We've talked about Payables, Receivables and Payroll. We still need to talk about Property and Inventory. But before getting into those, there are a few miscellaneous accounts we should touch on.
If you ask your hourly employees to work more than 40 hours in a week, or ask them to work on holidays, the government requires you to pay them overtime — time-and-a-half or double-time.
You should account the overtime premium into a separate overtime-expense account — for government audit, but also to watch what that practice (i.e., asking employees to work overtime) is costing you. In your Payroll Journal, account their actual hours worked to the labor-expense account — but account the overtime premium (i.e., the extra half- or full-hour you're paying them) to an overtime-expense account, e.g., accrued-wage / amt– labor-expense / amt+ overtime-expense / amt+.
If you accrue vacation for your employees, you need to account it. That's money you owe — and if it doesn't show up on your Balance Sheet, you're just digging yourself another hole of unforeseen expense. We need to add an accrued-vacation account and a vacation-expense account.
When you accrue vacation for your employees, e.g., at end of month, you have a General Journal transaction, accrued-vacation / amt– vacation-expense / amt+ . When they take vacation, it's a normal payroll transaction — their vacation time is simply charged to the accrued-vacation account number.
If you have many employees, you should consider setting up an Employee Vacation journal, to record the individual accruals, and an Employee Vacation subsidiary ledger (sheet per employee) to track their balances.
The interesting aspect of employee vacation accounting is that the accounting is typically in hours — not dollars. Your employees are concerned with how many "hours" of vacation they have coming — not with how many "dollars". But your financial records need to be in dollars. If an $8/hour employee has 40 hours of vacation accrued, your liability to that employee is $320 — and should show as such on your Balance Sheet.
But what if between accruals, you raise that employee's pay to $9/hour. Your liability to that employee just went from $320 to $360. You need another General Journal (or Vacation Journal) transaction, accrued-vacation / amt– vacation-expense / amt+ , to record this added liability. These accruals can be expensed to vacation-expense, as shown — however, I prefer to expense them to a separate account, vacation-rate-change-expense, simply to track what they're costing separate from the normal accruals.
If you offer your employees sick time — in addition to vacation — recognize you'll have a parallel set of books and transactions recording that time. Just replace "vacation" in everything above with "sick time".
Keep in mind that an employee can also be a vendor. For example, an employee travels to a trade show or entertains a customer for your company. He turns in an Expense Report and you reimburse him. This is a Payables transaction ( cash / amt- T&E / amt+ ) — NOT Payroll.
It is important to account employee travel & entertainment expenses into a separate Travel & Entertainment (T&E) account because the government has its own peculiar ideas about what T&E expenses are "valid" — hey, the employee had to eat anyway — and this is one of the first areas an IRS auditor will dig into.
Note: If you have T&E expenses, make special effort to stay current with the rules — and adhere to them strictly! By the time an audit rolls around — and you argue and appeal a bit — you will find that penalties and interest can more than double the amounts disallowed.
What if you advance the employee cash for a trip? That's a payables transaction, cash / amt– employee-advance / amt+ . When the employee turns in his Expense Report, another payables transaction, cash / amt– employee-advance / amt– T&E / amt+ — if the advance didn't cover the trip... Or a general journal transaction, employee-advance/amt- T&E/amt+ — if it did but he hasn't yet returned the overage... Or a cash receipts transaction, cash / amt+ employee-advance / amt– T&E / amt+ — if he did return the overage.
This latter is a good illustration of the importance of good accounting. It's so easy to advance someone, say $500, for a trip you want them to take for you. And they come back with an expense report for, say $450. You know they owe you $50 — but that's very easy to forget. But if you account the transaction properly, there sits $50 in an Employee Advance account that stares back at you every time you look at your Balance Sheet. Now forgetting that $50 isn't likely to put you under — but it doesn't take that many to do so.
When you or your employees frequently make small (reimbursable) cash purchases from local businesses, it's convenient to set up a Petty Cash box. You initially load it with cash, say $100.
Whenever someone needs to be reimbursed for a small cash purchase, they simply turn in the receipt (or fill out a petty-cash slip) and the keeper of the box gives them cash. Eventually the box will contain more receipts and slips than cash — whereupon we reimburse (replenish) the box by writing a Payables check to vendor "Petty Cash".
The transaction to initially set up the box is cash / 100– petty-cash / 100+ . Since petty-cash is an asset account, this has no effect on your expenses. When you go to replenish the box, you'll find that the receipts and slips will need to be accounted to many different expense accounts. The transaction is payable / amt– expense / amt+ ... . Note that the petty-cash account balance doesn't change — it continues to show on your Balance Sheet as a asset of $100. However, this transaction — in terms of number of expense / amt+ entries — can be one of the longest you'll encounter. Make sure you have, get or write software that can handle long transactions.
Let's say you do your selling through sales reps and they get, say a 5% commission on sales. You need some way of accruing these commissions so you can pay them out as agreed, e.g., monthly. You're going to need a commissions-payable account and a commissions-expense account.
First question — is the commission accrued on order or on invoice? If on order, you're going to have to build into your Customer Order Processing system a step that enters a Payable — commissions-payable / amt– commissions-expense / amt+ . If on invoice, however, you can simply add that transaction onto the end of your normal sales transaction — see earlier Receivables Accounting column. Reps prefer the former. I very much prefer the latter — less transactions and easier to audit.
If you have many reps, you may wish to set up a separate Commissions Payable subsidiary ledger (sheet per rep) so you can more easily track how each is doing and how much each is owed.
At end of month, another Payable transaction(s), cash / amt– commissions-payable / amt+ , to pay each what you owe.
The bank loans you some money. You now have cash — but you also have a debt. Transaction is cash / amt+ bank-loan / amt– . The added cash shows as an asset on your Balance Sheet — but the bank loan shows as an offsetting liability.
The bank will expect you to make regular interest payments on that loan. If the payments are interest only, the payable transaction is cash / amt– interest-expense / amt+ . If it's a self-amortizing loan (i.e., your payments include principal), the payable transaction is cash / amt– bank-loan / amt+ interest-expense / amt+.