Payroll Accrual & Journal Entries

Department: Finance & Accounting Process Owner: Controller Last Updated: January 2026

1. Overview and Purpose

Objective: To define the month-end procedures for completing payroll-related journal entries, including recording bi-weekly payroll, calculating required accruals, handling corrections, adjusting for special pay items (holiday pay, PTO payouts), and tying payroll entries to grant allocations. This ensures payroll costs are recognized in the correct period and properly supported for grant billing and financial reporting.

2. Scope

This SOP applies to payroll-related accounting entries and reconciliations, including:

• Bi-weekly payroll journal entries based on payroll system results
• Month-end payroll accruals for unpaid workdays
• Allocation-related adjustments driven by the Master Allocation File (organization's allocation methodology)
• Corrections to payroll entries related to sensitive / unallowable time types
• PTO payout adjustments and holiday pay entries
• Accrual reversals

Payroll processing itself is governed by your organization's payroll processing SOP; this SOP focuses on month-end accounting.

3. Step-by-Step Process

3.1 Record Bi-Weekly Payroll Journal Entries

• Download bi-weekly payroll reports from your payroll system, including:
  • Payroll Summary
  • Payroll Register
  • Deduction / Garnishment Report
  • Allocation Detail
• Break down payroll by:
  • Wages
  • Employer taxes
  • Benefits
  • Grant allocations (from payroll system + Master Allocation File)
• Record journal entry:
  • Debit: Wage Expense accounts (by program / grant / class)
  • Debit: Employer Tax & Benefit Expense
  • Credit: Cash or Payroll Clearing
• Attach all payroll reports to the journal entry and save to your organization's document management system

Reviewer / Back-up: Accounting Supervisor

3.2 Incorporate Allocation and Sensitivity Adjustments

Validate Allocation Logic

• Compare payroll allocation outputs to the organization's allocation methodology/file
• Identify differences requiring correction:
  • Unexpected employee shifts between grants
  • Hours charged to grants beyond expected allocation
  • Misallocations from timecard corrections

Adjust for Sensitive / Unallowable Time Types

Examples: Mental health days, certain holiday hours, PTO rules that may vary by grant.

• Identify hours coded to grants that are not allowable under the grant agreement
• Remove or adjust portions of payroll expense that cannot be billed to grants
• Reclass these adjustments to unrestricted expense where appropriate
• Document rationale and save in payroll support folder

Corrected Timecards

• If employees or managers corrected timesheets after payroll was run:
  • Ensure corrected entries have manager re-approval
  • Post journal entry adjustments to reflect corrected allocation distributions

Reviewer / Back-up: Senior Accountant

3.3 Calculate Month-End Payroll Accrual

If payroll does not end on the last day of the month:

Calculate Unpaid Days

• Determine number of unpaid days in the current period
• For each employee:
  • Multiply daily rate × unpaid days
  • Apply taxes / benefits as applicable
  • Split cost by grant allocation (using organizational allocation methodology unless actual time is available)

Prepare Accrual Entry

• Journal entry format:
  • Debit: Wage Expense (split by grant / class/ program)
  • Debit: Tax / Benefit Expense
  • Credit: Accrued Payroll Liability

Document the Accrual Calculation

• Save to your organization's document management system in the appropriate month-end close folder
• Include:
  • Employee-level detail
  • Allocation logic
  • Any sensitive-time or grant allowability adjustments

Reviewer / Back-up: Senior Accountant

3.4 Process Special Payroll Adjustments

Holiday Pay for Part-Time Employees

• Determine eligibility and hours owed
• Confirm correct classification (grant-allowable or not)
• Adjust accrual or payroll journal entry accordingly

PTO Payouts Under Organizational PTO Policy

• For eligible employee categories:
  • Calculate payout amount
  • Confirm tax and benefit impact
  • Classify cost correctly (typically unrestricted unless grant explicitly allows leave payouts)

Reviewer / Back-up: Controller

3.5 Reverse Prior Month's Accrual

• Reverse accrual journal entry on the first day of the following month
• Reference original accrual journal entry in memo line
• Confirm reversal appears correctly in accounting system

Reviewer / Back-up: Accounting Coordinator

3.6 Reconcile Payroll Journal Entry Activity to Cash & Payroll System

• Confirm payroll-related cash movement equals payroll clearing account reduction
• Reconcile payroll journal entries to payroll system reports and allocation summary
• Investigate variances between:
  • Payroll journal entry wage totals
  • Allocation file totals
  • Payroll system allocation summaries

Reviewer / Back-up: Controller

4. Key Roles and Responsibilities

5. Key Files and Systems

• Payroll System Summary & Register
• Organizational Allocation Methodology / File
• Payroll Accrual Calculation Sheet
• Payroll Allocation Summary
• Document Management System – Payroll Folder
• Accounting System Journal Entry Module

6. Exceptions & Special Cases

• Grant-Ineligible Time - (e.g., mental health day, training hours) must be removed before final journal entry
• Special PTO payouts - Require leadership approval
• Employee corrections after payroll close - May require separate journal entries and documentation
• Multi-grant employees - May require manual allocation adjustments if timecard entries differ from allocation file

7. Risk & Control Summary