Chapter

Payroll Accounting

Learning Objectives:

Upon completion of this chapter, you should be able to:

1. Identify and apply the payroll-specific accounts in a chart of accounts

2. Prepare a payroll journal entry
3. Determine the effect of payroll journal entries on the income statement and
balance sheet
4. Demonstrate the difference between cash accounting and accrual accounting
5. Prepare accrual and reversal journal entries
6. Analyze the payroll expense accounts for reasonableness
7. Reconcile payroll liability accounts
8. Prepare journal entries for payroll corrections

Communication Objective:

Upon completion of this chapter, you should be able to explain the impact of
charging an employee’s payroll expense to the wrong account and how to correct the
error.

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Chapter Contents

Introduction....................................................................................................................1-3
General Accounting........................................................................................................1-3
The General Ledger ....................................................................................................1-4
Types of Accounts ......................................................................................................1-5
Posting Journal Entries ...............................................................................................1-9
Trial Balance ............................................................................................................1-14
Income Statement and Balance Sheet........................................................................ 1-15
Content Review ........................................................................................................ 1-17
Review Questions ..................................................................................................... 1-18
Payroll Accounting .......................................................................................................1-19
Payroll Journal Entries.............................................................................................. 1-19
Content Review ........................................................................................................ 1-37
Review Questions ..................................................................................................... 1-38
Accrual Method of Accounting .................................................................................... 1-41
Workers’ Compensation Accruals ............................................................................1-44
Vacation Accruals .................................................................................................... 1-45
Sick Leave Accruals ................................................................................................. 1-48
Employer Health Taxes ............................................................................................ 1-48
Labour Costs Accruals.............................................................................................. 1-48
Content Review ........................................................................................................ 1-51
Review Questions ..................................................................................................... 1-52
Reconciliation and Analysis of Accounts ......................................................................1-56
Journal Entry Analysis.............................................................................................. 1-57
Expense Accounts .................................................................................................... 1-57
Liability Accounts .................................................................................................... 1-61
Payroll Audit ............................................................................................................1-65
Payroll and Budgets..................................................................................................1-65
Content Review ........................................................................................................ 1-66
Review Questions ..................................................................................................... 1-67
Chapter Review Questions and Answers ......................................................................1-69

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Introduction
In Payroll Compliance Legislation (PCL), students learned about the federal and
provincial/territorial legislation and government agencies that impact payroll, from an
employer and an employee’s perspective. Payroll Fundamentals I provided students with the
information and processes necessary to produce payroll at an employee level.

Payroll Fundamentals 2 covers the areas that payroll is responsible for at the organizational
level. These include payroll accounting, government and third party remittances and
reconciliations, and federal and provincial year-end filing requirements.

Successful completion of an introductory accounting course is recommended for students

enrolled in Payroll Fundamentals 2. This chapter on Payroll Accounting will apply specific
payroll-related accounting requirements to the general concepts and processes already
learned.

General Accounting
The accounting process begins with a financial transaction following a specific flow or cycle
ending with the financial statements.

One of the responsibilities of the payroll department is to ensure that all payroll transactions
are accurately recorded in the accounting system of the organization. Payroll information will
be tracked from the payroll transaction through the General Ledger to the financial
statements of the organization.

Note:
The calculations of the individual employees’ pays in this material are not necessarily based
on current year statutory deductions and are used only to demonstrate the accounting process.
Dates used throughout the chapter may not be for the current year and are being used for
demonstration purposes only. In most cases the year will be referred to as 20XX.

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Prior to exploring the specifics of payroll accounting, it is important to understand the

general accounting principles that guide the payroll function.

The General Ledger

All the accounts that we use to record financial transactions form the General Ledger of an
organization. The purpose of the General Ledger is to keep an organized record, by account,
of the organization’s financial transactions and hold information that is required to prepare
financial statements. Each of the accounts is given a numerical reference number that is
usually grouped by account type into a chart of accounts.

An example of a simple chart of accounts is listed below:

Account Number Range Account Type

1000 – 1999 Asset accounts
2000 – 2999 Liability accounts
3000 – 3999 Owners’ equity accounts
4000 – 4999 Revenue accounts
5000 – 5999 Expense accounts

Each account in the General Ledger can have two types of entries − debits and credits. Debit
entries are recorded in the left column of a ledger account and credit entries are recorded in
the right column of the ledger account.

Note:
For purposes of this course we will use account names for journal entries; however, most
systems use both a number and a name as a unique identifier.

ACCOUNTING EQUATION
The foundation of accounting revolves around the accounting equation which dictates how
business transactions are recorded, accounted for, and used to determine the financial
position of a company at any given point of time.

The accounting equation states:

Assets = Liabilities + Owners’ Equity

A company's assets are items of value that are owned by the company such as cash,
inventory, and equipment. Liabilities are the debts or financial obligation of a company.
Equity is the amount available when liabilities are deducted from assets of the company.

Owners’ equity has two components:

Owners’ Equity = Contributed Capital + Retained Earnings

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Contributed capital is the amount of payments in cash or assets that the owners have made to
the company. Retained earnings are the accumulated profits to date less any amounts of
dividends or other amounts paid to investors.

With this information, the accounting equation can be expanded to:

Assets = Liabilities + Contributed Capital + Retained Earnings

Types of Accounts
A typical for-profit organization has five different types of accounts:

 asset accounts
 liability accounts
 revenue accounts
 expense accounts
 owners’ equity accounts (sometimes called shareholders’ equity accounts if there are
shareholders in the business or partnership equity accounts if the business is in the
form of a partnership)

The number of accounts used by different organizations can vary; some small organizations
can have as few as a dozen accounts while large organizations may have hundreds or
thousands of accounts.

The account types are described as:

Asset Accounts
An asset account contains the value of items owned by the organization. An organization’s
asset accounts include cash, accounts receivable, prepaid expenses and inventory. Payroll
assets are typically items that have been prepaid to or for the employee, such as pay advances
or loans.

Liability Accounts
A liability account indicates the money that the organization owes to its creditors. An
organization’s liability accounts include accounts payable, salaries and wages payable
(sometimes referred to as net pay or payroll clearing account) and vacation pay payable.
Employee deductions are monies collected by the organization and owed to a third party,
therefore deductions appear in a liability account. Payroll liability accounts may be for
statutory, legal, company-compulsory or voluntary deductions.

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Revenue Accounts
Revenue accounts are used to record the income earned by the organization during the
accounting cycle. Generally, the revenues result from the sale of merchandise, the
performance of services, the rental of property and the lending of money. When a loan is paid
back with interest, the interest becomes revenue for the lender. The employees’ payroll is not
generating revenue, subsequently the payroll function does not normally use any of these
accounts.

Expense Accounts
Expenses are costs incurred by an organization in the process of earning revenue during a
designated period of time. Typical expense accounts related to payroll would include such
items as wages, salaries, employer payroll expenses, and group insurance benefit expenses.
Payroll expenses have a direct impact on the profitability of an organization.

Equity Account
The equity account shows the owners’ or shareholders’ worth or interest in the organization.
Equity is the amount remaining of the assets after the liabilities are deducted. Sometimes
equity is referred to as net assets.

Owners’ equity is divided into contributed capital (equity created through investments by
owners or shareholders) and retained earnings (equity that has resulted from the
organization’s profitable activities).

Each type of account is shown in the following chart with the effect that a debit or credit
entry has on the normal balance. In the case of asset and expense accounts, which have
normal debit balances, debit entries will increase the account balance. Credit entries made to
these accounts will have a negative effect and will decrease the normal debit balance.

Similarly, liability, revenue and equity accounts that have normal credit balances will see
those balances increase with each credit entry. Debit entries made to liability, equity, and
revenue accounts will have a negative effect and will decrease the normal credit balance.

TYPE OF NORMAL
DEBIT ENTRY CREDIT ENTRY
ACCOUNT BALANCE
Asset Debit Increases Balance Decreases Balance
Liability Credit Decreases Balance Increases Balance
Revenue Credit Decreases Balance Increases Balance
Expense Debit Increases Balance Decreases Balance
Equity Credit Decreases Balance Increases Balance

The different types of accounts are used for different accounting purposes. The closing
balances in the revenue and expense accounts are used to produce the Income Statement and
the closing balances in the asset, liability and owners’ equity accounts are used to produce
the Balance Sheet. Both the Income Statement and the Balance Sheet will be explained later
in this chapter.

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To better understand the impact of payroll in financial activities, the following is a sample of
a chart of accounts where the payroll related accounts are highlighted.

Example: CHART OF ACCOUNTS

Assets 1000 Liabilities 2000
Current Assets Current Liabilities
101 Cash – petty cash 201 Accounts payable – general
102 Bank – general account 202 Interest payable
103 Bank – payroll account 203 Office salaries payable
104 Accounts receivable 204 Rent payable
105 Interest receivable 205 Warehouse salaries- payable
106 Rent receivable 206 C/QPP contributions payable
107 Employee advances 207 EI premiums payable
108 Merchandise inventory 208 Federal income tax payable
109 Office supplies 209 Quebec income tax payable
110 Allowance for doubtful accounts 210 QPIP premiums payable
111 Prepaid insurance 211 Life insurance payable
112 Prepaid interest 212 AD&D payable
113 Prepaid property taxes 213 Donations payable
114 Prepaid rent 214 Medical/dental payable
215 Union dues payable
Long-term Investments 216 Contribution Related to Labour
Standards payable
141 Investment in shares 217 RRSP payable
142 Investment in bonds 218 Pension payable
219 Social club payable
Capital Assets 220 Third Party Demand payable
151 Trucks 290 Garnishments payable
152 Accumulated amortization-trucks 300 Miscellaneous deductions
153 Office equipment 301 Accrued office salaries
154 Accumulated amortization-office 302 Accrued warehouse salaries
equipment
155 Building 303 Accrued office vacation
156 Accumulated amortization-building 304 Accrued warehouse vacation
157 Land 305 Salaries and wages payable (net
pay)
158 Land improvements 306 Accrued payroll expenses
159 Accumulated amortization-land 310 Workers’ Compensation accrual
improvements
311 HST payable
Intangible Assets 312 GST payable
191 Patents 313 QST payable
192 Franchise 314 PST payable

Revenues 4000 Owners’ Equity 3000

701 Sales revenue 401 Owners’ equity
702 Returns and allowances 402 Retained earnings
703 Sales discounts 403 Net earnings to date
704 Interest earned

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705 Earnings from investment

Expenses 5000
Administration expenses Warehouse expenses
201 Office – salaries 601 Raw material purchase
202 Office – sick pay 602 Warehouse wages-regular
203 Office – overtime 603 Warehouse overtime
204 Office – vacation 604 Warehouse shift pay
205 Staff incentive 605 Warehouse stat pay
206 Office lieu/severance pay 620 Warehouse sick pay
207 Office – stat pay 621 Warehouse vacation pay
301 Marketing – salaries 640 Warehouse – lieu/severance pay
302 Marketing – overtime 651 Warehouse – C/QPP employer
308 Sales – salaries 652 Warehouse – EI employer
309 Sales – overtime 653 Group benefits – employer
654 Company pension employer
Employee fringe benefits – administration 655 Employer RRSP
401 C/QPP employer 656 Workers’ compensation expense
402 EI employer 660 Employer payroll expenses
403 Group insurance benefits
404 Company pension plan Other expenses
405 Employer RRSP contributions 700 Amortization & depreciation
406 Manitoba employer tax 720 Interest expense
407 Newfoundland and Labrador employer tax 725 Office supplies
408 Employer Health Tax 740 Rent expense
409 QHSF 750 Office equipment expense
410 Quebec employer taxes – other 781 Utilities
411 Workers’ compensation expense 782 Telephone
412 QPIP employer 783 Corporate tax
413 Contribution Related to Labour Standards 784 Auditors expense
– expense
414 Vacation – administration 785 Bank service charges
786 Processing fee
800 Clearing accounts
850 Income summary

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Each General Ledger account consists of the following five elements:

 account name
 opening balance – debit (DR) or credit (CR)
 reference (source of the entry)
 debit and credit transactions
 closing balance (DR or CR)

Posting Journal Entries

In order to record each financial transaction in the accounts, the transaction is journalized and
the debits and credits are posted to the relevant accounts.

