March 22, 2024

Salary slip also known as a pay slip is provided to employees to record their monthly pay and allowances. It is a document that makes the employees aware of their incomes and deductions as it would differ from employee to employee. Importance of Salary Slip The salary slips act as evidence of employment. It proves that the organization has permanently recruited an employee. This is handy in negotiating with new employers for a better pay. Salary slips aid to apply for loans in banks. It is an authentic proof of income and used to file income tax returns. It serves as a proof for PF and insurance deductions. All employees must receive payslips on a monthly basis as it is the proof of his employment in an organization and is required for various compliances filing like income tax filing and PF return filing. If an employee has not received it, he/she could speak with their payroll team to have it sent automatically post payroll processing. Computerised and Manual Salary Slip Manual salary slips are outdated now as most of us work in paperless offices and the pdf file of a salary slip is received on the date of the salary.  Issuing manual salary slip might be time-consuming and might consume a lot of paper. Computerised payroll consumes substantially lesser time.  Computerized payslip or the E-payslip could be printed or used at the employee’s convenience. Lesser cost is incurred as it is automated. It secures the data, thereby maintaining its confidentiality. Manual papers are generally issued to provide the original salary slip with the company’s seal and signature of the authorized official. Validity of a Salary Slip Manual payslip and the e-payslip are lawful and valid proof documents. It had to be noted that an issued and authorized payslip must not be manipulated or modified as it might be a criminal offense to edit a pay slip. Components of a Salary Slip Organizing salaries and processing payroll is an inevitable responsibility for every HR and payroll team. While creating the ideal salary structure, we must keep in mind that the payslip should be tax efficient, reduce employer’s liability and must be compliant with the minimum wages and PF Laws. The components are sub-divided into 2 sides which are as follows. Income or earnings Deductions We look into the various components of a salary slip in the paragraphs below: Income- The payslip is divided into 2 sides, we record all types of incomes or gains or allowances on the left hand-side of the payslip. Let’s examine the possible incomes recorded on a payslip of an employee. Basic Salary + Dearness Allowance- This is the prime and main component of a salary structure. It is the biggest component comprising around 40% to 45% of the total salary. This is the basis for calculation of various other components such as PF, gratuity, ESI etc. This component are completely taxable. Just as basic salary, dearness allowance too would affect the salary components. It is to be noted that both basic salary and dearness allowance must neither be high nor be low. If high, it would affect the tax liability of an employee. If low, it would be non-compliance of the state’s minimum wages rules. House Rent Allowance- The House Rent Allowance, as the name suggests, is an allowance to pay out the house rent of employees, which could be claimed in the year end. The employee could get an exemption from income tax for HRA. HRA would be calculated usually at 50% of the Income Tax. Know more about House Rent Allowance. Conveyance Allowance- This has been mainly added for an employee to cover his expenses from home to work and return, it is also exempt from income tax to a certain amount. The maximum amount that is tax deductible under this component is Rs. 1,600 a year to Rs. 19,200 a year. Leave Travel Allowance– Leave travel allowance (LTA) reimburses employees for their travel during their leave, provided it is within the confines of the country.  This component is mostly used by employers due to its tax emoluments. An employee could claim tax benefits for the fare expenses paid for his/her family when they take a holiday. However, there are restrictions to what you can claim as tax benefits: Only the travel fare expenses can be claimed. Stay and food on your trip aren’t covered. Travel must be within India. Immediate family that are mainly dependant on the employee are only covered under LTA. Medical Allowance- Medical allowance is a reimbursement for medical expenses made by employees. This amount is tax deductible up to Rs. 15,000 a year or Rs. 1,250 every month. In order to claim tax benefits under this component, employees must submit proof of their medical expenses. In case the Rs. 1,250 isn’t claimed in one month, then this amount is carried forward to the next month. This means that a progressive amount of Rs. 15,000 could be claimed at the end of the year. This is also the suggested quota that establishments generally assign to this section of the salary set-up. Child Education Allowance- This payment is made towards tuition fees of employees’ children and is tax deductible for the amount of about Rs. 100 every month for a maximum of two children. Hence, this sum is generally fixed up to Rs. 2,400 annually. Special Allowance- Special allowance is the component generally used by companies as the residue of Cost to Company (CTC) when the rest of the components have been paid out. This component is fully taxable and is also considered for the computation of Provident Fund Deductions- Deductions are facets of the salary structure wherein portions of CTC are deducted from the take-home salary of employees. We record all types of deductions on the right hand-side of the payslip. Let’s examine the possible deductions recorded on a payslip of an employee. Provident Fund- Provident Fund (PF) is calculated at 12% of Basic + Dearness Allowance + Special Allowance. The employer and the employee both

