Learning Outcomes
After reading this article, you will be able to explain the purpose of the wages control account, record payroll transactions in the general ledger, account for gross pay, deductions, employer contributions, and net pay, authorise and document payroll payments, and reconcile payroll accounts in line with the ACCA FA1 specification.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how payroll transactions are recorded, controlled, and reported within accounting systems. When revising this area, focus on:
- The operation of the wages control account for recording payroll
- Posting entries for gross pay, deductions, employer contributions, and net pay
- Accounting for statutory and non-statutory payroll deductions
- Authorising, documenting, and securing payroll data and payments
- Reconciling and clearing payroll-related accounts in the general ledger
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What roles does the wages control account (also called salaries payable) serve in payroll accounting?
- List three typical items posted as credits to the wages control account.
- Which accounts receive the credit entries for employee deductions such as income tax and pension contributions?
- What should you do if the wages control account does not balance after all payroll amounts are recorded and paid?
Introduction
Accurate payroll accounting is required for all businesses employing staff. Payroll includes not only wages paid to employees but also deductions, employer contributions, and payments to third parties such as tax authorities. These transactions are controlled and monitored through the wages control account, sometimes called the wages or payroll payable account. Understanding how to post, authorise, and reconcile these entries is essential for effective bookkeeping and successful completion of the ACCA FA1 exam.
Key Term: wages control account
A general ledger account used to accumulate and control all payroll-related obligations until amounts are paid to employees and third parties.Key Term: gross pay
The full amount earned by employees before any deductions, including standard salary, overtime, bonuses, and commission.Key Term: statutory deduction
Deductions required by law, such as income tax and state social security contributions.Key Term: non-statutory deduction
Voluntary deductions from employees’ pay, such as trade union subscriptions, pension contributions, or payroll charity giving.Key Term: net pay
The amount of pay given to the employee after all deductions have been subtracted.Key Term: employer’s contribution
Amounts paid by the employer, in addition to gross pay, for obligations such as employer’s social security or pension contributions.Key Term: payslip
A document issued to each employee showing gross pay, deductions, net pay, and relevant details for a single pay period.
Accounting for Payroll and Wages Control
All payroll costs and movements flow through the wages control account, which acts as a clearing account for all related expenses and liabilities. The account is structured to ensure that every payroll outflow—either to staff, government, or other agencies—is matched with the initial payroll costs.
The Payroll Cycle
At each pay period, these steps are followed:
- Calculate Gross Pay: Add together regular pay, overtime, bonuses, etc.
- Determine Deductions: Work out all compulsory (statutory) and voluntary (non-statutory) deductions.
- Calculate Employer Contributions: Identify costs that the employer must contribute directly.
- Post All Entries: Input the relevant amounts into the general ledger using double entry.
Payroll Ledger Entries
The following main ledger entries are required for each payroll:
- Debit: Wages and salaries expense account—total gross pay for employees
- Debit: Employer’s contribution accounts (for social security, pension, etc.)
- Credit: Wages control account—total owed for payroll including employer’s contributions
When payments are made:
- Debit: Wages control account (to clear amounts owed)
- Credit: Bank account (net pay, employer contributions)
- Credit: Payable accounts for deductions (income tax payable, pension payable, etc.)
This process ensures all payroll elements are recorded, paid, and ultimately cleared.
Key Term: payroll ledger posting
Recording of payroll amounts—including gross pay, deductions, employer contributions, and payments—in the appropriate general ledger accounts.
Structure of the Wages Control Account
The wages control account operates as follows:
- Credits: Total gross pay and employer contributions for the period
- Debits: Actual payments made—net pay to employees, deductions to third parties, employer contributions to relevant agencies
The balance of the account at period end should be nil if all obligations have been met. Any remaining balance signals outstanding liabilities or posting errors.
Worked Example 1.1
A business has these monthly payroll amounts:
- Gross pay: $15,000
- Employee income tax deduction: $3,000
- Employee pension deduction: $750
- Employer’s state benefit contribution: $1,500
- Net pay: $11,250
Show the ledger entries for these transactions.
Answer:
- Debit Wages expense $15,000
Debit Employer’s state benefit expense $1,500
Credit Wages control account $16,500- When payments are made:
- Debit Wages control account $16,500 (to clear control)
- Credit Bank $11,250 (net pay)
- Credit Tax payable $3,000 (deduction)
- Credit Pension payable $750 (deduction)
- Credit State benefit payable $1,500 (employer contribution)
Deductions and Third Party Payments
All deductions from employees’ pay—whether for taxes, social security, pensions, or voluntary amounts—must be recorded separately as payables in the general ledger. These must then be paid promptly to the correct authority or agency.
The employer’s contributions (which are not withheld from staff pay) are also recorded as liabilities and paid separately.
Worked Example 1.2
During a weekly payroll, the following occurs:
- Gross wages: $2,000
- Net pay: $1,500
- Income tax deducted: $300
- Employee pension deducted: $100
- Employer’s pension cost: $150
What general ledger postings are made?
Answer:
- Debit Wages expense $2,000 Debit Employer’s pension expense $150 Credit Wages control account $2,150
- On payment:
- Debit Wages control account $2,150
- Credit Bank $1,500 (net pay)
- Credit Tax payable $300
- Credit Pension payable $100 (employee)
- Credit Pension payable $150 (employer)
Authorisation, Security, and Documentation
Payroll processes must be properly authorised to avoid mistakes and fraud. This often involves:
- Timesheets or clock cards for hourly staff
- Authorisation of rates, hours, and overtime by supervisors or managers
- Payslips issued to all employees showing gross pay, deductions, and net pay
Only designated personnel should have access to payroll information and systems, ensuring confidentiality and security.
Exam Warning
Errors often occur when only net pay is recorded and employer costs or deductions are omitted. Always record each payroll element in the correct account.
Clearing the Payroll Accounts
After all payments related to a payroll run are made, the wages control account should balance to zero. If a balance remains, review the account to ensure all payables (for deductions) are paid and that no errors or omissions exist.
Worked Example 1.3
At the end of the month, the wages control account shows a $450 credit balance. What does this mean?
Answer:
This likely indicates unpaid deductions or employer contributions. Payment has not yet been made for all payroll liabilities. The business should review records and pay outstanding amounts.
Revision Tip
Ensure each stage of your payroll process—from calculation through payment—is supported by valid documentation and authorisation. Regularly review wages control and related payable accounts for unbalanced items.
Summary
Every payroll run is recorded by crediting gross pay and employer costs to the wages control account, with debits to expense accounts. Payments to employees and third parties (bank and payables) are debited to clear the control account. This ensures that all payroll costs and obligations are tracked, controlled, and paid. The account must be reconciled regularly to ensure no hidden liabilities persist.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the use of the wages control account in payroll
- Record double entries for gross pay, deductions, net pay, and employer contributions
- Distinguish between statutory and non-statutory deductions
- Authorise, document, and control payroll processes and payments
- Reconcile and clear payroll accounts at period end
- Identify the importance of payroll security and payslips
Key Terms and Concepts
- wages control account
- gross pay
- statutory deduction
- non-statutory deduction
- net pay
- employer’s contribution
- payslip
- payroll ledger posting