## **Learning Outcomes**

After reading this article, you will be able to prepare and explain double-entry payroll journal entries, identify the use of the wages control account, account for payroll deductions, and complete payroll reconciliations. You will understand common payroll errors, recognize necessary payroll controls, and correctly present payroll balances in basic financial statements—a requirement for the ACCA FA2 assessment.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how payroll transactions are recorded and how payroll reconciliations support accurate financial records. In particular, make sure you can:

- Process and record payroll transactions in the journal and general ledger.
- Recognize the function and operation of a wages control account.
- Account for payroll deductions (PAYE, NIC, pension, etc.).
- Reconcile the wages control account and resolve differences.
- Post correcting entries following payroll errors.
- Present payroll balances within the trial balance and financial statements.

## **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 account is used to control and reconcile totals from the payroll journal before posting individual entries to the general ledger?
   a) Petty cash
   b) Wages control account
   c) Accumulated depreciation
   d) Capital account

2. True or false? The net wages paid to employees are recorded as a credit entry in the wages control account.

3. A pay run includes gross wages of \$4,000. Deductions are: PAYE \$700, NIC \$300. What is the double-entry to record the initial payroll expense?
   a) Dr Wages expense \$4,000, Cr Net pay \$3,000, Cr PAYE/NIC \$1,000  
   b) Dr Wages expense \$3,000, Cr Net pay \$3,000

4. Why is payroll reconciliation important for accurate financial reporting?

## **Introduction**

Payroll is often one of the largest expenses for a business. Payroll accounting ensures that staff costs and all statutory deductions are properly recorded and reported. Key to this is using journals to record payroll entries and performing regular reconciliations to detect and correct any discrepancies.

This article explains the double-entry required for payroll, the function of the wages control account, treatment of deductions, and the reconciliation process. Worked examples illustrate key concepts, and common areas of error are highlighted to support successful completion of the ACCA FA2 exam.

> **Key Term: payroll journal**
> A summary record of all wage and salary-related transactions for a pay period, showing gross pay, deductions (such as PAYE and NIC), and net pay.
>
> **Key Term: wages control account**
> A general ledger account used to collect and reconcile total payroll costs and payments before final allocation to expense and liability accounts.

## **Payroll Journals and Posting Payroll Entries**

### Payroll Process Overview

Accurate payroll accounting typically follows these steps each pay period:

1. Calculate gross wages for all employees.
2. Determine statutory and other deductions (e.g., PAYE, NIC, pension).
3. Calculate net wages to be paid.
4. Record the full payroll entry using the payroll journal.
5. Make payments—net pay to employees, deductions remitted to authorities.
6. Reconcile the wages control account regularly with payroll summaries and bank payments.

### Double-Entry for Payroll

The gross payroll cost is an expense to the employer. However, the cash paid to the employee is only the net amount. Statutory and voluntary deductions must be withheld and remitted separately.

> **Key Term: gross pay**
> The total amount earned by employees in a period before deductions.
>
> **Key Term: net pay**
> The amount paid to employees after all deductions.

**The initial payroll journal entry (at the end of the pay period) is:**

- Debit Wages expense (gross wages)
- Credit Wages control account (with gross wages total)

This records the liability to pay employees and remit deductions.

**Subsequent entries split the control account:**

- Debit Wages control account (gross wages)
- Credit Bank (net pay)
- Credit PAYE/NIC liabilities (deductions to be paid to authorities)

The control account should then balance to zero after all payments have been made.

### **Worked Example 1.1**

An entity processes a payroll for the week:

- Gross wages: \$5,000
- PAYE: \$800
- National Insurance (NIC): \$400
- Net pay: \$3,800

**What are the journal entries to record and clear the payroll?**

> **Answer:**
> Step 1—Record the payroll expense:
>
> - Dr Wages expense \$5,000
> - Cr Wages control account \$5,000  
>   Step 2—Distribute the control account:
> - Dr Wages control account \$5,000
> - Cr Bank (net pay) \$3,800
> - Cr PAYE payable \$800
> - Cr NIC payable \$400

**Presentation:** Wages expense appears in profit or loss. At period-end, amounts unpaid for PAYE and NIC are reported as current liabilities.

