{m}.{s}.1Combined entry

Note that we have split the recording of the transaction down into three different journal entries. This is the easiest way to understand the double entry involved. It is common to combine these into two or even just one entry.

J Allen, Jeweller
   Date: 24 October 
      
Name:Miss S Bennett Tax Code350L 
      
 Gross pay for month1,100   
Less deductions     
 PAYE188   
 National Insurance90   
  278   
      
 Net Pay for month822   
      
 Employer's National Insurance112  
      
[{m}.{s}a]

{m}.{s}.2Two journal entries

Recording the October salary as three entries gives:

      Dr Cr
1 Net salary of £822 Wages & salaries 822  
    Bank   822
2 Employee's deductions of £278 Wages & salaries 278  
    HMRC   278
3 Employer's NI of £112 Employer's NI 112  
    HMRC   112
[{m}.{s}b]

 

The first two entries can be combined together to record the full gross salary of £1,100:

      Dr Cr
1 Gross salary of £1,100 Wages & salaries 1,100  
    Bank   822
    HMRC   278
      1,100 1,100
 
[{m}.{s}c]

This records the salary cost of £1,100, £822 having been paid already from the bank, the remaining £278 being due to HM Revenue & Customs.

The entry to record the employer's NI remains the same.

 

{m}.{s}.3One journal entry

We have looked at the recording of the salary as two entries:

      Dr Cr
1 Gross salary of £1100 Wages & salaries 1100  
    Bank   822
    HMRC   278
      1100 1100
2 Employer's NI of £112 Employer's NI 112  
    HMRC   112
[{m}.{s}d]

 

These two entries can be combined into one entry:

      Dr Cr
1 Gross salary & Employer's NI Wages & salaries 1,100  
    Employer's NI 112  
    Bank   822
    HMRC   390
      1,212 1,212
         
[{m}.{s}e]

This includes, as one entry, the full expense of £1,212. Of this total, £822 has already been paid. The balance (£1,212 - £822 = £390) is due to HMRC. This is made up of:

Employee's tax 188
Employee's NI 90
Employer's NI 112
  390
   
[{m}.{s}f]

 

{m}.{s}.4Three journal entries

While recording in practice may well be as two journal entries, or even one, for clarity we will continue recording the 3 separate stages:

  1. Payment of net salary to employee.
  2. Recording the deductions from the employee's salary.
  3. Recording the employer's NI
Woman with ledger

{m}.{s}.5Wages book

In the example above, we have considered a monthly salary. Exactly the same process will be followed where remuneration is paid weekly, two-weekly or four-weekly. The entries to be made will be just the same as for the monthly salary.

Also, we have considered only one employee. Usually a business will have more than one member of staff. In this case the entries that we have seen will be made in total for all employees.

The wages of the employees will be summarised in some way such as a wages book or wages sheet.

 

 

 

 

 

 

{m}.{s}.6Wages sheet example

    Gross Tax NI Net Empl NI
Oct 25 J Smith 242.20 38.25 19.61 184.34 24.73
  T Jones 185.60 24.00 13.91 147.69 12.98
  A Green 225.00 34.10 17.91 172.99 23.00
    652.80 96.35 51.43 505.02 60.71
[{m}.{s}g]

Wages sheet for pay date 25 October

Our three entries to record the weekly wages would be:

      Dr Cr
1 Payment of Net Wages Wages & salaries 505.02  
    Bank   505.02
2 Employee's deductions Wages & salaries 147.78  
    HMRC   147.78
3 Employer's NI Employer's NI 60.71  
    HMRC   60.71
[{m}.{s}h]

{m}.{s}.7Pension

We have considered the treatment of tax and national insurance. Often a business will also run a pension scheme for employees. Operation of such schemes can vary, but often they will operate in a manner similar to national insurance - the employee will make a contribution (which may be a fixed percentage of pay) and the employer will make a further contribution on top of this (again this may be a fixed percentage of pay).

Accounting for such pension payments is similar to accounting for national insurance.

We set up a liability account for the pension creditor and an expense account for the employer's pension contributions.

The amount deducted from the employee's pay is credited to the Pension creditor account.

The employer's contribution is credited to the creditor account and debited to the new expense account.

Payment will be made to the pension company, possibly the same month, possibly the next. This will debit the Pension creditor account.

 

Pension (expense)
Employer's contribution xx    
       
       
       
       
[{m}.{s}i]
Pension Creditor
Payment xx Employees' deductions xx
    Employer's contribution xx
       
       
       
[{m}.{s}j]

{m}.{s}.8Pension- Example

Shown below is Miss Bennett's September payslip where she is contributing 5% of her gross pay to a pension scheme. The employer is adding a further 7.5%.

               
Gross Pay 1,000 Deductions PAYE 150   Miss Bennett  
      NI 80 Employer's NI.I 102  
      Pension 50 Employer's Pension 75  
Net Pay 720   Total deductions 280      
               
[{m}.{s}k]

Our entries to record this salary are:

      Dr Cr
1 Payment of net Wages & salaries 720  
    Bank   720
[{m}.{s}l]

This is as before, but she is receiving less net pay.

2 Employee's deductions Wages & salaries 280  
    HMRC   230
    Pension creditor   50
[{m}.{s}m]

We now have the additional deduction of the £50 pension - this must be credited to the Pension creditor account. Note that, as before, we have now debited the gross pay of £1,000 to the Wages & salaries account (£720 + £280).

3 Employer's NI Employer's NI 102  
    HMRC   102
[{m}.{s}n]

This entry is unchanged, but we must now have an additional entry to record the employer's pension contribution.

4 Employer's Pension Employer's Pension 75  
    Pension creditor   75
[{m}.{s}o]

We have now credited a further expense of 75.

Let us suppose that, in this case, the payments are due immediately to the pension company. We will have the further entry to record the payment of £125. This will clear the balance in the Pension creditor account.

 

HMRC
    Sep W & S 230
    Empl NI 102
       
       
       
[{m}.{s}p]
Wages & Salaries
Sep Bank 720    
Dedns 280    
       
       
       
[{m}.{s}q]
Employer's NI
Sep HMRC 102    
       
       
       
       
[{m}.{s}r]
Pension Creditor
Sep Bank 125 Sep W & S 50
    Empl Pens 75
       
       
       
[{m}.{s}s]
Employer's pension
Sep Pension Cr 75    
       
       
       
       
[{m}.{s}.t]

{m}.{s}.9Accounts

At the year end, the Employer's NI account is cleared to the profit and loss account just like any other expense account.

The balance may be shown as a separate expense item in the profit and loss account or more usually, it may be added to the balance in the Wages & salaries account to be shown as one figure in the profit and loss account.

{m}.{s}.10VAT

Note that Wages & salaries are outside the scope of VAT - there is therefore no effect on VAT.