June 06, 2021

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Accrued Payroll Explanation

Accrued Payroll Explanation

Definition

Every business owner will likely come across the term accrued payroll sooner or later. As you probably know, wages and salaries mean the same thing. This is the amount you pay your employees. At the same time, wages may vary from period to period based on hours worked or performance, while salaries are fixed payments.

Accrued Payroll Explanation

Accrued expenses, such as payroll, are considered to be short-term liabilities. Accordingly, accrued payroll is how much the organization still has to pay its employees. Accrued payroll is a salaries and wages expense that a business has incurred but has not yet recorded or made a payment for.

The accrued payroll is an expense that will be paid out in the future, but right now, in the present, you are still waiting for that to happen. Why is this important? Because most businesses have to adhere to the accrual basis of financial accounting.

All the payroll accruals and deductions can be typically divided into the following groups:

  • Periodic (scheduled). It is known in advance about the need for their accrual (withholding), their calculation is performed regularly on a weekly or monthly basis.
  • One-time. Their accrual (withholding) is made if necessary, and additional information is usually required.
  • One-time charges and deductions. These include vacation pay, sick leave, bonuses, and other one-time surcharges, fines, and other one-time deductions.

How to Calculate Accrued Payroll

The end of the accounting period, whether it is a year, quarter, or month, does not usually fall on payday. Therefore, most employees owe some wages and salaries to their employees on that date. This means you need to make a journal entry for the payroll expense that has accumulated to that date but you have not paid yet.

Accrued Payroll Explanation

Every day, for example, you have to pay our employees a total of $2,200 and your employees work a five-day workweek. In your company, employees are paid every Friday. Thus, every Friday, the Cash account decreases and the Salaries Expense increases. Assuming that the month of July starts on Monday, you will owe your employees $11,000 on July 5th. On the 12th, 19th, and 26th day of the month, the same thing would happen and you will increase your Salaries Expense account and lower the Cash.

The fun part is the last week of the month, where July 31st falls on Wednesday. As of the end of the month, you owe salaries for the 3 days your employees worked, but this will not be paid until the next month (August 2nd).

At the end of the month, the bookkeeper needs to update the journal to show that your company owes $6,600 ($2,200 x 3 unpaid days) to employees at the end of July. So, which accounts must be updated as of July 31st. The journal entry to account for the accrued payroll at the end of the month is represented below.

Account

Debit

Credit

Payroll Expense

$6,600

Payroll Payable

$6,600

Once the company pays the full week of salaries on August 2nd, it will get rid of the debt under the Payroll payable with an adjusting entry by debiting that account for $6,000. It will also record a Payroll expense for the remaining two days and lower the Cash for all five days.

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Author: Charles Lutwidge

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