Payroll activities involve the financial management of wages paid to workers along with withholding and taxes. Many companies have a payroll department that works closely with accountants to properly record information in the general ledger -- a record that contains financial information relating to a company's business transactions. Two common payroll terms are expense and liability.
Payroll expense is the use of assets to pay workers for completing business tasks. For example, an administrative assistant earns $20 an hour. Working a standard 40-hour work week will result in total wages of $800. Companies report this amount as payroll expense in their general ledger. The business will incur this expense as long as the individual remains employed by the company. All wages face similar reporting requirements under standard accounting principles.
Payroll liability indicates a company owes money to employees for wages. Many companies pay workers every two weeks. Each week, however, the company incurs payroll expenses, such as the $800 weekly charge for employing the administrative assistant listed above. Companies can record a payroll liability each week by debiting payroll expense and crediting payroll liability. The liability goes away once the company hands the accountant a paycheck, resulting in a debit to the payroll liability and a credit to cash.
Companies report payroll expense on their income statements. This financial report lists all capital expenditures for the current accounting period in relation to the income earned during the same time. Payroll liabilities go on the company’s balance sheet. This account indicates the company owes employees money that remains unpaid. Companies will remove this liability in the subsequent month when it issues payroll checks.
Companies will also have payroll expense and liabilities for federal and state taxes. Companies must pay a portion of Social Security and Medicare taxes on every individual the business employs. These accounts work similarly to standard payroll accounts. Companies recognize the expense when they owe workers money and remove payroll tax liabilities when the business pays government tax authorities.