Whether you operate a small business or large enterprise, you will have to account for payroll. Properly posting and reporting payroll will be a recurring task. If you follow best practices, you will journalize your payroll and use a payroll clearing account.
What Is a Payroll Clearing Account?
A payroll clearing account is a temporary zero-balance liability account.
How Does a Payroll Clearing Account Work?
Deductions from your bank accounts for payroll are offset by the payroll clearing account.
Advantages:
- Easier Bank Reconciliations: Using a payroll clearing account makes bank reconciliation easier, especially if payroll correcting entries are necessary. A clearing account is balanced when all the entries come to zero.
- Identify Errors Easier: Ideally, payroll processing and journalizing will be error-free. Realistically, there will be times when the payroll register from the payroll company has a transaction that was entered incorrectly. A payroll clearing account puts a spotlight on the amount of the error and makes it easy to make the adjustment. You won’t have to sort through transactions from daily operations.
- Better Financial Information: You can allocate payroll to specific accounts (direct and indirect labor), departments, and jobs from the payroll clearing account.
The Payroll Journal Entry
A journal entry to a payroll clearing account is a journal entry that summarizes the total expenses that are included in all net payroll checks. In other words, this is an entry that helps you determine exactly how much you are paying out in payroll in a given period. The "clearing" in a payroll clearing account means that you are using this accounting method to "clear" revenues and expenses and reconcile any potential errors you may have in determining payroll.
Sample Payroll General Journal Entry
| DR | CR | |
| Wages | XX | |
| Employer Taxes | XX | |
| Workers' Comp. | XX | |
| Payroll Processing Fees | XX | |
| Payroll Clearing | XX | |
| When Funds are Removed | ||
| Payroll Clearing | XX | |
| Cash | XX | |
Using a journal entry like the one above is simple and easy to follow. Memorize it in QuickBooks or go to the most recent entry and copy it. Setting up your journal entry and reconciling your payroll clearing account is a good way to stay on top of your largest expense and make paying payroll taxes seamless.
If you need help setting up an easy procedure to enter your payroll in a way to provide you with optimal financial information, email me at kathy@budgetease.biz.
