When defining ledger account types for payroll, which types should be set up?

• A. Assets, Liabilities, and Expense. Best practice to set up the Balance Sheet and Income Statement
• B. Revenue
• C. Equity
• D. Gains

Answer: (A)

Payroll touches three areas in the chart of accounts: assets, liabilities, and expenses. When you pay employees, cash (an asset) decreases; payroll liabilities such as withholdings payable and employer payroll taxes payable increase, and the cost of labor is recorded as an expense. Posting payroll data to these account types ensures the impact shows on both the Balance Sheet (assets and liabilities) and the Income Statement (expenses). Using revenue, equity, or gains would be inappropriate because payroll does not generate revenue, does not directly affect owners’ equity in normal operations, and is not a gain. So the best setup is to define payroll ledger accounts as assets, liabilities, and expenses.