How Does Payroll Factor Into a Balance Sheet?

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A well-written balance sheet indicates the total assets, liabilities and working cash in a business to establish the value of that business. A business that has employees must handle the payroll accounting aspects of both the income and balance sheet. Payrolls have a key role in the balance sheet. Payroll accounting needs to be carried out diligently to ensure that a company’s current assets and liabilities are reconciled.

Payroll Withholdings

Payroll withholdings are the amounts that an employer deducts from an employee’s gross pay. These withholdings are amounts required by the government in the form of Social Security Tax, Medicare tax, federal and state income taxes payable by the employee. These payroll withholdings are not recorded as expenses for the employer but as part of current liabilities in the balance sheet. They are recorded as liability because they are payable to a third party rather than a source of income for the company.

Employer Payroll Taxes

Other than employee payroll-related liabilities, the employer also incurs payroll liabilities. These come in the form of taxes an employer pays as a result of having employees. Employer related-liabilities are also recorded as current liabilities in the balance sheet. Example of these liabilities include: the employer’s portion of Social Security and Medicare, unemployment tax, worker compensation insurance and contributions to pension plans. These payments serve to increase the liabilities in the balance sheet.

Accrued Payroll

Accrued payroll such as employee withholdings and employer payroll-related liabilities are recorded as liabilities in the balance sheet. Accrued payroll of wages payable is the amount designated for paying employees. If an employer is able to pay his employees, this is an asset in itself but accrued wages payable are recorded as a current liability because they have not been processed and disbursed to the employees yet. After disbursement, wages will not be recorded as a liability and the company’s balance sheet will be less one liability.

Effects on Balance Sheet

Overall, the payroll can be said to have a negative effect on the balance sheet. This is because accrued payrolls debit the account under the gross pay of an employee while at the same time crediting the payroll liability accounts. Payroll essentially reduces the amount of money a company earns. Consequently the recruitment and hiring of employees is an important decision for companies as they seek to use cash on paying personnel that will be an asset and not a liability

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