## **Learning Outcomes**

After reading this article, you will be able to explain the purpose and process of month-end payroll reconciliation for ACCA FA1. You will understand how to check payroll records, identify and resolve discrepancies, and complete double-entry postings related to payroll within the accounting system.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand payroll accounting and the controls used to ensure payroll is accurate. This article focuses on:

- Reconciling payroll records to payroll payment documentation at month-end
- Identifying and investigating discrepancies in payroll records
- Correctly posting payroll costs and deductions to general ledger accounts
- Ensuring payroll-related payments and liabilities are recorded as required

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which document should be compared with actual payroll payments during a month-end payroll reconciliation?
   a) Petty cash summary
   b) Payslips
   c) Payroll summary report
   d) Sales invoice

2. When reconciling payroll at month-end, if net pay paid is less than expected, which of the following is a possible cause?
   a) Under-accrued employer pension
   b) Overstated gross pay
   c) An omitted deduction
   d) A bank error in payment

3. True or false? All payroll-related expenses and liabilities must be posted to general ledger accounts at month-end, even if payment to employees or agencies is made later.

4. Briefly outline why regular payroll reconciliation is important for business controls.

## **Introduction**

Payroll is one of the largest and most sensitive expenses for many businesses. Ensuring that payroll payments are correct, and appropriately recorded, is essential both for employee trust and for accurate financial statements. Month-end payroll reconciliation is a systematic check comparing payroll records, payment documents, and general ledger entries. This process detects errors such as missing payments or inaccurate deductions, and ensures complete and accurate accounting.

> **Key Term: Payroll Reconciliation**
> The process of verifying and matching payroll records against actual payments and accounting entries to confirm accuracy and completeness.

## **PURPOSE OF PAYROLL RECONCILIATION**

Month-end payroll reconciliation is performed to ensure:

- All employees have received the correct pay
- All statutory and voluntary deductions have been made and are recorded properly
- Payroll payments match amounts recorded in the payroll and general ledger
- Any differences (such as errors or omissions) are identified and corrected before the financial reporting period closes

Failing to perform regular payroll reconciliation may lead to misstated payroll costs, unrecorded liabilities, or exposure to fraud.

## **PAYROLL RECORDS AND SOURCES USED IN RECONCILIATION**

During reconciliation, the following documents and records are compared:

- Payroll summary (listing gross pay, deductions, and net pay for each employee)
- Payslips issued to employees
- Bank payment records or automated payments logs
- Statutory and non-statutory deduction schedules (e.g., tax, pensions)
- General ledger postings for payroll expense and related liabilities

> **Key Term: Payroll Summary**
> A document produced at each payroll cycle detailing each employee’s gross pay, itemized deductions, and net pay.
>
> **Key Term: General Ledger**
> The primary accounting record containing all accounts for assets, liabilities, equity, income, and expenses.

## **STAGES OF MONTH-END PAYROLL RECONCILIATION**

### Review Payroll Summary Versus Payments

Compare the total net pay on the payroll summary with total payments made to employees via bank, cheque, or cash. Any differences should be investigated promptly.

### Review Deductions and Liabilities

Cross-check deductions for tax, social contributions, pensions, or other voluntary deductions:

- Confirm deduction amounts in the payroll summary are paid or owed to the appropriate authorities/agencies
- Ensure liabilities for any unpaid deductions at month-end are correctly recorded in the general ledger

### Update and Post General Ledger Entries

At month-end, double-entry postings must be made in the general ledger to reflect:

- Gross payroll as a wage/salary expense
- Deductions as liabilities until paid
- Employer contributions (such as social security or pension) as an additional expense and liability

> **Key Term: Liability**
> An amount owed by the business to employees or external agencies, shown as a credit balance until settled.

## **HANDLING ERRORS AND DISCREPANCIES**

When differences are identified during reconciliation, common causes include:

- Missing employees from payment runs
- Incorrect or omitted deductions
- Overpayments or underpayments
- Timing issues (such as late entries or payments processed in the wrong period)

Each discrepancy must be traced to its source, corrected in the accounting records, and flagged for resolution before the books are closed for the period.

### **Worked Example 1.1**

**A company’s payroll summary for April shows total net pay of \$18,450 and statutory deductions of \$3,700 for income tax and \$2,100 for pension. However, the bank statement indicates \$18,250 was paid to employees, and only \$3,600 sent to the tax authority. How should these differences be addressed in reconciliation?**

> **Answer:**
> The \$200 shortfall in net pay suggests an employee was not paid or was paid incorrectly; trace payroll records and payment logs. The \$100 underpayment to the tax authority must be investigated and accrued as a liability in the general ledger for future settlement.

### **Worked Example 1.2**

**During reconciliation, it is found that the employer’s pension contribution of \$980 was not posted to the general ledger. What is the correct accounting treatment?**

> **Answer:**
> Post a debit for \$980 to employer pension expense (increases company expense) and a credit of \$980 to pension payable liability (reflecting amount owed to the pension scheme).

## **COMMON ERRORS SPOTTED DURING PAYROLL RECONCILIATION**

- Employee added or removed in error, causing incorrect totals
- Deductions calculated on outdated rates or missing employee authorisation for voluntary deductions
- Payments delayed or processed in the wrong month
- Accounting entries for employer contributions omitted

### **Exam Warning**

> Payroll reconciliation questions may include data for both payroll summaries and payments. Take care to match figures by category (net pay, individual deductions, employer contributions) and confirm all necessary ledger postings have occurred.

## **Summary**

Month-end payroll reconciliation is a key control activity in accounting. It compares payroll records to actual cash paid, ensures deduction and expense entries are accurate, and confirms liabilities for outstanding payments. Rigorous reconciliation ensures the accounting system accurately reflects payroll expenses and obligations.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define payroll reconciliation and explain its objectives
- Identify the documents and records involved in payroll reconciliation
- Describe the typical process for month-end payroll reconciliation
- Recognise and resolve common errors found during reconciliation
- Understand double-entry postings for payroll expenses and liabilities

## **Key Terms and Concepts**

- Payroll Reconciliation
- Payroll Summary
- General Ledger
- Liability

Accounting for payroll - Month-end payroll reconciliation