Our recommended approach for handling payroll integration with Xero is to use Accounts Payable invoices. The following example will step through how this works and explains in detail the resulting Profit and Loss and Balance Sheet figures.
Consider the following fictitious example of a UK pay run.
We have wages of £2500 and National Insurance of £259.07 The total expense to the business is £2759.07
The employer may need to make other contributions and deductions from their employees pays before paying their staff (net pay). These amounts can be reflected on an Accounts Payable invoice as required.
Once this Accounts Payable invoice is approved we can see on our Profit and Loss the wage expense and employer national insurance are correctly shown for the period.
Looking at the Balance sheet before the payments to the employees have been reconciled we see the outstanding employee net pay is shown in the accounts payable total.
Once the payments to the employees for their net pay have been made and the Cheque Account has been reconciled the Accounts Payable liability reduces by the full amount of the net pay, leaving just the the NIC Payable and PAYE Payable.
In the case that there is an outstanding amount (e.g. an employee hasn't banked a wage cheque) on an accounts payable invoice at the end of a period you can pay the invoice off by using a clearing account. e.g. the Salaries Liability account
To do this you'll need to go into the Chart of Accounts and make sure this account has "Enable payments to this account" selected.
In Xero, go to Settings > Chart of Accounts > Liabilities and select the account you wish to use for this. Select the "enable payments to this account checkbox".
Once this account is setup you can go to the invoice and make a payment from your chosen liability account / clearing / holding account.
The resulting balance sheet shows the liability now moved to the salaries liability account.
The example shown is of a generic nature and your payroll solution may identify different lines. The same theory is applied to any regions payroll integration requirements.
Payroll systems usually create a general journal that can be imported to an accounting system - why doesn't Xero support this?
We have tried to reduce the need for anyone to create general journals in Xero. General journals in Xero cannot be posted to a bank account and a collection of system accounts (e.g. Accounts Payable).
How can I make it easy for my clients to post payroll journals?
You can import payroll journals using an accounts payable invoice in Xero. The detailed example above shows this has the same effect as a general journal.
How is posting an accounts payable invoice different to posting a general journal?
An approved accounts payable invoice has a resulting journal so all we are doing here is interpreting and presenting the same data that you present on the general journal for import to the accounting system in an easier way for our customers using Xero.
The accounts payable invoice value is equal to the net pay, the accounts payable lines identify the various debits and credits - much the same as you would identify on the general journal. The Account/GL/Nominal codes that are used within the accounts payable invoice are specified in the payroll system much the same as creating a general journal.
How can I interpret the payable entry to be made from the journal created by the payroll system now?
It's quite simple - the journal debits are represented as positive line values and the credits presented as negative line values on the accounts payable invoice. The net pay is the value of the payable and is not explicitly presented as a line on the accounts payable invoice.