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We have a Profit sharing program with the branch managers of our firm and I have a question about where to include those payments with regards to our P&L.

We currently provide payments quarterly based on branch performance, but then deduct those payments out of the branch payroll expenses for the following month (which is when the payment was made). What this does is effectively deduct the last quarters profit share out of the current quarters profits. Which doesn't seem quite right.

Can anyone provide any additional insight/arguments on how to manage profit share in our accounting books?

Thanks!

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2 Answers

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You accrue a liability for the bonus in the fist quarter on the balance sheet ... Expensing the profits then. THen you pay off the liability in the next quarter with cash which is a balance sheet onl transaction and doesnt hit the pl in that next quarter.

Essentially, you book a payable at the end of the first quarter

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P & L statements are internal accounting management statements. They don't need to follow generally accepted accounting rules but need to be consistent. So the answer depends on what is the accounting statements trying to reveal and what behavior are you trying to improve on?

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Thanks for the answer. Well essentially the bonus payments made in one quarter are paid out after the end of the quarter. We currently deducted these payments against the branch profitability of the following quarter, due to those bonus payments being listed as a payroll expense. I understand that the P&L is just internal, but we use this sheet to calculate bonuses. And deducting one bonus against another potential future bonus seems counterintuitive. I'm looking for a good explanation to justify this method or a different way to think about how best to calculate this. Thanks!!! – cactus Jun 16 '11 at 2:47

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