Paying wages and salaries

There are a number of ways that the payment of wages and salaries can be recorded. The following method is the one we recommend and is also recommended by Sage:

1. Set up the following accounts:
   • A/C 6000 Direct Labour
   • 6001 Employer’s NIC on Direct Labour
   • 7000 Directors’ Remuneration
   • 7001 Employer’s NIC on Directors’ Remuneration
   • 7005 Sales Salaries and Commissions (if sales people employed)
   • 7006 Employer’s NIC on Sales Salaries
   • 7010 Administration Salaries
   • 7011 Employer’s NIC on Sales Salaries
   • 2220 Net wages and salaries payable
   • 2210 PAYE payable
   • 2210 NIC payable
2. Prepare a journal entry at the time of each payroll run. This will breakdown the payroll cost as follows:
   • Dr 6000 Direct Labour
   • 6001 Employer’s NIC on Direct Labour
   • 7000 Directors’ Remuneration
   • 7001 Employer’s NIC on Directors’ Remuneration
   • 7005 Sales Salaries and Commissions (if sales people employed)
   • 7006 Employer’s NIC on Sales Salaries
   • 7010 Administration Salaries
   • 7011 Employer’s NIC on Sales Salaries
   • Cr 2220 Net wages and salaries payable
   • 2210 PAYE payable
   • 2211 NIC payable

   The actual cost of the payroll has therefore been analysed to the Profit and Loss Account (accounts 6000 to 7011) and the amounts which need to be paid have been set up as creditors (accounts 2220 to 2210).

3. When you actually pay the net wages you then post the payment to A/C 2220 and when you pay the PAYE and NIC (usually the following month) you post the payments to A/C 2210 and 2211.

Your accounts may well show more analysis than set out above and you may have to set up accounts to cover things like pension payments, student loan deductions, SSP etc. However the principle is the same and that is to create credit balances which will represent the amounts payable (A/C’s 2220 to 2210 above) and then when the payments are made these are posted to these accounts.

Reconciling Wages and Salaries Control Accounts

By using the above method the “control” accounts (i.e. 2220, 2210 and 2211 above) will show a zero balance every time a payment is posted to them.

Typically, at the end of each month you will have credit balances on the PAYE and NIC control account because these amounts do not have to be paid to the Inland Revenue until the 19 th of the following month.

By reconciling these control accounts we mean checking that these balances do agree with the amounts you will actually pay in respect of PAYE and NIC. Also, there should be a reason for any balances appearing on the Net Wages and Salaries Payable Account.

All these control accounts should “zero out” on a regular basis.