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Why use Wages Journals ?

I think that sometimes it is better not to do them.  If you don't know what you are doing, if the process doesn't make sense then maybe you shouldn't.

What I hope to do here is to explain both sides, the pros and cons of Wages Journals

So why do a payroll journal?

Control
By doing a payroll journal we get a bit more control, instead of one account with everything going into it, we get lots of separate accounts for each element of the expenditure in the balance sheet.  So when we have our payroll done, we enter into the balance sheet how much money we will need to pay to the employees (2200) Net Wages, the tax man (2210 PAYE and 2211 National Insurance) and the pension (2230 Pension Fund), against that we put the total cost of employment (all the bits added up) into the Wages account

The advantage of this is that we have a record of how much we should be paying each, when we pay each of them the balance sheet account goes back to having a zero balance.  This provides us with a way of double checking we didn't over or under pay anyone.

This control aspect is why these are called control accounts, they are there as a double check, control accounts are also used for other purposes not just for wages.

It is worth noting there are some serious penalties if you fail to make pension payments on time, if you pay staff the wrong amount there will be trouble and if the HMRC are underpaid you are not going to have a good time when they visit.

Fair representation
If I were to look at my profit and loss account, the day after the wages were calculated for the month, under the scenario where payments are posted to the P&L as they are made, there would be nothing showing in expense, we would not have made the payments to the staff, the revenue or the pension fund so no expenditure would show.

If we have done a wages journal, then the full cost of employing the staff for the period will show, even if we haven't yet paid the staff, the tax or the pension.

If we pay our tax on 13th of the month for the previous month, then we have a small issue on the first system, in that whilst we pay it in mid March, the period we incurred the expense was February, same goes for the pension and tax.  Everything is out of step by a month.

So the wages journal gets the cost of employment into the correct period, even through we may not have paid the tax etc in that period. 

Analysis
So far I have only mentioned one account in the Profit and Loss (7000) Gross Wages, in some situations you need to separate out wages costs.  If you have production staff in a factory, the cost of their employment could be put into a separate account to the office staff.  When the factory is very busy production labour costs will go up as there may be overtime or extra shifts, but income will go up as well, so being able to monitor the increase in factory wages relative to factory output is a useful metric.  If we added in the Office Staff or Sales peoples bonuses then the relationship would be distorted.

So often we want to look at the costs of employment based on the function in the business, Management, Administration, Sales, Production along with Bonuses might all want to be separated but when we look at each we want to see the total cost, the wages, NI, PAYE and pension.

This is what the payroll journal allows us to do.

So what is the alternative to posting a wages journal?

The alternative is to simply record all the expenditure directly into the Profit and Loss account.

There are 3 main payments associated with employment.  The payment to the employee, the payment to HMRC (for tax and national insurance deducted the national insurance paid by the employer) and payment to a pension provider (for pension contributions by employee and possibly employer).  (There are other payments that may need to be made, there could be deductions form the pay packet through attachment of earnings, the can be repayments on student loans and more. For now I will keep it simple.)

So in our profit and loss account in Sage50 we have an account setup in the default layout for (7000) Gross Wages.  You could post all the different payments above to that one account.

Better still you can split it up a bit, put the wages in 7000, the NI and PAYE in another account and the Pension in a third.