Once you have posted a pay run in Xero and paid your employees, you need to reconcile the general ledger. In this tutorial, we will use Xero’s demo company to reconcile the Wages Payable account after posting a pay run and making salary and wage payments to our employees.
The Pay Run Reconciliation Process in Xero
After you have processed a pay run in Xero, you need to make the following payments:
- Salaries and Wages to your employees.
- PAYG Withholding Tax to the Australian Tax Office (ATO).
- Superannuation to a clearing house.
When these payments appear in your bank account feed in Xero, you need to reconcile them to the appropriate general ledger accounts. This article provides a step-by-step guide on how to do this.
1. Pay Runs in Xero Payroll
First, we need to go to the right area of Xero to process a pay run:
- Go to Settings → Payroll in the main menu.
- Click on the Pay employees tab.
2. Post a Pay Run
Next, we need to post a pay run. Xero’s demo company should have a draft pay run ready to be posted, so go ahead and post it when you are ready. If you do not know how to post a pay run, see this guide for instructions.
Once you have a freshly posted pay run, click anywhere on its row in the Pay Run History section. For this exercise, I have clicked on the pay run that I just posted from the demo company’s draft pay run:
You should now see a screen that shows us details of the pay run and allows us to perform a few tasks via the buttons at the bottom of the screen:
3. Open the Bank Payments Report
Now it’s time to take a look at the salary and wage payments we’ll make to our employees. These payments are listed in the Bank Payments report. To open the report:
- Click on View Reports at the bottom of the screen.
- Then click on Bank Payments in the drop-down box.
This will open a report that shows us the payments we need to make to each employee. From this report, we can see that we need to make four payments totaling $4,862.25:
4. Make the Salary and Wage Payments
Next, we need to pay our employees from our bank account. The payment transactions will then flow into our bank feed. From there, we can reconcile the transactions to the general ledger. For this tutorial, we are going to process the four payments to our employees as a single Batch Payment instead of making four individual payments. To do this:
- Click on Pay Run Options at the bottom of the screen.
- Click on Download ABA from the drop-down list.
A batch file – called an ABA File in Xero – will download to your computer. When running your business’ payroll in real life, you would then upload the ABA file into your internet banking account to make the payments to your employees.
Because we are using the demo company for this tutorial, we will not make real payments from a bank account. This means the transactions will not automatically flow into our bank feed. Instead, we will pretend we have made the payments and upload the transactions into our bank feed manually.
To achieve this, I have used a CSV file to upload a transaction into the main bank account in Xero’s demo company that mimics the batch payment that would have been made in real life.
5. Reconcile the Transactions
Once the transaction for the batch payment appears in the bank account’s feed, we can reconcile it to the general ledger. To find the batch payment transaction, go to Accounting → Bank accounts and click on the main Business Bank Account link:
On the Reconcile tab, scroll through until you find the transaction for the batch payment. Once you have found the transaction, you need to reconcile it to the general ledger.
For this tutorial, we will do that by creating a general ledger transaction that will post to the Wages Payable account:
- Select the Create tab.
- Type Wages into the Who box.
- Select the 804 – Wages Payable – Payroll account in the What box.
- Type Batch Payment into the Why box.
Click on the OK button when ready. If everything is correct, the transaction should disappear as it is now reconciled.
6. PAYGW Tax and Superannuation Payments
The process for making and reconciling PAYG Withholding tax and superannuation payments is almost the same as for salary and wage payments. The main difference is that they are reconciled to different general ledger accounts:
- PAYGW Tax payments will most likely be reconciled to general ledger account 825 – PAYG Withholdings Payable.
- Superannuation payments will most likely be reconciled to general ledger account 826 – Superannuation Payable.