Introduction to Payroll

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session, we saw Journal Posting. That means when & in what cases, we do Journal entries, right? In today’s session, we will see what Payroll is. What Payroll Reconciliation is, what Payroll Journal is, what parties are involved in payroll. Understood? If it is the person writing the account or reviewing the account, they will have a problem during Payroll. Why? Because there is always some adjustment in it. You have to work carefully & your concepts should be thorough, which means there shouldn’t be any confusion.

If you go to any interviews, even in the tests, there is always a question about payroll. So that is what we are going to learn today, as in what is payroll? Okay? You can see on the screen that there is a payroll. Look, before we talk about the technicality of the payroll, we will need to understand certain languages & words. What is the first one? Gross Wages. What is Gross Wages? Gross Wages is the total, your Gross Salary, okay? After that comes Employees Deduction. Deduction means whatever your Gross Salary is, suppose your Gross Salary is 30,000. Then comes Employee Deduction. Means there will be certain deductions here. Which further means that there will be a deduction from the Gross 30,000, okay?

Next comes Cost to Company, what is it? The company has given you employment, okay? There are Employees & Employers. The one who works is called Employee & the person who gives you work is called Employer. Now who is Employer? He can be the owner, that is an individual party or a company as well. Here it is written CTC. What does CTC mean? Cost to Company. The company provided you with the employment, what did it cost them? It’s simple. My salary is the company cost. No. CTC means apart from the salary, we have to follow some government rules & give contributions as well. So that is Cost to Company. Cost to Company simply means the salary that you are getting, plus it includes the cost paid to the government on behalf of you, okay? Are Gross Wages & CTC same? No. Gross Wages are Gross for you. It is an employee term. If someone asks you what your Gross Wages are, 60,000. 60,000 are Gross Wages. Cost to Company is for the Company that it will get Gross Wages but what will be added? The taxes that they are paying the government on behalf of you, who? Company. That too will be added.

Which won’t be only Gross Wages, taxes will also be added. Means if I add taxes in your Gross Wages which the employer has to pay, it will become Cost to Company. Then comes On Hand Salary. Okay? Like I said 30,000 is Gross, okay? From that, there will be some deductions. Suppose there are 5000 deductions. As we move ahead, I will tell you what the type of deductions are. What is your Gross Salary? 30,000. Deduct 5000 from that. That means your On Hand Salary is 25,000. I request you that whenever you go for an interview, okay, ask them what will be your On Hand Salary. Alright? Whenever you do some negotiation or discuss salary, always ask how much On Hand salary you will get. Because in Gross you will feel that your salary is 30,000 while your On Hand Salary will be 25,000, okay? So always ask what will be your On Hand Salary. On Hand is also called Take Home at times, okay? I am explaining this to you because HR will tell you your CTC. What is CTC? Gross Wages + Taxes. So we don’t have to talk about CTC, we will have to know what our On Hand & Take Home is at the end of the month. Inshort, you have to negotiate on CTC or Take Home Salary.

Let’s see what are the Employee Deductions. You can see on the screen what the employee deductions are -

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First of all is TDS. TDS means Tax Deducted at Source. You would know that every employee has to face the income tax rules, every individual has an individual tax slab, that if your annual income is near 5 lakhs, you will have to pay this tax, if it is between 5 to 10 lakhs, then you will have to pay a certain amount, okay? So what is this? It is TDS. If you fall under that slab, if your annual salary is above 10 lakhs, above 5 lakhs, inshort if it is more than the tax limit set by the government, then TDS will be cut from your salary. Did you understand?

Second is the Provident Fund. It is also known as PF. The government has also made some rules regarding the Provident Fund. If a certain person’s CTC is this much , then this much will be allotted to the Provident Fund, that means it will go to the government. So that too will be deducted from your Gross Wages. What will be the first thing to get deducted? TDS. What will be the second? Second will be the Employee’s Part, which is Provident Fund. 

Third will be Professional Tax. That is calculated state wise. It is cut statewise and you never get it back. While in TDS, if your TDS is cut more, then you can claim it when you file your individual tax return. But professional tax is one kind of expense only, therefore you can’t claim it back. Did you understand? The professional tax is state wise so you have to see what the professional tax is in your state. Generally it is 200 or 300 rupees per month. Alright? 200 or 300 rupees are cut every month & it differs from state to state.

What is the fourth one? Other Deductions. Other Deductions means you have taken a loan from your company. Suppose you needed some money so you have taken your salary in advance. You took the salary in advance & you told them to deduct money from the upcoming 4-5 months. Okay? Let’s come back here. What was your Gross Salary? 30,000. Suppose TDS was cut, Provident Fund was deducted, Professional tax was cut & if you have taken some loan, that amount was cut. The amount remaining at the end is called Take Home salary or On Hand Salary. Okay?

