Salary Paid journal entry is used to record expenses and payments.
That’s the most frequent expense for any business.
So let’s learn how to record it in any accounting software.
Recording journal entries may seem like rocket science until it’s learned correctly.
Every transaction includes debit and credit of GL accounts.
Table of contents
The critical rule is that the sum of balances of all general ledger (GL) accounts on the debit side must equal the sum of balances on the credit side. However, it is not a mandate that the GL accounts on the Debit and Credit sides of the Journal Entry shall be equal.
Now that we know the fundamentals of recording the journal entry, we can jump into how to record the Salary paid journal entry.
The GL Accounts involved here are Salary Expenditure and Salary Payable Liability. First, we must understand when a GL account will be on the debit or credit side of the journal entry. So, let’s learn the rules of accounting.
Per Modern Accounting Rules,
Salary Paid Journal Entry:
Per the above rules, we need to debit the Salary GL to increase the expenditure and credit the Salary Payable GL correspondingly.
Journal Entry when payment happens:
Journal Entries relating to the Salary:
Let’s look into various journal entries relating to the Salary
Recommended Article: Fictitious Assets (also called Unreal Assets)
Salary journal entry example:
The journal entry records salaries due to the entity’s employees. So, the entity debits the expenditure with corresponding credits to the payable. Here, Payables include the Salary Liability, other Liability due on behalf of the employees, and taxes, including the professional Tax and TDS payable. First, let’s see how the entry is recorded in the books of accounts.
(Being Salary Expense entry recorded along with the Statutory Liabilities)
Also read: Salary TDS JE
Runners Insight:
Provident Fund
The Provident Fund is the amount of contribution from both Employees and Employers to a fund established by the government to support employees after their retirement. So, the employee contribution is deducted from the Salary and deposited with the Statutory authorities.
Nowadays, employers quote salaries on a CTC (Cost to the Company) basis. So, the Salary amount debited in the above journal entry includes the employer contribution. We need not debit this employer’s PF contribution separately as an expense.
What’s the percentage of Provident Fund?
The Provident Fund amounts to 12% of the Basic salary and Dearness Allowance, if any. The PF website provides further details on the calculation.
Tax Deducted at Source:
TDS provisions are introduced to ensure the quick and smooth depositing of income tax for individuals based on their applicable tax rates. So, Employers are liable to deduct the Tax applicable to each employee every month and deposit it to the income tax authorities within the stipulated dates.
What’s the rate of TDS?
There are no fixed TDS rates. Employers ask their employees to declare all their income and tax-saving information, such as insurance, mutual funds, 5-year fixed deposits, etc. This helps employers understand the total net income for each employee and the applicable slab tax rates. Refer to the income tax website for tax rates.
Also Read: True Up Journal Entry
Professional Tax
Professional Tax is a tax levied by the governments in the respective states on all persons earning income. The tax amount depends on the Salary of the employee. It has different slabs. For example, a professional Tax of $150 is applicable for salaries of $10,000-Rs. 20,000.
The Primary Liability is the Employee’s. Similar to TDS, where tax is deducted from the source, professional tax is also deducted from the salary by the employer and deposited with the respective tax authorities. Understand more about professional tax here.
Salary Received Journal Entry:
Salary is a reward for the employee. Generally, the employee isn’t required to maintain the books of accounts and record all their financial transactions. Also, there is no legal requirement that employees shall not preserve books. The cost of maintaining books is more than the benefits arising from it. However, we can see how the entry is recorded.
(Being Salary Income received from the company)
Also Read: Cash Coverage Ratio
Salary paid in an advance journal entry:
Employers provide salary advances to their employees to meet their requirements. The amount of advance deducted from the Salary depends on the Employer’s terms and conditions.
The transaction involves the Salary Advance (Asset) and Bank (Asset). So, these two GLs are real accounts. Therefore, per the above modern rules of accounting, we will record the entry as follows:
(Being advance paid to the employee)
When it is recovered, the salary advance will be adjusted against the expense. Suppose the Employer recovers the advance from the next month’s salary. Then, the entry will be
(Being Salary advance adjusted with Salary)
Conclusion:
A salary-paid journal entry records the employer’s payment to its employees. So, it will be a debit to the Salary or Salary Payable (if there is already an accrual of liability) and a corresponding credit to the Bank account. Like any other journal entry, the steps to record a transaction depend on the GL accounts involved and applicable accounting rules. I hope this article provides a good foundation for recording the different types of salary journal entries.
