It has often been observed that different organisations follow different methods of accounting for Payroll. While there is no set formula or rules for the same, the ease and adaptability of the method used has to be justified on a case-to-case basis.
In this article we have tried to come up with some useful practices which can be used by the HR and Accounts department to ensure that the books are in sync with the Salary sheets and all statutory dues are correctly deducted as well as reflected.
Employee Onboarding
The following documents shall be obtained from employees at the time of onboarding itself – PAN, AADHAR, Address proof (if different), Bank account details (vide cancelled cheque), Photograph, Family details, Mobile No, Personal Mail ID, Emergency Contact Details, CV, Qualification Documents, etc
Keeping in pace with changing technologies, the company shall maintain a Google Form on which employees can update all these details and a Goole drive in which all employees’ data can be securely stored.
The Company shall also obtain a Tax declaration from the employee and in case the hiring has been made in the middle of the year, details of compensation received from the previous employer too shall be obtained for ensuring appropriate tax deduction.
Components of Compensation
While there are different formulas used by different companies for dividing the compensation, it should usually have a minimum of the following to ensure that employee’s taxes can be saved.
Basic – 40-50%
HRA – 20-30%
Others – Balance
Given, the removal of exemptions for conveyance, food, etc its not mandatory to divide into those heads anymore.
Sample Salary Sheet
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q |
| Employee ID | Employee name | Gross Pay | Present Days | Gross Payable | Deductions | Actual Payable | PF | ESIC | PT | TDS | Loan Recovery | Incentive/ Bonus | Net Pay | Cost to Company | ||
| Employee Cont | Employer Cont | Employee Cont | Employer Cont | |||||||||||||
| A1 | ABC | 1,00,000 | 27 | 90,000 | 2,000 | 88,000 | 1,800 | 1,800 | 263 | 714 | 200 | 10,000 | 15,000 | 7,000 | 67,737 | 97,514 |
| A2 | XYZ | 15,000 | 28 | 14,000 | 100 | 13,900 | 1,800 | 1,800 | 263 | 714 | 200 | – | – | 12,000 | 23,637 | 28,414 |
| A3 | MNP | 25,000 | 29 | 24,167 | 500 | 23,667 | 1,800 | 1,800 | 263 | 714 | 200 | – | 3,000 | 3,000 | 21,404 | 29,181 |
| A4 | RST | 35,000 | 30 | 35,000 | 1,200 | 33,800 | 1,800 | 1,800 | 263 | 714 | 200 | – | – | 4,000 | 35,537 | 40,314 |
| A5 | JKL | 1,30,000 | 27 | 1,17,000 | 2,400 | 1,14,600 | 1,800 | 1,800 | 263 | 714 | 200 | 15,000 | 8,000 | 6,000 | 95,337 | 1,23,114 |
| A6 | POL | 2,45,000 | 28 | 2,28,667 | 5,000 | 2,23,667 | 1,800 | 1,800 | 263 | 714 | 200 | 30,000 | 20,000 | – | 1,71,404 | 2,26,181 |
| 5,08,834 | 11,200 | 4,97,634 | 10,800 | 10,800 | 1,578 | 4,284 | 1,200 | 55,000 | 46,000 | 32,000 | 4,15,056 | 5,44,718 | ||||
| Ref | Details | Description |
| A | Employee ID | As per Company’s Policy |
| B | Employee Name | As per his ID Proof |
| C | Gross Pay | Total agreed monthly compensation apart from variables |
| D | Present Days | No of days for which Salary is payable, this is after deducting loss of pay days |
| E | Gross Payable | Usually arrived on proportionate basis – E = C/30 x D |
| F | Deductions | These may be on account of late coming, less hours clocked, or any other as per company policy |
| G | Actual Payable | G = E – F |
| H & I | PF Contribution | Employee and Employer’s Contribution – Only Employee Cont is to be recovered from Salary |
| J & K | ESIC Contribution | Employee and Employer’s Contribution – Only Employee Cont is to be recovered from Salary |
| L | PT | Professional Tax to be recovered from Employees |
| M | TDS | Income Tax Payable which has to be deducted from Employee’s salary |
| N | Loan Recovery | If any past loans are paid to Employees on which monthly recoveries are being made, the same shall be deducted from salary |
| O | Incentive/ Bonus | Payable as per the Company Policy |
| P | Net Pay | Take Home Salary of employee – to be paid to his account |
| Q | CTC | Cost to Company – Actual cost incurred on the HR |
Generally, while accounting the following must be kept in mind.
