Treatment of salary costs in your budget balance sheet

So far when it comes to constructing the balance sheet for your budget I have showed how to include stock, trade debtors and trade creditors. These were calculated using the sales, cost of sales and expenses in the profit and loss account.

One of the items included in the expenditure section of the profit and loss account which is treated differently in the balance sheet is salaries. The salary figure included in the profit and loss account is the gross salaries plus the employer’s national insurance contributions (NIC). However people are paid their gross salary less PAYE less employees NIC. Therefore we have to split the gross salary between the net salary, PAYE and employees NIC. The easiest way to do this is assign 70% of the gross figure as net salary and 30% as the PAYE and employees NIC. The 70:30 split is arbitrary so you may find a percentage split which suits your business better.

On the balance sheet it is easier if you have two accounts for salary costs. One is for the net salary which is the 70% of the gross salary and the second for the 30% of the gross salary representing the PAYE and the employees NIC. The employer’s NIC is added to this account. The reason for the split is because the net salary is paid in the month before the PAYE and national insurance. PAYE and NIC are paid to HMRC on the 19th of each month. The split makes it easier to allocate these payments into the correct months in the cash flow forecast which is integrated with the profit and loss account and balance sheet.

Similarly employee pension contributions have to be deducted from the gross salary and kept in a separate account with the employer’s contributions as they are likely to be paid over to the pension companies on a different date each month from the net salaries, PAYE and NIC. The treatment is exactly the same as for NIC.

The treatment of salary costs can appear complicated and people often become confused. My understanding came when I was training to be a Chartered Accountant and very often we produced T accounts to make sure the reconciliations were correct. Do people remember/still use T accounts for difficult reconciliations?