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Companies pay employees through various forms of compensation. Usually, companies have two types of employees classified based on these forms. These include salary and wage expenses for employees. The former category receives a fixed compensation, while the latter gets compensated based on hourly work. Typically, companies use a wages expense account for the wage class of employees.
What is the Wages Expense Account?
The wages expense account is a record-keeping tool to track the cost of paying employees during a specific period. It helps companies that compensate their workers with a salary or hourly wage. Typically, the wages expense account appears as a separate expense item on a financial statement called the income statement. It shows the total cost of wages paid to employees during that period.
Tracking wages expense is crucial for businesses because it helps them monitor labor costs. Similarly, it also helps with managerial decisions and analysis. The wages expense account allows companies to comply with tax laws and regulations by accurately reporting their payroll expenses. Every company maintains this account as a part of its accounting system for tracking employee wages.
What is the accounting for the Wages Expense Account?
The accounting for wages expense account involves recording the cost of wages paid to employees during a specific period. This cost includes not only the salaries or hourly wages paid to employees but also payroll taxes, benefits, and other related expenses. Typically, the accounting for wages expense account involves recording these expenses as a part of a single account.
The wages expense account records these expenses through a debit entry. The credit side includes the form of compensation. Usually, the accounting treatment in the wages expense account occurs through the accrual concept in accounting. The expense becomes a part of the income statement as a part of operating expenses. It may also impact the balance sheet if the wages and other expenses are payable later.
What is the journal entry for the Wages Expense Account?
The journal entry for wages expense involves recording various items in the account. As stated above, these may include expenses, such as wages, taxes, benefits, etc. When these items accrue, companies must record them in the wages expense account. It is a part of the requirement under the accruals concept in accounting.
The debit entry for the wages expense account is this account itself. However, the credit side may differ based on the type of expense getting recorded. For example, when a company records wages payable to employees, the journal entry is as follows.
|Dr||Wages expense account|
When a company records taxes payable to wages-related employees, the credit side will differ. The journal entry, in that case, will be as below.
|Dr||Wages expense account|
When the company pays these amounts in the future, it must debit the credit-side account. On the other hand, it will record the compensation paid to settle the liability. However, that process does not impact the wages expense account.
A company, Red Co., incurs $10,000 in wages expense during a fiscal year. The company also calculates the taxes on these wages to equal $1,500. Similarly, other benefits related to employees amount to $1,000. Collectively, Red Co. records these items in a single journal entry as follows.
|Dr||Wages expense account||$12,500|
The wages expense account allows companies to record all wage-related costs. It records items such as wages expenses, taxes, benefits, etc. Usually, the accounting for this account involves creating an expense while crediting the relevant compensation account. In most cases, the credit side will be a payable account under the accruals concept in accounting.
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