Salaries and wages of staff members comprise the company payroll, which is a vital component of the financial statements of a business. However, the company payroll doesn’t appear directly on the balance sheet. In this article, we will take a much closer look at the impact of company payroll on financial statements. Let’s start!
How does payroll in UAE affect financial statements?
The payroll of UAE businesses appears on profit and loss statements and it is treated as a company expenditure. On monthly statements, the paid monthly salary for each employee for a current month will show up as the sum which offsets the gross revenue. This is when calculating the net profit of the business.
The total for all categories of company expenses will be added together in order to calculate the total monthly expenditures. Expenditure total will then be subtracted from the month’s total revenue to calculate the month’s net profit.
In accordance to the equation expressed in profit and loss statements, net profit equals revenue minus expenditures, net profit is less when the company payroll is high. The smaller the amount spent on the company payroll, the higher the net profit of the company will be. It’s true for all other kinds of expenditures as well. Utilities, materials, rent, office supplies, bank fees, and advertising all increase the total expenditures. This cuts into the net profit.
How can increased company payroll in UAE improve the company’s bottom line?
If you look at company payroll expenses and their connection in the accounting equation, doing so will let you fall into a trap of treating the salaries of employees as a ‘zero-sum’ game or situation. This certainly appears to be the actual situation on the surface. The bigger the amount that you write on paychecks, the less money you’ll have in the corporate bank account when employees encash their checks.
However, there are a couple of ways for increased payroll to improve the company’s bottom line. It’ll eventually lead to increased assets for your company in the accounting equation.
Ways for increased payroll to improve the company’s bottom-line
- High employee retention – recruiting new employees in UAE is very expensive. This is especially so if you factor in the costs for training and hiring them. Apart from the cost of human resources advertising and interviewing potential candidates, inexperienced employees often make mistakes. More often than not, this costs businesses more than they would have paid when they offer salaries that are sufficient in encouraging existing skilled staff to remain.
- High employee engagement – staff members are likely to care for their work when they see company administration caring enough with regard to their well-being and giving them a fair living wage. Employees that are engaged will represent companies in positive ways. They also sell more and provide excellent customer service.
- Outsource company payroll – payroll outsourcing in Dubai, UAE saves businesses a lot of money. The management of payroll internally can be very expensive as there is a need for hiring skilled payroll professionals, providing infrastructure, paying costly penalties if there are errors in the processing of payroll, and investing and maintaining payroll software. Also, you’ll see the huge difference when you’re comparing the cost of time employees spend on activities that are related to payroll to what you’ll spend on payroll outsourcing in Dubai, UAE. It is very likely that you will save a considerable amount of money.
Will it reflect in financial statements if I process payroll later?
The company balance sheet includes details regarding the current and future liabilities of a business. As such, the accounting equation which summarizes the information does not change regardless of whether you write your staff members’ paychecks immediately or pay your employees a week or so after the end of a particular pay period.
If you write employees their paychecks right away, then you will end up with fewer assets on a date that is captured by a balance sheet. If you choose in waiting to write the paychecks, the accrued amount will add to the liabilities. The owner’s equity, either way, will add up to the exact amount.
If you have AED 2,000 in the bank, then you write paychecks which total AED 1,000, you’ll end up with AED 1,000 in cash assets. When you have AED 500 as credit card debt, the accounting equation will reflect AED 1,000 in assets that is balanced by AED 500 in liabilities with AED 500 in owner’s equity. If you, however, have not paid the staff members, then the balance sheet will show AED 2,000 in cash assets that’s balanced by AED 1,500 in liabilities (AED 1,000 for accrued payroll liabilities and AED 500 for credit card debt). This leaves you with the exact amount of AED 500 as owner’s equity.