Reconciling the Payroll Register to the General Ledger
If the payroll register and the ledger have never been reconciled, at least one of them is wrong and you do not yet know which.
Payroll is usually the largest expense in a company of this size and it is reliably the least reviewed. That combination is not an accident. It is a consequence of how payroll gets into the ledger: a provider produces a register, software posts a journal from it through a mapping somebody configured once, and the resulting figure looks right every month because it is large, stable and roughly what everyone expected.
What most companies call reconciling payroll is checking that the bank debit agrees to the net pay total. That is worth doing and it proves one thing only, which is that the correct amount of money left the account. It says nothing about whether the expense landed in the right accounts, whether the liabilities created by the run are complete, or whether the balance sitting in the payroll liability account tonight is a real obligation or a residue of four years of small mapping errors.
The full reconciliation takes ten minutes once it has been built. It is the highest return ten minutes in the close, and the reason is arithmetic rather than principle: an error rate that would be trivial on any other line is not trivial on the largest one.
What this reconciliation proves, and what it does not
Stated first, because the distinction is the whole basis on which the rest of the piece is safe to follow.
This reconciliation proves that the register and the ledger agree. It proves that every dollar of cost the register generated has landed somewhere in the accounts, that the split between expense, liability and cash is faithful to the register, and that the clearing account nets to nothing.
It does not prove that the register itself is correct. Whether the amounts withheld are the right amounts, whether the employer portions are right, whether the company’s remitting position is what it thinks it is, and when anything has to be sent are questions of a completely different kind. They are answered against the facts of a specific company by the accountant who prepares its returns, and nothing on this page is guidance on any of them. A reconciliation that ties perfectly against a register that is wrong is a tidy record of a problem, and it is worth knowing which of the two things you have.
Every figure below is illustrative. No rate, proportion, threshold or obligation should be inferred from any of them, and none is intended: they exist so that the arithmetic of the method is followable.
The identity underneath it
One line, and everything else in this piece is a way of testing it.
Gross pay plus employer cost equals net pay plus every liability the run created.
The left side is what the run cost the company. The right side is where that cost went: some of it out of the bank this week, the rest owed to somebody and sitting on the balance sheet until it is paid. Nothing else can happen to it. If the two sides do not agree, a cost has either been recorded twice or has gone missing, and both are worth ten minutes.
Route every run through a clearing account
This is a design decision and it should be made before the first reconciliation rather than after the third failed one.
Post the payroll journal to a payroll clearing account rather than directly to the bank. The bank debit, when it lands, clears that account. The clearing account is then a standing test: it should be nil at every month end, and any balance in it is either a run that has not yet been debited, which is a timing item with a known date, or an error, which is not.
Posting straight to the bank collapses that test into the bank reconciliation, where a payroll error looks exactly like an unpresented item and is treated as one. The clearing account costs nothing to create and it converts a class of silent errors into a visible balance.
One run, worked through
A semi-monthly run. Illustrative figures.
| Line on the register | Amount |
|---|---|
| Gross pay | 240,000 |
| Employee deductions withheld, all types in total | (68,000) |
| Net pay to employees | 172,000 |
| Employer costs remitted alongside the withholdings | 15,000 |
| Employer benefit plan premiums, payable to the plan provider | 6,000 |
| Total cost of the run to the company | 261,000 |
The deductions and employer amounts are shown in total on purpose. Their composition is a matter for the register and for the company’s accountant, and the reconciliation does not need it broken down to work.
The journal that should exist:
| Account | Debit | Credit |
|---|---|---|
| Salaries and wages expense | 240,000 | |
| Employer payroll costs expense | 21,000 | |
| Payroll liabilities, statutory | 83,000 | |
| Benefit plan payable | 6,000 | |
| Payroll clearing | 172,000 | |
| 261,000 | 261,000 |
The statutory liability of 83,000 is the 68,000 withheld from employees plus the 15,000 of employer cost that travels with it. The employer costs expense of 21,000 is that 15,000 plus the 6,000 of plan premiums.
Then the bank debit, when it lands: payroll clearing debited 172,000, bank credited 172,000. Clearing is back to nil, which is the point of it existing.
Check the identity. Gross of 240,000 plus employer cost of 21,000 is 261,000. Net pay of 172,000 plus liabilities of 89,000 is 261,000. Agreed, so every dollar the run generated is accounted for.
The liability account across a month
The single run above proves the journal. The month-level test is the roll-forward of the liability account, and it is the one that finds the errors that have been accumulating.
Two runs in the month, and amounts remitted during the month on whatever schedule applies to the company. Illustrative again.
| Movement | Amount |
|---|---|
| Opening balance | 79,500 |
| Charged by the first run | 83,000 |
| Charged by the second run | 84,200 |
| Remitted during the month | (162,500) |
| Closing balance | 84,200 |
Now the test that makes the roll-forward worth doing, and it is not that the arithmetic works. Arithmetic always works.
