Quick answer: Payroll accounting is recording payroll in the books: the expense (gross salary and the employer's PF, ESI and other contributions), the liabilities (net salary payable, and PF, ESI, professional tax and TDS deducted or due from the employer but not yet paid over), the payments, and provisions for bonus, gratuity and leave. Each month the payroll register is posted to the general ledger, the payables are cleared as salaries and dues are paid, and the ledger is reconciled with the payroll, bank and challans.
Payroll is often the largest cost in a services business, yet it sometimes reaches the books as a single number with little detail. Done properly, payroll accounting tells you exactly what you owe employees and the government on any date, ties every rupee to a challan or bank payment, and produces the employee benefits figures for the financial statements. This guide covers the accounts used, how a month's payroll flows into the ledger, a worked example with journal entries at current rates, provisions, the month-end close and how payroll appears in the accounts. For how salary is worked out in the first place, see our payroll process guide.
What is payroll accounting?
Payroll accounting is the part of accounting that records the cost of employees and the amounts owed because of them. It answers three questions every month: how much did employees cost (expense), how much is still owed and to whom (liabilities), and has everything owed been paid on time (payments and reconciliation).
It is different from payroll processing, which calculates each employee's pay and deductions and pays them. Processing produces the payroll register; accounting turns the register into ledger entries and checks them against the bank and government challans. In a small business one person may do both; in larger ones payroll (HR or a provider) processes and finance accounts.
Payroll vs accounting
Payroll knowledge is about the law: wages, PF, ESI, professional tax, TDS, bonus and gratuity. Accounting knowledge is about recording: accruals, liabilities, provisions and presentation. Payroll accounting needs both, because a wrong payroll calculation becomes a wrong liability in the books, and a liability that is never cleared usually means a deposit was missed.
Why payroll accounting matters
Clean payroll accounts do three jobs. They show the true cost of people, including employer contributions and provisions, so that budgets and pricing are realistic. They prove that every amount deducted from employees reached the government on time, which is what inspectors and auditors check. And they give the tax auditor and statutory auditor the figures they need for employee costs, statutory dues and provisions without a scramble at year end.
Accounts used in payroll accounting
A typical Indian chart of accounts for payroll has three groups. Names vary between companies; what matters is that each statutory amount has its own account so it can be reconciled to its challan.
| Account | Type | What it holds |
|---|---|---|
| Salaries and wages (and bonus, incentives, overtime) | Expense | Gross pay for the month |
| Contribution to provident and other funds | Expense | Employer PF, pension (EPS), EDLI, PF administration charges, employer ESI (employer LWF is often in staff welfare) |
| Gratuity and leave encashment expense | Expense | Provision charge for the period |
| Staff welfare | Expense | Canteen, insurance premiums, events |
| Salary payable | Current liability | Net pay due to employees |
| PF payable (employee and employer) | Current liability | All PF amounts due to EPFO for the month |
| ESI payable | Current liability | Employee and employer ESI due to ESIC |
| Professional tax payable, LWF payable | Current liability | Amounts due to each state |
| TDS on salary payable | Current liability | Tax deducted, due to the government |
| Bonus payable | Current liability | Statutory and other bonus accrued, paid after the year end |
| Provision for gratuity, provision for leave encashment | Provision | Employee benefit obligations, current and non-current |
| Salary advance, loans to employees | Asset (current, or non-current if repayable after 12 months) | Amounts recoverable from employees |
Multi-state employers keep a separate professional tax and LWF payable for each state, and many companies split salary expense by department or cost centre so that the profit and loss shows where the cost sits.
How payroll flows into the books
- Payroll is processed: attendance, joiners, exits and revisions are applied, and the payroll register shows gross pay, each deduction, employer contributions and net pay for every employee.
- The register is posted: one summary journal for the month debits the expenses and credits salary payable and each statutory payable.
- Salaries are paid: the bank file is uploaded and salary payable is cleared.
- Dues are deposited: TDS by the 7th, PF and ESI by the 15th, professional tax and LWF by each state's date; each deposit clears its payable.
- Accounts are reconciled: every payable should come back to zero for the month, and the ledger should agree with the payroll register, bank statement and challans.
These are the five payroll steps from an accounting point of view. Our guide to payroll compliance sets out the due dates in full.
