Accounting for Employee Compensation: Payroll, Leave & Bonuses

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  • 0:01 Compensation
  • 0:56 Salaries & Wages
  • 2:18 Benefits & Bonuses
  • 3:46 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Compensating your employees is a major part of making sure that your business operates efficiently. But what, exactly, is covered under the term 'compensation'? And how do the various aspects affect bookkeeping? Watch this lesson for answers.


Billy owns a company that makes screen protector sheets for phones and tablets. He has employees that work to design the best sheets possible, a factory that makes the sheets and people who sell them to the stores. That's a lot of employees!

Billy needs to make sure that all of his employees are compensated and that he still has a profit, but he's not sure how to account for employee compensation in his books. Does he just stick all their salaries in a line in his budget? What about their sick days or bonuses?

An employee's salary or wages plus benefits is his or her total compensation. Benefits might include things like sick days, a retirement account, insurance, bonuses and more.

Let's look at how Billy and other business owners can account for employee compensation, starting with payroll.

Salaries & Wages

As we've seen, Billy has a lot of employees that are doing different jobs, from design to manufacturing to marketing and sales. How does he account for each employee on his payroll?

One way to separate out employee compensation, including salary, is by grouping the employees into two groups: direct and indirect. Direct employees are involved directly in the creation of the company's product. For example, Billy has lots of people who work at his factory to make his screen protectors. The people who are on the assembly line, the ones who actually touch the product, are direct employees.

On the other hand, indirect employees support product development and manufacture indirectly. That is, they don't actually touch the end product. The engineers at Billy's company that design the screen protectors and the salespeople who sell them are indirect employees. They help support the product indirectly.

In payroll accounting, many companies choose to put the salaries or wages of the direct employees on one line and the salaries or wages of indirect employees on another. This is because, in many companies, the pay of indirect employees is filed under overhead expenses, or those that keep the business running but are not directly related to the manufacture of the product.

Benefits & Bonuses

Billy understands how to account for the salaries and wages of both direct and indirect employees at his company. But as we've seen, what shows up on their paycheck isn't the only compensation they receive. From health insurance premiums to paid vacation and sick days, there's a lot more that employees can cost Billy.

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