Lessons · Accounting · the shape of gross pay to net pay
Gross pay, deductions, net pay
Gross pay is what the worker earned. Deductions come off it. Net pay is what reaches their bank. The business's expense is the gross, not the net, and the difference is money the business is holding rather than money it has saved.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
Almost every payroll error is a failure to keep those three apart. A business that books the net as its wages cost understates its expense and hides a liability it will have to settle, and both errors point the same way: the accounts look better than the position is.
How to think about it
Work top down and never sideways. Start with gross, list each deduction with what it is for, subtract, and check that net plus the deductions comes back to gross.
Worked example
Gross pay for the periodWhat was earned. This is the business's cost.
Less deductions withheld from the workerStill the worker's money, held by the business.
Equals net payWhat actually reaches the bank account.
Net plus deductions must come back to grossThe check that takes five seconds and catches most of it.
Your turn
Name which figure is the business's wages expense.
The wages expense is the pay, not the net
Solve one, graded on the server
The trap
Recording the net as the wages cost. The expense is understated by every penny withheld, and the liability for those withholdings never appears, so the books are wrong twice and both in the flattering direction.