Payroll journal entries turn a month's payroll register into accounting: expenses recognised, liabilities created for net pay and statutory dues, and those liabilities cleared as payments go out. Getting them right matters because payroll is usually the largest cost line after purchases, and statutory payables (TDS, PF, ESI, PT) are exactly what auditors and tax officers check first. This guide walks through a complete set of entries for one month with real numbers, then covers provisions, reimbursements, loans and the monthly reconciliation that keeps the ledgers clean.
The Accounts You Need
| Account | Type | Purpose |
|---|---|---|
| Salaries and wages | Expense | Gross salary of employees |
| Employer contribution to PF | Expense | Employer 12% (EPS plus EPF) |
| PF admin and EDLI charges | Expense | Employer-only charges |
| Employer contribution to ESI | Expense | Employer 3.25% |
| Gratuity expense | Expense | Monthly provision |
| Bonus expense | Expense | Statutory or performance bonus accrual |
| Salaries payable | Liability | Net pay due to employees |
| TDS payable (salary) | Liability | Tax deducted, due by the 7th |
| PF payable | Liability | Employee and employer PF, EDLI, admin, due by the 15th |
| ESI payable | Liability | Employee and employer ESI, due by the 15th |
| Professional tax payable | Liability | State PT |
| Provision for gratuity, leave encashment, bonus | Liability | Accrued employee benefits |
| Loans and advances to employees | Asset | Amounts lent to employees |
The Worked Example: One Month's Payroll
A company in Karnataka has 18 employees:
- 10 managers at ₹1,50,000 gross a month each (₹15,00,000), basic ₹75,000 each, PF capped at ₹15,000, new regime TDS of ₹12,567 each.
- 8 associates at ₹20,000 gross each (₹1,60,000), basic ₹10,000 each, PF on actual, ESI covered, no PT (below the Karnataka threshold), no TDS.
Payroll register summary
| Item | Calculation | ₹ |
|---|---|---|
| Gross salary | ₹15,00,000 + ₹1,60,000 | 16,60,000 |
| PF wages | 10 × ₹15,000 + 8 × ₹10,000 | 2,30,000 |
| Employee PF | 12% × ₹2,30,000 | 27,600 |
| Employer EPS | 10 × ₹1,250 + 8 × ₹833 | 19,164 |
| Employer EPF | ₹27,600 minus ₹19,164 | 8,436 |
| EDLI | 0.5% × ₹2,30,000 | 1,150 |
| PF admin | 0.5% × ₹2,30,000 | 1,150 |
| Employee ESI | 0.75% × ₹1,60,000 | 1,200 |
| Employer ESI | 3.25% × ₹1,60,000 | 5,200 |
| Professional tax | 10 × ₹200 | 2,000 |
| TDS | 10 × ₹12,567 | 1,25,670 |
| Net pay | ₹16,60,000 minus ₹27,600 minus ₹1,200 minus ₹2,000 minus ₹1,25,670 | 15,03,530 |
The figures for EPS use per-employee rounding (8.33% of ₹10,000 is ₹833). For the calculation logic, see our guide to monthly payroll processing steps.
Entry 1: Recording Salary and Employee Deductions
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Salaries and wages | 16,60,000 | |
| PF payable (employee share) | 27,600 | |
| ESI payable (employee share) | 1,200 | |
| Professional tax payable | 2,000 | |
| TDS payable (salary) | 1,25,670 | |
| Salaries payable | 15,03,530 | |
| Total | 16,60,000 | 16,60,000 |
Entry 2: Employer Contributions
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Employer contribution to PF | 27,600 | |
| PF admin and EDLI charges | 2,300 | |
| Employer contribution to ESI | 5,200 | |
| PF payable (employer share and charges) | 29,900 | |
| ESI payable (employer share) | 5,200 | |
| Total | 35,100 | 35,100 |
Total employer cost for the month: ₹16,60,000 + ₹35,100 = ₹16,95,100, before provisions.
Entries 3 to 7: Payments
| Entry | Debit | Credit | ₹ | Timing |
|---|---|---|---|---|
| 3. Net salary paid | Salaries payable | Bank | 15,03,530 | Pay day |
| 4. TDS deposited | TDS payable | Bank | 1,25,670 | By the 7th |
| 5. PF challan paid | PF payable | Bank | 57,500 | By the 15th |
| 6. ESI paid | ESI payable | Bank | 6,400 | By the 15th |
| 7. PT paid | Professional tax payable | Bank | 2,000 | As per state |
The PF challan of ₹57,500 breaks down as: EPF account ₹36,036 (₹27,600 + ₹8,436), EPS ₹19,164, EDLI ₹1,150 and admin ₹1,150. After all payments, every payable account for the month should be zero.
Provisions: Gratuity, Bonus and Leave
Gratuity
Accrue gratuity monthly. Using 4.81% of basic as a management estimate:
- Managers: 4.81% × ₹75,000 = ₹3,607.50 × 10 = ₹36,075.