To journalize a transaction is to create a journal entry which reflects the financial impact of a
particular transaction. To post the journal entry to the accounts is to record each debit or
credit amount in the journal entry in the appropriate account.

Each journal entry must contain the following components:

 a journal entry reference or number

 the date of the transaction
 the debit and credit amounts to be applied to each account
 a total of the debit entries and of the credit entries
 a brief explanation of the transaction

Example:
The organization received a payment of $1,000.00 on account from one of its customers.

Journal Entry #XXX

DATE ACCOUNT NAME DEBIT CREDIT
September 3, 20XX Bank – general account 1,000.00
Accounts Receivable 1,000.00
Total 1,000.00 1,000.00
To record cash received from an accounts receivable account.

Note that the left side of the account, the debit side, is entered first, followed by the
transactions to the credit side. This is not always the case in a larger organization where more
complex transactions are recorded as one entry, or where the journal entry may be system-
generated. Regardless, the total of the debit entries for each journal entry must equal the total
of the credit entries.

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The journal entries, detailing the debit and credit amounts for each account, are posted to the
General Ledger at regular intervals. Posting is the process of transferring information from
the journal entry to the applicable account in the General Ledger.

Once the transactions are journalized and each journal entry has been posted to the General
Ledger accounts, each of the accounts will have either a debit (DR) or credit (CR) balance.
This shows the balance of that account for a particular accounting period.

Example:
Using the previous example, the General Ledger would appear as follows once the
information from the journal entry has been posted:

Account Name: Bank – general account

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 1,000.00 DR
Sept. 3, 20XX JE #1 1,000.00 2,000.00 DR

Account Name: Accounts Receivable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 4,500.00 DR
Sept. 3, 20XX JE #1 1,000.00 3,500.00 DR

Double-entry Method of Accounting

The accounting equation is the foundation of the accounting process. The two sides of the
equation must always stay in balance. This is accomplished by the double-entry accounting
method. Double-entry involves recording each transaction in at least two accounts, a debit to
one or more accounts and a credit to one or more accounts.

The double-entry method of accounting is a standard method of accounting. The process

ensures that the journal entry is in balance: total debits equal total credits. This means that
each journal entry posted to the accounts must balance; the total of the debit amounts in the
journal entry must equal the total of the credit amounts in that same journal entry.

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Example:
The journal entry for the following transaction which took place on September 3, 20XX is
shown below.

The organization remits union dues of $2,000.00, deducted from the employees, to the
union.

Journal Entry #XXX

DATE ACCOUNT NAME DEBIT CREDIT
September 3, 20XX Union dues payable 2,000.00
Bank – general account 2,000.00
Total 2,000.00 2,000.00
To record union dues paid to the union.

To illustrate the effect of posting to accounts, a visual representation of the accounting

process using the standard transaction data entry method called a T-account. This method
demonstrates the fundamental principles of the double-entry method of accounting. These are
referred to as T-accounts because they resemble the letter T and visually show the effect of
each transaction as it affects the account.

Each class of account is shown below with the effect that a debit or credit entry has on the
normal balance. In the case of asset and expense accounts, which have normal debit balances,
debit entries will increase the account balance. Credit entries made to these accounts will
have a negative effect and will decrease the normal debit balance. T-accounts represent
actual general ledger accounts but are simpler to use for demonstration on how entries are
posted.

Similarly, liability, equity, and revenue accounts that have normal credit balances will see
those balances increase with each credit entry. Debit entries made to liability, equity, and
revenue accounts will have a negative effect and will decrease the normal credit balance.

ASSETS LIABILITIES OWNERS’ EQUITY

(normal DR balance) (normal CR balance) (normal CR balance)
DR CR DR CR DR CR
+ - - + - +

REVENUES EXPENSES
(normal CR balance) (normal DR balance)
DR CR DR CR
- + + -

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Accounting Periods
An organization records its financial transactions and activities over consecutive periods of
time. Many organizations use a twelve-month calendar period as their annual accounting
year, in which case their accounting year ends on the same date every year. This date is not
necessarily December 31st.

Example:
Smith Broadcasting’s twelve-month accounting year runs from January 1 st to December 31st.
Creative Cushion’s twelve-month accounting year runs from April 1 st to March 31st.

Some organizations will divide the accounting year into monthly accounting periods that end
on the last day of each calendar month while others will divide the accounting year into
periods of four and five week months.

Example:
Smith Broadcasting divides their accounting year of January to December into the twelve
calendar months. Their month-end is the last day of the calendar month.

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Creative Cushion divides their accounting year from April to March into periods of four and
five week months, always ending on a Friday. The month-end dates are bolded in the
following calendar.

APRIL MAY
S M T W T F S S M T W T F S
1 1 2 3 4 5 6
2 3 4 5 6 7 8 7 8 9 10 11 12 13
9 10 11 12 13 14 15 14 15 16 17 18 19 20
16 17 18 19 20 21 22 21 22 23 24 25 26 27
23 24 25 26 27 28 29 28 29 30 31
30

JUNE JULY
S M T W T F S S M T W T F S
1 2 3 1
4 5 6 7 8 9 10 2 3 4 5 6 7 8
11 12 13 14 15 16 17 9 10 11 12 13 14 15
18 19 20 21 22 23 24 16 17 18 19 20 21 22
25 26 27 28 29 30 23 24 25 26 27 28 29
30 31

AUGUST SEPTEMBER
S M T W T F S S M T W T F S
1 2 3 4 5 1 2
6 7 8 9 10 11 12 3 4 5 6 7 8 9
13 14 15 16 17 18 19 10 11 12 13 14 15 16
20 21 22 23 24 25 26 17 18 19 20 21 22 23
27 28 29 30 31 24 25 26 27 28 29 30

OCTOBER NOVEMBER
S M T W T F S S M T W T F S
1 2 3 4 5 6 7 1 2 3 4
8 9 10 11 12 13 14 5 6 7 8 9 10 11
15 16 17 18 19 20 21 12 13 14 15 16 17 18
22 23 24 25 26 27 28 19 20 21 22 23 24 25
29 30 31 26 27 28 29 30

DECEMBER JANUARY
S M T W T F S S M T W T F S
1 2 1 2 3 4 5 6
3 4 5 6 7 8 9 7 8 9 10 11 12 13
10 11 12 13 14 15 16 14 15 16 17 18 19 20
17 18 19 20 21 22 23 21 22 23 24 25 26 27
24 25 26 27 28 29 30 28 29 30 31
31

FEBRUARY MARCH
S M T W T F S S M T W T F S
1 2 3 1 2 3
4 5 6 7 8 9 10 4 5 6 7 8 9 10
11 12 13 14 15 16 17 11 12 13 14 15 16 17
18 19 20 21 22 23 24 18 19 20 21 22 23 24
25 26 27 28 25 26 27 28 29 30 31

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The accounting period used to record financial transactions is determined by the organization
and may be based on the type of business activity.

Example:
Tyler Automobile Sales starts their year on October 1 st, just before the new car models are
brought out, and ends their year on the following September 30th.

Trial Balance
Creating the trial balance is the first step in the preparation of financial statements. It is used
to ensure that for every debit entry recorded, a corresponding credit entry has been recorded,
in accordance with the double-entry method of accounting. A trial balance report is a listing
of all the organization's accounts and their balances. If the totals of the Trial Balance do not
agree, the differences must be investigated and resolved before the financial statements are
prepared. This is especially important when transactions are recorded in a batch (for
example, a group of 100 payroll entries), summarized and posted as one entry. If each single
entry does not balance, the entire batch will be out of balance. Trial balance totals may agree
even if there are errors. An example would be an incorrect debit entry being offset by an
equally incorrect credit entry. Likewise, a Trial Balance gives no proof or exception errors
when transactions are recorded incorrectly or omitted.

The following is an example of a partial Trial Balance:

ABC Company
Trial Balance
As at October 31, 20xx
ACCOUNT
ACCOUNT NAME DR CR
NO.
1000-102 Bank – general account $ 857.74
1000-104 Accounts Receivable 1,630.13
1000-153 Office Equipment 495.33
2000-312 GST Payable $ 126.41
3000-401 Owners’ Equity 1,000.00
4000-701 Sales Revenue `2,106.79
5000-201 Office Salaries Expense 250.00
$ 3,233.20 $3,233.20

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Income Statement and Balance Sheet

The account balances in the General Ledger are used to create the two primary statements
that are used in financial reporting: the Income Statement and the Balance Sheet.

Income Statement
The Income Statement is a financial statement which presents the revenue, expenses, and net
profit or loss of an organization during a specified period of time. This is called an
accounting period or cycle (commonly 3-month, 6-month or 12-month periods); the length of
the period would depend on management’s needs for up-to-date information to make sound
business decisions. Revenue and expense accounts appear on the Income Statement. The
main purpose of an Income Statement is to show whether the organization has earned a profit
or incurred a loss during the period being reported. This is determined by calculating the net
income.

Revenue - Expenses = Net Income/Loss

A profit is earned if revenues exceed expenses; a loss is incurred when expenses exceed
revenues. At the end of the accounting period the revenue and expense accounts are closed
out to zero balances with the resulting net income being added (credited) to the owners’
equity account on the Balance Sheet. A net loss would be subtracted (debited) from the
owners’ equity account.

The following is an example of a partial Income Statement.

Example:
ABC Company
Income Statement
For the period ended August 31, 20XX
Revenue:
Sales A $42,000.00
Sales B 33,000.00
Total Revenue $75,000.00
Expenses:
Payroll 11,000.00
Net Income $64,000.00

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The Balance Sheet

The Balance Sheet is a financial statement which presents and summarizes the organization’s
assets, liabilities and owners’ equity at a specified point in time. The information provided on
the Balance Sheet is used in the decision-making process of an organization; it also presents
the organization’s financial position to the shareholders or investors. It shows that the assets
are equal to the combined total of the liabilities and equity. As an organization’s profits
increase, the gain can be used to pay off debts (liabilities). The owners’/shareholders’ equity,
also called retained earnings, is the total of investments made by the owners or shareholders
in the business and the accumulated profits (or losses) earned by the business from prior
years. The Balance Sheet is normally presented in such a manner that the reader easily sees
that its components are balanced.

Assets = Liabilities + Owners’ Equity

For example, on a one-page Balance Sheet the assets could be presented on the top portion of
the page and the liabilities and owners’ equity could be presented on the lower portion of the
page, below the assets. Another format, as shown below, is to present the assets on the left
side of the page and the liabilities and owners’ equity on the right side. The reader can
quickly see that the total of the assets equals the total of the liabilities and owners’ equity.

The following is an example of a simple balance sheet.

Example:
ABC Company
Balance Sheet
As at August 31, 20XX
Assets Liabilities and Owners’ Equity
Cash $ 240,000.00 Accounts Payable $140,000.00
Office Equipment 20,000.00 Payroll Payable 200,000.00
Building 1,000,000.00 Bank Loan 500,000.00
Total Liabilities 840,000.00

Owners’ Equity
H. Smithers 420,000.00

Total Liabilities and

Total Assets $1,260,000.00 Owners’ Equity $1,260,000.00

Remember that the total of the organization’s net profit or loss is included in the Owners’
Equity as retained earnings. Therefore payroll expenses, which are recorded on the Income
Statement, do not appear as a separate item on the Balance Sheet.

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Content Review
 The General Ledger is used to keep an organized record, by account, of the
organization’s financial transactions and holds information that is required to prepare
financial statements.
 Financial transactions are recorded in five different types of accounts: revenue,
expense, asset, liability and owners’ equity.
 Asset and expense accounts have a normal debit balance, while liability, revenue and
equity accounts have a normal credit balance.
 A journal entry is created to record each financial transaction of the organization and
the debits and credits are posted to the relevant accounts.
 Each journal entry must contain the following components:
o a journal entry reference or number
o the date of the transaction
o the debit and credit amounts to be applied to each account
o a total of the debit entries and of the credit entries
o a brief explanation of the transaction
 The accounting equation is the foundation of the accounting process. The two sides
of the equation must always stay in balance. This is accomplished by the double-
entry accounting method. Double-entry involves recording each transaction in at
least two accounts, a debit to one or more accounts and a credit to one or more
accounts.
 The account balances in the General Ledger are used to create the two primary
statements used in financial reporting: the Income Statement and the Balance Sheet.
 The Trial Balance is used to ensure that for every debit entry recorded, a
corresponding credit entry has been recorded in accordance with the double-entry
method of accounting.
 The Income Statement presents the revenue, expenses, and net profit or loss of an
organization during a specified period of time.
 The main purpose of an Income Statement is to show whether the organization has
earned a profit or incurred a loss during the period.
 The formula for calculating net income is: Revenue - Expenses = Net Income/Loss.
 The Balance Sheet is a financial statement which presents a summarized list of the
amounts of all the organization’s assets, liabilities, and owners’ equity at a specified
point in time.
 The equation for a balance sheet is: Assets = Liabilities + Owners’ Equity.

