Reconciliation in accounting entails comparing two records of a transaction or other financial activity to ensure that they agree. Reconciliation is intended to identify errors, oversights and discrepancies and to ensure the accuracy of a company’s books. Payroll reconciliation then is the process of comparing information regarding employee compensation to ensure its accuracy.

Defining Payroll

Payroll is generally defined as the process of compensating employees for their services. But the payroll process involves more than handing out checks based on salary or hourly wages. It involves the entire process of calculating gross compensation, withholding taxes and other deductions, accounting for benefits due the employee, issuing a paystub that details how the final net amount was arrived at and, as is normally the case today, performing direct deposit of the net amount into the employee’s bank account.

Payroll reconciliation ensures that the employee’s compensation is correct and that it is paid on time. Payroll reconciliation also helps ensure financial statements regarding the company’s overall health are accurate and it helps ensure regulatory compliance and accurate tax filings.

Typical Payroll Reconciliation Process

Although the exact process may vary somewhat from business to business the following steps are a fair representation of the payroll reconciliation process.

Step 1: Check the payroll register

The payroll register contains details about employee payroll during a given pay period. This includes basic information such as names, departments, employee numbers and more. The register should also include the date of the pay period, the hours worked by each employee, their pay rate, benefits, deductions and gross and net pay.

When reviewing the payroll register, keep an eye open for incongruous entries, such as an unusually large number of hours worked, a change in departments, an increase in hourly rate, etc.

Step 2: Approve timesheets

The next step in the reconciliation process is to review and approve employee timesheets checking to see if the scheduled time matches worked time. While reviewing timesheets, it is important to make note of time off whether paid or unpaid, scheduled or unscheduled.

Note: most companies today use payroll software that saves a lot of time when compared to manually reconciling paper timesheets or Excel sheets.

Step 3: Check pay rates

The next step in the payroll reconciliation process is to check pay rates for employees. Pay rates apply to both salaried employees and those who are compensated hourly. Things to look for during this part of the reconciliation process include whether an employee received a raise in pay, whether any shift premiums apply, and whether any employees worked overtime. If so, it is important to go back and make sure these things are accounted for in the payroll register.

Step 4: Check deductions

This involves making sure that income taxes and any other applicable deductions are correctly accounted for and withheld from the employee’s paycheck. Typical statutory deductions include income tax deduction, insurance or other benefit contributions, 401K or pensions contributions, and more. Depending on the organization there may be other deductions. It is often suggested to check deductions with each pay run rather than waiting for end of the month payroll reconciliation.

Step 5: Submit your payroll

Once all payroll data has been double-checked it is time to submit your payroll. At this point, whether you issue physical paychecks or you pay via direct deposit you should feel confident that compensation is correct for each employee and that all information included on employee paystubs is accurate.

Step 6: Enter in the general ledger

The last step in the payroll reconciliation process is to record payroll in your company’s general ledger. Within the general ledger financial transactions are organized into assets, liabilities, capital, revenue and expenses. Employee wages are treated as an expense with deductions being treated as credits.

Conclusion

Payroll reconciliation adds a step to the payroll process, but it is considered worth the time and trouble because it helps prevent payroll issues that can cause friction, ensure the overall accuracy of a company’s books, and facilitate a smooth financial reconciliation process. However, conducting financial reconciliation manually can be a very labor-intensive process, which is why so many companies are choosing to simplify things with Trintech financial reconciliation software.