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June 19th 2019

How to record employment costs correctly

I recently wrote about common problems with bookkeeping (and, by extension, management accounts). Dealing with employment costs (wages, paye, pensions etc) correctly was one of those problems.

Common problems

There are two classic errors:

1) Wage payments are posted to the balance sheet, but no wages journals are posted. Consequently, the profit & loss account shows zero wages; and the balance sheet shows a big debtor balance; and

2) Wage payments are posted directly to the profit & loss account. Consequently, the balance sheet tells us nothing reliable about outstanding PAYE, wages or pensions liabilities; and the amount and classification of costs within the profit & loss account is unlikely to be correct.

The solution

The solution is simple: use “wages journals” to post into the books the amounts payable (to employees, HMRC, the pension scheme etc). This can be done automatically if your accounting and payroll systems speak to one another, or else by posting manual journals, which are pretty easy to do too and we can always help with that if needed! The figures used should be taken directly from the payroll.

When the payments are actually made, they should be posted against the appropriate liability account in the balance sheet (wages control, PAYE control, pension control etc).

A simple example

Here is an example of a basic wages journal (the figures are made up to keep things simple):

Date: 30 June 2019

Details: monthly wages June 2019

Dr Wages cost £10,000 (being the gross wages for the month)

Dr Employers NIC £1,000 (being the employer NIC for the month - after any employment allowance)

Dr Employers pension contribution £500 (being the employer’s contributions)

Cr Wages control £7,500 (being the net wages payable to the staff)

Cr PAYE control £3,000 (being the PAYE and NIC payable to HMRC)

Cr Pension control £1,000 (being the total pension contributions payable to the pension scheme)

Commentary

The first three items are profit & loss expense accounts; the next three items are balance sheet liability accounts.

When the payments are made (to the employees, HMRC etc) they should be posted to the appropriate liability account - not to the profit & loss account.

Summary - why this matters

This isn’t just some esoteric accounting thing. If you want to get reliable and accurate management accounts to help you manage your business effectively, it’s important to record employment costs correctly.

Posting wages journals and wages payments correctly helps you ensure that:

1. employment costs are correctly stated in your profit & loss account - so you know what you are spending;

2. liabilities (to pay staff, the tax man etc) are correctly stated in the balance sheet - so you know what you owe; and

3. errors - eg under or overpayments - are spotted and corrected promptly - so you can sort out any mistakes quickly and effectively.

If you would like some assistance with this, contact our bookkeeping or payroll teams today.

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