Transactions with Payroll

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

In the last session we saw about Payroll & today we will learn about Payroll Journal. Let’s take an example of Mr. X. We have the payroll details of Mr. X for the month of July. His Gross Salary is Rs. 45,000. His TDS is Rs. 2,500 for the month of July. His PF, that is the Employee Provident Fund Part is Rs. 2,500, okay? And the same part will be contributed by the employer. So let’s decide what his Gross Wages are accordingly.

So what are Mr. X’s Gross Wages? 45,000. Okay? Let’s try to find his On Hand Salary. 45,000 Gross Salary, 2,500 TDS cut and 2,500 Employee PF will be cut. So 45,000 minus 2,500 TDS minus 2,500 for PF, so he will get On Hand - 45,000 minus 5000 = 40,000. Therefore, the company is paying you 40,000. See the Gross Wages are 45,000 & how much will you get? 40,000. That is why I was insisting to always ask about what will be your On Hand Salary, okay?

And what is the Employer’s part here? 2,500. Here comes CTC’s role. What will be the CTC? CTC means Cost to Company. What will be the expense of your employment? One will be the salary, that is 45,000 plus 2,500. For what? Employee’s PF which the Employer will pay out of his own pocket. So what will be the CTC here? 47,500. That is Gross Wages plus Employee’s PF Part. Cost to Company will be an expense to the company. So if you look at the Profit & Loss account of the company, you will get 2 things on the debit side of the profit and loss account - one is Gross Wages, 45,000 and Employer’s Provident Fund Contribution, how much? 2,500. So let’s see what will be its Journal. The Journal in front of you is Recording of Payroll. What will be the first? Gross Wages Debit. Because it’s an expense, it will follow the nominal rule of accounting. Expenses are debited, so Gross Wages Debit 45,000, Employer’s Provident Fund Contribution, this too is an expense so it will be debited, 2,500 To TDS. TDS is a government liability which you have to pay to the government. Liability is always credited so 2,500 credited. To Employee PF Contribution.

You have to submit Employee’s PF plus Employer’s PF to the government department, it will become your liability too so that will also be credited. There is a contribution of both in 5000 of Provident Fund - 2,500 of the Employee & 2,500 of the Employer. So the accumulation of both will be debited to PF. To Net Wages. That means if you have not yet paid but only booked a payroll, it is a booking entry. This is not a payment entry, it is a recording entry, that is why we have done net wages. There is Liability in Net Wages. You do know that we get the January Wages on 7th or 10th February, based on the rules of your company. If I book the payroll for 31st January, I wouldn’t have received the payment yet. It would have only been recorded so it depends on that. If I talk about individual items, then Gross Wages is a part of Profit & Loss, Employer PF is also a part of Profit & Loss, TDS is a liability so it belongs to the Balance Sheet. Provident Fund is a government due, government tax which you have to pay, that too will be a liability which is an item of the balance sheet. To Net Wages. It is a liability towards the employees so you have to pay that to your employees so this too will be a balance sheet item. Understood which things will go to P&L and which ones in the Balance Sheet?

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Always remember if it is an expense, it will be debit, if it’s income, it will be credit. Asset will be debit, Liability is credit. If you have any problem in doing any entry, remember these 4 things - that Assets debit, Liability credit, Incomes credit & expenses debit. Another thing is, if you want to increase the expenses, you have to debit. If you want to lessen the expenses, then you have to credit the expense. If you want to increase your income, then credit. If you want to lessen the income, then debit the income. If there is an increase in Asset, then debit the asset & if you want to increase the liabilities, credit the liabilities. If you want to decrease the asset, then credit & if you want to decrease the liability then debit. If you want to increase the income or liability, then it will be credit, asset & expense will be debit. Vice versa in the reverse case. If you want to decrease the liability, the asset will be credit while the liability is debit. Are you understanding?

Now we will see what will be the entry during the payment. Payment entries are right in front of you. This is the entry of the next payment which generally happens on 7th or 10th of every month. So what are the entries? Net Wages, the ones you pay to the employee, okay? Either by cash or will pay through Bank ECS or issue a cheque. So first of all, your liability will lessen because you are making a payment. Net Wages will be debit, To Cash & Bank. What is Cash & Bank? Real account. What was Real Account’s principle? Credit what goes out. So 40,000 are going out of the company's bank account so what will be credited? Credit what goes out. So Cash & Bank will be credited, net wages will be debited because it is not a liability right now, we have paid that liability.

