General Ledger 101

How do I create a journal entry from payroll reports?

I receive enough questions about General Ledger, that I though it worth creating a forum targeting this topic.  The topic is open to all registered users, so feel free to share tips, or ask questions as necessary. 

To start, we'll have a "101" lesson of the very basics.

How do I figure out a basic journal entry?

Without delving too far into Accounting 101, there are essentially three types of accounts that are typical in payroll: Bank accounts, Liability accounts, and Expense accounts.  Occasionally, we add additional accounts--Receivables accounts, Cost of Goods Sold accounts, Equity, etc.  For this, we'll stick with the main three:

Bank accounts - We'll call this our "CHECKING" account, which is where funds are drafted from.
Liability accounts - We'll create two: Payroll Liabilities, where we'll lump any deductions due, and Payroll Tax Liabilities, where all our tax liabilities will go to.
Expense accounts - We'll start with two: Salaries & Wages Expense and Payroll Taxes Expense, but you'll need additional ones for any employer deductions you may be using/calculating.

So let's create our first GL (General Ledger) Journal Entry, assuming employees were paid a gross payroll of $1,000.

This ends up looking like this for their entire payroll:

Salaries and Wages Expense (Gross Payroll)    $1000 (Debit)
Payroll Tax Liabilities (Employee Taxes Withheld)                      $200 (Credit)
Payroll Liabilities (Child Support Withheld)                                $100 (Credit)
CHECKING (Net Pay)                                                               $700 (Credit)

Payroll Taxes (Employer payroll taxes)              $100 (Debit)
Payroll Tax Liabilities (Employer Taxes)                                    $100 (Credit)

Payroll Tax Liabilities (EE + ER Taxes)              $300 (Debit)
CHECKING (Total Tax Liability)                                                $300 (Credit)

Payroll Liabilities (Vendor Payment DR)             $100 (Debit)
CHECKING (Vendor Payment CR)                                             $100 (Credit)

Note: Debits (DR) always equal Credits (CR)

This is a very simple example of how every payroll is entered into a general ledger.  This is important to grasp and understand.  This entry can be simplified to this, but combining the similar accounts:

Salaries and Wages Expense             $1000 (Debit)
Payroll Taxes                                     $100 (Debit)
CHECKING                                                              $1100 (Credit)

Note:  Debits (DR) always equal Credits (CR).  Also, notice how the above entry contains many accounts that wash to zero.  That is how the entry becomes so simplified.

Here is an example of the same simple entry, except without a vendor payment setup:

Salaries and Wages Expense             $1000 (Debit)
Payroll Taxes                                     $100 (Debit)
Payroll Tax Liabilities (Child Support)                          $100 (Credit)
CHECKING                                                              $1000 (Credit)

Note: This shows that the company's total expense was $1,100, but that we only collected $1,000.  The company has an additional $100 that they need to pay.

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