Employee advances and benefits - Non-cash benefits and posti...

Learning Outcomes

After reading this article, you will be able to explain the treatment of employee advances and non-cash benefits, identify common types of non-cash benefits, and prepare the correct accounting entries for advances, repayments, and benefit postings. You will understand how these transactions affect the general ledger, payroll control accounts, and financial statements for the purposes of the ACCA FA2 exam.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand the accounting treatment of employee-related transactions, including advances, non-cash benefits, and their postings. Ensure you are able to:

• Record and explain cash advances given to employees and their settlement
• Identify and account for common non-cash benefits in kind
• Prepare and post payroll-related entries, including deductions and benefit postings
• Report employee advances and non-cash benefits correctly in the financial statements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which account is debited when an employee is given a cash advance for future business expenses?
2. What is the double-entry to record the provision of a non-cash benefit, such as a company car, to an employee?
3. True or false? Employee advances remaining unpaid at year-end are reported as a current asset in the statement of financial position.
4. Briefly explain why non-cash benefits may need to be shown as expenses in the payroll or wage expense account.

Introduction

During the normal course of business, employers may offer cash advances or non-cash benefits to staff as part of their compensation or to cover business expenses. Properly recording these transactions is essential for accurate payroll control, correct expense reporting, and clarity in financial statements. For ACCA FA2, you must be able to distinguish between advances (which are repayable assets) and benefits in kind (which are a form of staff remuneration).

This article explains typical non-cash benefits, the process for posting employee advances, and the correct accounting entries for each, according to ACCA requirements.

Key Term: Employee Advance
An amount paid to an employee before it is earned or before related expenditure is incurred, which the employee must later settle—often by expense claim or payroll deduction.

Key Term: Non-cash Benefit
Any benefit provided to an employee that is not in the form of cash salary or wages, such as a company car, private healthcare, or subsidised accommodation.

Key Term: Payroll Control Account
A general ledger account used to record the total amounts paid to employees and any associated deductions, ensuring accurate reconciliation between payroll records and the financial statements.

Employee Advances: Definition and Accounting Entries

Employers may advance funds to employees to cover expected business expenses (such as travel) or for personal advances. It is essential that these transactions are recorded to maintain an accurate record of company assets and ensure eventual recovery or appropriate expense allocation.

Accounting for Cash Advances

When a cash advance is given:

This records a receivable from the employee. The advance remains an asset until the employee either repays in cash or provides supporting documentation for expense reimbursement.

When the employee submits receipts for legitimate business expenses:

If part or all of the advance is repaid in cash instead, Cash at bank is debited and Employee Advances is credited.

Reporting in the Financial Statements

Unsettled employee advances at the end of the period are shown as current assets under receivables. If not repaid or justified with expenses, they remain outstanding until cleared.

Worked Example 1.1

Min receives a $400 cash advance to travel for business. Min submits $325 of receipts after the trip and returns $75 in cash. Show the ledger entries required.

Answer:

1. When the advance is paid: Debit Employee Advances $400
   Credit Cash at bank $400
2. When Min submits receipts: Debit Travel Expenses $325
   Credit Employee Advances $325
3. When $75 is returned: Debit Cash at bank $75
   Credit Employee Advances $75 After posting, Employee Advances has a zero balance.

Non-cash Benefits: Recognition and Posting

Non-cash benefits (benefits in kind) are items or services an employer provides to employees without paying cash. Common examples include company cars, health insurance, and housing. These are part of employee compensation and must be recorded as expenses, reflecting their cost to the employer.

Accounting for Non-cash Benefits

When a non-cash benefit is provided, its value (either actual cost or an appropriate estimate) must be recognized as an expense. For example, when a company car is provided:

If the benefit is a service acquired from a third party (e.g., private healthcare), the entry is:

The corresponding credit reflects payment to the supplier. Benefits are included in total staff costs in the statement of profit or loss.

Worked Example 1.2

A business provides health insurance (worth $600) and the use of a company car (annual value $1,200) to an employee as part of remuneration. How are these recorded?

Answer:

1. Health insurance: Debit Staff Benefits $600
   Credit Payables/Cash at bank $600
2. Company car (if already owned): Debit Staff Benefits $1,200
   Credit Accumulated Depreciation/Car Account $1,200 The expense increases wages and salaries in the statement of profit or loss.

Payroll Control and Year-End Reporting

To maintain control over payroll costs and employee benefits, the payroll control account is used to summarise all payroll-related transactions, including advances, salaries, deductions, and benefits. Non-cash benefits and settled advances are recognised as expenses within this account as they arise.

Unsettled advances must be reclassified as receivables. Unpaid benefits (for example, outstanding benefit invoices) are included in payables. All amounts must be correctly presented in the financial statements for year-end reporting.

Worked Example 1.3

At year-end, $250 of advances to staff remain unsettled, and a private medical benefit invoice of $350 is unpaid. Where are these shown?

Answer:

• Employee Advances: $250 in current assets (receivables)
• Outstanding medical invoice: $350 in current liabilities (payables)
• Both items are also included in relevant control accounts for reconciliation.

Exam Warning

Non-cash benefits must be recorded as expenses even if no cash has been paid out yet. Failing to recognise the economic substance may cause underreporting of salary expense and errors in payroll reconciliation.

Revision Tip

Always check that all employee advances have been either cleared to an expense or shown as a receivable at each reporting date. Ensure all non-cash benefits provided in the period are recognized in wage and staff costs.

Summary

Employee advances should be recorded as assets until settled, while non-cash benefits must be recognised as expenses when incurred or provided. Both impact payroll control and disclosure in financial statements. Clear, accurate ledger postings avoid misstatement of assets, expenses, and liabilities.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify and record employee advances as current assets until settled
• Post settlements of advances to expense accounts against the advance
• Recognize and record non-cash benefits as staff costs in the period provided
• Use the payroll control account to capture advances, repayments, and benefit expenses
• Present unsettled advances and unpaid benefit liabilities in the correct part of the financial statements

Key Terms and Concepts

• Employee Advance
• Non-cash Benefit
• Payroll Control Account