I recently bought out my business partner and began to manage the accounts. We use Paychex to manage our Payroll. Paychex issues checks to our employees and pays our taxes, then sends us a bill once a month. My partner had not bothered to detail payroll in the books – he just recorded the total amount we paid Paychex as an expense, then he sent the Paychex reports to our CPA every year at tax time and our CPA figured out our payroll as necessary to prepare taxes.
I want to clean this up, so I hired a bookkeeper. I asked her to show me how she would record payroll, and she created a journal entry to demonstrate. On the credit side, everything looks great – she separately credits accounts for each employee's salary, in addition to the accounts for various taxes. On the debit side, however, she posted everything against our bank account. I thought that was inappropriate, since we don't pay salaries and taxes directly out of our bank account. (We pay Paychex, and Paychex pays those things.) So, I asked her instead to create a liability account representing Paychex and to debit that account rather than our bank account when she enters the payroll detail. Then, once a month when we pay Paychex, she could create a transaction debiting our bank account and crediting our Paychex liability account.
To my surprise, my bookkeeper said that creating such a Paychex liability account would be inappropriate. She couldn't explain why it is inappropriate – she wants time to prepare an explanation, and she will tell me next week.
In the meantime, I figured I would reach out to the wider community for an explanation. Those of you who use a payroll service like Paychex, do you post your payroll expenses directly against your bank account, or do you post them against a payroll service liability account? And what might be inappropriate about the latter approach?
I want to clean this up, so I hired a bookkeeper. I asked her to show me how she would record payroll, and she created a journal entry to demonstrate. On the credit side, everything looks great – she separately credits accounts for each employee's salary, in addition to the accounts for various taxes. On the debit side, however, she posted everything against our bank account. I thought that was inappropriate, since we don't pay salaries and taxes directly out of our bank account. (We pay Paychex, and Paychex pays those things.) So, I asked her instead to create a liability account representing Paychex and to debit that account rather than our bank account when she enters the payroll detail. Then, once a month when we pay Paychex, she could create a transaction debiting our bank account and crediting our Paychex liability account.
To my surprise, my bookkeeper said that creating such a Paychex liability account would be inappropriate. She couldn't explain why it is inappropriate – she wants time to prepare an explanation, and she will tell me next week.
In the meantime, I figured I would reach out to the wider community for an explanation. Those of you who use a payroll service like Paychex, do you post your payroll expenses directly against your bank account, or do you post them against a payroll service liability account? And what might be inappropriate about the latter approach?