The accrual principle in accounting is a concept that requires entities to record transactions in the period in which they occur. This concept goes against the cash accounting method in which entities only account for cash transactions. However, the accrual principle does not consider the timing of the cash flows. There are several accounts that entities must maintain to follow this principle. One of these includes salary payable.
What is Salary Payable?
Salary payable is an account that entities maintain to record unpaid salary expenses. It represents the amount of liability that entities owe their employees. Usually, entities pay their employees after the month in which they work. However, as every month ends, entities incur salary expenses. Under the accrual principle, entities must record these expenses.
Entities usually pay off salary expenses after the end of the month. Despite the cash flows being on a different date, entities must record salary payable. Although named “salary” payable, the account may also contain various other employee-related expenses. These may include basic salaries, overtime, bonuses, benefits, and other allowances.
Usually, entities settle salaries payable within a few days. Therefore, the account does not often include any balances. However, when entities close their accounts and prepare financial statements, they must report salary payable. Since the liability gets settled within a few days, it will fall under current liabilities on the balance sheet. The related salaries expense will get reported on the income statement.
How to calculate Salary Payable?
Calculating salary payable is straightforward. Entities can calculate the amount by aggregating all employee-related expenses for a month. As mentioned, these will include employee salaries, wages, taxes, overtime, bonuses, and other related amounts. A sample formula for salary payable is as follows.
Salary Payable = Salaries + Wages + Bonuses + Employment Benefits + Overtime + Other Allowances
However, the above salary payable formula may not apply to every entity. Furthermore, the calculation is more complex in practice. Entities must calculate the salary expense for every employee separately. After that, they must aggregate those amounts to reach salary payable.
What is the journal entry for Salary Payable?
The journal entry for salary payable involves recording salary expenses and creating a liability. At the end of every month, entities must record this expense. Since there is no cash settlement involved at the date, increasing current liabilities is mandatory. Therefore, the salary payable journal entry will be as follows.
Dr Salary Expense
Cr Salary Payable
When entities settle the salaries at the start of next month, they must decrease the salary payable account balance. Therefore, this account also has another journal entry. The entry involves removing any remaining balances from the account that an entity settles. Nonetheless, the second journal entry for salary payable will be as follows.
Dr Salary Payable
Dr Cash/Bank
Example
A company, Kite Co., has over 100 employees. The total salaries expense at the end of each month for these employees is $100,000. Similarly, the company pays its employees on the 5th of next month for their work. At the end of each month, Kite Co. must record a salary expense and payable. Therefore, the company must use the following journal entries.
Dr Salary Expense $100,000
Cr Salary Payable $100,000
On the 5th of the next month, the company settles the entire amount through the bank. Therefore, Kite Co. must remove the balance from the liability account. The journal entries will be as follows.
Dr Salary Payable $100,000
Dr Bank $100,000
Conclusion
Salary payable is an account that entities use to record accrued salary expenses. This account exists due to the accrual principle in accounting. Salary payable includes various expenses, including salaries, wages, bonuses, overtime, allowances, etc. Once entities settle the amount, they must decrease the account balance.
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