Payroll Reconciliation: How to match HR records with accounts and the bank?
Payroll Reconciliation: How to Match HR Records with Accounting and Bank Statements?
Payroll reconciliation is not just a “post-event” step for the accountant; it is a safety valve that prevents erroneous payments and uncovers discrepancies before they turn into disputes or audit findings. To understand the full payroll cycle (before and during reconciliation): Your essential reference: Payroll Accounting.
- What is Payroll Reconciliation and why is it a core part of a Payroll Review.
- Triple Reconciliation: Register ↔ GL ↔ Bank/Transfer + How to document it.
- How to detect and interpret variances (Cut-offs, retroactive adjustments, deductions, etc.) instead of just “patching” them.
- When you need additional reconciliation with Social Insurance/WPS files, and how to build a consistent Checklist.
1) What is Payroll Reconciliation?
Payroll Reconciliation is a monthly verification process ensuring that: What was calculated in the payroll register matches what was recorded in the accounting entries and matches what was actually paid via the bank. This is the heart of Payroll Settlement and Payroll Review.
2) Triple Reconciliation: Register ↔ GL ↔ Bank
Instead of scattered checks, adopt the following “Reconciliation Triangle” as a fixed framework: (1) Approved Register, (2) General Ledger (GL), (3) Bank Statement/Transfer File. Every side has evidence, and every variance has an explanation.
Account Reconciliations Pack: AR/AP/Bank/Payroll/FA - Excel Files
3) Required Data Before Starting
The most common reason for failed reconciliation is “weak data.” Before you begin matching the register with the GL and Bank, prepare the following monthly file:
3.1 HR File (Master + Changes)
- Employee List with (ID/Bank/IBAN/Role/Cost Center).
- Change Log: Hire/Termination/Promotion/Salary Change/Allowances—with effective dates.
- Attendance & Leave + Absences + Overtime (if applicable).
3.2 Payroll Pack
- Approved Payroll Register (Gross + Deductions + Net) + Summary totals for each item.
- Deductions Report separately: (Social Insurance/Taxes/Loans/Penalties/Others) for component-level matching.
- Bank Transfer File (Net) + Rejection/Return status.
4) Monthly Payroll Reconciliation Steps (Workflow)
These are practical steps you can adopt as a Standard Operating Procedure (SOP). To see the “payroll journey” before the reconciliation stage: You may also like: Payroll Register.
| Stage | What to Match? | Evidence | Owner |
|---|---|---|---|
| Pre-Approval | HR Changes + Attendance + Variable Items | Change Log + Attendance Report | HR |
| Upon Approval | Total Items + Outlier Tests | Payroll Summary + Variance vs Prior Month | Payroll/Finance |
| Post-Entry | Register ↔ Payroll Journal Entry (GL) | JE + GL Extract + Tie-out Sheet | Finance |
| Post-Transfer | Net Pay ↔ Transfer File / Bank Statement | Bank File + Bank Statement + Rejections | Treasury |
| Month Closing | Deduction Liabilities ↔ GL Balances | Liabilities Rollforward + Supporting Schedules | Finance |
5) Reconciling Bank Statements & Transfers
Bank Statement Reconciliation for payroll starts with “Net Pay,” not Gross. The goal is to ensure that: Net from Register = Amount Transferred ± Rejected/Returned/Held.
5.1 Practical Equation for Variance Explanation
Approved Net Payroll (Register)
− Rejected/Returned Transfers
− Suspended Employees / Payment Holds
± Bank Account Corrections
= Total Amount to appear as Executed in Bank
6) Reconciling Accounting Entries (GL Tie-out)
Here we prove that the “Register” was accurately reflected in the books. Your company may record a Gross entry or a Net entry with detailed deductions. Either way, a clear Tie-out is required:
| Payroll Element | Where it appears in GL? | Account Type | Audit Note |
|---|---|---|---|
| Gross Salaries/Wages | Payroll Expense (by Cost Center) | Expense | Verify distribution across departments/projects |
| Net Salaries | Accrued Payroll / Clearing / Bank | Liability/Asset | Ensure Cut-off (Accrual vs Payment entry) |
| Deductions | Liabilities (Insurance/Taxes/Loans) | Liability | Monthly Rollforward of liabilities is required |
7) Reconciling Deductions & Social Insurance (Reconciliation by Component)
The best way to reduce variances is “Component Matching”: Instead of matching one giant number, match each liability separately: Social Insurance, Taxes, Loans, Penalties, etc. This makes Payroll Settlement fast and accurate.
| Item | Equation | Why it matters? |
|---|---|---|
| Opening Balance | Previous Month’s Closing | Prevents “forgetting” old variances |
| Accrued for Month | From Approved Register | Links the Register to the Books |
| Payments/Adjustments | Payment to Agency / Loan deduction | Links Liability to the Bank |
| Closing Balance | Opening + Accrued − Paid | Must equal the GL balance |
8) Reconciling WPS Files & Mudad (If applicable)
In some environments (e.g., Saudi Arabia), an extra reconciliation path appears: Wage Protection System (WPS) files and uploading to Mudad. Here, there are two goals:
- The WPS file is built on the Approved Payroll Register (not a different version).
- What was uploaded/accepted matches the Bank Transfer and Net Pay.
9) Variance Analysis: “Explain” Before You “Settle”
The biggest mistake in Payroll Reconciliation is recording an adjustment entry without explanation. Variances usually fall into 5 families:
| Variance Type | Examples | Diagnostic Question | Required Document |
|---|---|---|---|
| Cut-off | New hire/Leaver mid-month | Is the effective date correct? | Hiring/Termination Action + Day count |
| Retroactive | Prior months’ differences | Is the adjustment documented? | Memo + Variance Calculation |
| Bank/Transfer | Rejected/Returned transfer | Is there a Rejection List? | Bank Rejection Report |
| GL Entry | Duplicate entry / Wrong account | Does the Tie-out pinpoint the account? | JE + GL Extract |
10) Internal Controls & Audit-Ready File
The quality of a Payroll Review isn’t just about math; it’s about governance: Who changes employee master data? Who approves the register? Who generates the transfer file? Who records the entry?
| Area | Control | Outcome |
|---|---|---|
| Master Data | Limited access + Change Log | Proof of every change and approval |
| Approval | Formal sign-off + Monthly Variance | Approved Register + Variance Report |
| Posting | Standard JE + Tie-out + Liability review | JE + Tie-out + Rollforward |
12) Frequently Asked Questions
What is Payroll Reconciliation?
It is a monthly verification process linking the approved payroll register with HR data, accounting entries, and bank transfers/WPS to ensure what was calculated = recorded = paid.
What is Triple Payroll Reconciliation?
Matching 3 sources: (Payroll Register) ↔ (GL) ↔ (Bank/Transfer). Any variance is analyzed and documented (Cut-offs, retro-adjustments, bank rejections, etc.).
What are the most common causes of variances?
Undocumented data changes, retroactive adjustments, cut-off differences, wrong allowance classification, bank rejections, or duplicate GL entries.
13) Conclusion & Next Step
Successful Payroll Reconciliation = (Approved Register + Clear Entry + Documented Bank) with evidence-based variance analysis. When you make reconciliation a fixed monthly process, you move from “chasing errors” to a “control system” that prevents errors at the source.