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Review Questions
1. What is the purpose of the General Ledger?

2. List the five elements of a General Ledger account.

3. What does double-entry accounting mean?

4. What is the main purpose of the Income Statement?

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Payroll Accounting
There are many payroll expenses that must be accounted for in an organization. These
include employee salaries and wages expenses, employer expenses for statutory and non-
statutory requirements and any employer-paid employee benefits required by organizational
policy or the terms of a collective agreement.

Payroll Journal Entries

Information about each payroll transaction is recorded in the payroll journal or payroll
register, which is used to prepare the payroll journal entry. The payroll journal entry is an
accounting document that summarizes the information on the payroll register for posting to
the General Ledger. The payroll journal entry shows:

 a journal entry reference number

 the date of the transaction
 the debit and credit amounts to be applied to each account
 the totals of the debit entries and of the credit entries
 a brief explanation of the transaction

Often the payroll information is journalized and entered into the organization’s accounting
system before the payroll is actually issued. When this occurs, the net pay amount is not
credited to the bank account but to a clearing account often referred to as “salaries and wages
payable”, “net pay” or “payroll clearing”, depending on the organization. This account will
be cleared when the payroll is issued with a journal entry that debits the clearing account and
credits the bank account. The payroll journal entries in this material will use a salaries and
wages payable account.

The payroll register for the warehouse might look like the following (does not include
accruals for vacation). For demonstration purposes, only the employee details for part of the
register are shown.

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Example:
Atkins, K. Wages 900.00 CPP 56.54 Union 12.00 Net Pay
#64839 Overtime 247.50 EI 20.71 Med/Den 50.00
Sick Pay 100.00 Tax 387.68
Tax Ben 29.30 720.57
Cool, L.L. Wages 1,000.00 CPP 44.29 Union 12.00 Net Pay
#35212 Overtime EI 16.60 Med/Den 50.00
Sick Pay Tax 325.43
Tax Ben 29.30 551.68
Gibson, M. Wages 1,200.00 CPP 71.92 Union 12.00 Net Pay
#53972 Overtime 352.47 EI 25.77 Med/Den 80.00
Sick Pay Tax 401.25
Tax Ben 35.16 961.53
Knight, B. Wages 1,475.00 CPP 75.79 Union 12.00 Net Pay
#86753 Overtime 147.50 EI 26.93 Med/Den 80.00
Sick Pay Tax 397.53
Tax Ben 43.22 1,030.25
Li, S. Wages 1,198.08 CPP 50.36 Union Net Pay
#72813 Overtime EI 19.89 Med/Den
Sick Pay Tax 124.80 1,003.03

Totals Wages 575,730.08 CPP 24,591.23 Union 587.50 Net Pay

Warehouse Overtime 12,685.34 EI 11,964.29 Med/Den 1,250.00
Sick Pay 1,005.22 Tax 73,873.09
Tax Ben 2,474.68 477,154.53

The payroll register is used to accumulate information from all the organization’s employees
for a pay period or possibly even multiple pay periods.

When there are multiple transactions, the entries are often consolidated and posted to the
General Ledger from specialized or sub-journals, such as a payroll journal. Instead of having
a line on each journal entry posted to each account in the General Ledger for each employee,
a single line will post the amount for all employees in each account. The payroll register is a
sub-journal that shows the detail for each employee’s gross earnings and deductions.
However, in the General Ledger account, only the total of similar transactions recorded
(posted) to the same account appears.
The advantage of using a payroll register as a sub-journal is that only one journal entry is
required to post the entire register to the General Ledger. Other reports may also be produced
when the payroll is processed, such as reports which show the totals for each earning and
deduction type, employer expenses (for example, C/QPP, EI, QPIP) and taxes. If the

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organization uses a service provider the report may also show the provider’s service charges
for processing the payroll. The journal entries for the payroll would be created using these
reports.

Some organizations may have the journal entries for payroll posted to the General Ledger
using an automatic interface. In other words, the system is programmed to post the payroll
journal entries to the General Ledger automatically at a specific time. In this case there are
usually edit reports provided from either the payroll or General Ledger system. The report
would show the amounts posted and any amounts that were not posted because of errors.
These errors need to be corrected as soon as possible or the entire entry would not balance.

Example:
The information from the payroll register shown in the previous example would be
recorded in the payroll journal entry as follows:

Journal Entry #1
ACCOUNT
DATE ACCOUNT NAME DEBIT CREDIT
NO.
May 26, 20XX Regular wages 5000-602 575,730.08
Overtime 5000-603 12,685.34
Sick pay 5000-620 1,005.22
C/QPP contributions 2000-206 24,591.23
payable
EI premiums payable 2000-207 11,964.29
Federal Income tax 2000-208 73,873.09
payable
Union dues payable 2000-215 587.50
Medical/dental payable 2000-214 1,250.00
Salary and wages 2000-305 477,154.53
payable (net pay)
Total 589,420.64 589,420.64
To record wages expense for payroll of May 26, 20XX

Note:
The recording of the employer’s payroll expenses will be explained later in the chapter.

Once the information from the journal entry has been posted, the General Ledger accounts
would be updated and each transaction affecting the employees’ earnings and deductions
would be posted to a separate account.

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The updated General Ledger is then used to create internal financial statements which are
distributed within the organization to analyze and reconcile the accounts.

Labour Costs
In some organizations, payroll salaries and wages expenses may be allocated or distributed to
one or more of the organization’s expense accounts. Salaries and wages expenses can be
classified into two types:

 direct labour costs

 indirect labour costs

Direct labour costs, or variable labour costs, are those payroll costs incurred to pay
employees who are actually performing a particular service, work or sales activity. Payment
to this type of employee is often further divided into productive (hours actually worked) and
non-productive (hours paid but not directly related to the actual service or sales activity, i.e.,
statutory holiday, sick, vacation).

Example:
Enzo Mazzone is a cabinet installer for Ramsey Kitchens. Enzo earns $1,500.00 each bi-
weekly pay period, a direct labour cost to the organization for the installation of cabinets.
Enzo’s salary would therefore be charged to direct labour.

Indirect labour costs, or fixed labour costs, are those payroll costs incurred to pay employees
who do not actually perform the particular service, work or sales activity, but perform
administrative functions. Such employees may include supervisors, managers, executives, or
administrative support staff.

Example:
At Ramsey Kitchens, Olga Schmidt, who manages the accounting department, earns
$2,200.00 bi-weekly, an indirect labour cost to the organization. Olga’s salary would
therefore be charged to indirect labour.

The allocation of direct and indirect labour costs is often handled through the posting of the
payroll journal entry. Using the following example, the distribution of labour costs through
the payroll journal entry is illustrated.

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Example:
Assume that Jim is considered indirect labour and that Bob and Mary are considered direct
labour.

CANADA
EMPLOYEE SALARY EMPLOYMENT INCOME NET
PENSION
NAME & WAGES INSURANCE TAX PAY
PLAN
Jim Rogers 1,384.61 61.88 25.34 289.65 1,007.74
Bob Smith 1,439.79 64.61 26.35 325.42 1,023.41
Mary Wilson 1,249.50 55.19 22.87 279.47 891.97
Totals 4,073.90 181.68 74.56 894.54 2,923.12

The resulting journal entry is as follows:

Journal Entry # 4
DATE ACCOUNT NAME DEBIT CREDIT
Salaries and wages expense -
September 28, 20XX 1,384.61
indirect
Salaries and wages expense – direct 2,689.29
Canada Pension Plan payable 181.68
Employment Insurance payable 74.56
Income tax payable 894.54
Salaries and wages payable (net pay) 2923.12
Total 4,073.90 4,073.90
To record payroll register for September 20XX.

Most organizations report their payroll expenses over many accounts or business segments
(based on multiple locations) to track their costs for the different products or services they
offer.

Accounting for Statutory Requirements

The employer’s expenses for compensating employees not only include the labour costs, but
also a number of other payroll-related expenses, such as those required by law.

Expenses an organization incurs as a result of federal and provincial legislation are known as
statutory requirements.

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Depending on the employees’ province of employment, examples of statutory expenses for

the employer are:

1. portion of Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions
2. portion of Employment Insurance (EI) premiums
3. portion of Québec Parental Insurance Plan (QPIP) premiums
4. Ontario Employer Health Tax (EHT)
5. British Columbia Employer Health Tax
6. Manitoba Health and Post-Secondary Education Tax Levy
7. Newfoundland and Labrador Health and Post-Secondary Education Tax
8. Québec health services fund contributions
9. Contribution related to Labour Standards
10. Workforce Skills Development and Recognition Fund (WSDRF) contributions
11. Workers’ Compensation (WC) premiums (CNESST in Québec)

Journal Entries for Statutory Requirements

There are two journal entries required to record the employer’s statutory requirements:

 one to account for the statutory deductions withheld from the employees
 one to account for the employer’s expenses for statutory requirements

In many organizations, these two journal entries are incorporated into a single journal entry.

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Example:
The totals from the payroll register for the month of September are:

Gross pay $70,398.93

Employee CPP contributions $ 2,341.46
Employee EI premiums $ 1,253.10
Income tax deducted $37,208.64
Employer CPP contributions $ 2,341.46 (100% of employee’s contributions)
Employer EI premiums $ 1,754.34 (1.4 times employee’s premiums)

The journal entries to record the payroll and the employer’s expenses are:

Journal Entry # 5
DATE ACCOUNT NAME DEBIT CREDIT
September 28, 20XX Salaries and wages expense 70,398.93
Canada Pension Plan payable 2,341.46
Employment Insurance payable 1,253.10
Income tax payable 37,208.64
Salary and wages payable (net pay) 29,595.73
Total 70,398.93 70,398.93
To record payroll register for the month of September 20XX.

Journal Entry # 6
DATE ACCOUNT NAME DEBIT CREDIT
September 28, 20XX Canada Pension Plan expense 2,341.46
Employment Insurance expense 1,754.34
Canada Pension Plan payable 2,341.46
Employment Insurance payable 1,754.34
Total 4,095.80 4,095.80
To record payroll expenses for the month of September 20XX.

The $4,095.80 payroll expenses will remain in the General Ledger as part of the
cumulative total for the payroll expenses for the year. The CPP contributions and EI
premiums payable, however, will be cleared from the liability account by a debit entry
when the payment is processed to remit the statutory deductions to the government.

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To illustrate this point, assume cheque voucher number (CV 4576) was issued to the
Canada Revenue Agency for $44,899.00, as follows:

CPP (employee and employer) $ 4,682.92

EI (employee and employer) $ 3,007.44
Income tax $37,208.64
Total remittance $44,899.00

Journal Entry # 7
DATE ACCOUNT NAME DEBIT CREDIT
September 28, 20XX Canada Pension Plan payable 4,682.92
Employment Insurance payable 3,007.44
Income tax payable 37,208.64
Bank 44,899.00
Total 44,899.00 44,899.00
To record payment of payroll expenses for CV 4576 for the month of September
20XX.

When the transactions have been posted, the accounts in the General Ledger will look
as follows:

Account Name: Canada Pension Plan payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Sept 28, 20XX JE #5 2,341.46 2,341.46 CR
Sept 28, 20XX JE #6 2,341.46 4,682.92 CR
Sept 28, 20XX CV #4576 4,682.92 0.00

Account Name: Employment Insurance payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Sept 28, 20XX JE #5 1,253.10 1,253.10 CR
Sept 28, 20XX JE #6 1,754.34 3,007.44 CR
Sept 28, 20XX CV #4576 3,007.44 0.00

Account Name: Income tax payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Sept 28, 20XX JE #5 37,208.64 37,208.64 CR
Sept 28, 20XX CV #4576 37,208.64 0.00

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Account Name: Bank

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 576,484.00 DR
Sept 28, 20XX CV #4576 44,899.00 531,585.00 DR

Accounting for Other Expenses

Employer-Paid Benefit Premiums
Another payroll expense is the cost of the premiums required for employer-paid benefits,
including:

 group term life insurance premiums

 provincial medical premiums
 pension plan payments
 deferred profit-sharing plan payments
 sick leave
 other employer-provided leaves

The following is an example of how to account for employer-paid benefits.

