Set up Chart of Accounts
Before you can start inputting data into Quickbooks, you have to define your chart of accounts. The chart of accounts is your database of all the accounts you use to track the different types of income that it produces. It even identifies your Accounts Receivable account along with your Accounts Payable account (sometimes called customers).
Basically, your chart of accounts is a list of accounts that you want to track. Think of it like a table with accounts listed down the left column, and income listed down the right column. Each account is associated with a negative number. The first account is number -1, the second is -2, and so on. This means that each income entry has a negative sign before it (i.e. -1, -2, -3, etc).
An income entry will always be followed by another negative entry (like -1, -2, -3, etc). For example, your entry for income in the Accounts Receivable account might look something like this: -10000, -5000, -1000, -7000.
To set up a chart of accounts, you pretty much follow the same steps you would follow to set up an account in Quicken.
You can learn how to setup Chart of Accounts in Quickbooks from this Quicken Customer Care thread, or watch this video tutorial.
Gather Payroll Reports
Preparing payroll and related payroll documents is the first step to good payroll accounting. Obtain and review the wage reports (payroll reports) and other documents for required fields. Depending on the company’s instructions, there may be additional documents, such as paystub, or allocating report, that must be submitted with the payroll.
Gather Paychecks and Other Documents
Obtain copies of paychecks (payroll stubs) for last two. Payroll stubs should contain information for each employee together with their earnings details.The payroll stubs are the starting point for the payroll. To obtain copies of payroll stubs, you must have all the employee’s names and Social Security number. You must also know the names and numbers for each tax form (W-2 and W-4), if you have different withholding allowances for each employee.
Although payroll stubs are not the most accurate source of pay data, they are the most frequently submitted to government agencies. Payroll stubs may also be submitted to other non-government agencies to complete certain tax forms.
Calculate all withholdings from paychecks and other forms.
Record Payroll Journal Entries
When record payroll journal entries in a single transaction, repeat the employee, payroll period, and payroll transactions on that same page.
For example, if you have two employees (Jane and John) and two payroll periods (April and May), you would start by recording a journal entry in the Payroll function. After creating the entry, repeat the same steps with Jane (as illustrated below).
Tip: Because EMPLOYEE, PERIOD, and PAYROLL TASK are all calculated fields, once you make the necessary calculations, you can make the journal entry now. Likewise, you can now calculate the same information for Payroll Transactions.
Journal Entry to Record $10,000 in Payroll Expense
Journal Entry to Record Paying Expense Being Held as Liability
Credit card, check or bill and cash.
Journal Entry to Record Accrued Vacation
Employee X accrued vacation pay of fourteen days, which is a combination of vacation leave and annual leave. The vacation leave accrual is for twenty-four days of the thirty-two days of leave used in the calculation. The annual leave accrual is for one day per week.
Payment to Employee X for vacation pay recordable on JE 10-30, 2002.
Cash 12,798 Accounts (payable) 12,798 Accrued Vacation Pay 14,000.
Journal Entry to Record Accrued Sick Pay
When an employee is absent from work for one week or more due to illness, the employee is entitled to receive sick pay.
Sick pay is regularly paid to the employee after the employee and supervisor have signed a statement on the hours worked. The sick pay statement is attached to the appropriate employee pay record. The record is allocated to the appropriate payroll account. Example, the statement is placed with the Regular Pay or Contract Pay pay records. This entry is for the journal entry only. The payroll report reflects the posting to the Employee’s Sick Pay account.
In this journal entry, the entry type is Sick Pay Expense. This is the account that is impacted. The entry type is Supplement Workpapers Act. The act is paid. The nature is Sick Pay. The amount is the total sick pay expense for the paying period.
If the sick pay for the employee for the pay period is zero, then the entry should be as follows: 0.00.
If the sick pay is nominal, then the entry is similar to this: 1.00.
If the sick pay is substantial (i.e., 2 or more weeks), then the entry should be as follows: 2.00.
Mississippi state law requires employers to pay accrued wages to employees at least monthly. However, employers who choose not to pay employees their full wages at the end of every pay period may determine the exact time and day when wages shall be paid, but must pay the balance within two working days of the last day of the period covered by the payroll.
Accrued wages are wages that an employee is entitled to receive but has not yet been paid, whether the wages were earned in the current pay period or in a previous pay period. Employers are required to pay these wages at the following times:
- If an employee quits or is discharged or leaves early, accrual of wages ends.
- No wages need to be remitted if an employee is absent from work for less than one week. In this case, the employer may choose to give the employee a partial, prorated payment.
- ALL HOURS worked must be paid on payday. No “comp time” can be requested when the employer chooses to pay accrued wages at the end of the pay period.
- Wages should be paid to employees on payday or on payday plus two working days.
- After two working days have passed, accrued wages should be paid regardless of whether the employee is absent from work.
Post Payroll Journal Entries to the General Ledger
Payroll is the process of recording payroll expenses for your employees. In a nutshell, payroll accounting includes the following tasks:
- Creating a payroll journal
- Approving and posting the payroll journal entries to the General Ledger (GL)
- Creating, posting, and reconciling paychecks
- Creating electronic pay stubs
The key tasks of payroll accounting include approving payroll journal entries, posting payroll journal entries to the General Ledger, creating paychecks and electronic pay stubs, and reconciling payments.
Common Area Expenses
Payroll typically includes common area expenses like rent, common area maintenance, telephone costs, and utilities.
Before we begin discussing payroll accounting tasks, it’s a good idea to understand the common area expenses and include them in your employee’s check.
While the home office deduction is the most common deduction taken on employee’s checks, in some cases, some employers feel the need to take deductions for common area expenses to support each employee’s needs.
Examples of common area expenses include:
- Telephone operating costs
- Utility costs
- Mail costs
- Insurance premiums
Each common area expense includes a designated checking account and a designated debit memo.
Reconcile Payroll to General Ledger
It’s important that all your payroll is first matched back to the general ledger. This ensures that your payroll activity has completed on every bank’s system and that the bank detail has been correctly entered into your accounting system.
Using a standard set of account codes and transactions, accounts can be linked to the payroll data. Reconciliation from payer to payee data can be done on a one-to-one or one-to-all basis across multiple payrolls.
Reconciliation from Payer
All payroll accounts need to be reconciled to the general ledger. This entails matching the payee’s account with the payer’s account. You need to make sure that all the filers have been assigned, along with the types of each section of the general ledger.
To reconcile the payroll, you first need to link the payee’s account to the payer’s account. This is done on the general ledger in the –personal expenses” section. You then link a distribution code. Once the distribution code is assigned, the detail lines can be entered. The –personal expenses” sections in the personal expenses bank statement and the payer’s ledger is now completed.
The Bottom Line: How to Do Payroll Accounting
Payroll accounting is the process of recording, reconciling, and reporting to the government and/or company, the amounts of the money you pay your employees, as well as withholding money from employees’ paychecks.
Put simply, it’s the act of tracking what each and every employee of the company receives in pay. And it’s a necessary function of running a business since it provides the straightest and fairest way to pay employees for their actions and determine how much money you owe them.
From start-up companies right up to those scaling to the sky, payroll accounting is an essential function that has to be performed.
Therefore, if you don’t know how to do payroll accounting, it shouldn’t come as a surprise that many people find it an intimidating task that they’re put off of doing altogether.
Fortunately, it doesn’t have to be so intimidating.
In this complete guide, we’ll show you what you need to know about how to do payroll accounting.