Question

Why might a company have a separate cash account for payroll? Explain your answer and additionally, would you agree with having a separate cash account for payroll if you are a business owner?

Answer 1

A company may choose to have a separate Payroll Account for many reasons. A Payroll account is an account which is entirely for doing transactions related to payment made to employees.

Reasons why a company wants to have Separate cash account for Payroll are given below.

1. Unlike any other transaction such as transport expenses, Electricity expenses, Purchases etc salaries and wages have numerous numbers of transactions. In fact Payroll transactions are the highest number of transactions in a period, say month. Companies open a separate payroll account so that all the transactions are in one account and in one place.
2. It helps in reducing confusion and assists in Reconciliation of accounts. All the transactions are in one place which prevents it from mixing with other transactions. Person responsible for reconciling Payroll transaction will only have to look at one account and one type of transaction.
3. We might also say that it increases the level of security by separating other business funds from Payroll Funds. If Employee gets the check from the main account of company then he may get the information related to account number of company, He may even lose it which will be the worst case scenario.
4. Internal control is also strengthened with the use of Separate Cash account for Payrolls.