Learning Outcomes
After studying this article, you will be able to explain the accounting entries required for payroll remittances to tax authorities, identify key statutory deductions and their treatment, and describe the correct timing and presentation of related liabilities in financial statements. You will also be able to record and adjust payroll liabilities and assess common errors involving payroll remittance timing and classification.
ACCA Maintaining Financial Records (FA2) Syllabus
For ACCA Maintaining Financial Records (FA2), you are required to understand the process of recording payroll transactions, focusing on statutory deductions and the remittance of these to the relevant authorities, as well as the correct reporting and timing issues. Ensure that you are comfortable with:
- The accounting entries for gross wages, employee deductions, and employer payments
- Recording liabilities for payroll deductions and statutory contributions
- Accounting for the payment (remittance) of payroll deductions to government authorities
- Understanding the timing difference between wage payments and remittances
- Reporting payroll liabilities in 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.
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When an employer deducts tax from employee wages but has not yet paid the amount to the tax authority, what type of item is this in the financial statements?
- Expense
- Prepayment
- Liability
- Asset
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Which is the correct accounting entry when paying previously accrued wage deductions to the tax authority?
- Debit Wage Expense, Credit Bank
- Debit Liability (e.g., Tax Payable), Credit Bank
- Debit Bank, Credit Tax Payable
- Debit Tax Payable, Credit Wage Expense
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True or false? If payroll deductions are not remitted until the next accounting period, they should still appear as liabilities at the period end.
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Briefly explain the consequence of omitting to record statutory payroll deductions as a liability at year-end in the financial statements.
Introduction
Payroll involves not only paying employees their net wages but also accounting for statutory deductions such as income tax and social security contributions. Employers are legally required to withhold these amounts from gross wages and remit them to government authorities, usually at set intervals after each payroll. Careful attention to the timing of these payments—and recording liabilities when remittances remain outstanding—is critical for accurate financial statements and legal compliance.
This article explains the double-entry bookkeeping for payroll statutory deductions and the remittance process, and sets out how and when payroll liabilities should be reported in the accounts.
Key Term: statutory deductions
Amounts an employer is required by law to withhold from employees’ gross pay (such as income tax and social security), to be remitted to government authorities.
PAYROLL REMITTANCES—KEY ENTRIES AND TIMING
Payroll Cycle Overview
When recording payroll, three key steps occur:
- Recognising gross wages and deducting statutory amounts;
- Creating liabilities for the deductions to be paid to authorities;
- Settling those liabilities when remittance is made.
Main Payroll Accounting Entries
On each payroll date:
- To record gross wages and deductions:
- Debit: Wages Expense (gross pay)
- Credit: Cash/Bank (net pay to employees)
- Credit: Payroll Liabilities (amounts withheld for tax, social security, pension)
On remittance of deductions to authorities:
- To pay liabilities:
- Debit: Payroll Liabilities (e.g., Tax Payable, Social Security Payable)
- Credit: Cash/Bank
Timing Considerations
There is normally a time gap between when wages are paid to employees and when the corresponding deductions are remitted to government authorities. Until payment is made, the amounts withheld are reported as current liabilities.
Key Term: payroll liability
The outstanding obligation to pay withholdings and employer contributions to tax and other government agencies.
Worked Example 1.1
An entity runs its monthly payroll. Gross wages are $10,000. Income tax withheld is $1,800, and social security deducted from employees is $700. The net pay to staff is $7,500. Employer social security contributions are $700. Salaries are paid on the last day of the month. The statutory deductions and employer contributions will be remitted to the authorities on the 15th day of the following month.
Required: Show the accounting entries on the payroll date and when the remittances are later made to the authorities.
Answer:
On payroll date:
- Debit Wages Expense $10,000
- Credit Payroll Liability—Tax $1,800
- Credit Payroll Liability—Employee Social Security $700
- Credit Payroll Liability—Employer Social Security $700
- Credit Bank (net pay) $7,500
On 15th of next month, when remitted:
- Debit Payroll Liability—Tax $1,800
- Debit Payroll Liability—Employee Social Security $700
- Debit Payroll Liability—Employer Social Security $700
- Credit Bank $3,200
Reporting Payroll Liabilities on the Statement of Financial Position
Unpaid payroll deductions and employer contributions must be shown as current liabilities at the reporting date if not yet remitted.
Worked Example 1.2
At 31 December, an entity owes $2,000 in unremitted tax and $800 in unremitted social security contributions from the December payroll. These will be paid in early January.
Where do these appear in the year-end financial statements?
Answer:
The total $2,800 is presented under current liabilities (e.g., “Tax and social security payable”) in the statement of financial position as at 31 December.
Exam Warning
Payroll liabilities are commonly left unpaid at period end. Failing to record these as liabilities results in an understatement of both liabilities and expenses in the financial statements.
Reconciliation and Documentation
Supporting records should clearly show calculations of gross wages, deductions, employer contributions, and remittance due dates. This enables proper monitoring of outstanding payroll liabilities and supports statutory compliance.
Summary
Payroll statutory deductions must be recognised as liabilities until paid. The timing of wage payments and remittances to authorities often differs, so reporting outstanding amounts as current liabilities is essential for accurate accounts and meeting legal obligations.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain statutory payroll deductions and their accounting treatment
- Record accounting entries for payroll deductions and remittance to authorities
- Identify and report payroll liabilities in the financial statements at period end
- Recognise the effect of timing differences between payroll and remittance
- Understand the impact of errors in not recording payroll liabilities
Key Terms and Concepts
- statutory deductions
- payroll liability