Payroll processing of employees is a major aspect of employee management in an organization since salary is one of the key factors that motivates them to keep working for their company. In any organization, the salaries of the employees are processed each salary cycle to ensure that the staff members are compensated adequately for their time and effort. Hence, payroll accounting is essential for any organization as they need to maintain the records of the payments of their employees.
In this comprehensive guide, we will share all details about payroll accounting such as its importance, types, and benefits. We will also help you understand the challenges associated with payroll accounting and the benefits of deploying dedicated payroll software to overcome these issues.
What is Payroll Accounting?
Payroll Accounting is the process of maintaining records of employee payroll and related activities in an organization. It ensures the maintenance of employee compensation records according to legal requirements.
Payroll accounting consists of various operations, such as:
- Calculating and recording employee salaries.
- Deducting taxes from the salary.
- Disbursing salaries and benefits.
- Generating statutory reports.
- Filing taxes with the government, etc.
Examples of Payroll Accounting
As a part of payroll accounting, all activities related to employee payroll and benefits are recorded in the accounting books, which can be either physical or digital ledgers. These ledgers are maintained by the accounting team for record-keeping and hence, they can be audited for accuracy by the regulatory authorities whenever required.
Based on the types of these entries, there are three major examples of payroll accounting:
1. Initial Recordings
The initial recordings are the payments made by the employer to the employee after deducting all the taxes. It includes all figures spent on the employees such as the taxes paid on their behalf, the direct payments done as salaries, additional benefits, etc. Hence, it includes both credits and debits undertaken, related to employee salaries.
2. Accrued Wages
Accrued wages include the wages required to be paid to an employee within a specific salary cycle. It differs from the initial recording as the amounts included within it are yet to be paid to the employee. For example, arrears would be included in accrued wages initially, and once it is paid to the employee, it will be included within initial recordings.
3. Manual Payouts
Manual payouts are the payments which are not calculated periodically. For example, payments made to an employee related to their corporate trips are usually a part of manual payouts since they do not occur each salary cycle. It can also include payroll corrections, such as overtime payments, petty cash transaction payments, etc.
Payroll accounting is an indispensable part of employee management as it ensures the maintenance of salary records, providing the organization with a general ledger of the organizational expenses of their staff members.
Importance of Accurate Payroll Accounting
Payroll accounting provides companies with a complete picture of their expenses related to their employees. It helps them track their expenses, while also giving an idea of the various taxes paid to the government, helping them stay compliant with the regulations.
The major benefits of the payroll accounting process are:
➔ Employee Cost Records
Since payroll accounting helps you maintain a record of the salaries and benefits of your employees, it provides a secure way to track your costs related to your staff members. Since the records are maintained securely in compliance with the statutory norms, you can also be sure that the data integrity is maintained.
Additionally, it also provides the organization with a seamless option to maintain records of the various deductions in their employees’ salaries, resulting in easier calculations and verifications. It also helps with auditing the company expenses since it contains all records of expenses on the employees such as their salaries, pay rate, time sheets, etc.
➔ Compliance Handling
Payroll accounting enables companies to maintain records of their employees’ payments and associated expenses according to statutory norms. Hence, it provides them with a simplified option to track their tax payments to the authorities. Additionally, it also enables them to prove tax payments, which are undertaken on behalf of the employee, such as their provident fund, professional tax, etc.
With the help of payroll accounting, companies can also keep track of the time of payments undertaken, helping them stay on budget. To ensure that they remain compliant with the statutory regulations, they are also required to format it according to the rules, which are undertaken with the help of payroll accounting.
➔ Business Expenses Analysis
Since payroll accounting provides easy access to the company’s expenses on their employees, it also proves useful when analyzing the overall business expenses. Since human resources within an organization are its most valuable resource, companies can use the payroll accounting data to find out how much they are spending on their staff members.
By analyzing the cost incurred with employees, companies can develop better strategies to optimize their workforce, while maximizing their profits, all the while keeping them engaged with their organization. Hence, payroll accounting proves instrumental in analyzing business expenses and developing business strategies.
Challenges with Manual Payroll Accounting
Processing employee payroll and accounting it accurately is a time-consuming task. Being an activity that needs to be undertaken every salary cycle, calculating accurate payroll based on employees’ working hours becomes a strenuous task when undertaken manually. It can lead to manual errors, which has the potential to delay salaries for the staff, which is an undesirable scenario for the HR and accounts team.
The major challenges with manual payroll accounting are:
1. Manual Calculations Accuracy
With manual calculations, there is always a possibility of human error, which can not only impact payments but can have a detrimental effect on employee morale too. It also requires you to keep manual ledgers and paper trails, which are costly to maintain accurately. Even if the payroll information is maintained on digital workbooks and spreadsheets, there is always a chance of breaches and erroneous data, due to its limitations.
2. Handling Multiple Pay Structures
Companies are comprised of multiple teams working together to fulfil organizational objectives. Hence, it requires employees in different positions, with varying payroll structures. However, handling multiple pay structures becomes a challenge with manual payroll accounting since their payments need to be calculated accurately each salary cycle.
3. Managing Remote Employees’ Payroll
Due to the rising popularity of remote and hybrid work structures, many companies have reorganized their office work policies around these concepts. As a result, remote workers are a major part of the modern workforce, which leads to an increased number of challenges for the accounting department, such as statutory compliance, additional liabilities, etc.
