Calculating salaries is only half of payroll. The other half is recording them correctly in your books. Many small business owners calculate net pay, transfer the money, and leave the accounting for later. Then month-end arrives and the PF, TDS and salary numbers don’t match the bank statement.
This guide shows how to record payroll cleanly, with one worked example you can copy.
Why payroll accounting matters
- Accurate profit figures. Salaries and employer contributions are usually your biggest expense.
- Easy compliance. PF and TDS are liabilities. They sit in your books until you deposit them.
- Clean audits. Your accountant can trace every rupee from gross salary to bank payment.
Step 1: Set up the right accounts
Before you record anything, make sure your Chart of Accounts has these:
| Account | Type |
|---|---|
| Salary Expense | Expense |
| Employer PF Expense | Expense |
| Salary Payable | Liability |
| PF Payable | Liability |
| TDS Payable (Salary) | Liability |
| Bank | Asset |
If your accounting software lets you customize the Chart of Accounts, add any other deductions you handle, such as professional tax or ESI. Tools like Gimbla let you customize accounts this way, which helps if your payroll structure does not fit a default template.
Step 2: Calculate the monthly payroll
Use a payroll calculator to get the numbers first. You can use our salary calculator to work out gross pay, deductions and net pay for each employee. (Link this to your existing tool page.)
Here is a simple example for one employee:
- Gross salary: ₹40,000
- Employee PF (12% of a ₹15,000 PF wage): ₹1,800
- TDS on salary: ₹1,000
- Net pay: ₹37,200
- Employer PF contribution: ₹1,800
Step 3: Record the salary entry
At month-end, record the expense and the liabilities together:
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | ₹40,000 | |
| Employer PF Expense | ₹1,800 | |
| Salary Payable | ₹37,200 | |
| PF Payable (employee + employer) | ₹3,600 | |
| TDS Payable | ₹1,000 |
Debits and credits both total ₹41,800, so the entry balances.
Step 4: Record the payments
When you pay the employee:
| Account | Debit | Credit |
|---|---|---|
| Salary Payable | ₹37,200 | |
| Bank | ₹37,200 |
When you deposit PF (due by the 15th of the next month):
| Account | Debit | Credit |
|---|---|---|
| PF Payable | ₹3,600 | |
| Bank | ₹3,600 |
When you deposit TDS (due by the 7th of the next month):
| Account | Debit | Credit |
|---|---|---|
| TDS Payable | ₹1,000 | |
| Bank | ₹1,000 |
After these entries, all three payable accounts should be zero. If one is not, something was missed or paid incorrectly.
Step 5: Reconcile every month
Compare your payable balances against your payroll report and bank statement. A quick check:
- Does total net pay match the bank transfers?
- Does PF Payable equal employee plus employer contributions?
- Is TDS Payable equal to the amount deducted in the payroll report?
Choosing accounting software for payroll entries
You do not need complex software for a small team. Look for:
- A customizable Chart of Accounts
- Simple journal entries
- Clear financial reports
- Invoicing and payment integrations (for example, Stripe) if you also bill customers
When selecting accounting software, consider features such as ease of use, scalability, integrations, and compliance with local tax and accounting requirements. For very small businesses with straightforward finances, spreadsheets may still be a practical starting point.
Common mistakes to avoid
- Recording only net pay and ignoring the employer contribution
- Mixing employee and employer PF in one expense account
- Forgetting to clear payable accounts after deposit
- Skipping month-end reconciliation
Final thoughts
Good payroll accounting is repeatable. Calculate, record, pay, deposit and reconcile the same way every month, and compliance problems become much rarer. Start with our free payroll calculators for the numbers, then use the entries above to keep your books accurate.
This guide is for general information. Confirm PF, TDS and other statutory rules with your accountant or the latest government notifications.
