The labor reconciliation process automatically applies labor costs to the:
- correct expense account
- correct order
- correct office / department, and
- correct category.
The goal is to have a substantially more accurate income statement while eliminating an enormous amount of otherwise tedious book work to achieve the same results.
The automatic process
By default, the labor reconciliation process runs every night. However, it will only process timesheets that have been marked as CLOSED since the previous time the process ran, so the act of closing timesheets typically prompts the labor reconciliation.
Important notes about closing timesheets
You will not be able to edit a timesheet once it is closed, so you will probably want to close timesheets only once or twice monthly and only for timesheets more than a week old. This will give users and supervisors sufficient time to submit and review their records.
The labor reconciliation process always uses the current date when it runs. Submitting, approving (if applicable), and closing timesheets in a timely fashion is essential in order to achieve the desired results. Consider implementing a policy that everyone fully submit and approve their timesheets at month end and year end.
The labor reconciliation process does not attempt to post to previous dates. This is because timesheets may be left in pending, submitted, or approved status for substantial periods of time when proper policies are not in place. Additionally, posting accounting transactions to prior months is not a best-practices policy. Doing so may cause errors if the period has been closed. It is far better to manage timesheets in a timely fashion or have bookkeeping professionals create journal entries to reallocate costs if the need arises.
What the labor reconciliation process does
For each line item on each closed timesheet, the process will debit the cost account associated with the related category and credit the accrued wages account as specified in in your system settings.
Sample Labor Category:
Note: To check the default settings for the accrued wages, see the topic on setting up Accrued Liabilities in aACE Preferences.
Each Debit/Credit will contain the following:
- The account, either the expense account associated with the related category or the Accrued Wages account.
- The office of the related job.
- The department of the related job.
- The order of the related job.
- The category of the timesheet item.
- The labor cost, which will debit the related expense account or credit Accrued Wages.
The labor cost is the Bill Rate in the related team member record (see below) multiplied by the number of hours in the timesheet item. The Bill Rate equals the Pay Rate times a multiplier for benefits and other overhead. The Bill Rate is the rate that the payroll company (e.g. ADP, Paychex, etc.) bills your company to cover the full cost of the employee.
The major benefits of the labor reconciliation process include:
- Your labor costs are applied to applicable expense accounts automatically. This allows you to associate each category with expense accounts such as "Art Design," "Production Labor," or "Project Management." Indeed, the same person can have their time expensed to multiple accounts depending on the nature of the work performed even though their labor cost rate is the same.
- Your labor costs are applied to the applicable office and department. This is useful for companies that are 1) managing income and expenses for multiple entities or departments and 2) have employees that perform work for multiple offices or departments.
- Your labor costs are applied to the particular order and category. This provides accurate profit and loss for given orders or categories of service.
To get the corresponding equivalent without such automation would require a tremendous amount of bookkeeping work. Altogether, you have a greater ability to identify unprofitable labor, orders, and departments.
Ease of reconciling with payroll
When entering your payroll entry, rather than debiting various "Salary Expense" accounts in your payroll entry, simply debit the Accrued Wages account.
For clients that pay employees by the hour, there is generally no reconciliation process required as long as the bill rate is correct in each team member record. For salaried employees, however, there is some reconciliation required since the sum of the cost of hours worked will rarely correspond perfectly to their salary. This will leave a remaining balance in the Accrued Wages account. You may want to zero this account each period with a "Salary Expense Cost/Benefit" account, which may be a useful indicator for how over (or under) worked your staff may be.
Speak with your accounting adviser regarding the appropriate method for your business.
Updates to time records after closing a timesheet
Updates to individual time records–such as changing the job or category–after the timesheet has been closed will not update the accounting system appropriately. Such changes will have to be accounted for manually with a general journal entry.
Running labor reconciliation manually
If you close a batch of timesheets and would like to execute the process immediately, you may do so. Click here for step-by-step instructions.