### The Wages Control Account in Practice

The wages control account collects all payroll-related transactions for the period. When drawn up as a T-account:

| Wages Control Account    |
| ------------------------ | -------------------------- |
| Debit                    | Credit                     |
| ------                   | --------------             |
| Net pay (bank)           | Gross wages (from journal) |
| Deductions (liabilities) |                            |

When reconciled, the balance should be zero once all entries have been posted.

### Accounting for Deductions

Inside the payroll journal, each deduction type (e.g., PAYE, NIC, pension) is posted to its own liability account.

> **Key Term: payroll deductions**
> Statutory or contractual amounts withheld from employees' gross pay and payable to third parties.

- Deductions are credited (liabilities).
- As the business pays these to the relevant authority, the respective liability accounts are debited and the bank is credited.
- Delayed or missed payments will show up as unreconciled items in the control account or as outstanding payables.

### **Worked Example 1.2**

During the month:

- Wages expense: \$20,000
- Deductions: PAYE \$2,800, NIC \$1,200, pension \$500
- Net pay: \$15,500

The business pays all amounts due at period-end.

_What general ledger entries are required?_

> **Answer:**
> Step 1:
>
> - Dr Wages expense \$20,000
> - Cr Wages control account \$20,000  
>   Step 2:
> - Dr Wages control account \$20,000
> - Cr Bank \$15,500
> - Cr PAYE payable \$2,800
> - Cr NIC payable \$1,200
> - Cr Pension payable \$500  
>   Step 3 (once payments are made to authorities):
> - Dr PAYE payable \$2,800
> - Dr NIC payable \$1,200
> - Dr Pension payable \$500
> - Cr Bank \$4,500

### Payroll Errors and Correcting Entries

Common payroll errors include:

- Incorrect calculation of gross pay or deductions
- Double payment or omission of a payslip
- Posting amounts to the wrong account

When errors are identified, correcting journal entries must be made (often by journal reversal of the incorrect entry, followed by posting the correct entry).

### **Worked Example 1.3**

A wages payment of \$1,000 was posted twice in error (as a debit to both the wages control account and bank). How is this corrected?

> **Answer:**
> Reverse the extra erroneous entry:
>
> - Cr Wages control account \$1,000
> - Dr Bank \$1,000  
>   This clears the duplicated payment and restores the bank and control account to correct balances.

### **Exam Warning**

Always ensure that total credit entries and total debit entries for each payroll journal balance. Omitting a deduction or splitting amounts incorrectly will cause errors in the wages control and liability accounts—these are likely to be tested in the ACCA FA2 exam.

## **Payroll Reconciliation**

Regular payroll reconciliation confirms that:

- All payroll journal entries have been posted correctly.
- The amount paid out in net wages matches payslips and bank statements.
- All payroll deductions have been paid or remain as correct outstanding liabilities.

The process includes:

1. Comparing totals from payroll summaries, control account, and bank payments.
2. Investigating any uncleared postings, outstanding liabilities, or unexplained balances.
3. Making correcting entries as necessary.

**After reconciliation:**

- The wages control account should have a nil balance.
- Only due but unpaid items (statutory deductions or unclaimed wages) appear as liabilities.

> **Key Term: payroll reconciliation**
> The process of checking that payroll-related accounts in the general ledger match actual payments and statutory remittances.

### **Revision Tip**

Practice drawing up T-accounts for the wages control account using varied payroll scenarios, including deduction errors, to strengthen correct double-entry logic.

## **Summary**

Payroll accounting requires accurate recording of all payroll costs and deductions, using the wages control account to match payroll journals to cash payments and liabilities. Statutory deductions are credited to specific liability accounts and only cleared when remitted. Regular reconciliation is necessary to detect and correct errors and to ensure all withholding obligations are fairly stated.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Record payroll journals for gross wages, deductions, and net pay using the control account
- Split deductions to appropriate payroll liability accounts
- Post clearing payments to employees and authorities from the control account and liabilities
- Identify and correct payroll posting errors via the journal
- Reconcile the wages control account to ensure all payroll entries and payments are complete and accurate
- Present payroll-related balances appropriately in financial statements

## **Key Terms and Concepts**

- payroll journal
- wages control account
- gross pay
- net pay
- payroll deductions
- payroll reconciliation

Payroll accounting entries - Payroll journals and reconciliations