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 | |||||
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Date: | 24 October | ||||
Name: | Miss S Bennett | Tax Code | 350L | ||
Gross pay for month | 1,100 | ||||
Less deductions | |||||
PAYE | 188 | ||||
National Insurance | 90 | ||||
278 | |||||
Net Pay for month | 822 | ||||
Employer's National Insurance | 112 | ||||
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 |
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 | |||
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.
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 |
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 | |||
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 | |
While recording in practice may well be as two journal entries, or even one, for clarity we will continue recording the 3 separate stages:
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.
Gross | Tax | NI | Net | Empl NI | ||
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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 |
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 |
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.
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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 | ||||
Our entries to record this salary are:
Dr | Cr | |||
1 | Payment of net | Wages & salaries | 720 | |
Bank | 720 |
This is as before, but she is receiving less net pay.
2 | Employee's deductions | Wages & salaries | 280 | |
HMRC | 230 | |||
Pension creditor | 50 |
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 |
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 |
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.
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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.
Note that Wages & salaries are outside the scope of VAT - there is therefore no effect on VAT.