Worked example: one month's payroll
A company in Karnataka has three employees in October 2026. PF is paid on PF wages up to the ₹25,000 ceiling; only employee B is within the ESI limit; professional tax is ₹200 a month at ₹25,000 and above; employee C, under the old tax regime, has TDS of ₹2,500. All three are assumed to be EPS members, and ESI for B is worked out on gross pay, as many employers still do; the Labour Ministry's view is that ESI applies to wages as defined in the Codes, which would lower B's ESI (see our ESI guide).
| A | B | C | Total | |
|---|---|---|---|---|
| Gross salary | 30,000 | 18,000 | 60,000 | 1,08,000 |
| PF wages | 25,000 | 15,000 | 25,000 | 65,000 |
| Employee PF (12%) | 3,000 | 1,800 | 3,000 | 7,800 |
| Employee ESI (0.75%) | – | 135 | – | 135 |
| Professional tax | 200 | – | 200 | 400 |
| TDS | – | – | 2,500 | 2,500 |
| Net pay | 26,800 | 16,065 | 54,300 | 97,165 |
| Employer PF (12%: EPS + EPF) | 3,000 | 1,800 | 3,000 | 7,800 |
| EDLI (0.5%) | 125 | 75 | 125 | 325 |
| Employer ESI (3.25%) | – | 585 | – | 585 |
The employer's 12% splits into pension (EPS) of 8.33%, ₹2,083 each for A and C and ₹1,250 for B, with the balance to EPF (₹917, ₹550 and ₹917). PF rates are on the EPFO site and ESI rates on the ESIC contribution page. PF administration charges are 0.5% of PF wages, which here is ₹325, but the establishment minimum of ₹500 a month applies, so ₹500 is due.
Journal entry when payroll is processed (accrual)
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Salaries and wages | 1,08,000 | |
| Contribution to provident and other funds (7,800 + 325 + 500 + 585) | 9,210 | |
| To salary payable | 97,165 | |
| To PF payable (7,800 employee + 7,800 employer + 325 EDLI + 500 admin) | 16,425 | |
| To ESI payable (135 + 585) | 720 | |
| To professional tax payable | 400 | |
| To TDS on salary payable | 2,500 | |
| Total | 1,17,210 | 1,17,210 |
The employer's total cost for the month is ₹1,17,210: ₹1,08,000 of gross pay plus ₹9,210 of contributions. That is why cost to company is higher than gross; our guide to CTC explains the difference.
Journal entries when payments are made
| When | Debit | Credit | Amount (₹) |
|---|---|---|---|
| Salary credited (by 7 November) | Salary payable | Bank | 97,165 |
| TDS deposited (by 7 November) | TDS on salary payable | Bank | 2,500 |
| PF ECR paid (by 15 November) | PF payable | Bank | 16,425 |
| ESI paid (by 15 November) | ESI payable | Bank | 720 |
| Professional tax paid (by 20 November in Karnataka) | Professional tax payable | Bank | 400 |
After these entries every payable for October is nil. Anything left over is a missed or short deposit, a reversal that needs explaining, or a posting error. The EPF guide and ESI guide explain the contribution rules behind these numbers.
Other common payroll entries
A few other entries come up every month. A salary advance is an asset (debit salary advance, credit bank), and recovering it through payroll credits the advance, not salary expense, because the cost of the work done is unchanged. Reimbursements paid with salary are debited to the expense they relate to, such as travel or telephone. A pay revision agreed now, with arrears for past months, is a current-period cost: accrue it once approved, with PF and ESI on it; restating earlier periods applies only to errors. Gratuity paid by the company on exit is debited to the provision; where an insurer pays it from a funded scheme, the company debits the provision and credits the plan assets, with no bank entry.
Provisions: bonus, gratuity and leave
Some employee costs are earned every month but paid later, so accrual accounting requires a provision:
- Statutory bonus: payable within eight months of the year end but earned through the year, so many companies provide for it monthly at the expected rate (8.33% to 20% of bonus wages for eligible employees).
- Gratuity: payable at exit to eligible employees but earned with each year of service. Companies provide for it during the year and measure the year-end obligation actuarially under Ind AS 19 (or AS 15 for companies not on Ind AS), using the projected unit credit method. Many fund it through an insurer's group gratuity scheme. See our gratuity guide.
- Leave encashment: unused leave that can be carried forward or encashed is also an employee benefit obligation; leave expected to be used or paid within 12 months is measured without discounting, and longer-term leave actuarially.
The Labour Codes' wider definition of wages raised gratuity and leave obligations for many companies; in KPMG's review of 223 large listed companies' December 2025 quarter results, 104 showed the one-time impact as an exceptional item and 59 within employee benefits expense.
Month-end payroll close checklist
- Cut-off: post the month's payroll even if it is paid in the next month; accrue for any salaries, overtime or incentives earned but not yet processed.
- Reconcile gross to net: payroll register totals agree with the journal, and net pay agrees with the bank file and bank statement.
- Reconcile statutory payables: each payable agrees with its challan, ECR or return, and clears to nil after payment.
- Variance review: compare headcount, gross pay and each deduction with last month and explain every large change (joiners, exits, revisions, arrears).
- Advances and recoveries: loans and salary advances recovered through payroll reduce the asset account, not salary expense.
- Exits: full and final settlements are posted, including leave encashment and gratuity, against the provisions already made; see the full and final settlement guide.
- Provisions: update bonus, gratuity and leave provisions.
- Cost allocation: split the cost across departments, projects or cost centres if management reports need it.
Controls that keep payroll accounting clean
- Separate duties: the person who changes salary data should not be the one who approves the bank file or posts the journal.
