The greatest bookkeeping challenge for most small business owners is preparation of payroll. This is often the case even when the only worker is the owner and the business is incorporated. The corporate enterprise must treat the owner as both employee and shareholder.
Computation of payroll taxes as well as other paycheck additions or subtractions is tedious and complex. Many entrepreneurs outsource the function to payroll services. A substantial number of business owners deploy internal computer payroll applications. These platforms commonly interface with the company’s general bookkeeping system. Unfortunately, this frequently leads to a false sense of security that accurate accounting for payroll is automatic.
Careful input of employee data and details for each pay date is a manual process requiring great care. Scrutiny of the resulting payroll reports is a crucial step to assure the correct amounts and types of payroll taxes are determined and remitted. Most importantly, diligent examination of the business’s financial statements is essential for assuring that the payroll data has imported accurately to the bookkeeping accounts.
Periodic comparison of payroll information to the business financial statements is the best procedure for averting payroll accounting problems. This examination necessitates having both the company balance sheet and income statement as well as the payroll data. The income statement should have an expense account showing the amount of gross wages paid before employee taxes and other deductions. The expense account for payroll taxes should indicate the employer’s taxes only. The balance sheet will have liability accounts for deductions from employee paychecks and the employer share of taxes.