Accounting Best Practices, Fifth Edition

17–1. Disallow Prepayments

Many employees do not have the monetary resources to see them through until the next payday. Their solution is to request a pay advance, which is repaid at the time of the next payday. It is a humane gesture on the part of the payroll manager to comply with such requests, but it plays havoc with the efficiency of the payroll department. Whenever such a request is made, the payroll staff must manually calculate the taxes to take out of the payment, then manually cut a check and have it signed. However, the inefficiencies are not yet over! In addition, the staff must manually enter the pay advance in the computer system so that the amount is deducted from the next paycheck. For larger advances, it may be necessary to make deductions over several paychecks, which requires even more work. Clearly, paycheck prepayments do not help the efficiency of the payroll department. This is a particularly large problem in companies where a large proportion of the employees are paid at or near the minimum wage, since these people may not receive enough money to meet their needs.

The solution is to create a rule that no paycheck prepayments will be handed out, which effectively ends the extra processing required of the payroll personnel. The trouble with this rule is that a needy employee can usually present such a good case for a pay advance that exceptions will be made, which grinds away at the rule over time until it is completely ignored. Other managers will assist ...