Accounting for Labour Costs

We will have an overview of accounting for labour costs.

  1. Gross Earnings

This is shown as item, A which appears as a credit in the wages account and as a debit in the wages analysis control. The gross earnings are analyzed to show the various deductions leaving net pay and also direct and indirect wages are charged to a range of account codes

  1. PAYE tax

Is show as item C which is credited to a PAYE tax account before being paid to the Kenya revenue Authority by the employer. Item X shows the payments from the bank account (credit) and the clearing of the PAYE tax account (Debit)

  1. National Hospital Insurance Fund (NHIF) Deductions

The employee’s national insurance deduction is credited to a national insurance account (Item D). In addition the employer makes a national insurance contribution for each employee. This is shown as item F, which is debited to an expense account and credited to the national insurance account. The total insurance (D+F) is then paid to the national Inland Revenue. Item Y shows the entries, which clear the national insurance account (Debit) and record bank payment (Credit). The employer’s national insurance is a business overhead expense.

  1. Other deductions

Includes such items as pension contributions and trade union subscriptions. The initial deductions from employees are credited in deductions account (Item E) before payment is made to the appropriate fund.

  1. Net pay

This is shown as item B which is the balancing figure in the wages account (debit) and when payment is made, it is shown in the bank account (credit)

  1. Direct Wages

Item T shows the credit to wages analysis control and the debit to job/product accounts. Individual accounts would be kept for each job or product in addition to overall control account.

  1. Indirect Wages

It is a simple analysis transaction which is debited to overhead expense account or departmental accounts