Understanding the nuances of accounting within Xero is vital for maintaining accurate financial records and optimising business operations. In this FAQ, we’ll explore the rationale behind the presence of multiple accounts for wages and salaries within the Profit and Loss Account. We’ll delve into the distinct categories such as Direct Wages, Salaries, and Director’s Salaries, elucidating their respective roles and significance in financial reporting. Furthermore, we’ll provide practical insights into effectively allocating these costs within Xero’s payroll settings, ensuring precise accounting and streamlined processes.
Wages and Salaries in Xero Profit and Loss Account
There can typically be three different wages and salaries accounts on the Profit and Loss Account, depending on the type of business. These are:
- Direct Wages
- Salaries
- Director’s Salaries
Direct Wages In Xero
Direct wages are the wages of those employees who are directly involved in the production of goods or services sold by the business. This is primarily seen in a manufacturing business where the factory employees’ wages are allocated to direct wages. An equivalent example for a service business are the engineer salaries directly attributable to installations and maintenance in a security system company.
In both cases, this cost is a key element of the cost of sales, and is therefore deducted before arriving at the business’ gross profit. These costs are generally seen as variable costs to the business – if the business won significant additional sales, an increase in direct labour would be expected to fulfil these sales.
Salaries in Xero
Salaries are shown within the administrative costs or overheads of the business. These include the cost of employees who facilitate the business, but who are not directly involved in the production of goods or services for sale, for example employees in sales, IT and administration departments. These costs are generally seen as fixed costs to the business.
Directors Salaries in Xero
Director’s Salaries are the payroll costs of the company directors. These are split out separately in order to provide this detail as required in the trading Profit and Loss Account in the year end accounts.
How can I allocate these costs correctly in Xero?
Different earnings items can be set up in payroll settings/ pay items/ earnings. Each earning item is then allocated to the relevant wages account in the profit and loss account. This way the monthly payroll journal automatically debits the correct profit and loss account for the split of wages and salaries in the month.
Examples for each are shown below:
In this example the direct wages account in cost of sales has been renamed engineer’s wages for ease of reference.
The employee is then set up with the relevant regular earnings type in payroll/ employees/ employment information based on their job type.
What is the net wages account?
The net wages account is a reconciliation account which sits on the balance sheet. When the payroll journal is posted at the end of the month the net wages account is automatically credited with the amount due to be paid over to the employees.
The spend money transactions for wages payments are therefore posted to the net wages account to match off against the payroll journal.
Following the wages payment, the net wages account should therefore be £nil. Any difference on the account should be investigated and resolved as part of the month end reconciliation process.
For expert guidance and support with Xero accounting and any other accounting needs, contact Ascentis today and experience the difference in financial management!