Even if you own or operate a small business, chances are you have employees – meaning payroll is a fact of life. Maintaining payroll accounting books involves knowing simple accounting journal entries – basically, to be sure your books are accurate and are in compliance with Canadian best practices, it’s vital that you know how to perform some basic accounting functions.
What is Payroll Accounting?
Payroll accounting maintains an accurate record of your employee’s earnings and accounts for any other expenses related to their employment such as taxes, provincial and otherwise. If you haven’t already, now is a good time to setup your small business payroll with government.
Payroll accounting involves using a system of journal entries to record these entries. These entries are maintained by you or your payroll department using a small business general ledger.
What are Payroll Accounting Journal Entries?
Small business payroll accounting uses three basic types of journal entries:
- Initial entries
- Accrued wages
- Manual payments
There’s a different practice for each type of payroll journal entry. The entry most often worked with is the initial recording. The initial recording can also be referred to as the originating entry – it’s the first entry you record to note that a transaction has occurred. These entries include your employees’ gross earnings and withholdings. In these initial entries you also record the employment taxes owed by you associated with the transaction that you must remit to the Canadian Revenue Agency (CRA).
Enter the accrued wages for that period at the end of your accounting period. As the name suggests, these are wages that are owed to your employees that you haven’t paid yet. After you pay these wages, you’ll make reversed entries in your ledger to account for this payment.
Of these entries, manual payments entries only come up occasionally. This type of entry is used if you have to make an adjustment to employee pay or if you have recently demoted or let an employee go.
Expenses and Liabilities in Small Business Payroll Accounting
The above entries are two-part entries, which will be discussed in more detail below. The entries are either:
- Expenses
- Liabilities, or
- Assets
An expense equals an amount that you’ve already paid.
A liability is an amount that you currently owe.
An asset is an item that you own, the value of which decreases over time. This is an intangible accounting item, but must be valued appropriately to maintain equality of entries in your ledger.
In small business payroll, these entries will reflect:
- Gross wages
- Income tax payable
- Provincial income tax payable
- Canada Pension Plan (CPP) amounts (your share and your employees’ share), and
- Employment Insurance (EI) premiums (your employees’ share and your share, which is 1.4 times your employees’ share)
Taxes, CPP, EI, and all other deductions must be remitted to the CRA according to the schedule created when you setup your payroll account. It’s important to correctly account for these amounts and to remit them on time, otherwise the CRA can penalize you for not doing so.
There are forms on which you must report employee income and deductions, such as T4 and the T4A. These forms are due to the CRA by February 28th (29th in leap years) of each year, or you can face penalties. If any of your employees cease working for you, regardless of the reason, you must also complete the Record of Employment (ROE) form within five days of the separation.
How to Calculate Your Expense or Liability Entries
You can use the Canada Revenue Agency’s convenience online payroll calculator to figure your specific payroll deductions each period. QuickBooks can also help you automate your tax calculations. This handy tool calculates your deductions and posts these transactions to the proper payroll accounts in your online ledger.
First, you enter your employee information in CRA’s online calculator. The calculator will then generate a result showing gross wages, federal tax deductions, as well as provincial tax deductions, Canada Pension Plan amounts, and any Employment Insurance contributions, resulting in a Net Pay amount. You can then print or save the results for your records. This won’t take the place of the actual statement of earnings for your employee, but it gives you all of the information you need to prepare the statement.
Not only is the CRA’s online calculator great for obtaining the initial figures for statements of earnings, but it also gives you the figures for your CRA payments.
Expense and liability entries
In your ledger, you account for your payroll expenses and liabilities using a system of debits and credits, the two-part entry system mentioned above. The type of transaction occurring will designate whether each entry is a debit or a credit. Some of your payroll ledger accounts will increase with a debit and decrease with a credit, while others increase with a credit and decrease with a debit. Each entry may consist of several debits and one credit, or several credits and one debit. An important thing to remember is that for each complete entry, your debits will equal your credits. If they don’t, go back through your accounting to see where a number might be transposed or an entry forgotten.
How to Record Your Basic Small Business Accounting Entries in the General Ledger
If you’re feeling intimidated, it’s certainly understandable – but CRA payroll accounting need not be intimidating. There are steps that you can follow to ensure that your payroll ledger entries are correct, and using QuickBooks accounting software can help.
Step 1 – Payroll Expenses
Your first entries in the payroll ledger are payroll expenses. This means anything you have already paid out during this specific payroll accounting period. Because these are amounts that you have paid, you increase the Expense Account in the ledger by entering the amounts for wages and other payroll expenses as a debit.
Step 2 – Payroll Liabilities
Now, enter the amounts of your payroll liabilities. These are amounts owing that you haven’t paid yet. Liabilities are also referred to as payables. Payables are entered as credits because you are increasing the amount that you owe. These payables include any taxes, CPP, EI, or other liabilities pertaining to your business payroll.
Step 3 – Amount Owed
At some point, you’ll have paid the amounts that you currently owe. After you have made these payments, those first entries are no longer payable – they aren’t liabilities anymore. Make an entry in your Cash Account to reflect the payment. This reduces your Cash Account and erases the balance in the Payables Account.
With every payment you make, your cash balance depletes. Cash is considered an asset, and you decrease assets with credits. After you credit your cash account for the total amount of all entries that you paid, your books will balance. If they don’t, go back and look for transposed numbers or missing entries.
Operating a small business can be made so much easier by using tools at your disposal. With all the time you save, you can focus more on growing and improving your business. Software like QuickBooks can assist you in your mission to make all your business processes run smoothly. In fact, did you know you can pay employees in QuickBooks? Add Payroll today.