Lessons · Accounting · money you are holding for somebody else
Money you are holding for somebody else
Amounts withheld from a worker's pay are not the business's money and never were. The business is holding them on behalf of whoever they are owed to, and until they are handed over they sit on the balance sheet as a liability.
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
This is the idea the whole road turns on, and the reason payroll destroys small businesses that would otherwise have survived. The money is in the business's bank account, so spending it requires no decision that feels like theft: a difficult month, a supplier who must be paid, and the withheld amounts are gone. The obligation does not go with them.
How to think about it
On every pay run, recognise the withheld amounts as a liability at the moment they are withheld. Then treat that balance as somebody else's money sitting in your account, which is exactly what it is.
Worked example
Withheld from the worker's payReduces net pay. Does not reduce the expense.
Recognised as a liability the same dayOwed to somebody, not earned by anybody.
It is in the business's bank accountWhich is what makes it dangerous rather than safe.
Settled when it falls due, and the liability clearsOnly then is it no longer yours to account for.
Your turn
Name where withheld amounts sit until they are handed over.
Amounts withheld sit on the balance sheet as a
Solve one, graded on the server
The trap
Thinking of the bank balance as what the business has. Part of it belongs to somebody else from the moment a payroll is run, and a business that spends it is borrowing from a creditor who has not agreed to lend and usually charges penalties rather than interest.