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Example:
World Health Drug Stores provide their employees with company-paid life insurance,
dental and vision care coverage, and a non-contributory pension plan. World Health
records the insurance premiums payable for life, dental and vision care in one liability
account. For the month of August 20XX, the expenses for these benefits were as follows:

Group term life insurance premiums $ 200.00

Dental plan premiums $ 243.83
Vision care premiums $ 186.40
Pension plan payments $2,009.12

The journal entry would be prepared as follows:

Journal Entry # 8
DATE ACCOUNT NAME DEBIT CREDIT
Group term life insurance benefit
August 31, 20XX 200.00
expense*
Employee benefits expense** 2,439.35
Insurance premiums payable 630.23
Pension plan contributions
2,009.12
payable
Total 2,639.35 2,639.35
To record the organization’s expense of employer-provided benefits for the month of
August, 20XX.
* As the premiums paid for group term life insurance are a taxable benefit to the employees, World
Health chose to separate the expenses that are a taxable benefit into a separate account so that
they can be reconciled with the taxable benefits reported on the employees’ year-end information
slips.
**Instead of having a separate expense account for each individual expense, such as pension plan
expense and medical expense, an organization will sometimes combine the expenses into one
account. In the General Ledger, the employee benefits expense account will have a closing
balance that will include the total year-to-date employer-paid benefits expenses. In this example,
the employee benefits expense account will not include the group term life insurance benefits
expense as it is reported in a separate account.

The closing balance for each of the payable accounts for the employer-paid benefits will be
cleared to zero when the insurance providers, pension fund administrators or other suppliers
are paid.

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Example:
World Health Drug Stores issued the following cheque vouchers (CV) on August 31,
20XX:
 CV 3456, in the amount of $630.23, payable to Greenland Insurance Company for the
total premiums for the employees’ insurance coverage; $200.00 of this amount is for
group term life insurance coverage
 CV 3457, in the amount of $2,009.12, payable to Marshall Funds for the employer’s
contribution to the employees’ pension plan

World Health Drug Stores records the $200.00 for their employees’ group term life
insurance in a separate expense account.

When journal entry #8 and the cheque vouchers have been posted, the expense and payable
accounts will look as follows:

Account Name: Employee benefits expense

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 19,575.93 DR
Aug. 31, 20XX JE #8 2,439.35 22,015.28 DR

Account Name: Group term life insurance benefit expense

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 3,096.75 DR
Aug. 31, 20XX JE #8 200.00 3,296.75 DR

Account Name: Insurance premiums payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Aug. 31, 20XX JE #8 630.23 630.23 CR
Aug. 31, 20XX CV #3456 630.23 0.00

Account Name: Pension plan contributions payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Aug. 31, 20XX JE #8 2,009.12 2,009.12 CR
Aug. 31, 20XX CV #3457 2,009.12 0.00

Account Name: Bank

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 297,473.67 DR
Aug. 31, 20XX CV #3456 630.23 296,843.44 DR
Aug. 31, 20XX CV #3457 2,009.12 294,834.32 DR

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If any of the employer-provided benefits are taxable and have an impact on payroll, the total
expense must be balanced so that the resulting year-end slips are correct. In our previous
example, the group term life insurance benefits expense for the year should balance with the
total amount reported on the employees’ year-end tax information slips.

Example:
The balance in the group term life insurance benefits expense account at the end of
December, 20XX is $4,945.30.

The payroll department must ensure that the total amount of life insurance reported on the
employees’ T4s equals $4,945.30.

Accounting for Deposit Recalls and Cancelled Cheques

Occasionally it may be necessary to recall a direct deposit payment from the bank or cancel a
pay cheque. When cancelling a cheque, cut the signature out of the original cheque and keep
the cancelled cheque forms in a secure location. If the cancelled cheque is not in hand, issue
a stop payment order to the bank for the specific cheque.

Example:
After balancing the weekly payroll for Edgepark Construction, the payroll administrator
realized that cheque #3940 for $437.75, issued to Laszlo Somer on April 13, 20XX, was
incorrect. The amount calculated for gross pay was $582.35 instead of $528.35, CPP
contributions were $25.49, EI premiums were $10.66 and the income tax deduction was
$108.45.

The payroll administrator recalculated the statutory deductions as follows:

CPP contributions $22.82

EI premiums $ 9.67
Income tax $93.60

The original cheque was cancelled and a replacement cheque, #3945, was issued in the
amount of $402.26.

Assuming the journal entry had already been prepared for the regular weekly payroll, the
payroll administrator now had to prepare journal entries to account for:

 cancelling the original cheque

 issuing the replacement cheque

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The payroll records in the payroll register might look like these:

Laszlo Sommer Wages -582.35 CPP - 25.49

Employee # 3495 EI - 10.66
Tax - 108.45
Net Pay - 437.75
Laszlo Sommer Wages 528.35 CPP 22.82
Employee # 3495 EI 9.67
Tax 93.60
Net Pay 402.26

The journal entries to correct the situation should be prepared as follows:

Journal Entry # 9
DATE ACCOUNT NAME DEBIT CREDIT
April 13, 20XX Canada Pension Plan payable 25.49
Employment Insurance payable 10.66
Income tax payable 108.45
Salary and wages payable (net pay) 437.75
Salaries and wages expense 582.35
Total 582.35 582.35
To cancel cheque #3940 issued in error.

Journal Entry # 10
DATE ACCOUNT NAME DEBIT CREDIT
April 13, 20XX Canada Pension Plan payable 25.49
Employment Insurance payable 14.92
Canada Pension Plan expense 25.49
Employment Insurance expense 14.92
Total 40.41 40.41
To cancel CPP and EI expense for cheque #3940.

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Journal Entry # 11
DATE ACCOUNT NAME DEBIT CREDIT
April 13, 20XX Salaries and wages expense 528.35
Canada Pension Plan payable 22.82
Employment Insurance payable 9.67
Income tax payable 93.60
Salary and wages payable (net 402.26
pay)
Total 528.35 528.35
To account for replacement cheque # 3945.

Journal Entry # 12

DATE ACCOUNT NAME DEBIT CREDIT

April 13, 20XX Canada Pension Plan expense 22.82
Employment Insurance expense 13.54
Canada Pension Plan payable 22.82
Employment Insurance payable 13.54
Total 36.36 36.36
To record CPP and EI expense for cheque # 3945.

If an organization has a manual process, the reversal should occur as soon as the error has
been identified. This will ensure accurate reporting of expenses in the General Ledger for
month-end. If an organization has automated payroll processing, this journal entry would not
normally be prepared for one individual cancellation. It is more likely that an adjustment
would be made on the pay register and the next journal entry for payroll would be processed
accordingly.

Payroll Journal Entry Templates

The basic intent of the payroll journal entry and the employer expense entry do not change
from organization to organization. While some organizations may have more line items than
others, the concept is the same.

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The line items in a basic payroll journal entry are:

 debits to the salary and wages expense accounts for the employer’s expense
 credits to the payable accounts for the amounts withheld from the employees and
owing to a third party
 a credit to the salaries and wages payable account for the employees’ net pays
 an organization that withholds other deductions from their employees for legal, union,
company-compulsory or voluntary deductions would expand the journal entry to add
line items and credit the amounts to the payable account for each deduction.

Regardless of the number of deductions withheld from the employees, the total of all the
deductions plus the salaries and wages payable will equal the salaries and wages expense of
the organization.

The line items in an employer expense journal entry are:

 debits to the various expense accounts for the employer’s expenses for the payroll
 credits to the various payable accounts for the amounts owing

An organization that incurs other payroll-related expenses would expand the journal entry to
add line items to record these costs to their respective expense accounts and credit the
applicable payable accounts.

The following is a summary that may be used as a reference tool for posting regular payroll
entries.

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Payroll Accounting

Employer Portion & Other

Pay Statement DR CR DR CR
Expenses
Gross pay X C/QPP employer expense X
C/QPP contributions payable X EI employer expense X
EI premiums payable X QPIP employer expense X
QPIP premiums payable X EHT X
Federal income tax payable X Employer share of group X
benefits
Quebec income tax payable X C/QPP contributions payable X
Union dues payable X EI premiums payable X
Benefits payable X QPIP premiums payable X
Voluntary deductions X EHT payable X
Salaries and wages payable (net X Employer group benefits X
pay) payable

Remitting Payments to Third

Paying Employees DR CR DR CR
Parties
Salaries and wages payable (net X C/QPP contributions payable X
pay) (EE & ER)
Bank - payroll account X EI premiums payable (EE & X
ER)
QPIP premiums payable (EE & X
ER)
Union dues payable X
Benefits payable (EE & ER) X
EHT payable X
Bank - payroll account X

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Accounting for Stale-Dated Cheques

Occasionally a payroll cheque is not cashed and remains outstanding for a number of months.
Once a cheque becomes six months old and has not been cashed, it becomes stale-dated,
which means it can no longer be cashed at the bank. If the stale-dated cheque is not on hand,
it is recommended that a stop-payment be placed on the cheque.

The treatment of a stale dated cheque is different from the cancellation of a pay cheque or
deposit recall. The payroll record history is not affected; do not reverse the payment in the
payroll system. The entries for the gross pay and deductions are not adjusted through payroll
and the T4 slip information remains as originally reported. The employee worked and was
paid wages for the pay period. The funds were available to the employee on payday. The pay
has been posted to the various accounts for the accounting period in which the expense
occurred. The wages have been expensed to the appropriate cost centre and deductions have
been deducted and remitted to the appropriate third parties.

The net pay for the stale-dated cheque is cancelled and a replacement cheque is issued.
These transactions occur in the payroll bank account. This process leaves the accounting
transactions recorded in the correct accounting period and leaves the employee’s payroll
information correct. Also, remember that the deductions are based on the requirements for
the year in which the payment was originally paid. The employer is simply replacing a
cheque that is not negotiable at the bank for cash. The employee’s year-to-date earnings and
deductions are not adjusted.

Example:
When reconciling the bank account for the month ending September 30, 20XX, it was
noticed that cheque# 2912 issued March 14, 20XX to Amir Dabu was still outstanding. As
the cheque was over 6 months old, a new cheque was issued to the employee.

The journal entries to correct the situation should be prepared as follows:

Journal Entry # 13

DATE ACCOUNT NAME DEBIT CREDIT

October 10, 20XX Bank – payroll account 375.75
Salaries and wages payable (net pay) 375.75
Total 375.75 375.75
To cancel stale-dated cheque #2912 issued March 14, 20XX

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Journal Entry # 14

DATE ACCOUNT NAME DEBIT CREDIT

October 10, 20XX Salaries and wages payable (net pay) 375.75
Bank – payroll account 375.75
Total 375.75 375.75
To issue cheque #4012 (replacement of stale-dated cheque #2912)

Prior to re-issuing the cheque, document your attempts to contact the employee. If
unsuccessful, each jurisdiction has legislation regarding unclaimed wages. Such as in British
Columbia, Section 19 of the Employment Standards Act addresses that if an employer cannot
locate an employee to pay the employee’s wages, the employer must pay the wages to the
Director of Employment Standards within 60 days after the wages became payable.

It should be noted that although legislation in some jurisdictions does not specifically address
whether the employer is required to make a reasonable attempt to contact the employee, it is
recommended that every effort to locate an employee to whom final wages are owed is made.
The attempt can be a telephone call or a letter which will further provide back-up that an
attempt to contact was made.

