Payroll Accounting System

Payroll accounting system is not so easy as you think. Just passing the voucher entry of salary in payment voucher is sufficient accounting treatment of this in a small business. But in a very large business, we have to think many things. All these things, we can include in its two parts.   

Ist Part of Payroll Accounting System 

In first part, we calculate total salary of every employee. We can include basic pay, house rent allowance, bonus, incentives and other benefits.  All these are the indirect expenses of company.



2nd Part of Payroll Accounting System 

In second part of payroll accounting system, we calculate employee's contribution in EPF @ 12% of basic pay, employee's contribution in employee's state insurance (ESI) @ 1.75% of formula salary.  We also calculate  canteen deduction., income tax deduction and professional tax deduction.


Now we pass the journal entries 

1		Debit	Credit
(A)
Basic Pay
HRA
Overtime
Incentives
Bonus
(B)
	Income Tax Deduction (TDS)
	Canteen Deduction
	Employee's contribution in EPS @12% of Basic Pay
	Employee's contribution in ESI @ 1.75%
	Advance Salary Deduction
(A) - ( B)  Net Salary Payable Account			XXXXXX

2. Net Salary Payable Account Dr XXXXXX


Bank Account Cr. XXXXXX

Now, net salary account will be shown in profit and loss account and all the deduction except canteen deduction and advance salary deduction  will be shown in liabilities side of balance sheet.