- Approve before paying: a named approver signs off the payroll register and the bank file each month, with a variance report attached.
- Match the bank file to the register: account numbers and amounts in the bank upload should agree with the approved register line by line, which catches duplicate or fictitious employees.
- One ledger per payable: do not net PF against ESI or lump all deductions into one "statutory dues" account, or reconciliation becomes impossible.
- Keep the evidence: challans, ECRs, returns and approvals filed with the month's journal, as the compliance guide describes.
Tax timing for payroll costs
Income-tax rules decide when payroll costs are deductible for the employer, and the Income-tax Act, 2025 changed one of them:
- Employer's contributions to PF, ESI and other welfare funds are deductible in the year they accrue only if paid by the due date for filing the return; otherwise in the year of payment (section 37 of the Income-tax Act, 2025, earlier section 43B).
- Employees' contributions deducted from salary are included in the employer's income and deducted only if credited to the fund in time. Under the 1961 Act the deadline was the due date under the PF or ESI law, and the Supreme Court confirmed this strict reading in Checkmate Services (2022). Under section 29(1)(e) of the 2025 Act, as amended by the Finance Act, 2026, from tax year 2026-27 they are allowed if credited by the due date for filing the return (TaxGuru summary); the Delhi tribunal held in MI2C Business Enterprises (2026) that the relief does not apply to earlier years.
- Provisions: leave encashment is deductible only when paid (section 37), and a gratuity provision is generally deductible only when the gratuity is paid or contributed to an approved gratuity fund, so book provisions and tax deductions differ.
The relaxation is only for income tax. Interest and damages under the PF and ESI laws still apply to every late deposit, so the due dates in the payroll calendar still matter.
How payroll appears in the financial statements
Companies following Schedule III of the Companies Act show employee benefits expense as a separate line in the statement of profit and loss, with a note that typically splits it into salaries, wages and bonus; contribution to provident and other funds; gratuity and leave; share-based payments; and staff welfare. Under Division I (companies not on Ind AS), unpaid salaries and statutory dues appear under other current liabilities; under Division II (Ind AS), salary payable is usually shown under other current financial liabilities and statutory dues under other current liabilities. Gratuity and leave obligations appear under provisions, split between current and non-current. Both Ind AS 19 and AS 15 require disclosure of the actuarial assumptions, and Ind AS 19 also the movement in the defined benefit obligation; smaller companies under AS 15 can use simpler measurement.
Payroll accounting software and Tally
Most payroll software exports a journal file or posts directly to the accounting system, mapping each pay head and deduction to a ledger. Tally Prime has its own payroll module in which pay heads are linked to ledgers and payroll vouchers post the entries; many businesses instead run payroll elsewhere and import a single summary journal. Either way, keep the mapping of pay heads to ledgers documented and review it whenever a salary component is added.
Related reading: Payroll in India · Payroll process · Gross vs net salary · Professional tax guide
Run payroll and post it to the books in one workbook. The Complete Indian Payroll Excel Workbook calculates salary, PF, ESI, PT and TDS and produces the payroll register you post each month.
Frequently asked questions
What is the journal entry for payroll?
When salary for the month is processed, debit salaries and wages (gross pay) and the employer's contributions expense, and credit salary payable (net pay) and a payable account for each deduction and employer contribution: PF, ESI, professional tax and TDS. When salary and dues are paid, debit each payable account and credit bank.
Can a bookkeeper do payroll?
A bookkeeper can record payroll in the books, and in a small business often runs it too. Running payroll in India also needs knowledge of PF, ESI, professional tax, TDS and the Labour Codes, so many businesses use payroll software or a payroll provider for the calculations and let the bookkeeper or accountant post the journals and reconcile.
Which part of accounting is payroll?
Payroll sits in expense accounting and current liabilities. Gross pay and employer contributions are expenses, shown under employee benefits expense; amounts deducted but not yet paid over are current liabilities; and gratuity and leave encashment provisions are long-term or short-term provisions.
What are the three types of payroll?
The phrase is used loosely. It most often refers to three ways of running payroll: manually or in spreadsheets, with payroll software, or outsourced to a provider. It is also used for pay frequency (monthly, weekly, daily). In India most salaried staff are paid monthly, which is why the Labour Codes require monthly wages to be paid before the seventh day of the following month ends.
Is payroll accounting the same as payroll processing?
No. Payroll processing works out each employee's pay and deductions and pays them. Payroll accounting records the result in the books: the expense, the liabilities, the payments and the provisions, and reconciles them every month.
Who gets paid more, HR or accounting?
There is no general answer: pay depends on the role, level, city and industry, not the function alone. Payroll specialists sit between the two, and people who understand both payroll law and accounting are valuable to employers.
Position as of 14 November 2026. Based on the Labour Codes, the EPF and ESI contribution rules, the Income-tax Act, 2025, Schedule III of the Companies Act, 2013 and Ind AS 19 / AS 15. Figures are illustrative; your chart of accounts and policies may differ. General information, not legal or tax advice.