Most businesses pay their employees by check or by direct deposit. By using these methods, the business avoids the inconvenience and risk involved in dealing with currency.

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Payroll Liabilities
Deductions from employee paychecks are liabilities for the employer.

Paying by Check

Paychecks may be written on the firm’s regular checking account or on a payroll bank account. The check stub shows information about the employee’s gross earnings, deductions, and net pay. Employees detach the stubs and keep them as a record of their payroll data. The check number is entered in the Check Number column of the payroll register (Figure 10.3, Column R). The canceled check provides a record of the payment, and the employee’s endorsement serves as a receipt. Following is an analysis of the transaction to pay Kent Furniture and Novelty Company’s employees.

Checks Written on Regular Checking Account The above entry is shown in general journal form for illustration purposes only. When paychecks are written on the regular checking account, the entries are recorded in the cash payments journal. Figure 10.4 shows the January 8 entries to pay employees. Notice that there is a separate Salaries and Wages Payable Debit column.

Checks Written on a Separate Payroll Account Many businesses write payroll checks from a separate payroll bank account. This is a two-step process.

1. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account.
2. Individual payroll checks are issued from the payroll bank account.

FIGURE 10.4   Cash Payments Journal

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Separate Payroll Account
Using a separate payroll account facilitates the bank reconciliation and provides better internal control.

Using a separate payroll account simplifies the bank reconciliation of the regular checking account and makes it easier to identify outstanding payroll checks.

PAYING BY DIRECT DEPOSIT

A popular method of paying employees is the direct deposit method. The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday the employee receives a statement showing gross earnings, deductions, and net pay.