Payroll Effect on Balance Sheets
Payroll is one of the largest expense categories for most businesses, and it affects a company's value by drawing down its bank account but potentially adding to its overall worth by enhancing its human capital. A balance sheet is a snapshot of a company's financial picture at a particular moment, reflecting both tangible and intangible assets. Payroll represents an ongoing outlay, one that affects your balance sheet in both the short term as an expenditure and in the long term as an investment.
Every time you pay an employee, you write a check that comes out of your bank account, reducing the cash balance that is a fundamental entry on your balance sheet. The more you pay your employees, the less money you have remaining in liquid capital assets. Because most businesses write payroll checks regularly, these outgoing amounts create an ongoing shift in bank balance amounts, which will be reflected on the most current company balance sheet.
Because your employees continue working between paydays, your business will usually have an accounts payable balance for payroll, or an amount that is accrued and owed to employees that has not been paid. Accrued payroll is a liability on your balance sheet, or an amount that you owe, which offsets your cumulative assets when calculating your net worth. When you pay for these hours, your cash balance declines, but so does your accounts payable liability.
A business that manufactures products which are held as inventory until they are sold has invested some of its payroll hours in creating items that are listed as assets on its balance sheet. If it takes 40 hours for your business to build 40 birdhouses, and these birdhouses are unsold when you compile your balance sheet, the payroll hours that draw down your bank balance are offset by the value of the inventory that has been produced during these hours.
Good will is a balance sheet entry that represents the intangible value of your business. Although it is difficult to quantify the worth of employee engagement and experience, these payroll investments nonetheless add to the value of your company by enabling it to function more smoothly and intelligently. If you choose to sell your business and your employees retain their jobs, the knowledge they have developed as a result of your payroll expenditures -- represented on your balance sheet as part of the good will entry -- makes the company more valuable to a new owner.