Wages journals are as complicated as bookkeeping gets. If a business has employees, it is likely that they will have to account for any payment made to those employees, including the employees and employers tax contributions and payments. In this post, I will teach the basics of wages journals...
The best place to start to help you identify what needs accounting for, is to look an example of an employees payslip. The payslip should list the following information, as well as other details...
Income Tax Deduction
National Insurance Contribution
All of these will need accounting for using journal entries, and so will the employers national insurance contribution (not listed above).
Please note: All figures are for example only and are not accurate of present tax rates.
Journal #1 - Gross Pay Journal
Let's say the employee was paid £2000.00 gross. Any tax and national insurance is deducted by the employer and it is the employers responsibility to pay these amounts to HMRC. Because of this, the employer needs to account for the liability i.e the amount owed to HMRC.
DR Gross Wages Expense Account £2000.00
CR Employees Tax Control Account £500.00
CR Employees NI Control Account £100.00
CR Net Pay Control Account £1400.00
Journal #2 - Employers NI Journal
We now need to account for the employers national insurance contribution.
DR Employers Tax Expense Account £300.00
CR Employers Tax Control Account £300.00
Journal #3 - Net Payment to Employee Journal
Once the net wages or net salary has been physically paid to the employee, this transaction will need accounting for.
CR Bank Account £1400.00
DR Net Pay Control Account £1400.00
Journal #4 - Tax Payment to HMRC Journal
Once the employees and employers tax and national insurance payments have been physically paid to HMRC, these transaction will need accounting for.
CR Bank Account £900.00
DR Employees Tax Control Account £500.00
DR Employees NI Control Account £100.00
DR Employers Tax Control Account £300.00
I hope this helps!
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