The Effects of Payroll on Assets and Liability
Following general accounting principles is essential to managing your business. Maintaining a balance sheet of your assets and liabilities, tracking your cash flow with an income statement and accruing expenses such as your company's payroll are disciplines that can help you understand your company's financial health and how it changes over time.
A company's balance sheet is a list of the company's assets and its debts. Assets minus liabilities plus the shareholders' equity in the business equals the company's net worth. Assets may include real estate, cash in bank accounts and accounts receivable. Liabilities may include short- and long-term debt, including an amount accrued for expenses that are owed but have not been paid. If unpaid expenses were not included on a balance sheet, the company's net worth would be artificially inflated.
The accounting principle of matching helps keep a company's balance sheet consistent over time. The matching principle dictates that expenses the company incurs to generate revenue be included in the same period when the revenue is recorded. Thus the company deducts the payroll expense for employees who worked during the current fiscal year during this fiscal year, even though the employees may receive one or more paychecks or a bonus during the next fiscal year.
The accrual principle accounts for expenses that are incurred during a particular fiscal period but paid after the fiscal period ends. For example, if a company pays its quarterly payroll taxes 10 days after the fiscal quarter ends, it accrues the payroll tax expense during the same quarter when the employees provided the services that generated the tax. The accrual indicates that the company's cash assets will be reduced by the amount of the payroll tax during the next fiscal quarter.
While it is not always possible to calculate payroll expenses to the last cent, accruing the estimated expense as a liability on the balance sheet helps create an accurate snapshot of the company's net worth. Analysts can estimate accrued payroll expenses for salaried and commissioned employees by prorating salary times days for salaried employees and by calculating the unpaid commission percentage for commissioned employees. For hourly employees, an analyst can estimate accrued payroll by multiplying the number of hours to be paid by the average rate of pay for employees in that position.
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.