Bottom Line: Basic Accounting Is a Necessary Skill in Payroll

Payroll professionals need to understand basic accounting principles to understand how payroll impacts their company’s general ledger and overall finances, two payroll accounting experts said May 13.

The general ledger records a company’s finances and consists of journal entries, which are postings that describe a specific event, said Mark Thornton, payroll supervisor for Southern Company. Payroll journal entries list a company’s payroll transactions and distinguish between debits and credits, added Kathleen Burke, chief financial officer for PayrollOrg.

Debits increase assets and expenses, while credits decrease them, Thornton said. Conversely, debits decrease liabilities, revenues, and equity, while credits increase them, he added. In payroll, wage expenses and employer-paid taxes and benefits are debits, but cash, employee tax withholding, and employee-paid benefits are credits, Burke explained.

“Cash represents the net pay that is deposited into the employee’s bank account. The tax and benefit liabilities represent money withheld from the employees that will be sent to third parties later,” she said. “Employer taxes and benefits go on the debit side because they are company expenses not withheld from the employee. Employee withholdings go on the credit side because they’re liabilities that the company must eventually remit to an agency.”

Thornton and Burke spoke at PayrollOrg’s 44th Payroll Congress in Nashville, Tennessee.

Payroll journal entries must always balance, meaning that the amount of debits must equal the amount of credits for each entry, Burke said. If a journal entry does not balance, there is either an error in the mapping of the entry or the source data is incorrect, she said.

“If your net pay or gross wages don’t tie out, make a red flag. That could indicate a missing pay element, a problem with retro pay, or an error in the accounting interface file,” Burke said. “If they don’t tie out, stop and go back and figure out what was wrong.”

Payroll professionals should review entries to ensure that all pay transactions during the period properly appear and are complete, she said. There should be no duplicate lines, and entries must show that amounts are going into the correct accounts, she said. Failure to properly review journal entries can result in reconciliations and further review down the line, she said.

Proper expense reporting is integral, since payroll is usually the largest recurring expense for most businesses, Thornton said. Payroll is also highly complex and can affect several company accounts, so any mistakes can create a false financial picture, he said.

“If we are not reporting our wage expenses in the right way or something gets missed and does not get passed to accounting, we would have misleading profits for that period,” he said. “If your payroll records don’t match what’s in the general ledger or what’s been sent to accounting, audits are going to find that real quick. It’s not only going to hurt your credibility, there could be actual consequences to you or your business as well.”

Thankfully, reviewing payroll journal entries only requires recognizing patterns, and payroll professionals do not need to be accounting experts, Burke said.

“If you’ve been doing payroll for awhile, you already know what a normal result looks like. So, when the net pay is unusually low, it’s going to jump out at you. Or when a benefit line disappears, you are going to see it,” she said. “The same applies to journal entries. You are not trying to recreate them, you are just verifying that the numbers and accounts make sense.”