In payroll accounting, which amount should be used as the basis for the payroll expense entry on the income statement?

• A. Net pay
• B. Deductions
• C. Gross earnings
• D. Employer taxes

Answer: (C)

The amount used for the payroll expense on the income statement is the gross earnings. This reflects the employer’s cost of labor before any withholdings or employer-side taxes. Net pay is what employees actually receive after deductions, so it is not the expense the company incurs. Deductions are liabilities that go to third parties and don’t represent the employer’s cost. Employer taxes are additional costs the employer must pay, but the base expense for payroll starts with gross earnings, with employer taxes shown as a separate payroll tax expense or added to total labor cost as appropriate.