to the authority.
Records and controls
Key records are the payroll register, individual employee records, timesheets, and contracts. Controls include segregation of duties (the person who prepares payroll should not authorise payment), reconciliation of the payroll to the general ledger, and independent review of changes to standing data such as bank details.
Traps in questions
- Gross versus net confusion. Questions often give net pay and ask for the journal; the employer's cost is gross pay plus employer contributions.
- Employer versus employee contributions are separate liabilities. Only the employee portion is deducted from pay.
- Timing. Payroll is usually accrued for days worked but not yet paid at period end.
- Statutory versus voluntary deductions. Pension may be either; tax is statutory.
Worked rule of thumb
Gross pay 3,000; employee tax 500; employee social security 200; employer social security 300. Net pay is 3,000 − 500 − 200 = 2,300. The employer's total cost is 3,000 + 300 = 3,300. The journal debits wages 3,000 and employer social security 300, credits net pay payable 2,300, tax payable 500, employee social security payable 200, and employer social security payable 300. Check that debits equal credits before moving on.