Transaction 2—A company pays a salary of $300 to one of its employees for work performed during the past week. No amount had previously been recorded by the accounting system for this amount. What accounts are affected by this salary payment? Answer: Cash (an asset) is decreased here by $300. Whenever cash is involved in a transaction, determining that change is a good place to start the analysis. Increases and decreases in cash are often obvious. The cash balance declined here because salary was paid to an employee. Assets were reduced as a result of the payment. That is a cost to the company. Thus, a salary expense of $300 is reported. Recognizing an expense is appropriate rather than an asset because the employee’s work reflects a past benefit. The effort has already been carried out, generating revenues for the company in the previous week rather than in the future.
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salary expense (expense) increases by $300 cash (asset) decreased by $300 The continued equilibrium of the accounting equation does exist here although it is less obvious. Assets are decreased. At the same time, an expense is recognized. This expense reduces reported net income. On the statement of retained earnings, current net income becomes a component of retained earnings. The reduction in income here serves to decrease retained earnings. Because both assets and retained earnings go down by the same amount, the accounting equation continues to balance. Question: In Transaction 2, the company paid a salary of $300 that it owed to a worker. Why does a payment to an employee not reduce a salary payable balance?
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