{m}.{s}.1Two HMRC creditor accounts

In practice there are many variations possible in the recording of wages and salaries.

To keep more detailed information available in the nominal ledger, HM Revenue & Customs creditor account may be split into two:

HM Revenue & Customs creditor - PAYE
HM Revenue & Customs creditor - NI

Entries will be very similar to before, but now instead of crediting HM Revenue & Customs with all tax and national insurance figures,

PAYE deductions will be credited to HM Revenue & Customs - PAYE
NI deductions will be credited to HM Revenue & Customs - NI
Employer's NI will be credited to HM Revenue & Customs - NI

This has the advantage that the balances in the accounts will tell us separately how much is owed to HM Revenue & Customs for tax and how much for national insurance.

Paying

{m}.{s}.2No HMRC creditor account

In another method of recording, less detailed information is kept. All payments made in respect of wages or salaries are debited to the Wages & salaries account. No HM Revenue & Customs account is maintained during the year.

In September, the payment of Miss Bennett's net pay of £757 will be debited to Wages & salaries (and credited to the bank).

Also in September, a payment will be made to HM Revenue & Customs - this will relate to the August salary deductions. In this system the payment, say £320, will also be debited to the Wages & salaries account.

Note that at this point our Wages & salaries balance does not include the September deductions or September's employer's NI (These will be debited to the account when they are paid in October). Also our records do not record the liability at this point due to HM Revenue & Customs.

For small businesses that are not producing monthly accounts, this may not matter. However, it is important at the year-end to have all expenses and all liabilities included. Thus an adjustment must be made at the year-end for the final month's PAYE and NI.

Wages & Salaries
Sep Bal b/f 12,300   
    Bank - Net 757   
    Bank - HMRC320    
      

[{m}.{s}a]

{m}.{s}.3Adjustment: Year-end

If September was the year-end here, we would need a year-end adjustment for the September tax and NI of £345:

    Dr Cr
Sep 30 Wages & salaries 345  
  Sundry creditors (HMRC)   345
to record September PAYE and NI
[{m}.{s}b]

The Wages & salaries account now includes the full expense for the year and the liability to HM Revenue & Customs is also included (here as part of Sundry creditors).

At the year-end the Wages & salaries account will be cleared to the profit and loss account and the balance in the Sundry creditors account will be carried forward.

Wages & Salaries
Sep Bal b/f 12,300 Sep P & L 13,722
    Bank - Net 757    
    Bank - HMRC Net 320    
    SundryCr - HMRC 345    
  13,722   13,722
       
[{m}.{s}c]
Sundry Creditors
    Sep W & S 345
       
       
       
       
       

[{m}.{s}d]

{m}.{s}.4Reversal of year-end adjustment

We now see the opening position at the start of the following year.

The year end adjustment should now be reversed at the start of the new year.

    Dr Cr
Oct 1 Wages & salaries   345
  Sundry creditors 345  
reversal of September PAYE and NI
[{m}.{s}e]

This creates a credit balance in the Wages & salaries account, but this will be cleared once the payment of the September tax & NI is made to HM Revenue & Customs.

The Wages & salaries account will now continue building up the net payments and, one month later, the associated payments to HM Revenue & Customs.

 

Wages & Salaries
Oct Bank - HMRC 345 Oct SundryCr - HMRC 345
       
       
       
       
[{m}.{s}f]
Sundry Creditors
Oct W & S 345 Sep W & S 345
       
       
       
       

[{m}.{s}g]