Expert: Shirley McAllister, CPP, PHR - 3/3/2010

Question
A payroll service does my company's payroll.  401K contributions are deducted from employees pay and sent directly to the investment company. When recording the payroll entry in our G/L the 401k contribution is recorded as a liability.  My company does not send any money to the investment company.  Does the 401k contribution continue to accumulate in our G/L, and when is it removed?

Answer
At some point the money has to be paid from a bank account to cover payroll. When this transaction takes place is when the adjusting entry is made.

My 401K account for employee's is

Credit 401K (when payroll is posted)
Debit  401K (When payroll is paid)

21165  401K                  CR  3500.00 (payroll processing, posting)
10200  Bank    DB 3500.00 (when payroll is paid)

If you do not pay payroll directly from a bank account you still have to pay the payroll service or someone the funds to cover payroll. When that transaction happens the 401K amount should be coded to the 401K.

Shirley