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Content Review
 Payroll expenses that must be accounted for in an organization include employee
salaries and wages expenses, employer expenses for statutory requirements and any
employer-paid employee benefits required by organizational policy or the terms of a
collective agreement.
 Information about each payroll transaction is recorded in the payroll journal or
payroll register, which is used to prepare the payroll journal entry.
 The payroll journal entry summarizes the information on the payroll register for
posting to the General Ledger.
 Direct labour costs are those payroll costs incurred to pay employees who are actually
performing a particular service, work or sales activity.
 Indirect labour costs, or fixed labour costs, are those payroll costs incurred to pay
employees who do not actually perform the particular service, work or sales activity,
but perform administrative functions.
 Occasionally an incorrect payroll cheque is issued. To correct this error, the original
cheque must be cancelled and a replacement cheque issued. Journal entries may also
have to be prepared to account for the corrections.
 A payroll cheque that is not cashed and remains outstanding for more than six months
becomes stale-dated and can no longer be cashed at the bank.

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Review Questions
5. What payroll expenses must an organization account for?

6. a. What is a payroll journal entry?

b. What information does a payroll journal entry show?

7. Fill in the blanks:

labour costs are those payroll costs incurred to pay employees who are actually
performing a particular service, work or sales activity.

labour costs are those payroll costs incurred to pay employees who do not
actually perform the particular service, work or sales activity, but perform administrative
functions.

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8. List five statutory expenses an organization could incur, depending on the employees’
province(s) of employment.

9. True or false: A stale-dated cheque is one which is four months old, has not been cashed,
and is no longer valid because of the age of the cheque.

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10. Given the following information from the payroll journal, calculate the net pay and
prepare a journal entry for the month of November 20XX for Crosstown Appliances.

Savings Plan deductions $ 2,300.00

Registered pension plan deductions $ 750.00

Income tax deductions $24,163.54

Gross pay $71,069.23

Canada Pension Plan deductions $ 2,364.92

Employment Insurance premiums $ 1,300.57

(Do not complete a journal entry for the employer’s portion of CPP and EI.)

Journal Entry #123

DATE ACCOUNT NAME DEBIT CREDIT

Total

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Accrual Method of Accounting

Canadian Auditing Standards (CAS) consists of a set of systematic guidelines used by
auditors when conducting audits of an organization’s finances to ensure the accuracy,
consistency and verifiability of the auditors’ actions and reports. Canadian Generally
Accepted Auditing Standards are developed and issued by the Canadian Auditing and
Assurance Standards Board.

By relying on CAS, auditors can minimize the probability of missing material information.
CAS is divided into these main sections:

1 • General standards

2 • Examination standards

3 • Reporting standards

Each section contains the requirements that the auditor and the subject company must
meet. In short, an auditor must adequately plan the audit in advance; be independent of the
client at all times; and always obtain reliable evidence. All Canadian publicly accountable
enterprises must present their financial statements in accordance with International
Financial Reporting Standards (IFRS).

While adhering to IFRS is mandatory for all publicly accountable for-profit organizations, not-
for-profit (NFP) and privately held organizations can choose to adopt IFRS or the Canadian
standards developed to meet their needs referred to as the Accounting Standards for
Private Enterprises (ASPE).

Both sets of Standards are Canadian Generally Accepted Accounting Principles or GAAP.
GAAP are accounting rules and standards that are followed in preparing and conducting
audits of financial statements.

GAAP are accounting rules and standards that are followed in the preparation and auditing
of financial statements. International Financial Reporting Standards (IFRS) is the
accounting framework adopted in Canada. For all Canadian publicly accountable for-profit
enterprises, adhering to IFRS is mandatory. Privately held enterprises can choose to adopt
IFRS or the Canadian standards developed to meet their needs referred to as the
Accounting Standards for Private Enterprises (ASPE). Not-for-profit (NFP) organizations in
Canada would report under Accounting Standards for Not-for-Profit Organizations (ANSPO).

Accounting standards require that the matching principle is applied when accounting for
revenue and expenses. The matching principle requires that expenses are matched with
revenues. Revenue earned in an accounting period must be matched to the expenses incurred
to earn that revenue. In reality, not all expenses that are incurred happen in the same period
as the related revenue is earned, so they must be matched to an appropriate period of time.

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Wages are reported as an expense in the period they are earned (date the work is performed),
not the period they are paid.

It is not uncommon for an organization to incur a liability in one accounting period and to
pay for that liability in a different accounting period. Examples would be:

 purchasing goods on account with the payment due in 60 days

 hiring an independent contractor whose invoice is due in 30 days

In order to accurately reflect the expenses in the period the goods were purchased, or the
period the work was performed, the accrual method of accounting is used.

Example:
An organization purchased office supplies on account and the terms of the account are net
30 days. The organization received the office supplies on August 22 and paid for them
September 20. If the organization follows the cash method of accounting, where expense
and revenue transactions are recorded in the accounting period when the actual cash is paid
out or received, no entry would be made on August 22; however, the following entry
would be made on September 20:

Journal Entry # 13

DATE ACCOUNT NAME DEBIT CREDIT

September 20, 20XX Office supplies expense 500.00
Bank – general account 500.00
Total 500.00 500.00
To record cheque #283 for office supplies.

If the cash method of accounting was used to produce the month-end financial statements as
at August 31, incomplete financial information would result as only cash transactions during
the period would be recorded. Although the organization owes the supplier of the office
supplies $500.00 and has incurred an expense of $500.00 as at August 31, this would not be
reflected in the financial statements.

To provide more complete and accurate financial statements, most organizations use the
accrual method of accounting. The accrual method of accounting must be used for any
external reporting which allows a common frame of reference to external stakeholders. The
accrual method of accounting records transactions in the accounting period in which they are
incurred. The purpose of accruing expenses is to give employers an accurate account of their
total financial transactions for a specific accounting period.

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Example:
Using the accrual method of accounting, the following journal entries would be recorded
for the above transaction:

Journal Entry # 14

DATE ACCOUNT NAME DEBIT CREDIT

August 22, 20XX Office supplies expense 500.00
Accounts payable 500.00
Total 500.00 500.00
To accrue expense for office supplies received on August 22, 20XX.

Journal Entry # 15

DATE ACCOUNT NAME DEBIT CREDIT

September 20, 20XX Accounts payable 500.00
Bank – general account 500.00
Total 500.00 500.00
To record cheque #283 for office supplies.

Financial statements produced using the accrual method of accounting as at August 31,
20XX would reflect the organization’s liability to the supplier of the office supplies and the
expense incurred in August, 20XX.

There are two types of accruals:

 continuous accruals reflect an ongoing expense incurred over a number of accounting

periods, and paid at a later date
 specific accruals reflect an expense incurred in one period that is reallocated to
another

There are many instances when payroll will use the accrual method of accounting to more
accurately reflect the financial position of the organization. Payroll accruals are used to
allocate labour costs and other related expenses to the appropriate accounting period. The
most common accruals that occur on a continuous basis are those that record the employer’s
expenses for workers’ compensation premiums and vacation pay as they are on-going
throughout the year.

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Note:
It is important, especially for students of this course who may have practical experience in
accounting or a payroll department, to understand that no two organizations may use exactly
the same system to account for payroll transactions. Each organization uses a system which
meets its own particular needs, given its own resources, but always in compliance with IFRS.
As a result, the examples provided in this material may differ slightly from those used by a
particular organization but are, in practice, commonly used.

Workers’ Compensation Accruals

An organization’s workers’ compensation (WC) premiums will be based on actual or
estimated payroll amounts, depending on the jurisdiction. If the premiums are based on
estimates, a reconciliation of the estimated and actual payroll, and premiums due, will be
done when the organization files their annual statement of payroll.

Depending on the jurisdiction, the premium remittance frequency can be annual, semi-
annual, quarterly, monthly (based on the organization’s remittance schedule with the Canada
Revenue Agency) or another frequency that is determined by the annual premium amounts.

Premiums that are based on the actual payroll amount will be expensed on the employer
expense payroll journal entry with other known employer expenses, such as Canada Pension
Plan (CPP) and Employment Insurance (EI). In Nova Scotia, an employer’s WC premium is
remitted to the Canada Revenue Agency along with the amounts due for CPP, EI and income
tax.

Premiums that are based on an estimated payroll and are paid on a non-payroll frequency
may require an accrual to record the employer’s expense in the period in which it was
incurred. If the employer’s expense was accounted for only when it was paid, the monthly
financial statements of the organization would be misleading. Therefore, many organizations
accrue the workers’ compensation premiums by journalizing the estimated expense each
month.

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Example:
Valid Care pays workers’ compensation premiums on a quarterly basis. They have
estimated that their premiums for the current year will be $17,000.00 or $4,250.00 per
quarter. The journal entry to accrue this expense on a monthly basis would be:

Journal Entry # 16

DATE ACCOUNT NAME DEBIT CREDIT

January 31, 20XX Workers’ Compensation expense 1,416.67
Workers’ Compensation payable 1,416.67
Total 1,416.67 1,416.67
To record WC accrual for January 20XX.

The $1,416.67 accrual is debited to the expense account and credited to the payable
account each month. Every quarter the payment of $4,250.00 to the WC Board will be
recorded as a debit to the payable account. This debit entry will clear the $4,250.00 credit
balance in the payable account. When the annual statement of payroll is filed, and the
actual annual premium is determined, the WC expense account will either be credited if the
amount owing had been overestimated, or debited if the amount had been underestimated.

Vacation Accruals
Vacation pay is an employer-paid benefit which must be accounted for and is generally done
on a continuous accrual basis. The purpose of accruing the vacation expenses is to give the
employer an accurate account of their total expenses for a specific accounting period.

Accounting for vacation expenses on an accrual basis requires that journal entries are posted:

 as the vacation expense is incurred

 when the employee takes vacation leave

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Example:
Gilles Morin works for Brandon Interiors in Manitoba and earns $1,500.00 semi-monthly.
He is entitled to 2 weeks of vacation paid at 4% of his vacationable earnings for the year.

Brandon Interiors processes its journal entries on a monthly basis and at month-end, the
payroll administrator prepares the journal entries for payroll. One of these transactions is to
record the vacation pay accrued for the month.

For the month of January, based on Gilles’ vacationable earnings of $3,000.00, the payroll
administrator calculated his vacation accrual amount to be $120.00 ($3,000.00 x 4%), and
prepared the following journal entry:

Journal Entry # 17

DATE ACCOUNT NAME DEBIT CREDIT

January 31, 20XX Vacation pay expense 120.00
Vacation pay payable 120.00
Total 120.00 120.00
To record vacation pay accrual for the month of January, 20XX.

This journal entry is repeated every month for all employees. The accrual for one
employee has been shown for illustrative purposes only; an organization would normally
accrue the vacation expense for all employees in one journal entry for the accounting
period.

Employment standards legislation states that vacation time earned in a year may be taken
the following year and vacation pay is paid at the time the employee takes their vacation.
Gilles decided to take his vacation leave during the first two weeks of August of the
following year, at which time the amount accrued for his previous year’s vacation pay was
$1,440.00 ($120.00 x 12).

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The entry to record the vacation paid to Gilles is:

Journal Entry # 520

DATE ACCOUNT NAME DEBIT CREDIT

August 31, 20XX Vacation pay payable 1,440.00
Canada Pension Plan payable 64.06
Employment Insurance payable 23.90
Income tax payable 264.96
Salaries and wages payable (net pay) 1,087.08
Total 1,440.00 1,440.00
To record vacation pay paid for employee #123.

Note:
Payroll accounting information is not only accessed by payroll personnel, no reference to
an employee’s name or Social Insurance Number should ever be included in the journal
entries or supporting documentation.

Journal Entry # 521

DATE ACCOUNT NAME DEBIT CREDIT

August 31, 20XX Canada Pension Plan expense 64.06
Employment Insurance expense 33.46
Canada Pension Plan payable 64.06
Employment Insurance payable 33.46
Total 97.52 97.52
To record employer CPP and EI expense for vacation pay for employee #123.

For the vacation period, Gilles’ labour costs have already been charged to the vacation pay
expense account, not to the salaries and wages expense account. The expense for one
employee has been shown for illustrative purposes only; an organization would normally
record the vacation expense for all employees who took vacation during a pay period in the
payroll journal entry for that pay period.

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Sick Leave Accruals

If the organization has a sick leave policy in place, a best practice is to accrue for sick leave
in the same manner as for vacation. When the employee uses the sick leave, the liability
account is reduced by the amount paid to the employee.

