Accounting and Journal Entry for Salary Paid

Journal Entry for Salary Paid

Salary is an indirect expense incurred by every organization with employees. It is paid as a consideration for the efforts undertaken by the employees for the business. Salary expense is recorded in the books of accounts with a journal entry for salary paid.

Salary is among the most recurring transactions and paid on a periodical basis. The amount of salary payable by the employer to the employee is specified in the employment contract.

 

Journal entry for salary paid (in cash/cheque)

Salary paid journal entry

Accounting rules applied – Modern Rules

Salary Account Debit Debit the increase in expense
Cash/Bank Account Credit Credit the decrease in asset

Accounting rules applied – Three Golden Rules

Salary Account Debit Debit all expenses – Nominal A/C
Cash/Bank Account Credit Credit what goes out – Real A/C

 

Accounting Treatment for Salary Payment

The life cycle to account for payment of salary expense (in cash/cheque) goes through a couple of steps as shown below;

Step 1 – Journal entry for salary paid (in cash/cheque)

Salary A/C Debit
 To Cash/Bank A/C Credit

 

Step 2 – Transferring salary expense into income statement (profit and loss account).

Income Statement Debit
 To Salary A/C Credit

 

Presentation in the Financial Statements

It is shown on the debit side of an income statement (profit and loss account)

Salary expense in P&L

 

Example

On the last day of every month, Unreal Corporation pays salaries to its employees amounting to 250,000. The payment relates to the salary due for the same month. Show related journal entries for salary paid in the books of Unreal Corporation.

End of every month – Journal entry at the time of payment of salary

Salary A/c 250,000
 To Cash/Bank A/c  250,000

 

End of every month/year – When the business posts closing entries

Income Statement 250,000
 To Salary A/c  250,000

 

Journal Entry for Salary Paid in Advance

Salary paid in advance is also known as prepaid salary (it is a prepaid expense). It is the amount of salary paid by an entity in advance but the corresponding work-effort equivalent to the advance salary paid is yet to be received from the employee. The money paid relates to a future accounting period.

It is presented as a current asset in the balance sheet, as it is an advance payment made by the firm.

 

Journal Entry

Prepaid Salary A/C Debit Debit the increase in asset
 To Salary A/C Credit Credit the decrease in expense

(Being salary paid in advance/ prepaid salary adjusted at the end of the period)

 

Example On 31st March ABC Co. paid salary amounting to 45,000 (15,000 x 3) for the month of March, April & May to one of its employees. Show journal entries to be posted in the books of ABC Co.

March 31 – Journal entry at the time of payment of salary.

Salary A/c 45,000
 To Cash/Bank A/c  45,000

 

March 31 – Journal entry for adjustment of prepaid salary (for April & May) at the end of March.

Prepaid Salary A/c 30,000
 To Salary A/c  30,000

 

April 1 & May 1 – Journal entry for salary obligation charged against the salary paid in advance.

Salary A/c 15,000
 To Prepaid Salary A/c  15,000

Related Topic – Inflation Accounting

 

Journal Entry for Salary to Partners

Salary is paid to the partners of the partnership firm only if it is specified in the partnership deed.

 

Journal Entry

The following are the steps to record the journal entry for salary to partners.

Step 1 – Journal entry for salary due.

Partner’s Salary A/C Debit
 To Partner’s Capital/Current A/C Credit

Partner’s Capital A/c to be credited if capitals are fluctuating.
Partner’s Current A/c to be credited if capitals are fixed in nature.

 

Step 2 – Transferring partners salary to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/C Debit
 To Partner’s Salary A/C Credit

Salary to partners is an appropriation of profits, therefore Profit & Loss Appropriation A/c is debited.

 

Step 3 – Journal entry at the time of payment of salary to partners

Partner’s Capital/Current A/C Debit
 To Cash/Bank A/C Credit

 

Example A & B are partners of AB Ltd. As per the terms of the partnership deed, they are allowed a monthly salary of 25,000 each. Assume partner’s capitals are fluctuating. Show related journal entries to be posted in the books of AB Ltd.

End of each month – Journal entry for salary due by crediting the partner’s salary to the partner’s capital account

Partner’s Salary A/c 50,000
 To A’s Capital A/c  25,000
 To B’s Capital A/c  25,000

 

End of each month/year – Journal entry for transferring partners salary to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/c 50,000
 To Partner’s Salary A/c  50,000

 

On the date of payment – Journal entry for payment of salary to partners

A’s Capital A/c 25,000
B’s Capital A/c 25,000
 To Cash/Bank A/c  50,000

 

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