Payroll accounting

What it means

Payroll accounting records gross pay, employer and employee social contributions, tax withholdings and net pay in double-entry bookkeeping. It mainly uses accounts in group 52 for personnel costs and group 33 for liabilities to employees and institutions.

Gross pay is expensed to the wage costs account and recorded at the same time as a liability to employees. Employer contributions are a further cost and a liability to the Social Insurance Agency and health insurers. Contributions and tax withheld from employees reduce the liability to them and increase liabilities to the institutions.

Wages belong to the period they relate to, even when paid out in the following month. December wages are therefore expensed in December, even though the money leaves in January. This ensures the year's result is stated correctly.

How it works in practice

The basis for the entries is the monthly payroll summary from the payroll software, which totals gross pay, contributions, deductions and net pay for all employees. Its accuracy depends on complete payroll inputs such as attendance, bonuses and absences.

On payday, liabilities to employees, insurers and the tax office are paid from the bank account and matched with statements. Deductions from pay, such as garnishments or meal charges, are booked separately so they can be reconciled with payments to the parties entitled.

At year-end a provision for untaken leave including contributions is created, and where relevant a provision for annual bonuses relating to the current year. These provisions ensure that the year's personnel costs are complete even though payment comes later.

What to watch out for

Balances on accounts for liabilities to employees and institutions should clear to zero once wages and contributions have been paid. Lingering balances signal an error, such as a misposted payment, an unpaid contribution or a difference between the summary and the actual payout.

Some payments to employees, such as benefits in kind, meal contributions or travel allowances, are treated differently for tax and contributions. They must be distinguished correctly in the books so that costs, tax and contributions are all reported accurately.