Days Sales Outstanding (DSO) is the average number of days taken by a firm to collect payment from their customers after the completion of a sale. As a business owner, you can also view DSO as the number of days it takes for credit sales to be converted to cash, or the number of days that receivables remain outstanding until they’re collected. What is Days Sales Outstanding (DSO)? Days Sales Outstanding (DSO) represents the average number of days it takes credit sales to be converted into cash or how long it takes a company to collect its account receivables. DSO can be calculated by dividing the total accounts receivable during a certain time frame by the total net credit sales. This number is then multiplied by the number of days in the period of time. The period of time used to measure DSO can be monthly, quarterly, or annually. If the result is a low DSO, it means that the business takes a few days to collect its receivables. On the other hand, a high DSO means it takes more days to collect receivables. A high DSO may lead to cash flow problems in the long run. DSO is one of the three primary metrics used to calculate a company’s cash conversion cycle. What is the Formula for Days Sales Outstanding? To determine how many days it takes, on average, for a company’s accounts receivable to be realized as cash, the following formula is used: DSO = Accounts Receivables / Net Credit Sales  X Number of Days Example Calculation-George Michael International Limited reported a sales revenue for November 2016 amounting to $2.5 million, out of which $1.5 million are credit sales, and the remaining $1 million is cash sales. The accounts receivable balance as of month-end closing is $800,000. Given the above data, the DSO totaled 16, meaning it takes an average of 16 days before receivables are collected. Generally, a DSO below 45 is considered low, but what qualifies as high or low also depends on the type of business. Different industries have markedly different average DSOs. Also, cash sales are not included in the computation because they are considered a zero DSO – representing no time waiting from the sale date to receipt of cash. What are the Indications of a High or Low DSO? A high DSO value illustrates a company is experiencing a hard time when converting credit sales to cash. But, depending on the type of business and the financial structure it maintains, a company with a large capitalization may not view a DSO of 60 as a serious issue. However, for a small-scale business, a high DSO is a concerning matter because it may cause cash flow problems. Smaller businesses typically rely on the quick collection of receivables to make payments for operational expenses, such as salaries, utilities, and other inherent expenses. They may struggle for cash to pay these expenses from time to time if the DSO continues to be at a high value. To solve high DSO issues, a company must determine what factors are affecting sales and collection. The situation may suggest the following various reasons: Credit issues with customers with a negative credit standing Sales teams are offering longer payment terms for customers to pump up sales Company is encouraging customers to purchase on credit, so they buy more products and services Company is inefficient or ineffective in its collection process On the other hand, a low DSO is more favorable to a company’s collection process. Customers are either paying on time to avail of discounts, or the company is very strict on its credit policy, which may negatively affect sales performance. However, having a low DSO for small to medium-sized businesses generally carries considerable benefits. Fast credit collectability decreases problems related to paying operational expenses, and any excess money that is collected can be reinvested right away to increase future earnings. FAQS What is Days Sales Outstanding (DSO)? Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes a company to collect payment from its customers for credit sales. It indicates the effectiveness of a company’s accounts receivable management and its ability to convert credit sales into cash. Why is DSO important? DSO is important because it provides insights into a company’s cash flow management, liquidity, and overall financial health. It helps identify trends in customer payment behavior, assess the effectiveness of credit policies, and identify potential areas for improvement in accounts receivable management. 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