What is the company CTC? In Gross Wages plus Provident fund, there are two things - one is employee’s part & other is Employer’s part. When these two mix, there is an addition, Employer’s part plus Employee’s part. When they join, they become government dues, okay? I will tell you what the Cost to Company is. The Gross Wages will be added to the Profit & Loss account because it is an expense for the company. Plus Employer’s Provident Fund part. After adding that, it will be CDC. Gross Wages plus CTC. Understood?

Look, there are 2 things - who runs the payroll? Your HR department. Who does the Salary Negotiation? Your HR Department. The Payroll Department has all the documents & information. But who makes the payment? It’s the Account Department. Remember what I said in Reconciliation? If you recall, I had told you one thing that is Wages Reconciliation. That two people are making one thing. Such as what is HR maintaining? They are maintaining your total payroll, your Gross Salary, your TDS, your Employee’s PF, PT, other deductions as well. He is making that too & who is making the accounts? Who is paying you? Finance Department, that means Accounts Department, okay. What does it do? It transfers your money to your account.

What happens here? Generally , the Accountant passes only 1 entry that is the payment one. Which one? The payment one. Salary expense debit to Cash and Bank. Do you understand? The amount which goes from the bank will be credited. If I don’t pass the payroll journal, then the net expense will be booked in net salary. Why? Because the accountant has passed only one entry, salary account debit, To Cash and Bank. But how has he done it? He has done it through On Hand salary which is wrong. The company expenses are your gross salary plus the payment done by the employer for PF so both the expenses should be booked. So if I don’t pass the Payroll Adjustment, don’t pass the payroll Journal then my payroll expense will lessen plus we also have to pay to the government.

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So what entry will I pass? We have paid the tax to the government so government tax debit, To Cash and Bank. Actually, I had not even credited the government taxes. I had not booked the library but straightaway made the payment. Therefore, it will be seen on the negative side of the balance sheet. Imagine, you haven’t passed the payroll journal. Hence, we have to make 2 payments here. There are 3 parties involved in this. ‘Employer, Employee & Government’. The Employer has to pay 2 people - To Employee & to the Government. You have to pay the salary to the Employee & Tax to the Government. See, TDS will be cut from the Employee, that is from the Employee’s salary. Plus the Employee’s PF will be cut from your salary. The employer will add his PF contribution and pay it to the government. Are you understanding? So 3 parties are involved here, Employee, Employer & Government. And the employee as well as the government should be paid regularly, okay? There are certain rules & regulations of the government as to when do you have to file an income tax return, it is called a Salary Return File or TDS Return File, okay? You will have to pay that too. The accountant has recorded the payment. Salary To Cash and Bank. Government Taxes Debit To Cash and Bank.

So what will happen? You would have created your Government Taxes as a Liability. So the liability will be seen in negative as you haven’t booked the liability. I have to book the payroll, so for that I need to know the payroll journal. For that, you need to know, Gross Wages are the company's expense so it will go into Profit & Loss account. The employer giving money for PF is also an expense for him so that too will go into a P & L account. And the remaining payments, TDS, Government dues are the liabilities so it would be credited. Okay? And when he makes the payment, cash & bank will be credited. So you need to remember this for payroll. Are you understanding?

Payroll’s periodic way is different. Some are ‘monthly wages’, who get a salary on a monthly basis. But then there are certain manufacturing units where labourers work. Those labourers have weekly payments, fortnightly payments, that means at every 15 days & the employees have monthly payments. Alright? And sometimes the officers are paid annually. Okay? And second you will have to bifurcate the payroll accordingly. See, there is a manufacturing unit, okay? So what will I do? I’ll make a department such as the production department, its expenses will go into another head, that is, in Wages which can be called Labour Wages, Contractual Wages, Production Wages, it will be calculated in COGS, Cost of Goods Sold.

Second is Admin Salary. Means the payment that you do to the Admin staff will go to the admin salary. That means you can bifurcate the payroll as well. Sometimes there are requirements of company law that if any employee draws more than a certain amount, you need to show that separately. Suppose there is a private limited company & there are more than 2 directors and they are paid a salary monthly. So generally what happens, you have to show the expenses of other employees separately & the payment to directors separately. This is called Director Remuneration, that is, Director Salary.

If you see its Profit & Loss account, you will see Director’s salary & Employee’s Salary separately. So this is how you have to divide keeping in mind the Government’s guidelines & rules. You should know that the labourwise wages will go in a separate COGS or Admin. Sometimes if your department is very big, you will have to separate Admin salary, Marketing Executive Salary, Advertisement Salaries so that you can understand the Costing as to what is my Admin Staff Expense, Production Staff Expense, Marketing Executive Staff Expense means Sales Promotion Activities Expenses, okay? So there are such different bifurcations but when will you be able to do it? When you know the Payroll Journal Entries.

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In the next video, we will see how to do Payroll Journal & why do we have to do Payroll Reconciliation, okay?

Until then Thank You.