Best Practice Setup for WIP Labor Accounting / Payroll

1. Assign Payroll Expense Account at Department Level

2. Enter Labor Inventory Account in the WIP Account Field on Payroll Expense Account

This setup ensures that when labor is added to a work order, a journal entry is automatically created to credit Labor Inventory and debit Payroll Expense. 

How It Works:

• When labor is applied to a work order:

  • A WIP journal entry is created.
  • This entry adds a positive amount to the Labor Inventory account (representing the cost of labor being held as WIP Labor Inventory).
  • Simultaneously, it subtracts that same amount from the Payroll Expense account.

• When the work order is closed and invoiced:

  • Another journal entry is automatically created.
  • This entry subtracts the labor cost from the Labor Inventory account (indicating that the labor is no longer in progress but completed).
  • At the same time, it adds a positive amount to the Labor Cost of Goods Sold (COGS) account, reflecting that the labor costs have now been recognized as a sale.
• Payroll Journal
  • The balance of the Payroll Expense account will be reduced to zero via an offsetting asset account during your payroll journal entry.  

Advantages of Best Practice Setup:

1. Accurate Labor Cost Tracking:

   • This setup enables precise tracking of labor costs in two stages:
     • While the work is in progress (WIP), labor costs are temporarily held in a labor inventory account.
     • Once the job is invoiced, the labor cost is automatically transferred to the cost of goods sold (COGS).

2. Payroll Reconciliation with Actual Costs:

   • This setup also allows for effective reconciliation with actual payroll, assuming labor costs are accurately assigned to technicians:
     • If the payroll expense account has a positive balance at month-end, it indicates that technician costs are set too low.
     • If the payroll expense account has a negative balance at month-end, it suggests that technician costs are set too high.
   • Properly balancing labor costs is crucial to ensure your gross profit for labor sales is accurately represented on each invoice.