Steps in the Payroll Accounting Process
The payroll accounting process is complex with numerous steps required to undertake it completely. However, we have provided a few steps that are required to be undertaken only once, while setting up your company. While these steps need to be set up only once, they should be reviewed periodically to ensure compliance.
The major steps in the payroll accounting process are:
➔ Obtain a TAN
The first step is to register the company with the authorities and obtain a Tax deduction Account Number or TAN. It is a 10-digit number issued by the income tax department and is used for deducting tax at the source (TDS). Once it is obtained, you will be able to set up an account with the bank that can be used to disburse salaries to your employees.
➔ Decide the Payroll Factors
Once the payroll account and TAN are obtained, you need to decide the factors that are a part of employee compensation. These factors include employee salaries, additional benefits, commissions, incentives, etc. Additionally, you should decide the compensation structure for each designation in your organization, as well as the frequency of the payments.
➔ Develop a Chart of Accounts
The next step is to create a general ledger that will enable you to record each transaction happening in your company, which are related to your employees. Hence, it will consist of both expenditures and liabilities of the company. It helps you track employee-related expenses in the organization as well as maintain a legal record of staff-related expenses within the organization.
➔ Collect Attendance Details
Once the preliminary steps are undertaken, you can move on to the regular tasks required to be undertaken each salary cycle, beginning with attendance capture and the tamper-proof storage of this data. Since employees are paid according to their working hours, a dedicated attendance software is used to calculate their wages accurately.
➔ Calculate Salaries
Once the attendance information is captured, you can calculate the salaries of every employee within the organization. To calculate the salaries, you will need to consider their gross salary as it will include income taxes, professional tax, net salary, added benefits, overtime, latecomings, leaves, etc.
➔ Disburse Payments
Once the salaries are calculated, you need to remove the deductions as per the statutory norms and disburse the salaries through the chosen mode of salary distribution. While disbursals are generally undertaken via direct deposits, they can also be done via cheque deposits, payroll cards, mobile wallets, etc. Once the salary is disbursed, you should also share the pay stub or payslip with the employees for record-keeping.
➔ Calculate Liabilities
Once the payroll is disbursed, all liabilities are calculated, which includes the amounts that the company owes to various parties including their employees, but has not been distributed yet. For example, it includes the income taxes deducted from employee salaries, but yet to be paid to the income tax department.
➔ Generate Payroll Reports
Once all kinds of payments are completed, you can generate various payroll reports. While some of these reports are for statutory purposes, you can also customize and generate other reports for yourself. It will help you analyse and understand the costs associated with the management of employees in your organization.
➔ Maintain Records
Finally, you need to maintain records of each step that we have undertaken until now. It helps you stay compliant with the statutory regulations, while also providing you with data for auditing. Maintaining payroll data will also prove instrumental if an employee raises a dispute against the wages they were provided for any salary cycle.
Benefits of Deploying Payroll Software
Since manual payroll processing is a tedious and time-consuming task dotted by manual errors, one should make use of modern technologies such as dedicated payroll and HR software. Taking the help of technology not only speeds up the processing of employee payroll but also helps avoid manual errors.
A few major benefits of deploying dedicated payroll software are:
1. Enhanced Efficiency
Payroll software automates the task of processing employee payroll, improving its efficiency by multiple times. It not only reduces the time required to calculate their salaries but also helps avoid manual errors, resulting in increased efficiency. It also automates compliance with the tax laws, resulting in improved efficiency.
2. Reduced Costs
Similarly, dedicated payroll software reduces costs associated with employee payroll processing and accounting since it automates the complete payroll process. It also helps curb extra payments due to manual errors, resulting in further cost savings. Additionally, it also helps in saving the company from non-compliance fines since it automatically ensures compliance.
3. Accurate Payments
Since the payroll software automates employee payroll processing, it results in accurate salary disbursals every pay cycle. It also ensures that the taxes are deducted accurately as well as the benefits are added according to pre-defined rules, ensuring complete peace of mind for the HR and accounting departments.
4. Payroll Data Security
Additionally, the payroll and employee data stored within payroll software is secured with enterprise-grade security algorithms. With such enhanced security measures, the data remains tamper-proof and can be retrieved whenever required by the authorized users of the system. As a result, it not only avoids human errors with payroll processing but also removes human corruption from the system.
5. Automated Compliance
Another major benefit of deploying payroll software is that it automates compliance handling. Modern payroll software is hosted on the cloud and hence, it stays up to date with the latest changes in statutory compliances. Hence, the HR team need not keep making changes to their payroll calculations, as these changes are automatically done by the software.
6. Scalability & Flexibility
Being cloud-based systems, modern payroll software also supports enhanced scalability and flexibility. These systems can scale according to the company’s growth, enabling you to keep on adding employees as and when required. Similarly, you can make changes to the system as per your requirement, adding and removing modules depending on the company’s requirements.
Conclusion
Payroll accounting is an essential component of employee management as it helps organizations maintain accurate compliance-friendly records of their employee payroll. It helps companies create records of employee-related expenses, enabling them to keep them for analytics and compliance. Hence, with this comprehensive guide, we have shared payroll accounting meaning, its relevance for companies, and the various types of payroll accounting.
We have also provided the general steps undertaken in the payroll accounting process, as well as the numerous challenges associated with it. Finally, we have also provided the benefits of deploying dedicated payroll system, which could be beneficial in not only reducing costs but also improving the efficiency and accuracy of the payroll calculation and disbursal process.
