Payslip transactions calulated as Accrual while file is Cash basis

As I understand it, the point of Cash Basis accounting is that no transaction counts until it is actually paid (in or out).

I have a monthly Payslip for a single casual employee created at the beginning of the month and post dated to the end of the month.

A new line for hours worked is added to the payslip each day the employee does any work, and then at the end of the month, a New Payment transaction is created to actually pay the employee the amount that has accumulated during the month.

The payments to the employee for the current month which are being tracked but have not yet been paid, are being shown in the Summary report and also in the Profit and Loss report as current payments exactly as they should be if we were using Accrual accounting, but everything is set to Cash basis. I would have thought these transaction would only show up after the payment had actually been made.

Have I misunderstood something, or is there a bug in the system?

Currently, viewing figures on cash basis only excludes unpaid invoices. It doesn’t exclude unpaid payslips. I will need to do some research on this whether it is correct.

Cash-basis accounting exists because tax authorities allow you not to pay taxes on money you haven’t received from customers yet. Not sure whether you are allowed to claim tax deduction on employee expenses you haven’t paid yet.

This is a more complex question than it first seems. Your description of cash basis accounting was too simplistic. The differences between accrual and cash basis accounting have more to do with philosophy than just with when transactions show up on the P&L statement.

Technically, you are correct that cash basis accounting records both revenues and expenses when money actually changes hands. But that is not, in fact, how you have been using Manager. By your act of recording payslips, you are accruing liabilities to pay employees. Under double-entry accounting, those credits must be matched by debits. So the salary/wage expenses show up in an expense account and the new liabilities show up in Employee clearing account. That keeps your books in balance.

If you were truly using cash basis accounting, you would not enter the payslip until you were ready to pay it. But do you want to leave those real liabilities unrecorded? That would be as bad as not recording a short-term business loan liability until the day you paid it off. That, of course, is one of the greatest shortcomings of cash basis accounting: your true financial position is not reflected in such situations.

You might ask, “How is this different from Accounts receivable on the balance sheet and Sales on the P&L?” It really isn’t. Both can be suppressed under cash basis accounting until money changes hands. That also distorts your financial position, but is somehow more acceptable. Accountants don’t seem to argue about that issue. On the other hand, many do argue about whether to suppress payroll liabilities and expenses until paid. In fact, some tax authorities have special procedures dictating when those payroll expenses will be recognized. If Manager were to automatically suppress payroll-related account postings until the employee is paid, users in some countries would be unable to comply with requirements of their authorities. So this is not an easy question to resolve.

Meanwhile, if you don’t want payroll expenses and liabilities to appear until you pay the employees, your best bet is to delay entry of payslips. Better yet, switch to accrual basis accounting and be confident that your financial statements accurately represent current position and performance rather than the partial view you get from cash basis accounts.

Thanks for your “insightful as ever” reply @Tut. Simply put, I use Cash accounting because my Accountant told me to. I’ll be seeing him again shortly anyway, so I guess that will be another topic of conversation he can charge me for ;^)

These comments are just totally illogical, lets illustrate that by rewriting the Employees / Payslips references with Suppliers / Purchase Invoices.

*"But that is not, in fact, how you have been using Manager. By your act of recording purchase invoices, you are accruing liabilities to pay suppliers.

If you were truly using cash basis accounting, you would not enter the purchase invoices until you were ready to pay it.

Meanwhile, if you don’t want purchase invoice expenses and liabilities to appear until you pay the suppliers, your best bet is to delay entry of purchase invoice"*

Regardless of, if you are entering purchase invoices, payslips or expense claims, you are taking up liabilities and to suggest that under cash accounting you shouldn’t enter any of these until you are ready to pay them is just plainly - ludicrous.

The valid point being made by @pcal and recognised by @lubos is that Manager is being inconsistent with liabilities when it comes to cash accounting. Purchase invoices aren’t being recognised in the financial accounts until they are paid, yet payslips and expense claims are being recognised in the financial accounts yet they haven’t been paid.

If employees and expense claims payers were categorised as sub-sets of Suppliers, then the cash accounting conflict wouldn’t arise.

Now we are being perfectly logical.

This comment, and your subsequent expansion on it, suggest that you might not have understood my entire post. You used the example of purchase invoices (and, by extension, Accounts payable). I used the example of Accounts receivable. But the considerations are the same:

  • Most people agree it is acceptable to enter sales or purchase invoices and then suppress them for cash basis reporting. I would personally not do that.
  • Plenty of accounting professionals take opposite positions about whether it is acceptable to enter payroll liabilities and suppress them for cash basis accounting. My personal opinion is that you should not.

I agree with you. And I agree that the program is inconsistent, although it may have to be to allow some users to satisfy local reporting requirements.

But that actually was not my point. What I was attempting to convey with my entire response was my belief that if you are going to be entering any of those sorts of liabilities, you should be using accrual basis accounting. I only mentioned payroll liabilities because that is what the originator was discussing. But the reasoning applies to everything, including—in my opinion—sales and purchase invoices. If you are entering any sort of transaction that involves future receipts, payments, or equity transactions, I think you should be using accrual basis accounting. Otherwise, you might just as well keep a cash book.