Employer Health Taxes

If the organization has employees in the provinces of British Columbia, Manitoba,
Newfoundland and Labrador, Ontario or Québec, which assess health taxes on payroll, the
estimated employer health tax expense is accrued with each payroll journal.

Labour Costs Accruals

The accruals for employer expenses such as workers’ compensation and vacation pay are on-
going, regular accruals. The accrual for labour costs is considered specific as it relates to a
particular period.

Salaries and wages, plus any related employer expenses, are journalized in the period in
which the payroll is processed (paid). There are occasions, based on the employer’s payroll
frequency, where the expenses may be incurred in one period, but not paid until the next.
This will occur when part of the pay period falls in one accounting period but is not paid until
the next. In this situation, many employers accrue for the expense of the salaries and wages
and payroll-related expenses that have occurred in the period, but have not yet been paid, to
more accurately reflect their expenses for the period. The calculation of the amount to accrue
for the salaries can be based on the number of unpaid days using an average daily rate from
the previous pay. For organizations whose payrolls fluctuate, an estimated amount based on
anticipated salaries and wages can be used.

Some of the payroll-related expenses an organization might accrue are the employer’s costs
for Canada/Québec Pension Plan, Employment Insurance, Québec Parental Insurance Plan,
workers’ compensation, vacation, pension plan contributions, and group insurance premiums.

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Example:
The organization has a bi-weekly payroll, where the payment falls 2 days after the end of
each pay period. In the month of May, the first pay period from May 1 st to May 14 is paid
on May 16. The second pay period from May 15 to May 28 is paid on May 30 and the third
pay period from May 29 to June 11 is paid on June 13.

The first two pay periods will be included in the May payroll journals. The third pay period
(May 29 – June 11) will be included in the June payroll journals. To accurately record the
payroll expenses for May 29 to May 31 in the correct accounting period, an accrual journal
entry should be entered in May and reversed in June.

Given that the exact figures for these expenses are unknown, the organization would need
to estimate its expense for the three days. A common method of accruing unknown payroll
expenses is to use a percentage or fraction of the most recent payroll. The estimate may or
may not include estimates for the employer’s expenses related to the payroll (that is,
C/QPP, EI, QPIP, etc.).

For example, the payroll of June 13 will include the payroll expense for three working
days in May and the seven working days in June. In order to accrue the expense for May,
the organization could divide the total payroll for the first two pay periods in May by 20
working days and multiply the result by three working days to accrue for May 29 – May
31.

The accrual would be:

$1,178,841.20 x 3 = $176,826.18
20

Because this amount is an estimate, the figure is usually rounded to the nearest dollar.

The Journal Entry would be:

Journal Entry #7
DATE ACCOUNT NAME DEBIT CREDIT
May 31, 20XX Warehouse wages 176,826.00
Accrued warehouse wages 176,826.00
Total 176,826.00 176,826.00
To accrue wages for May 29, 30 and 31, paid in June, 20XX

An even more accurate payroll accrual would also include an estimate of other payroll-
related employer expenses, such as the employer’s share of CPP and EI, as well as any
company-paid group benefits. The credit could be posted to a general Accrued Payroll
Expense Account; some organizations may set up specific accrual accounts for each
liability.

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For example, if an estimated 30% is typically spent on employer expenses in addition to

actual salaries, this 30% could also be accrued:

$176,826.00 x 30% = 53,047.80, rounded to $53,000.00

Journal Entry #8
DATE ACCOUNT NAME DEBIT CREDIT
May 31, 20XX Warehouse wages 176,826.00
Employer payroll expenses 53,000.00
Accrued warehouse salaries 176,826.00
Accrued payroll expenses 53,000.00
Total 229,826.00 229,826.00
To accrue payroll wages and expenses for May 29, 30 and 31, paid in June, 20XX

The following month Journal Entry #8 is reversed as the actual expenses and liabilities
would be included in the June payroll registers and journals.

Journal Entry #9
DATE ACCOUNT NAME DEBIT CREDIT
June 1, 20XX Accrued warehouse salaries 176,826.00
Accrued payroll expenses 53,000.00
Warehouse wages 176,826.00
Employers payroll expenses 53,000.00
Total 229,826.00 229,826.00
To reverse accrued wages and expenses for May 29, 30 and 31 20XX

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Content Review
 To provide more complete and accurate financial statements, most organizations use
the accrual method of accounting. The accrual method of accounting records
transactions in the accounting period in which they are incurred.
 There are two types of accruals, continuous and specific.
 The most common continuous accruals are used to record the employer’s expenses
for workers’ compensation premiums and vacation pay.
 The most common specific accrual is for labour costs as it relates to a particular
period.

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Review Questions
11. Explain the difference between the cash method of accounting and the accrual method of
accounting.

12. What is the purpose of accruing expenses?

13. Cassie Flohr, employee #375, was hired on May 1 last year at an annual salary of
$36,000.00, paid bi-weekly. As of May of the current year, Cassie was entitled to two
weeks of vacation at 4% of her vacationable earnings.

Cassie took her two weeks of vacation leave from July 9 to July 20, of the current year at
which time she was paid her vacation pay on a manual cheque.

Prepare the journal entry required to accrue Cassie’s vacation payable every pay and the
journal entry or entries required to record the manual cheque Cassie received when she
took her vacation leave in July of the current year.

For this question, use the following rates:

CPP 5.25 %
EI 1.58 %
Income tax 26.00%

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Journal Entry #

DATE ACCOUNT NAME DEBIT CREDIT

Total

Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

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14. Pantheon Inc. uses four and five week monthly accounting periods and pays its
employees on a bi-weekly basis, where the pay date is one week after the pay period end
date. The pay period end dates for the months of June and July are June 8, June 22, July 6
and July 20. The accounting month-end for June is June 29.

For the bi-weekly pay period ending June 22, Pantheon Inc.’s salaries and wages expense
was $95,000.00, its CPP expense was $5,040.00 and its EI expense was $1,500.00.

As of June 29, the employees will have worked one week of the two week pay period
ending July 6 which will not be paid until July 13. Pantheon Inc. wants to record the
salaries and wages and employer’s payroll-related expenses for the last week of June in
the June accounting period to accurately reflect their expenses for the month.

a. Prepare journal entries to record the labour and payroll-related expenses for the week
ending June 29, 20XX (based on June 22 payroll) and the reversal entry in July.

b. For the pay period ending July 6, the salaries and wages expense is $98,500.00, the
employees’ CPP contributions are $4,693.00, the employees’ EI premiums are
$1,635.10 and their income tax withholdings are $37,580.00. Prepare journal entries
for the July 6, 20XX payroll.

Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

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Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

Journal Entry #
DATE ACCOUNT NAME DEBIT CREDIT

Total

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Reconciliation and Analysis of

Accounts
Account reconciliations are a critical control in the accounting process. Account
reconciliation is the process of proving that the general ledger account balances are correct
by reviewing transactions and supporting documentation, and resolving any discrepancies
that are discovered. The complexity of payroll processing requires that payroll professionals
pay meticulous and ongoing attention to the management of payroll data from the point of
compiling pay information through completed reconciliation between the payroll worksheets,
payroll reports and the general ledger. A benefit of reconciling accounts is that in the process
of comparing transactions any incorrect entries, duplicated charges or fraudulent activity can
be found.

Account reconciliations should involve:

 a review of all transactions

 matching transactions with supporting documents
 investigating and resolving any discrepancies of concern

Payroll should have a reconciliation guideline policy in place, along with other policies and
procedures. The objective of the policy would be to validate that payroll transactions are
appropriately authorized and properly recorded so that the financial amounts accurately
reflect the payroll activity, and adequate reviews are performed and documented.

The end of the accounting period is termed the close of the period. Once the period is closed,
no further journal entries can be posted to the General Ledger for that period. Any journal
entries prepared after the close are posted to the next accounting period.

At the close of the period, the balances in all the General Ledger accounts should be analyzed
to ensure the journal entries have been posted to the correct accounts and posted correctly as
a debit or credit. Appropriate reports should be available showing details of the amounts
posted in the general ledger. The size of the organization will often determine whether the
General Ledger analysis will be done by one individual or if the accounts will be distributed
for analysis purposes.

The level of account analysis required will depend on the account type and the needs of the
organization; the account transactions may be analyzed in detail or merely looked at for
reasonableness. As there are many compliance requirements related to payroll withholdings,
the payroll liability accounts should be examined in detail to ensure any balance in the
account is related to a future payment, not to a missed remittance. Equally important is a
review of the accuracy of the transactions to the payroll-related expense accounts.

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As journal entries affect the General Ledger account balances, and impact the information
reported on both the Income Statement and the Balance Sheet, their accuracy is crucial to
providing correct information on the financial status of the organization.

Journal Entry Analysis

Prior to posting the journal entry to the General Ledger, review the line items to make sure
the debits and credits have been recorded correctly and that the entry will give the desired
result.

Some issues to examine when preparing journal entries include:

 Is the account an asset, liability, owners’ equity, revenue or expense account?

 What is the normal balance of the account, debit or credit?
 Is this entry intended to increase or decrease the account balance?

In an expense account, debit entries increase the expense balance and credit entries decrease
the expense balance. Amounts in the expense accounts are cleared to zero (or restarted at
zero) at the fiscal year-end. This is the same way the employees’ totals in the payroll register
are cleared to zero at the taxation year-end.

In a liability account, credit entries increase the liability balance and debit entries decrease
the liability balance. Amounts in liability accounts are not cleared at year-end, as the liability
continues to exist; the amounts are only cleared when the liability is paid.

If the journal entries are keyed into the accounting system, rather than downloaded from
another program, special care should be made to ensure that the data is keyed correctly and
that the entries balance. Most systems will not allow an unbalanced entry to be posted.
Systems that do allow unbalanced entries will post the variance to a suspense or clearing
account. These accounts must be reconciled and corrected immediately to restore the
integrity of the financial data.

Expense Accounts
Expense accounts include expenses incurred by an organization in the process of earning
revenue during a given time period.

The salary expense account details the debits (for example, employee salaries and wages) and
credits (for example, accrual reversals, recalls and cancelled pays) posted on the journal
entries for the period. Entries are posted to the General Ledger at the organization or
department total level, rather than with the individual employee details.

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Since expense accounts continue to build over time and are not cleared until the end of the
fiscal period, the most common reconciliation methods used for these accounts are:

 reasonableness
 year-over-year comparison

A reasonableness test requires an individual to examine the General Ledger account in detail
and to ensure that all the postings are in balance and seem valid.

Example:
The organization’s fiscal year is July 1 of year one to June 30 of year two. The salary
expense account would reflect all expenses posted to the account from July to June. In
November, the manager of the Sales Department wants to know why the salary account is
$3,000.00 for October instead of $5,000.00.

Sales salaries and wages account postings:

July $5,000.00
August $5,000.00
September $5,000.00
October $3,000.00
Balance $18,000.00

The payroll register for the Sales Department showed the following entries for October:

Employee #1 salary $1,000.00

Employee #2 salary $1,000.00
Employee #3 salary $ 0.00
Employee #4 salary $1,000.00
Employee #5 salary $ 0.00
Total salaries for sales department $3,000.00

There are five employees in the Sales Department, each earning $1,000.00 a month. On
October 1, employee #3 started her maternity leave and employee #5 transferred to the
Marketing Department.

By examining the payroll register or other reports providing details of the total amount
posted to an account, it should be analyzed whether the amount shown in the account is
correct. Recalled pays, cancelled cheques and manual cheques should be recorded as they
occur so that accounts reflect the most current data.

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Cost accounting plays a significant role in expense account reconciliation as well. An

organization that uses cost accounting will charge expenses to a department, a project or a
contract, according to their internal requirements. If an employee is transferred from one
department or branch to another, and the paperwork is not processed when the change is
effective, the employee’s salary, and any associated employer expenses, will be expensed
incorrectly. A journal entry will be required to move the expenses to the correct accounts.

Example:
Continuing our previous example, employee #5 transferred from the Sales Department to
the Marketing Department on September 1, at the beginning of a pay period. The
documents to process the transfer were only received by payroll at the beginning of
October, by which time the journal entry charging the employee’s September salary
expenses to Sales had already been posted. A journal entry is required to transfer the salary
expense from Sales to Marketing for September.

