If you've ever opened your accounts and thought "Why are my wages so high this month?" - you're not alone.

The Real Reason Your Payroll Looks Wrong

The confusion usually comes down to double counting.

Payroll doesn't just hit one place in your accounts - it flows through two key areas:

1. Profit & Loss (P&L) - Your Wage Expense

This is where your actual staff costs should appear:

Gross wages
Employer National Insurance
Pension contributions

This is the figure that shows the true cost of employing staff.

2. Balance Sheet – Your Payroll Liabilities

At the same time, your payroll creates liabilities - money you owe but haven’t paid yet, such as:

Net Wages

PAYE / Income Tax
National Insurance
Pension deductions

These sit on your balance sheet until they are paid to HMRC or your pension provider.

If these aren't handled properly, it can make your wage costs appear significantly higher than they actually are.

Where Things Go Wrong (And Why Payroll Looks Double)

Here's the key mistake:
Recording payroll correctly and then manually entering wage payments again.

This leads to:
Wages being recorded in the P&L ✅ (correct)
Then recorded again in the P&L when payments leave your bank ❌ (duplicate)

Result?
👉 Your payroll suddenly looks twice as high as it really is.

Where It Goes Wrong

The issue usually arises when payroll is:

Entered correctly...and then recorded again when payments leave the bank.

For example:

Payroll is processed → wages correctly recorded ✅
Bank transaction comes through → coded as 'wages' again ❌

👉 This creates duplicate entries, making payroll appear inflated.

A Simple Example

For this example I am going to ignore tax and National Insurance.


Wages for the month are £5,000.
When Quickbooks and Xero run the payroll they will create an expense in the P&L of £5,000, and
also a liability of £5,000, i.e at the time the payroll is run the business owes its staff £5,000.
When the payment is made it should go against the liability, because the business does not owe it
any more. Result is £5,000 has come out of the bank, the liability is £nil and wages are £5,000.
What often happens is that when the payment is actually made it gets posted incorrectly to the
expense, result is wages not of £5,000 but of £10,000, with £5,000 still being shown as due.

Why This Happens So Often

Even with software like QuickBooks and Xero, this issue is common because:

Bank feeds make it easy to categorise transactions quickly
Payroll journals aren't always fully understood
The difference between gross pay and net pay isn't always clear
Payroll systems aren't always set up or integrated properly

It's not a mistake caused by carelessness - just a gap in how the system works.

How to Fix It (and Avoid It Going Forward)

In most cases, the fix is straightforward:


Review how payroll journals are being posted
Check how bank transactions are categorised
Ensure payments are matched to payroll, not re-entered
Confirm liabilities are cleared when payments are made

Once corrected, your payroll figures should immediately look more realistic.

Do You Need Separate Advice for QuickBooks vs Xero?

The principle is the same in both systems:

👉 Payroll creates an expense and a liability - not just a bank payment.

The differences are in how each platform:
Posts payroll journals
Matches bank transactions
Clears liabilities

If something looks off, it's usually down to setup rather than the software itself.

When to Take a Closer Look

If your payroll figures:

Seem unusually high
Don't match what you're actually paying staff
Are affecting your reported profit

it's worth reviewing sooner rather than later.

Left unchecked, this kind of issue can:
Distort your financial position
Lead to confusion at year-end
Make decision-making harder than it needs to be.



Need a Second Opinion?

If you're unsure what's causing the issue, it can often be identified quite quickly.

A short review is usually enough to:
Spot duplicate entries
Correct the treatment
Give you confidence in your numbers again

Get in touch if you'd like a free consultation - there's no charge for an initial chat.