Second is Payment to Government. You will have to pay to the government also because it’s not like that you will take from the employee’s salary but you won’t pay. You will have to make a payment & also file a return. You have to file TDS Returns. Okay? Suppose you are making a payment, the liability accounts you opened TDS Account Debit, Provident Fund Account debit, these two were liability accounts so you will have to debit both of them and the money will go To Cash and Bank, 7,500. TDS will go to the Government. There is a possibility that both of their departments are different, okay, that one has to pay into another department & other has to pay in the PF. But ultimately both are governments. And we have the government liabilities, government dues, so eventually the payments are going to go there, okay?

So the payroll journal will be made accordingly. One is recording which I explained to you what the entry will be when you record and another is of payment. Remember that the closing date will be 31st March. What is your reporting year? Suppose it is April to March. When will you make the payment of 31st of March? In April. Now if you are doing a payroll entry, you don’t know anything about payroll, what will happen? You will do the payment in April so you will book that time. You booked March’s expenses in April that too through Net amount, so if you skip the Payroll Journal, that is if you are not booking Payroll, what will happen? That you won’t be able to book that particular month’s expenses in that month itself plus even if you book them, they will be wrongly booked. Are you understanding? So this was about Employee Role.

Now we will talk about Payroll Reconciliation. What is Payroll Reconciliation? HR maintains a Payroll Registration. If you know, there’s a Red coloured book containing the hard copies in which they tell you to sign that the payment has been done. So HR maintains the Payroll Register separately & the accountant maintains the entries separately, okay? Therefore, two people are making the same thing. What was there in Bank Reconciliation? Two people are making the same thing. I was making Bank Ledger & the bank was making the Bank Statement. What will happen here? 2 people are making the Payroll, one is the Accountant who himself is making the entry & the HR department, who is the Payroll department, is making it in their own way, okay?

Now what do we have to do? We have to do Reconciliation. What? Reconciliation. That means we have to see whether both the balances match or not. Can differences appear sometimes? Yes! That can most certainly happen, that Payroll as per accounts & payroll as per reports, the HR reports do not match. What can be the cases? Let’s take an example of Casual Wages. Suppose a labourer didn’t come one day, so what you did was, you brought in a daily wage worker for a couple of days, then paid him & let him go. We won’t be taking everyone on the payroll basis, right?

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 So you have paid them, so what entry will you make? Labour to Bank, okay? The expense it booked under Labour. But that labour was not your permanent labour right? It was casual labour, not permanent labour, that’s why you made a temporary adjustment and took casual labour, okay? So the difference that will be seen is that the wages will be shown more in your account and less in payroll. Second common reason can be that the accountant has shown the entry Salary To cash & bank, that is Net Wages & the payroll must be properly booked by HR. Gross Wages, deduction and then Net Wages. So the difference can be that the Gross expenses are yet to be booked. It can be possible that you haven’t booked the Journal. Sometimes what happens is that you might have missed out on booking the whole payroll. April to March is your reporting period but you missed out on recording one month, which can happen sometimes.

Look, I am not talking about the payment, you will have to make the payment otherwise the employees won’t tolerate, okay? Without doubt you will have to make the payment on the 7th or 10th. I am talking about the Gross Up of the payment, okay? The entry is Net Wages To Bank. That's all. You didn’t pass that month’s payroll journal. You have passed every month except that particular month. So this too can happen that you would have passed in Net Wages but left out Gross. This too can be a reason. What can be the other reason? That there are some deductions, okay, the employee would have discussed the deductions with the HR but the accountant was not aware so he did a full payment.

I’ll tell you once again, who does the payment? Accountant, that is The Finance Department. They forgot to deduct the advance salary that person had taken, which means that the advance amount was not deducted. Which further means that we paid him more so we have to take it back.

When will we get to know all this? When we do payroll reconciliation as to which employee was paid more, for which month & what was the reason for more money. Sometimes what happens is, we write a Rs. 500 cheque to some employee, right, but the accountant wrote 5000 instead of 500. When will we get to know this? When we will do Reconciliation, that is when you accumulate & reconcile the HR payroll report & the payment done by the accountant. Net Wages according to the HR & the Net Wages paid by you should match. The mistakes such as making more payment or less payment, you have paid someone twice, you mistakenly paid someone’s salary to someone else, you need to do Reconciliation to find this out. If your payroll is quite bigger, then there are 3rd party Agencies which run your payroll. If you go to the US or UK, there are payroll softwares, there are separate payroll agencies, it not only runs payroll on your behalf but also makes payment. So this was Payroll.

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In the next session, we will see what are Financial Statements.

Until then Thank You.