- Associates: 4.81% × ₹10,000 = ₹481 × 8 = ₹3,848.
- Total: ₹39,923.
Entry: Dr Gratuity expense ₹39,923; Cr Provision for gratuity ₹39,923. At year end, adjust the provision to the actuarial valuation under AS 15 or Ind AS 19. If the company funds gratuity through an insurer, contributions are debited to the provision (or a plan asset) and credited to bank.
Statutory bonus
For the 8 eligible associates, with a calculation ceiling of, say, ₹11,000 a month (illustrative, depends on the minimum wage): 8 × ₹11,000 × 8.33% = ₹7,330.40 a month at the minimum rate. Entry: Dr Bonus expense; Cr Provision for bonus. When bonus is paid, Dr Provision for bonus; Cr Bank (and TDS payable where applicable).
Leave encashment
Provide for encashable leave earned during the month at the encashment rate, adjusting at year end to the actuarial or computed liability.
Reimbursements, Loans and Other Items
- Reimbursements paid through payroll: Dr the relevant expense (travel, telephone); Cr Salaries payable. If taxable, they also appear in gross salary for TDS.
- Loan recovery through payroll: include a credit to Loans and advances to employees in Entry 1, reducing salaries payable.
- Notice pay recovery: credit to an income account (or a reduction of salary expense, as per policy).
- Arrears: debit salary expense in the month paid, or accrue in the month approved if material.
- Accrued salary at period end: if salary for the month is paid in the next month, the month-end balance in salaries payable is the accrual.
Month-End and Year-End Timing Entries
Salary paid in the following month
If October salary is paid on 1 November, the October books should still carry the full expense. Entries 1 and 2 are posted with October's date, and salaries payable sits on the balance sheet at 31 October. The payment entry is dated 1 November.
Statutory dues across the year end
March payroll creates TDS, PF and ESI payables that are paid in April. They must appear as liabilities in the year-end balance sheet. Auditors check that they were paid by the due dates, because employer contributions to PF and ESI paid late can be disallowed as a deduction for the employer's own income tax, and employees' contributions deposited after the due date have been disallowed in the employer's hands in tax assessments.
Year-end provision true-up
- Gratuity and leave: compare the monthly accruals with the actuarial valuation and post the difference.
- Bonus: compare accrued statutory bonus with the computation based on allocable surplus; adjust the provision.
- Performance bonus: accrue the expected payout for the year even if it is paid after year end.
- Arrears approved but unpaid: accrue if the revision relates to the year being closed.
Worked year-end check
If monthly gratuity accruals for the year total 12 × ₹39,923 = ₹4,79,076, and the actuarial valuation shows an increase in the obligation of ₹5,30,000 for the year (including interest cost and changes in assumptions), post a further ₹50,924 at year end: Dr Gratuity expense (or other comprehensive income for remeasurements, under Ind AS); Cr Provision for gratuity.
Cost Centre and Department Allocation
Allocate the salary and employer contribution expenses to departments or projects using the payroll register's cost centre tags. For companies that bill clients on effort, accurate allocation is essential. Allocate gratuity and bonus provisions the same way so departmental profitability reflects full employee cost.
Monthly Reconciliation
| Check | Should match |
|---|---|
| Salaries and wages expense | Gross in the payroll register |
| Salaries payable after payment | Zero, or only returned credits under investigation |
| TDS payable after deposit | Zero; challan matches the register |
| PF payable after payment | Zero; challan matches ECR |
| ESI and PT payable after payment | Zero |
| Loans to employees | Loan register balances |
| Provisions | Schedules for gratuity, bonus, leave |
A non-zero statutory payable after the due date is either a missed payment or a mismatch; investigate before the next payroll.
Common Payroll Accounting Mistakes
- Recording net pay as the expense instead of gross.
- Combining employee and employer PF in one expense line, inflating expense.
- Forgetting EDLI and admin charges in the accrual, leaving a small unexplained balance each month.
- Posting statutory payments to expense instead of clearing the payable.
- No gratuity or leave provision until an employee leaves.
- Loans recovered in payroll but not credited to the loan account.
Payroll Data for Accounting in Fininvo
Fininvo Payroll produces the payroll register, statutory reports and department-wise analysis that accounting entries are built from. See payroll reports and Fininvo Payroll.
Frequently Asked Questions
What is the journal entry for salary paid?
First record salary: Dr Salaries and wages (gross); Cr statutory payables and Salaries payable (net). When paid: Dr Salaries payable; Cr Bank.
Is employer PF an expense?
Yes. Employer PF, EDLI and admin charges are employer expenses, recorded separately from salaries and wages.
How is TDS on salary recorded?
As a credit to TDS payable in the salary entry, cleared when the tax is deposited by the 7th of the next month.
Should gratuity be provided monthly?
Accruing monthly gives accurate monthly results. The year-end provision should match the actuarial or computed liability under the applicable accounting standard.
Is this accounting advice?
No. This is general information. Follow the accounting standards applicable to your company and take advice from your auditor.
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