Payroll and the associated journal entries – Level 2 study tips

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As an AAT student you will have to analyse payroll transactions from the point of view of the Employer not the Employee

Receiving wages is a lot less complicated than actually paying them.  Why don’t we get paid our full gross wage into our bank account?  Where does some of our money go?

As part of the AAT Level 2 ‘Control Accounts, journals and the banking system’ assessment you will be expected to post the relevant entries for payroll into the journal.  Students should take a systematic approach to these questions and spend a little time preparing rather than jumping straight into the journal entries.

1. Before writing anything down, read the question thoroughly.  Remember that these questions are not set in stone in terms of the figures provided and variations do occur.

2. Remember that you are viewing these figures from the point of view of the Employer and as such we do not only pay the employee their share, there are also other parties who must be considered.

The following list is a good starting point for breaking down the payroll figures and deciding ‘Who gets paid what?’

  • The employee (receives their net wage)
  • HMRC (receives any income tax and national insurance contributions)
  • The pension providers (any deductions for pensions)
  • Any recipients of voluntary deductions (trade union, charities etc.)

Here is an example:


Gross Wages


Income Tax


Employee National Insurance


Employer National Insurance


Employee Pension Contributions


Employer Pension Contributions


Trade Union Fees


Using a systematic approach, you can break these figures down into

‘Who gets paid what?’

1. The employees will receive net wages of £39,350

This amount is calculated by subtracting any employee deductions from the gross wage.

Gross Wages – Income Tax – Employee N.I – Employee Pension – Trade Union Fees

£50,750 – £8,000 – £2,000 – £800 – £600 = £39,350

2. HMRC will receive £12,030

This amount is calculated by adding up any of the figures which will need to be paid to HMRC.

Income Tax + Employee N.I + Employer N.I

£8,000 + £2,000 + £2,030

3. Pension providers will receive £1,600

This amount is simply calculated by adding our 2 pension figures together

4. Trade union will receive £600

No calculation needed here, we have been given all the information we need


Now we have established how the payroll data is broken down in terms of ‘Who gets paid what?’ we can start to think about our journal entries.

Study tip: All payroll entries at this stage will involve the ‘Wages Control Account’ so a good approach would be to do this entry first in the journal.

1. Gross Wage Expense

This is probably the one journal entry which students ‘slip up’ on consistently.  In terms of Debit and Credit, think about that key word ‘Expense’, any expense is a debit entry in the general ledger and therefore the wages expense must be a debit entry in the journal.

The credit entry will be Wages Control Account and the actual amount of money we Dr & Cr is calculated by adding up all the payments we would make to the different parties previously calculated.

So:  £39,350 + £12,030 + £1,600 + £600 = £53,580

The journal entry

Wages Expense53,580


Wages Control53,580


Study tip: This entry is the only entry where wages control is credited; all other entries in the wages control account for the rest of the payroll transactions will be a debit.

Study tip: You can double check your wages expense figure by adding the gross wage amount with any Employer contributions.

(In this example £50,750 + £2,030 + £800 = £53,580)

2. Net Wages to employee

Money going out of the business bank account is a credit in the cash book and therefore this is the credit entry in the journal.  The debit entry in the journal will be ‘wages control’ as this account appears in all journal entries at this stage.

Study tip:  Do not be tempted into calling one of your accounts in the journal ‘net wages’ or ‘employee’ – the account is bank.

The journal entry

Wages Control39,350




3. HMRC Liability

In a similar way to Wages Expense, here we are asked for the journal entry for the ‘Liability’ to HMRC.  The date of payment to HMRC is likely to be later than the date that the payroll is run and the employees paid.

In the meantime we are recording that we owe HMRC money in the same way that we record any other outstanding billWe therefore can use our existing knowledge to establish that the HMRC liability is a credit entry.  The other account must be wages control as it is involved in all payroll entries at this point.  The amount has already been calculated in our original workings:  £12,030

The journal entry

Wages Control12,030


HMRC Liability12,030


4. Pensions and Voluntary Deductions

These are treated in the same way, both liabilities to be paid from the bank at a later date.  As they are liabilities we know they are credit entries in the journal.  We know that the ‘wages control’ is the debit entry for both.

The journal entries will therefore look like this:

Wages Control1,600


Pension Liability1,600


Wages Control600


Trade Union Liability600


Hopefully this has illustrated that by taking a little time to do some workings and break down the payroll figures at the beginning, you will be able to analyse payroll transactions tactfully. You can apply the same logic to any payroll question and with practice; it will become routine.

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Mathew Pickering is an AAT lecturer at The Sheffield College, part of the team which won Training Provider of the year (medium size provider) in 2015.

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