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Companies pay their employees after predefined intervals. However, accounting requires them to recognize any liability incurred for those expenses regardless of the payment. Therefore, companies use accrued payroll to track it.
What is Accrued Payroll?
Accrued payroll is a fundamental concept in accounting that represents the accumulated amount of employee compensation earned but not yet paid by a company as of the end of an accounting period. It includes various components such as wages, salaries, bonuses, commissions, benefits, and payroll taxes that employees have earned but have not received in cash or check.
The accrual of payroll occurs because of the time lag between when employees perform work and when they receive their compensation. This time difference is common in many businesses, especially those with regular pay periods such as weekly, bi-weekly, or monthly. From an accounting perspective, accrued payroll gets recorded as a liability on the company’s balance sheet.
What is the accounting for Accrued Payroll?
Accrued payroll accounting involves recognizing the wages, salaries, bonuses, benefits, and taxes employees have earned but not yet received as a liability. After every accounting period, an adjustment records the accrued payroll expense and increases the accrued payroll liability. This adjustment ensures that the income statement accurately reflects the expenses incurred during the period, regardless of the payment.
The accounting process for accrued payroll helps businesses maintain accurate financial statements by reflecting the true obligations and expenses related to employee compensation. It also facilitates effective cash flow management and budgeting by ensuring that payroll expenses are properly recorded and accounted for in the appropriate periods.
What is the journal entry for Accrued Payroll?
The journal entry for accrued payroll involves recording an increase in salaries and wages expenses. This expense includes all labor-related costs that a company bears. On the other hand, it also increases the accrued payroll liability. The journal entry is as follows.
| Dr | Salaries expense |
| Cr | Accrued payroll |
The above journal entry for accrued payroll only recognizes labour-related expenses incurred. However, it falls under the accrued category because the company has not paid for it yet. Once the company compensates its workers, it must reduce the liability using the following journal entry.
| Dr | Accrued payroll |
| Cr | Cash or bank |
Example
At the end of January, Green Co. calculates its total salaries and wages expenses to be $5,000. At the time of the calculation, the has incurred the cost and must record it using the following journal entry.
| Dr | Salaries expense | $5,000 |
| Cr | Accrued payroll | $5,000 |
After five days, Green Co. pays all its employees through cash. The company records this transaction as follows.
| Dr | Accrued payroll | $5,000 |
| Cr | Cash | $5,000 |
What is the importance of Accrued Payroll?
Accrued payroll ensures that financial statements accurately reflect the company’s financial position by recognizing the liabilities associated with employee compensation that have been earned but not yet paid. It helps present a true and fair view of the company’s obligations and expenses at the end of an accounting period.
Secondly, accrued payroll is crucial for effective cash flow management and budgeting. By recording accrued payroll expenses, businesses can plan and budget for future cash outflows related to employee compensation more accurately. It allows companies to allocate resources efficiently, anticipate financial commitments, and avoid cash flow shortages or surprises.
Conclusion
Accrued payroll is an account that records labour-related expenses that a company has incurred but not yet paid. It appears as a liability on the balance sheet until the company compensates its workers. On the other hand, it also increases the expenses for costs incurred. Accrued payroll is crucial in accurately reporting expenses and liabilities.
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