ANSWER ID:9281

On some occasions employees purchase goods or services from their employer and have the purchase amount deducted from their wages. The business deducts the amount from the employee's pay and enters an invoice for the sale. The sale income, employee payments, and GST collected need to be recorded. This support note explains how to do this in your accounting software.

Setting up

There are 3 tasks required to prepare your company file:

1. Create a contra cheque account

2. Create a payroll deduction category

3. Create an employee purchases card

Task 1 - Create a contra cheque account

1. Go to the Accounts command centre and click Accounts List.
2. Click the Asset tab then click New.
3. Enter a new number for the account in line with your account list.
4. Select Bank in the Account Type field.
5. Give the account an appropriate name, such as Employee Purchases.
6. Click OK. See our example account setup below.
   

Task 2 - Create a payroll deduction category

1. Go to the Payroll command centre and click Payroll Categories.
2. Click the Deductions tab then click New.
3. Complete the deduction fields as shown in the example below, making sure the Linked Payable Account is the account created in Task 1 above.
   Note: When you select the asset account for the Linked Payable Account, a warning may be displayed advising that this should typically be a liability account. Disregard this warning.
4. Click Employee and select the employees to whom this category is applicable, in other words the employees who will be paying for purchases from their paycheques.
5. Click OK to the Linked Employees and Deduction Information windows.

Note: This deduction will only reduce the reportable gross wages for the ATO if the deduction is selected under the "Gross Payments" field when preparing Payment Summaries. For more information see our support note Preparing and printing Payment Summaries.

Task 3 - Create an employee purchases card

1. Go to the Card File command centre and click Cards List.
2. Click the Customer tab then click New.
3. Create a customer card called Employee Purchase. Alternatively you can create a customer card for each employee that purchases goods/services from you.
4. Click OK.

Recording an employee purchase

There are 3 tasks involved in recording an employee purchase:

1. Enter the sale

2. Close the sale

3. Enter the employee's paycheque

Task 1 - Enter the sale

Firstly you will need to enter a sale of the goods and/or services as you would normally do with any customer. Enter sales to employees using the Employee Purchases card as created in Task 3 above. Allocate the sale to your normal income account and apply the applicable tax code. You can print a tax invoice for your employee if required. See our example sale below.

Note: The GST liability is reported at this stage if you are reporting using the non-cash (accruals) method.

Task 2 - Close the sale

As the employee will be repaying you out of their paycheque, you will need to close the sales invoice.

1. Go to the Sales command centre and click Receive Payments.
2. Choose the Employee Purchases account in the Deposit to Account field (the account created in Task 1 above).
3. Apply the payment to close the sale. See our example Receive Payments window below.
   

Note: GST is reported at this step if you are reporting GST using the cash method. If your employee is making part payments, only enter the value of the payment being made.

Task 3 - Enter the employee's paycheque

Enter your employee paycheque as normal. Enter the amount to be deducted from the employee's wage in the new Employee Purchase category created in Task 2 above. Make sure you enter the amount to be deducted as a negative amount as shown in the following example.

Employee Purchase displaying as unpaid on liabilities reports and the Pay Liabilities window

The process outlined above will result in the Employee Purchase deduction displaying as unpaid on liabilities reports and on the Pay Liabilities window. In this case, there are three options to work around this issue:

• Filter out the Employee Purchase category from reports
• Filter out the Employee Purchase category from the Pay Liabilities window
• Process the liability and create a general journal entry

To filter Pay Liabilities reports

1. Select the report you'd like to run.
2. Click Advanced Filters. In some versions this will be Customise.
3. Click the dropdown arrow next to the Payroll Categories (or Categories) field.
4. Deselect the Employee Purchases category and click OK.
   
5. Click Run Report or Display (based on your software version).

To filter the Pay Liabilities window

On the Pay Liabilities window:

1. Click the dropdown arrow next to the Payroll Categories field.
2. Deselect the Employee Purchases category.
3. Click OK.
   

To process the liability and create a general journal entry

1. In the Pay Liabilities window, select the employee deduction to be paid.
2. Go to the Edit menu and choose Recap Transaction.
   
3. Take note of the accounts being affected and the amounts being debited and credited.
4. Record a journal entry (Accounts command centre > Record Journal Entry) with the reverse debits and credits of the Pay Liability transaction.
   

How will this technique of recording employee purchases affect my accounts?

Entering the required transactions will result in:

• An amount in your income account indicating a sale has occurred. This will include a GST amount collected.
• Your trade debtors account will have increased and decreased - net effect zero.
• The Employee Purchases Account will have increased and decreased - net effect is zero.
• Your employee will have received the goods/services and consequently their pay reduced as payment for those goods/services.