 In this discussion we will discuss the discussion question of discuss the journal entry related to payroll expense. So when we think about the journal entry related to payroll it can be one of the more confusing payroll or more confusing journal entries in general. The one related to payroll expense typically being the most confusing of the payroll journal entries and the one that's most common. It's important to note those or it's good to work the payroll journal entry one because it's really good practice to know how to record journal entries because it's a bit longer of a journal entry and two it gives us an idea of how to record the payroll tax and how it's actually going to affect the accounts that will be affected and three because most people that work in payroll or a lot of times you know depending on where we work in payroll people don't understand the journal entry they understand tables they understand how to calculate the payroll tax don't really understand what it means typically in terms of what's going to be the impact and effect on the financial statements on the accounts to the financial statements on the accounting equation assets liabilities and equity and that can be a huge advantage to know that and we can see that and find what that will be by recording the journal entry. So the journal entry will typically come from the register so we'll typically have a register per pay period and that'll give us a basically a table of what happened in terms of the pay period. Now we could record a journal entry for each employee but we're just going to think of it in some meaning we're going to look at the register and look at the gross check for all employees and then we will look at the withholdings for all employees and then the net check for all employees and see how then we would construct and create a journal entry related to that information. It's also important to note that whether we do the payroll in uh in-house in our company in the system that we are using or if we uh outsource the payroll in some way to an outsourcing company like a paychecks or an ADP then we're still going to have to record the payroll in some way and so it's it's useful to know what that process will be we'll have to deal with payroll and look it up and deal with it whether we insource outsource payroll or not so um and just another good reason to look at the payroll journal entry. So once we have that information from the register we could start to build our our journal entry. Now if we think about the the most simple type of payroll journal entry it would simply be it like if we didn't have all the rules and withholdings that we needed by legislation and law now if payroll was just a simple handshake and says we're gonna i'm gonna pay you you know a thousand dollars every week or something like that then the payroll journal entry would be just like any other expense it would be very easy in other words we would just say we're gonna pay someone cash and credit cash at the point of payment and we would debit uh payroll tax expense it'll be just like paying the telephone bill or something like that be very easy but it's not so easy because there's a whole lot of laws and regulations related to payroll and the employer is typically the one who kind of is forced legally to be more of like the police person in terms of payroll taxes more of the regulator because the IRS knows they have more control uh they hand over the over the employer uh and so they therefore the employer has more responsibility to um to report withholdings things like even though they're really the employee's responsibility that's what's going to confuse the process here so when we construct the journal entry we'll start kind of from the same spot we're going to say okay the gross earnings are what they actually earned that's what they actually earned gross earnings just like if we were to use our simple journal entry we're just going to debit gross earnings because it's an expense so we're going to debit payroll tax payroll expenses not taxes payroll expenses debit for uh total earnings from the register that's the same we're going to credit cash or payroll liability depending on if we're paying it at the point of processing or not i'm just going to say cash so that we can think of it as similar to that normal journal entry but we don't know what the amount is or i'm not going to think about the amount yet i'll do that last that'll be the last thing we'll get to we'll construct the journal entry in a similar way as seen on the register meaning gross pay minus all the deductions including uh payroll tax deductions so therefore we're going to start with the the wages expense and then we're going to then credit all the all the stuff that we take out of wages expense so we're going to take out of wages expense the employee portion of the um employee portion of taxes payroll taxes so employee payroll taxes include federal income tax f it social security tax for the employee portion and medicare tax from the employee portion now we will have already calculated these hopefully from the register so we're just going to pull those numbers from the register we're going to credit our journal entry for those amounts those amounts that we are removing from the paycheck those amounts that on our register are part of the component to get from gross pay to net pay then on top of that we may have some state taxes s it state income tax uh and local taxes we won't spend a lot of time here on that we're going to focus in on the federal taxes states taxes will typically mirror in many ways the the federal taxes so once we know what type of tax we're talking about then we can apply it to whatever state regulation is in place then we could also remove anything that's going to be like voluntary type of of deductions which could include things like if there's a retirement plan of some kind like a 401k plan being the most common or if there's a cafeteria plan some kind of health insurance payments that could be taken out and those typically are going to be voluntary meaning we're given the option of the employee to put into a 401k plan typically a huge benefit because it lowers the taxable wages at the point of payment of the 401k typically so that's nice and in the cafeteria plan so those are optional ones and then there could be things like a garnish man or something where we where we are required by say a court order to take money directly from the employee paycheck and pay it to whoever the court told us to pay it to and there could be something like union dues also or something like that that we're going to pay out all those that we're going to withhold whether whether it be a 401k plan whether it be a cafeteria plan whether it be garnishments that we have to remove are going to be some type of liability account so we're going to credit a liability account for each of those numbers represented on the payroll register so we'll have a credit for all of those and then finally our last account is going to be a cash account that's going to be the cash that's going to come out or a liability for payroll liability we're going to use cash here and and that'll be the net check so that's kind of like the idea of the net check that's going to be that's going to be what actually came out of the bank account for this time period and that will be the debit of payroll expense minus all of the liabilities that we put in place including social security, Medicare, federal income tax withholding if there's any 401k plan the cafeteria plan if we have to pay the union if we have to pay garnishments or anything like that and that'll be the credit that actually comes out and that number should then match what's on our payroll register for the net check so that's in essence going to be our our journal entry and it should mirror the calculation for the payroll register now what's going to be the effect of this journal entry on the trial balance we know that the the debit to payroll expense is going to increase expenses and an increase to expense will decrease net income so expenses go up net income goes down and then all the other accounts are typically well then cash goes down of course if we paid cash or payroll liability would go up if we had not at this point then we'd pay cash later and then all the liabilities would then go up so so the other all those liabilities would go up reflecting the fact that we owe this money and that's important to note because clearly when we record the expense we recorded it gross all the expense we didn't record an expense equal to the net check that we paid we record an expense equal to the gross check and that's because we don't get to keep the money we've got to pay the money to whoever and we don't really owe the money the employee in theory kind of owes the money so we have to pay the money whoever we agreed to pay on behalf of the employees so that's why we report really gross earnings on the expense side and then we pay for the employees and so that can be confusing because when we think of payroll tax expenses on the financial statements they're not they're they're they're only going to include the employer portion note that we don't have any payroll tax expense account recorded on our financials from this journal entry the payroll tax expense will be recorded when we record the employer portion of payroll tax payroll taxes when we record the employee journal entry we're just recording all expenses whether they be going to the employee or to the whoever the employee owes including the government has payroll expense because they're really earnings by the employees whoever they're going to is is is different so we're reporting as the expense whatever was earned not who they're who they're going to