The closing balance must be identifiable as a specific, nameable set of unremitted amounts. Here it is exactly the second run’s charge of 84,200, which is a sentence somebody can write and somebody else can check. A closing balance that cannot be described that way, that is a residual left over after the movements, is a drifted account, and the difference between it and the nameable figure is the accumulated error.
Do that test in the first month of an engagement on a file nobody has reconciled. The difference is frequently small enough to have been ignored every month and large enough to matter once, and it will have a date of origin that explains it.
What the register does not prove, and needs its own schedule
Three balances sit in the payroll area of the balance sheet and do not come off the register at all. Reconciling the register and stopping there leaves them unexamined, which is how they become the year end problem.
| Balance | Where it actually comes from | The failure |
|---|---|---|
| Vacation and time-off accrual | A schedule of entitlement earned against time taken, per employee | Left static for months, then adjusted once a year by a figure nobody can support |
| Commission and bonus accrual | The plan document and the results the plan is measured on | Accrued at the amount last paid rather than the amount currently earned |
| Benefit plan payable | The provider’s invoice, agreed to what the run charged | Both the accrual and the invoice expensed, so the cost appears twice and the liability never clears |
The last row is the most common double count in payroll and it is easy to test. Compare the movement in the benefit plan payable against the provider’s invoices for the same period. If the account is not clearing, the invoice is probably being posted to expense as well as against the accrual.
When the reconciliation breaks, work it in this order
The causes are not evenly distributed, so the sequence is by frequency rather than by severity.
- A pay code posted to an unexpected account. New codes get added for a bonus, a stipend, a reimbursement, and the mapping defaults somewhere. Compare the account distribution of this run to the last one and look for accounts that are new or missing.
- An off-cycle run posted by hand. Off-cycle runs frequently bypass the standard journal and get entered manually, in a different shape. Any month with an off-cycle run should be checked here first.
- A manual journal into the payroll liability account. Anything posted to that account whose source is not the payroll journal is worth reading in full. It is usually a well intentioned correction that has now been made twice.
- The clearing account not clearing. Establish first whether it is timing, meaning a run debited after the period end with a date you can point to, or an error. Do not accept “it will clear next month” without the date.
- A run posted net. Deductions netted into wages expense rather than credited to the liability. Understates both the expense and the liability by the same figure, so the balance sheet still balances and the identity above is the only thing that catches it.
- An employer cost recorded in a different period from the run that caused it. Usually a plan invoice posted on receipt rather than matched to the period, which is a cut-off error rather than a payroll error.
- A reimbursement or a deduction that is not really payroll travelling through the run. Equipment purchases, salary advances, recoveries. These belong somewhere other than wages expense and they need their own accounts, or they will distort the expense line permanently.
Record the cause each month in a line. After a few months the recurring cause is visible, and it is nearly always a mapping problem rather than a person problem, which means it is fixable once rather than caught repeatedly.
The ten minute version
If a company cannot yet run the whole thing every month, run this, which is the part with the return in it.
- Total gross on the register, agreed to the wages expense accounts for the period. One figure against one figure.
- Total net on the register, agreed to what actually left the bank.
- The clearing account balance, which should be nil or a timing item with a date.
- The liability closing balance, described in a sentence as a specific set of unremitted amounts.
Four checks. Anything that does not agree becomes an item on the open list with an owner, and the full reconciliation gets built the following month, because a company that fails one of these four has more than one month of accumulated difference waiting.
Who does it, and what gets filed
The preparer performs the reconciliation and the reviewer checks it, and the reviewer is not the person who prepared the payroll run, for the same reason the approval gate before submission is not signed by the preparer. The design of that separation, and who is permitted to add an employee or change a deposit instruction, belongs to the financial controls work rather than to this reconciliation.
Filed each period, in one place: the register for every run, the journal as posted, the reconciliation with its four checks, the liability roll-forward with the closing balance described in words, the clearing account balance with its explanation, and the remittance confirmations. When somebody outside the company asks about payroll, which they eventually will, this folder is the answer and assembling it afterwards from a year of email is several days of work.
Where the reconciliation sits in the sequence is fixed rather than flexible: it happens after the final register for the period is available and before the balance sheet review, which is how it is placed in the close we run. A payroll difference discovered during the balance sheet review is discovered too late to investigate properly, and what happens then is that it gets posted to an expense account and forgotten.
What we do not do
We do not check whether the amounts withheld on the register are the right amounts, because that is not what this reconciliation is and the question belongs to the company’s accountant. We do not clear a difference to an expense account to make the period close, since a difference absorbed once is a difference that will recur unexplained. We do not post payroll directly to the bank. And we do not accept an unexplained balance in a payroll liability account on the grounds that it has been there for years, because length of tenure is the argument for investigating a balance rather than against it.