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.
© The Canadian Payroll Association – Payroll Fundamentals 2 1-1
Vs 15.0
,Chapter 1
Payroll Accounting
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
© The Canadian Payroll Association – Payroll Fundamentals 2 1-2
, Chapter 1
Payroll Accounting
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.
© The Canadian Payroll Association – Payroll Fundamentals 2 1-3
, Chapter 1
Payroll Accounting
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
© The Canadian Payroll Association – Payroll Fundamentals 2 1-4
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.
© The Canadian Payroll Association – Payroll Fundamentals 2 1-1
Vs 15.0
,Chapter 1
Payroll Accounting
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
© The Canadian Payroll Association – Payroll Fundamentals 2 1-2
, Chapter 1
Payroll Accounting
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.
© The Canadian Payroll Association – Payroll Fundamentals 2 1-3
, Chapter 1
Payroll Accounting
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
© The Canadian Payroll Association – Payroll Fundamentals 2 1-4
