## **Learning Outcomes**

After reading this article, you will be able to explain and record payroll accounting entries using wages control and payroll clearing accounts. You will learn the purpose of each account, understand the double-entry required for gross wages, payroll deductions, and net wage payments, and identify how these transactions appear in the general ledger and financial statements.

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

For ACCA Maintaining Financial Records (FA2), you are required to understand how to record and control payroll transactions efficiently. This article is relevant to your preparation by covering these key syllabus areas:

- The principle of double-entry bookkeeping for payroll (gross wages, deductions, net wages)
- The use and reconciliation of wages control and payroll clearing accounts
- Recording deductions such as PAYE, National Insurance, and other statutory contributions
- Posting payroll entries to the general ledger and preparing for the period-end
- Reporting payroll-related balances in the 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 initially debited for the gross wages expense before payments or deductions?
   a) Cash at bank
   b) Wages control account
   c) Payroll clearing account
   d) PAYE creditor

2. Which entry eliminates the balance on the wages control account?
   a) Crediting wages expense when net wages are paid
   b) Debiting PAYE creditor and NI creditor
   c) Crediting wage deductions and net pay when payroll is processed
   d) Debiting wages expense and creditors for deductions

3. True or false? The payroll clearing account is used to isolate timing differences between the payroll calculation and the actual payment of wages.

4. Name two common statutory deductions processed through payroll in the UK.

## **Introduction**

A business with employees must process payroll accurately to ensure both its staff and government obligations are met. Payroll transactions involve more than simply recording the wage payment—they require proper accounting for gross wages, statutory deductions such as income tax and National Insurance, and payment of net wages. Control accounts are used to manage these complex flows and ensure completeness and accuracy in the financial records.

In this article, you will learn how to structure and post payroll entries using the wages control account (sometimes known as the wages or payroll journal account) and payroll clearing accounts. These accounts help separate payroll cost recognition, statutory deductions, and cash movements, making reconciliation and audit trails straightforward.

> **Key Term: payroll (wages) control account**
> A temporary general ledger account used to collect and allocate gross wages, deductions, and net pay related to payroll before the final cash and creditor entries are made.
>
> **Key Term: payroll clearing account**
> An account used to reconcile the payment of net wages and the settlement of payroll deductions, clearing the amounts owed from payroll to employees and relevant authorities.
>
> **Key Term: payroll deductions**
> Statutory and voluntary amounts withheld from employees’ gross pay, such as tax, National Insurance, and pension, which must be paid to third parties.

## **Payroll Accounting Flow: An Overview**

Payroll accounting consists of several steps, each recorded with specific double entries to reflect the effect of gross pay, deductions, and payments. Control accounts allow the entity to manage the complexity and timing of these transactions.

### The Purpose of Wages Control and Payroll Clearing Accounts

- The wages control account accumulates the total payroll cost (gross wages) and allocates it between net pay to employees and deductions.
- Wages deductions are credited to appropriate creditor accounts, representing amounts owed to authorities and third parties.
- The net pay amount represents what is due to employees and is settled via the bank account.
- The control and clearing accounts ensure that all costs and liability movements are traceable, enabling reconciliations and compliance.

### Payroll Double-Entry Steps

**1. Processing gross wages:**

- Debit Wages (or wages expense) account for the total gross payroll.
- Credit Wages control account for gross payroll.

**2. Allocating deductions:**

- Debit Wages control account with total gross wages.
- Credit individual deduction liability accounts (e.g., PAYE creditor, NIC creditor, pension contributions).
- Credit Payroll clearing account with the net wages due to staff.

**3. Paying net wages:**

- Debit Payroll clearing account.
- Credit Cash at bank for the total net pay.

**4. Settling deductions:**

- Debit each deduction creditor account when payments are remitted.
- Credit Cash at bank.

### **Worked Example 1.1**

A company runs monthly payroll. Gross wages for the month are £10,000. Deductions include PAYE tax (£1,200), employee National Insurance (£800), and pension contributions (£400). The balance is paid to employees.

**Required:** Show the general ledger entries from recording payroll to paying staff and remitting deductions.

> **Answer:**
>
> #### Step 1: Recognise gross pay
>
> - Debit Wages Expense £10,000
> - Credit Wages Control Account £10,000
>
> #### Step 2: Allocate deductions and net pay
>
> - Debit Wages Control Account £10,000
> - Credit PAYE Creditor £1,200
> - Credit NIC Creditor £800
> - Credit Pension Creditor £400
> - Credit Payroll Clearing Account £7,600 (net pay)
>
> #### Step 3: Pay net wages to staff
>
> - Debit Payroll Clearing Account £7,600
> - Credit Bank £7,600
>
> #### Step 4: Remit deductions to authorities
>
> - Debit PAYE Creditor £1,200
> - Debit NIC Creditor £800
> - Debit Pension Creditor £400
> - Credit Bank £2,400

### The Importance of Wages Control Account Reconciliation

By using a wages control account, entities can track payroll costs and ensure all deductions and payments are made correctly. At the end of each pay cycle, the control account should balance to zero once all postings are made.

> **Key Term: reconciliation**
> The process of comparing account balances or transactions to supporting records, ensuring accuracy and detecting discrepancies.

### **Worked Example 1.2**

An accountant finds a balance of £500 remaining in the payroll clearing account after all wage payments are made. What should be checked?

> **Answer:**  
> The payroll clearing account should normally have a nil balance after all net wages are paid. A remaining £500 suggests an underpayment or a timing difference. The accountant should review individual net pay calculations, check for unprocessed or delayed payments, and reconcile payroll reports to bank transactions.

### **Exam Warning**

> Payroll questions often test your understanding of control accounts, not just the actual payment of wages. Be prepared to explain or correct entries for missing or incorrect payroll postings—especially in the wages control or clearing accounts.

## **Summary**

Payroll accounting uses control and clearing accounts to separate and manage the different flows arising from gross wage expenses, deductions, and payments. Accurate recording and reconciliation of these accounts ensure financial statements reflect payroll transactions correctly and all due amounts are paid to employees and authorities.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Identify the purpose and use of wages control and payroll clearing accounts
- Record payroll accounting entries for gross wages, deductions, and net wage payments
- Reconcile payroll control accounts after payroll processing
- Recognise how payroll transactions and deductions appear in the general ledger and statements
- Resolve typical errors or imbalances in payroll control accounts

## **Key Terms and Concepts**

- payroll (wages) control account
- payroll clearing account
- payroll deductions
- reconciliation

Payroll accounting entries - Wages control and clearing accounts