Ravi Ladia & Co

SOP for making Payroll entries

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 

ABCDEFGHIJKLMNOPQ
Employee IDEmployee nameGross PayPresent DaysGross PayableDeductionsActual PayablePFESICPTTDSLoan RecoveryIncentive/ BonusNet PayCost to Company
Employee ContEmployer ContEmployee ContEmployer Cont
A1ABC  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 
A2XYZ    15,000 28        14,000               100           13,900       1,800         1,800           263           714           200               –                 –         12,000           23,637     28,414 
A3MNP    25,000 29        24,167               500           23,667       1,800         1,800           263           714           200               –           3,000         3,000           21,404     29,181 
A4RST    35,000 30        35,000           1,200           33,800       1,800         1,800           263           714           200               –                 –           4,000           35,537     40,314 
A5JKL  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 
A6POL  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 
                 
RefDetailsDescription
AEmployee IDAs per Company’s Policy
BEmployee NameAs per his ID Proof
CGross PayTotal agreed monthly compensation apart from variables
DPresent DaysNo of days for which Salary is payable, this is after deducting loss of pay days
EGross PayableUsually arrived on proportionate basis – E = C/30 x D
FDeductionsThese may be on account of late coming, less hours clocked, or any other as per company policy
GActual PayableG = E – F
H & IPF Contribution Employee and Employer’s Contribution – Only Employee Cont is to be recovered from Salary
J & KESIC ContributionEmployee and Employer’s Contribution – Only Employee Cont is to be recovered from Salary
LPTProfessional Tax to be recovered from Employees
MTDSIncome Tax Payable which has to be deducted from Employee’s salary
NLoan RecoveryIf any past loans are paid to Employees on which monthly recoveries are being made, the same shall be deducted from salary
OIncentive/ BonusPayable as per the Company Policy
PNet PayTake Home Salary of employee – to be paid to his account
QCTCCost 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/cDr497634 Indirect Expense
Bonus A/cDr32000 Indirect Expense
PF Employee ContCr 10800Current Liability
ESIC Employee ContCr 1578Current Liability
Professional Tax Employees PayableCr 1200Current Liability
TDS Payable u/s 192Cr 55000Current Liability
Loan to Employees Cr 46000Current Assets
Salary Payable A/cCr 415056Current Liability
  529634529634 

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/cDr10800 Current Liability
PF Employer Cont A/c Dr10800 Indirect Expense
PF Admin Charges A/c Dr1449 Indirect Expense
PF Payable A/cCr 23049Current Liability
ESIC Employee Cont A/cDr1578 Current Liability
ESIC Employer Cont A/c Dr4284 Indirect Expense
ESIC Payable A/cCr 5862Current 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/cDr23049 Current Liability
ESIC Payable A/cDr5862 Current Liability
Professional Tax Employees Payable A/cDr1200 Current Liability
TDS Payable u/s 192 A/cDr55000 Current Liability
Salary Payable A/cDr415056 Current Liability
Bank A/cCr 500167Current 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/cDr100000 Current Asset
Bank A/cCr 100000Current Asset
Equipment A/c Dr35000 Fixed Asset
Travel A/c Dr35000 Indirect Expenses
Staff WelfareDr30000 Indirect Expenses
Reimbursements A/cCr 100000Current 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.

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