I'm stuck, for the first payroll an employee was found to be due a PAYE refund giving a pay roll with a net pay exceeding the Invoiced sales. a directors loan has been used to fund, and a tax refund requested from hmrc..

What I dont know is what to do with the cheque from HMRC when it arrives ?? as at the end of the tax year (i.e this month) the cheque from HMRC will still exceed both the years profit, and any PAYE+NI due on both months payroll. do i pay into "PAYE" as below, or should I create another account code if so should it be a liability of an asset? and How do i show this in the year end Balance sheet ?

Regards david

Worked example: Proposed entries:

"Sales" = sage n/c 4000
"Bank" = sage n/c 1200
"Gross wage" = sage n/c 7000
"Employer NI" = sage n/c 7010
"Net wages" = sage n/c 2220
"PAYE" = Liability, sage n/c 2210
"Total NIC" = Liability, sage n/c 2211
"Client" = a debtors account for the client
"Directors Loan account"= a new sage n/c 2340 under Long term liabilities

1 Feb Start trading

15 feb Invoice 1 - £450 debit "Client", credit "Sales" 
19 Feb payment Invoice 1 debit "Bank", credit "Client"

22 Feb Invoice 2 - £250 debit "Client", credit "Sales"
25 feb payment Invoice 2 debit "Bank", credit "Client"

25 Feb Directors Loan -£1500 debit "Bank", credit "Directors Loan account" 

BUT as the employee is due a PAYE return we get a payroll of
"Gross wage"  £500
"Employer NI"  0
"Net wages" £1400
"PAYE"  -£900
"Total NIC" 0

BUT as the employee is due a PAYE return i get a Payroll Journal entry of

28 Feb 2013  £ 500 debit "Gross wage"
28 Feb 2013  £1400 credit "Net wages"
28 Feb 2013  £900 debit "PAYE"

TBD Mar 2013  £900 cheque from HMRC  debit "bank", credit "PAYE"