Topic Overview
- Provident Fund is the contributory investment fund where both employees and employer contributes
- Employee’s contribution is deducted from their salary
- Employer’s contribution is treated as expenses of the company
- Provident Fund A/c to be maintained separately & company cannot use this fund.
- Interest earned from PF A/c is also credited to the employee’s account.
What is Provident Fund?
A Provident Fund is one type of investment that is jointly established by the employer and the employee. The purpose of this fund is to create a long-term savings A/c to support an employee upon retirement. It also represents job welfare benefits offered to the employee.
Sources of money invested in the provident fund:
Employees Contribution: Deducted from the employee’s monthly salary
Employer’s Contribution: Employer’s contribution considered as the expenses of the business.
Journal Entry for Employer’s Contribution
When an employer contributes to a provident fund, this contribution is the expenses of the business. Thus expenses are debited and liability towards the employees are credited in the books of accounts. The journal entry for the provident fund contribution is as follows:
| Provident Fund Contribution A/c | Debit |
| Provident Fund | Credit |
Journal Entry for Employee’s Contribution
Both employer and employee may contribute to the provident fund. The provident fund contribution of an employee is normally deducted from the salary. The following entry to be recorded in the books of accounts:
| Salary A/c | Debit |
| Provident Fund Payable A/c | Credit |
| Cash/Bank A/c | Credit |
Journal for Fund Transfer
Both employer’s and employee’s contribution are the liability of the business. As the provident fund cannot be used in business, this fund to be transferred from the company’s operational Bank A/c to Provident fund Bank A//c. The journal entry in this respect are as follows:
| Provident Fund Bank A/c (Employers & | Debit |
| Operational Bank A/c | Credit |
Interest on Provident Fund
Interest earned on the provident fund is also credited to the employee’s account in the following manner:
Provident Fund Bank A/c (Interest earned amount) Dr
Example
The gross salary of Mr. A is $2,000. Mr. A and his employer contributes to provident fund @ 10% of his salary. In this respect, his contribution to PF is $200 and his take-home pay is $1,800. What is the Journal entry?
Solution:
1) Recording of salary & deduction of Provident Fund:
Salary A/c Dr $2,000
To Employee A/c Cr $1,800
To Provident Fund (Employees Contribution) A/c Cr $200
2) At the time of Provident Fund depositing to Bank A/c (Both employer’s and employee’s contribution):
Provident Fund Bank (Employer Contribution) A/c Dr. $200
Provident Fund Bank (Employees Contribution) A/c Dr. $200
To Operational Bank A/c Cr. $400
[After this entry Provident Fund (Employees Contribution) A/c will be ZERO]
3) Employer contribution to be transferred to Profit & Loss Account:
Profit and Loss Account Dr. $200
To Provident Fund (Employer Contribution) A/c Cr. $200
(As this is the expenses for the organization)
Provident Fund Payable A/c (Employees PF A/c) Cr