Journal Entry #23

DATE ACCOUNT NAME DEBIT CREDIT

November 1, 20XX Marketing salaries and wages expense 1,000.00
Sales salaries and wages expense 1,000.00
Total 1,000.00 1,000.00
To transfer salary expense for employee #5 for September, 20XX.
The effect of this journal entry is that the Sales salary expense account will be credited
with the employee’s $1,000.00 salary, reducing the department’s expenses. The Marketing
salary expense account will be debited with the employee’s $1,000.00 salary, increasing
that department’s salary expenses. The original payroll entry for October was recorded on
JE #22.
Account Name: Sales salaries and wages expense
DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 15,000.00 DR
Oct. 31, 20XX JE#22 3,000.00 18,000.00 DR
Nov. 1, 20XX JE#23 1,000.00 17,000.00 DR

Account Name: Marketing salaries and wages expense

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 13,000.00 DR
Oct. 31, 20XX JE#22 4,000.00 17,000.00 DR
Nov. 1, 20XX JE#23 1,000.00 18,000.00 DR

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If the employee was paid more than one type of earning and each was posted to a different
General Ledger account, then the journal entry would reflect this. Depending on how the
General Ledger in an organization is set up and the requirements of the organization,
additional entries may be required to adjust the employer’s expenses. For example, if the
employer expenses for CPP and EI are charged to individual departments and your
organization requires that these expenses are accurately charged to the correct department,
you would need to transfer these expenses as well.

Journal Entry #23

DATE ACCOUNT NAME DEBIT CREDIT
November 1, 20XX Marketing salaries and wages expense 1,000.00
Marketing overtime expense 247.50
CPP expense-Marketing 47.31
EI expense-Marketing 23.45
Sales salaries and wages expense 1,000.00
Sales overtime expense 247.50
CPP expense-Sales 47.31
EI expense-Sales 23.45
Total 1,318.26 1,318.26
To transfer payroll expenses for employee #5 for September, 20XX.

As expense accounts normally have a debit balance, to reduce the expense you credit the
account and to increase the expense you debit the account.

All new hire documentation should indicate which department or cost centre the employee
will be working in. This home department is where the employee’s salary expense will be
charged. Each pay the employee’s salary, overtime, and other earnings will be expensed to
the salary and wages account for that department or cost centre in the General Ledger.

If the employee is transferred to another department, the employee’s payroll record needs to
be changed to reflect the new home department. If the employee is temporarily transferred,
the salary expense needs to be charged to the temporary department. Depending on the
payroll system and the organization’s procedure, you may be able to capture the correct
department in the time card entry system or complete a journal entry to record the expense
correctly. The salary expense for the employee’s home department is reduced or credited and
the salary expense for the department the employee actually worked in is increased or
debited.

A year-over-year comparison would compare each expense account for a certain time frame
to determine if there have been material changes.

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Example:
DCF Inc.
QUARTER 1 –
QUARTER 1 –
EXPENSE ACCOUNTS: CURRENT
PREVIOUS YEAR
YEAR
Wage expense - Manufacturing 137,000.00 149,000.00
Wage expense - Office 68,000.00 69,000.00
Wage expense - Executive 123,000.00 156,000.00

It may be known to the individual analyzing the account why there has been an increase in
the Manufacturing and Executive salary expenses in Quarter 1 of the current year. In this
case, the organization hired a new vice-president of Sales, who has brought in a large order
requiring an increase in the production staff.
If the reason for the change is unknown, an analysis of the source documentation will be
necessary to provide the details for the comparison between the quarters.

Liability Accounts
Liability accounts capture what the organization owes; these accounts are not cleared on a
fixed schedule. The analysis of each liability account should include a reconciliation of the
account balance to the amount that is actually payable at a given date. As liability accounts
normally have a credit balance, to reduce the liability you debit the account and to increase
the liability you credit the account.

Examples of liability accounts that are impacted by payroll include salaries and wages
payable as well as the payable accounts for Canada/Québec Pension Plan, Employment
Insurance, Québec Parental Insurance Plan and federal and provincial income taxes. Other
liability accounts could include union dues, voluntary deductions, employee-paid provincial
medical premiums and employee insurance premiums.

The organization needs to reconcile statutory deductions against remittances and the CRA
Statement of Account (PD7A). The statutory deductions from the employees’ pays are posted
to the general ledger accounts as a credit. Amounts deducted from the employees’ pays and
owed to a third party increase the liability to the organization. When the remittances are
made the payment is posted to the account as a debit. This decreases the organization’s
liability. Uploading data to spreadsheets can minimize the time spent identifying errors
during reconciliation of the payroll accounts.

Liability accounts should clear to a zero balance when the payment prepared to remit the net
pay, withholdings or employer payroll expenses is posted against the account. Most amounts
deducted from employees’ pay cheques are remitted to third parties, such as the Canada
Revenue Agency (CRA) or an insurance carrier. One example of a deduction which is
withheld from an employee’s pay cheque but not remitted to a third party is an employee
loan repayment. The only entry necessary to register the loan repayment is to credit a loan
receivable account. The deduction will automatically reduce the net salary payable amount.

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Unlike expense accounts which are closed out or cleared to zero at the end of the fiscal year,
liability account balances are carried forward to the next accounting period, as the liability
still exists. Liability accounts must be analyzed and reconciled on a regular basis.

Income taxes withheld from the employees’ pays are posted to the income tax payable
(liability) account as a credit, as the amounts deducted are owed to the CRA or Revenu
Québec. The credit entry reflects the increase in the liability of the organization. When the
remittance is paid, the payment is posted to the account as a debit, as the payment decreases
the organization’s liability.

Example:
This organization is a threshold 1 accelerated remitter. The remittance is due to the CRA
on the 25th of the month for pays dated the 1st to the 15th of the month and the remittance is
due on the 10th of the following month for pays dated the 16th to the end of the month.

Income tax withheld on the July 18 th payroll $36,000.00

Income tax withheld on the Aug. 1st payroll $37,000.00 – JE#29
Income tax remitted on Aug. 10th $36,000.00 – CV#4568
Income tax withheld on the Aug. 15th payroll $37,940.00 – JE#52
Income tax remitted on Aug. 25th $74,940.00 – CV#4592
Income tax withheld on the Aug. 29th payroll $38,100.00 – JE#72

The account details for the month of August are:

Account Name: Income tax payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 36,000.00 CR
Aug. 1, 20XX JE#29 37,000.00 73,000.00 CR
Aug. 10, 20XX CV#4568 36,000.00 37,000.00 CR
Aug. 15, 20XX JE#52 37,940.00 74,940.00 CR
Aug. 25, 20XX CV#4592 74,940.00 0.00
Aug. 29, 20XX JE#72 38,100.00 38,100.00 CR

The $36,000.00 credit balance at the beginning of the period is equal to the taxes deducted
from the employees’ pays on July 18th, due to the CRA August 10th (CV#4568).

The taxes deducted August 1st (JE#29) and 15th (JE#52) are due August 25th (CV#4592)
and the closing balance represents the taxes withheld on August 29 th (JE#72), due to the
CRA on September 10th.

When the payment is made on September 10th the account should have a zero balance as
the next payroll is not until September 12th.

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Finding Errors
An analysis of the liability accounts will show if there have been any amounts posted in
error. The Income tax payable and Union dues payable accounts showed the following
entries and account balances for August.
Example:
Account Name: Income tax payable
DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 36,000.00 CR
Aug. 1, 20XX JE#29 37,000.00 73,000.00 CR
Aug. 10, 20XX CV#4568 36,000.00 37,000.00 CR
Aug. 12, 20XX CV#4576 13,092.00 23,908.00 CR
Aug. 15, 20XX JE#52 37,940.00 61,848.00 CR
Aug. 25, 20XX CV#4592 74,940.00 13,092.00 DR
Aug. 29, 20XX JE#72 38,100.00 25,008.00 CR

Account Name: Union dues payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 13,092.00 CR
Aug. 1, 20XX JE#29 3,300.00 16,392.00 CR

Aug. 15, 20XX JE#52 3,370.00 19,762.00 CR

Aug. 29, 20XX JE#72 3,290.00 23,052.00 CR

When doing the monthly account reconciliation, it is noted that these two accounts do not
have the correct balances. The Income tax payable account should have a credit balance
of $38,100.00 for the employees’ August 29th withholdings and the Union dues payable
account should have a credit balance of $9,960.00 for the employees’ August union dues
deductions.

In order to determine the incorrect entry, the source documentation, and either the journal
entries or the cheque vouchers, should be examined.

A review of the journal entries and the cheque vouchers reveals that the cheque for the
union dues was posted to the Income tax account in error. A journal entry is required to
correct the error:

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Journal Entry #39

DATE ACCOUNT NAME DEBIT CREDIT

August 31, 20XX Union dues payable 13,092.00
Income tax payable 13,092.00
Total 13,092.00 13,092.00
To correct error for August 20XX cheque CV#4576 for union dues posted to the
income tax account in error.

The correcting journal entry will credit the Income tax payable account with $13,092.00,
resulting in a credit balance in the account of $38,100.00. This is the amount of the income
tax withholdings for the pay of August 29th that are due to be paid to the CRA on
September 10th. The Union dues payable account will be debited with $13,092.00,
resulting in a credit balance of $9,960.00, the amount of the union dues withheld in
August.

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Payroll Audit
Payroll, more than any other department, is subject to numerous controls, security and audits
(internal and external) on a regular basis. Payroll normally represents the largest expense to
any organization and as such there is a risk that, without controls, payroll funds can easily be
misappropriated. Payroll controls include built-in checks and balances within the payroll
system, fraud prevention measures and regular audits from various sources.

The payroll department can set up internal audit practices to test and maintain their payroll
controls. With changing personnel at all levels within the system, periodic testing will
determine if established controls are still being followed. Frequent reconciliations will also
help discover possible errors or attempts to falsify the organization’s statements and ensure
timely disclosure and correction; waiting until year-end to process manual and cancelled
cheques can lead to a misstatement of payroll expenses.

Auditors can be internal, external (an organization of professional accountants, management

consultants, or other professionals) or governmental (Canada Revenue Agency, Service
Canada, Revenu Québec, Ministries of Labour – Employment Standards, Workers’
Compensation Boards, Ministries of Finance – Manitoba, Newfoundland and Labrador,
Northwest Territories, Nunavut, Ontario).

Usually auditors want to be able to follow the trail of a transaction and the payroll
department will have to assist auditors with the information they require. Depending on the
legislative body performing the audit, you may be asked to provide:

 source documents (time sheets, new hire documents, termination letters, TD1 etc.)
 payroll registers
 year-end documentation (T4 information slips, Workers’ Compensation
reconciliations, etc.)
 collective agreements and/or company policies
 sub-contractor records
 board minutes
 financial statements

Payroll and Budgets

A budget is a monetary plan which an organization uses to set financial goals, to measure
financial performance against predetermined expectations, and to keep the finances on track.
The primary goal of budgeting is to provide managers with a clear understanding of the
activities to be undertaken and completed to accomplish the organization’s objectives.

Payroll participates in developing budgets for the organization’s operating costs, government
related payroll taxes, employees’ benefits such as sick leave, vacation and group benefits,
employee headcount as well as providing any additional information required.

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Content Review
 Once the accounting period is closed, no further journal entries can be posted to the
General Ledger for that period.
 The balances in all the General Ledger accounts should be analyzed to ensure the
journal entries have been posted to the correct accounts.
 The level of account analysis required will depend on the account type and the needs
of the organization; the account transactions may be analyzed in detail or merely
looked at for reasonableness.
 As there are many compliance requirements related to payroll withholdings, the
payroll liability accounts should be examined in detail.
 Prior to posting the journal entry to the General Ledger, review the line items to make
sure the debits and credits have been recorded correctly and that the entry will give
the desired result.
 Expense accounts include expenses incurred by an organization in the process of
earning revenue during a given period of time. The most common reconciliation
methods used for these accounts are reasonableness and year-over-year comparison.
 As expense accounts normally have a debit balance, to reduce the expense you credit
the account and to increase the expense you debit the account.
 Liability accounts capture what the organization owes; these accounts are not cleared
on a fixed schedule.
 Analysis of each liability account should include a reconciliation of the account
balance to the amount that is actually payable at a particular point in time.
 As liability accounts normally have a credit balance, to reduce the liability you debit
the account and to increase the liability you credit the account.
 A budget is a monetary plan which an organization uses to set financial goals, to
measure financial performance against predetermined expectations, and to keep the
finances on track.

