As a business owner, financial administration is just as important as your management of day-to-day operations. One slight error could send your business sailing off in the wrong direction.
This is especially true in the case of unfair and delayed payments, which can ruin your reputation with employees, partners, and customers alike. Without trust, your business could find itself in quite a predicament.
On that note, we will explore one essential aspect of financial administration in this post—accrued payroll and employee benefits. We'll uncover the fundamentals of accrual payments and how they impact your business.
Understanding Accrued Payroll
By definition, accrued payroll refers to the amount of money owed to employees for work that has been performed but is not yet paid. It may include salary, hourly wages, and any other compensation an employee has earned but not yet received. Accrued payroll is a liability on a company's balance sheet.
An accurate account of payroll accruals is essential to keeping a company’s financial records up to date and ensuring that employees receive the money they are due on time. In the case of inaccurate payroll accruals, a company might end up overpaying or underpaying its employees. This, in turn, can create financial and legal difficulties for a business.
How to Calculate Accrued Payroll?
You can calculate accrued payrolls by following these steps:
- Determine the employee's rate of pay: It can be either an hourly rate or an annual salary.
- Calculate time worked: For hourly employees, multiply the number of hours worked by the hourly rate. For salaried employees, divide the annual salary by the number of pay periods in a year.
- Calculate any overtime or bonuses earned: If the employee earned any overtime or bonuses, add them to the total amount of accrued payroll.
- Calculate the total accrued payroll: Simply add the figures from the previous step and calculate the total amount of accrued payroll.
Understanding Accrued Employee Benefits
Similar to accrued payroll, accrued employee benefits are also a liability on a company's balance sheet.
To fully understand how this works, let's first learn more about employee benefits. Employee benefits are nonwage compensation that a company offers to its employees in addition to their salary or hourly wages. There are two types of employee benefits:
Financial employee benefits included in payroll are bonuses, retirement plans, health insurance plans, etc. If it's a bonus, it may mean an increased net monthly income for an employee. If it's a retirement plan or health insurance, it may include a contribution deduction from an employee’s monthly salary.
Nonfinancial employee benefits include things like paid time off, gym memberships, and professional growth opportunities.
The purpose of employee benefits is to attract and retain top talent in the industry. Plus, offering benefits can increase employee satisfaction and loyalty, leading to increased productivity and a positive company culture.
The term ‘accrued employee benefits’ refers to nonwage compensations that an employee has earned but has not yet received. For example, let's say you offer two weeks of vacation per year. If the employee worked for six months in your company, they would've earned one week of vacation and this would be recorded as an accrued employee benefit.
This means your company is obligated to provide the benefit of vacation time to this employee at some point in the future. If you don't, you might be subject to legal and financial penalties.
How Are Accrued Payroll and Employee Benefits Linked?
Both accrued payroll and accrued employee benefits are liabilities for a company. They represent obligations that a company owes to its employees.
When payroll is recorded, it's important to track both types of accrued values and compensate every employee accordingly.
If you're careful handling your company's accrued payroll and employee benefits, you don’t need to worry. In fact, you can enjoy improved employee morale and satisfaction, higher productivity, attracting top talent in the industry, and improved company reputation.
If you're negligent, you might have to deal with administrative burden, cash flow challenges, and legal risks. Pay attention to the accrual of payroll and employee benefits if you want your business to stay on course and for there to be smooth sailing in the future!
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