Example – Recording payroll expenses

Let’s take a look at the following example to understand how the payroll expenses are recorded.

A company is processing its payroll for the month of December. The company has salaried employees who are paid monthly salaries on the 5th day of the following month. Department wise breakdown of the salary expense is given below. The amounts below are the gross salaries and include all allowances and benefits payable to employees.

  • Production Department: $6,000
  • Selling Department: $3,000
  • Administration Department: $10,000

In addition, the Production Department uses work force that is paid wages as per agreed hourly rates. Wages are paid at the end of each week and no balance is payable to the workers as of 31 December. Wages expense incurred and paid in December is $7,500.

Income tax deduction at source is not applicable on the wages as the annual income of workers falls below the threshold of taxable income as stipulated in the income tax laws of the country. However, income tax is deductible on the salaries and amounts to $4,750. As per law, the company is required to pay within 25 days following every month, but the company pays on the 20th of every following month to be on the safer side.

How will the above transaction be recorded in the books of account of the company?

Answer

Following journal entries will be recorded by the company.