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Review Questions
15. What is the purpose of reconciling accounts?

16. When Parker Nyland received his copy of the General Ledger for the month of February
(pay dates February 1st and 15th) it showed the following transactions in the Canada
Pension Plan payable account:

Account Name: Canada Pension Plan payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
Feb. 1, 20XX JE #143
(record employees’ payroll 812.68 812.68 CR
liability for February 1 st)
Feb. 15, 20XX JE #157
(record employees’ payroll 926.75 1,739.43 CR
liability for February 15th)
Feb. 15, 20XX JE #163
(record employer’s liability 926.75 2,666.18 CR
for February 15th)
Feb. 25, 20XX CV #3201
(record payment to the 3,478.86 812.68 DR
CRA)

a. Determine why there is a closing balance.

b. Prepare the journal entry required to clear the closing balance of $812.68.
Journal Entry #:
DATE ACCOUNT NAME DEBIT CREDIT

Total

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17. a. Why are liability accounts not closed or cleared to zero at the end of the fiscal period?

b. When are the payroll liability accounts reduced or cleared?

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Chapter Review Questions and Answers

1. What is the purpose of the General Ledger?

The purpose of the General Ledger is to keep an organized record, by account, of

the organization’s financial transactions.

2. List the five elements of a General Ledger account.

The five elements of a General Ledger account are:

 account name
 opening balance ― debit (DR) or credit (CR)
 reference (source of the entry)
 debit and credit transactions
 closing balance (DR or CR)

3. What does double-entry accounting mean?

Double-entry accounting means that each journal entry posted to the accounts must
balance; the total of the debit amounts in the journal entry must equal the total of
the credit amounts in that same journal entry.

4. What is the main purpose of the Income Statement?

The main purpose of an Income Statement is to show whether the organization has
earned a profit or incurred a loss during the period being reported.

5. What payroll expenses must an organization account for?

There are many payroll expenses that must be accounted for in an organization.
These include employee salaries and wages expenses, employer expenses for
statutory and non-statutory requirements and any employer-paid employee benefits
required by organizational policy or the terms of a collective agreement.

6. a. What is a payroll journal entry?

The payroll journal entry is an accounting document that summarizes the
information on the payroll register for posting to the General Ledger.

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b. What information does a payroll journal entry show?

A payroll journal entry shows:

o a journal entry reference number
o the date of the transaction
o the debit and credit amounts to be applied to each account
o the totals of the debit entries and of the credit entries
o a brief explanation of the transaction

7. Fill in the blanks:

Direct labour costs, or variable labour costs, are those payroll costs incurred to pay
employees who are actually performing a particular service, work or sales activity.

Indirect labour costs, or fixed labour costs, are those payroll costs incurred to pay
employees who do not actually perform the particular service, work or sales activity,
but perform administrative functions.

8. List five statutory expenses an organization could incur, depending on the employees’
province(s) of employment.

The statutory expenses an organization could incur, depending on the employees’

province(s) of employment, are an organization’s:

 portion of Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions
 portion of Employment Insurance (EI) premiums
 portion of Québec Parental Insurance Plan (QPIP) premiums
 Ontario Employer Health Tax (EHT)
 British Columbia Employer Health Tax
 Manitoba Health and Post-Secondary Education Tax Levy
 Newfoundland and Labrador Health and Post-Secondary Education Tax
 Québec health services fund contributions
 Contribution Related to Labour Standards (CNESST)
 Workforce Skills Development and Recognition Fund (WSDRF) contributions
 Workers’ Compensation (WC) premiums (CNESST in Québec)

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9. True or false: A stale-dated cheque is one which is four months old, has not been cashed,
and is no longer valid because of the age of the cheque.

False. A stale-dated cheque is one that is six months old and not yet cashed.

10. Given the following information from the payroll journal, calculate the net pay and
prepare a journal entry for the month of November 20XX for Crosstown Appliances.

Savings Plan deductions $ 2,300.00

Registered pension plan deductions $ 750.00
Income tax deductions $24,163.54
Gross pay $71,069.23
Canada Pension Plan deductions $ 2,364.92
Employment Insurance premiums $ 1,300.57
(Do not complete a journal entry for the employer’s portion of CPP and EI.)

Journal Entry #123

DATE ACCOUNT NAME DEBIT CREDIT
November 30, 20XX Salaries and wages expense 71,069.23
Canada Pension Plan payable 2,364.92
Employment Insurance payable 1,300.57
Income tax payable 24,163.54
Registered pension plan payable 750.00
Savings plan deductions payable 2,300.00
Salaries and wages payable 40,190.20
Total 71,069.23 71,069.23
To record payroll register for the month of November 20XX.

11. Explain the difference between the cash method of accounting and the accrual method of
accounting.

The cash method of accounting records expense and revenue transactions in the
accounting period when the actual cash is paid out or received.

The accrual method of accounting records transactions in the period in which they
are incurred.

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12. What is the purpose of accruing expenses?

The purpose of accruing expenses is to give employers an accurate account of their

total financial transactions for a specific accounting period.

13. Cassie Flohr, employee #375, was hired on May 1, last year at an annual salary of
$36,000.00, paid bi-weekly. As of May of the current year, Cassie was entitled to two
weeks of vacation at 4% of her vacationable earnings.

Cassie took her two weeks of vacation leave from July 9 to July 20, of the current year at
which time she was paid her vacation pay on a manual cheque.

Prepare the journal entry required to accrue Cassie’s vacation payable every pay and the
journal entry or entries required to record the manual cheque Cassie received when she
took her vacation leave in July of the current year.

For this question, use the following rates:

CPP 5.25%
EI 1.58%
Income tax 26.00%

The journal entry required to accrue Cassie’s vacation every pay should be
prepared as follows:

Bi-weekly salary: $36,000.00 = $1,384.62

26

Vacation accrual: $1,384.62 x 4% = $55.38

Journal Entry #1

DATE ACCOUNT NAME DEBIT CREDIT

May 11, 20XX Vacation pay expense 55.38
Vacation pay payable 55.38
Total 55.38 55.38
To record vacation accrual for the pay of May 11, 20XX.

The journal entry required when Cassie took her vacation leave should be prepared
as follows:

Vacation accrual for the year: $55.38 x 26 pays = $1,439.88

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Journal Entry # 263

DATE ACCOUNT NAME DEBIT CREDIT
July 20, 20XX Vacation pay payable 1,439.88
Canada Pension Plan payable $ 68.53
Employment Insurance payable $ 22.75
Income tax payable 374.37
Salaries and wages payable $ 974.23
Total 1,439.88 $1439.88
To record vacation pay paid by manual cheque to employee #375

Journal Entry #264

DATE ACCOUNT NAME DEBIT CREDIT
July 20, 20XX Canada Pension Plan expense $ 68.53
Employment Insurance expense $ 31.85
Canada Pension Plan payable $ 68.53
Employment Insurance payable $ 31.85
Total $100.38 $ 100.38
To record employer CPP and EI expense for vacation pay for employee #375.

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14. Pantheon Inc. uses four and five week monthly accounting periods and pays its
employees on a bi-weekly basis, where the pay date is one week after the pay period end
date. The pay period end dates for the months of June and July are June 8, June 22, July
6 and July 20. The accounting month-end for June is June 29.

For the bi-weekly pay period ending June 22, Pantheon Inc.’s salaries and wages
expense was $95,000.00, its CPP expense was $5,040.00 and its EI expense was
$1,500.00.

As of June 29, the employees will have worked one week of the two week pay period
ending July 6 which will not be paid until July 13. Pantheon Inc. wants to record the
salaries and wages and employer’s payroll-related expenses for the last week of June in
the June accounting period in order to accurately reflect their expenses for the month.

a. Prepare journal entries to record the labour and payroll-related expenses for the
week ending June 29, 20XX (based on June 22 payroll) and the reversal entry in
July.

b. For the pay period ending July 6, the salaries and wages expense is $98,500.00, the
employees’ CPP contributions are $4,693.00, the employees’ EI premiums are
$1,635.10 and their income tax withholdings are $37,580.00. Prepare journal entries
for the July 6, 20XX payroll.

a. The first journal entry will record the estimated payroll expense for the week
ending June 29 as 50% of the last pay ($47,500.00), plus an estimate of 50% of
the employer’s expense for Canada Pension Plan and Employment Insurance.

Journal Entry # 87
DATE ACCOUNT NAME DEBIT CREDIT
June 29, 20XX Salaries and wages expense 47,500.00
Canada Pension Plan expense 2,520.00
Employment Insurance
750.00
expense
Salaries and wages payable 47,500.00
Canada Pension Plan payable 2,520.00
Employment Insurance
750.00
payable
Total 50,770.00 50,770.00
To accrue salaries and wages and employer expenses for the week ending June
29, 20XX.

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In July, journal entry #87 will be reversed.

Journal Entry # 98
DATE ACCOUNT NAME DEBIT CREDIT
July 1, 20XX Salaries and wages payable 47,500.00
Canada Pension Plan payable 2,520.00
Employment Insurance payable 750.00
Salaries and wages expense 47,500.00
Canada Pension Plan expense 2,520.00
Employment Insurance expense 750.00
Total 50,770.00 50,770.00
To reverse JE #87 for the salaries and wages and employer expenses accrued for the
week ending June 29, 20XX.

b. The journal entries for the July 6, 20XX payroll, will be as follows:

Journal Entry # 111

DATE ACCOUNT NAME DEBIT CREDIT
July 6, 20XX Salaries and wages expense 98,500.00
Canada Pension Plan payable 4,693.00
Employment Insurance payable 1,635.10
Income tax payable 37,580.00
Salaries and wages payable 54,591.90
Total 98,500.00 98,500.00
To record payroll register for the payroll of July 6, 20XX.

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Journal Entry # 112

DATE ACCOUNT NAME DEBIT CREDIT
July 6, 20XX Canada Pension Plan expense 4,693.00
Employment Insurance expense 2,289.14
Canada Pension Plan contributions
4,693.00
payable
Employment Insurance premiums
2,289.14
payable
Total $6,982.14 $6,982.14
To record employer payroll expenses for the payroll of July 6, 20XX.

15. What is the purpose of reconciling accounts?

At the close of the period, the balances in all the General Ledger accounts should be
analyzed to ensure the journal entries have been posted to the correct accounts and
posted correctly as a debit or credit.

16. When Parker Nyland received his copy of the General Ledger for the month of February
(pay dates February 1st and 15th) it showed the following transactions in the Canada
Pension Plan payable account:

Account Name: Canada Pension Plan payable

DATE REFERENCE DEBIT CREDIT BALANCE
20XX Balance forward 0.00
JE #143
Feb. 1, 20XX (record employees’ payroll 812.68 812.68 CR
liability for February 1 st)
JE #157
Feb. 15, 20XX (record employees’ payroll 926.75 1,739.43 CR
liability for February 15th)
JE #163
Feb. 15, 20XX (record employer’s liability 926.75 2,666.18 CR
for February 15th)
CV #3201
Feb. 25, 20XX 3,478.86 812.68 DR
(record payment to the CRA)

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a. Determine why there is a closing balance.

There is a closing balance because the journal entry to record the employer’s
Canada Pension Plan liability for the February 1st pay was not posted to the
account, however the February 25th payment included the employer’s expense of
$812.68 for the February 1 pay.

b. Prepare the journal entry required to clear the closing balance of $812.68.

Journal Entry #172

DATE ACCOUNT NAME DEBIT CREDIT
February 28, 20XX Canada Pension Plan expense 812.68
Canada Pension Plan payable 812.68
Total 812.68 812.68
To record the Canada Pension Plan expense for February 1, 20XX.

17. a Why are liability accounts not closed or cleared to zero at the end of the fiscal period?

Liability account balances are carried forward to the next accounting period, as
the liability still exists.

b. When are the payroll liability accounts reduced or cleared?

The payroll liability accounts should be reduced or cleared to a zero balance

when the payment prepared to remit the net pay, withholdings or employer’s
payroll expenses is posted against the account.

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