- Cost to Company must be adequately debited to Profit and Loss account.
- Statutory Liability payable shall be reflected appropriately in Current Liabilities.
- Employees’ Take-Home salary shall be reflected in the Current Liabilities and match with the actual payment made.
General Accounting Entries to be passed for the above table
| Salary Expenses A/c | Dr | 497634 | Indirect Expense | |
| Bonus A/c | Dr | 32000 | Indirect Expense | |
| PF Employee Cont | Cr | 10800 | Current Liability | |
| ESIC Employee Cont | Cr | 1578 | Current Liability | |
| Professional Tax Employees Payable | Cr | 1200 | Current Liability | |
| TDS Payable u/s 192 | Cr | 55000 | Current Liability | |
| Loan to Employees | Cr | 46000 | Current Assets | |
| Salary Payable A/c | Cr | 415056 | Current Liability | |
| 529634 | 529634 |
By making this entry
Salary and Bonus are recorded at cost and the same is reflected in the Balance sheet as payable.
It must be noted that only Employee’s Contribution of PF and ESIC shall be deducted from Salary payable, employer contribution cannot be deducted from employee’s salary. In case, the employee’s salary has been decided as CTC and Employer’s contribution towards PF, ESIC, Gratuity etc is also included in the same, then the same must be deducted from base salary being calculated itself. (i.e., C in the above table)
| PF Employee Cont A/c | Dr | 10800 | Current Liability | |
| PF Employer Cont A/c | Dr | 10800 | Indirect Expense | |
| PF Admin Charges A/c | Dr | 1449 | Indirect Expense | |
| PF Payable A/c | Cr | 23049 | Current Liability | |
| ESIC Employee Cont A/c | Dr | 1578 | Current Liability | |
| ESIC Employer Cont A/c | Dr | 4284 | Indirect Expense | |
| ESIC Payable A/c | Cr | 5862 | Current Liability |
By making these entries
Cost of the Company towards PF and ESIC Contribution are covered as cost and the entire PF and ESIC payable statutorily would be appropriately reflected in the Balance sheet as well. Here, the PF and ESIC Employee Contribution ledgers would be nullified.
| PF Payable A/c | Dr | 23049 | Current Liability | |
| ESIC Payable A/c | Dr | 5862 | Current Liability | |
| Professional Tax Employees Payable A/c | Dr | 1200 | Current Liability | |
| TDS Payable u/s 192 A/c | Dr | 55000 | Current Liability | |
| Salary Payable A/c | Dr | 415056 | Current Liability | |
| Bank A/c | Cr | 500167 | Current Asset |
Finally, by making this entry all payables are settled and all ledgers in current liability would be nullified.
Thus in 4 simple steps we can account for the entire HR costs.
Reimbursements if any shall be accounted for in the following manner and not merged with any other head.
| Reimbursements A/c | Dr | 100000 | Current Asset | |
| Bank A/c | Cr | 100000 | Current Asset | |
| Equipment A/c | Dr | 35000 | Fixed Asset | |
| Travel A/c | Dr | 35000 | Indirect Expenses | |
| Staff Welfare | Dr | 30000 | Indirect Expenses | |
| Reimbursements A/c | Cr | 100000 | Current Assets |
By making above entries, reimbursement payable can be first established and then bifurcated to different heads as per actual expense.
We do not usually encourage employee wise accounting, an excel sheet shall be made for all employees as illustrated above and kept on record for every month. If for any reason employee wise accounting is required, the same entries need to be passed for all employees separately.