In the accrual basis of accounting, the transaction is recorded in accounting books even if one or more aspects of the transaction are incomplete. The credit sales or credit purchases are recorded in the books of accounts even before receiving or paying the cash proceeds. The accrual basis of accounting gives rise to accruals in the general ledger and all other accounting books.
Accrued payrolls are an important item in the balance sheet and accounting books of a business entity. The term ‘payroll’ is often used in businesses for recording the net salaries, wages, bonuses, taxes, deductions, and insurances of the business entity.
Payroll is similar to the nature of individual items included; that is an expense. However, the accounting treatment of each item included in the payroll is slightly different from the other. Therefore, understanding how each item is being accounted for plays an important role in calculating expenses and liabilities.
Wages and salaries are the primary items recorded in the accrued payroll of a company. All the taxes, deductions, contributions, PTOs, etc., are calculated based on the wages and salaries. Therefore, this article will focus on the accounting and classification for the accrued wages in a company’s accounting records.
What Are Accrued Wages?
Accrued wages can be defined as,
The employee earns wages during an accounting period but is not received by the employer in the same accounting period. The accrued wages are due at the end of a financial period and recorded in the liabilities section of a balance sheet as a current liability for the business entity.
Understand the example of accrued wages by the example of Tina, an hourly wager, at a Jeans manufacturing company. She is paid at 25 USD per hour and receives payment every week. The company does monthly accounting. The amount due in the last week of every month is accrued for the next month. It is recorded in the balance sheet as a liability for the business entity.
Accrued Wages Vs. Wages Expense
It is important to know what wages are to understand the difference between accrued wages and wages expense. Wages expense represents the net amount of wage that employees have earned during any given financial period. The monthly wages company pays to Tina are all part of the wages expense.
However, the part of monthly wages due in the last week of a month is treated as accrued wages for the business entity. This example highlights the difference between the wages expense and the accrued wages account. Accrued wages are a part of the payroll expense, and it is always a liability. On the other hand, wages expenses can be due or paid.
The wages and salaries are an expense for a business. If the business entity had paid its employees, the cash would be credited. On the other hand, if the cash is not paid but payable, the liability account of the business entity is increased. Therefore, the accrued wages account is created to record the effect of this transaction. In a nutshell, accrued wages are liabilities for any business entity and are recorded in the balance sheet.
What Is Included In Accrued Wages?
The accrued wages of a company includes the following accounts in general:
Wages and salaries of employees are remuneration or compensation of services they have provided to a business entity. The salaries and wages represent the compensation before the tax deductions and retirement contributions. The salaries and wages also include the fringe benefits and perquisites value provided to the employees of a business entity.
Most commonly, the bonuses earned in one financial period are paid in the next one. For instance, many business entities make announcements about the bonuses earned by employees at the end of a financial period and pay in the next year. Therefore, the bonuses are recorded as a part of accrued wages.
Employee-Paid Taxes, And Deductions
It is an open secret that tax becomes due every time your employee earns compensation and a business entity pays the employee. The taxes paid are used for employees’ retirement plans, health benefits, etc. payroll taxes are also added to accrued wages of employees. Some taxes that are deducted from employees wages are:
· 50% of Federal insurance Contributions Act(FICA) taxes
· Federal income tax
· State income tax, if applicable
· Unemployment Tax Act(SUTA), depending on your state
· Local taxes and state taxes
Let’s understand the calculation of accrued wages with the help of an example.
Let’s take the example of Tina, who is an employee at a textile company. She works at 20 USD per hour, 40 hours a week. The company pays her weekly, and her weekly income is credited to her account every Monday of the following week.
At the end of the financial year, her wages in the last week of December are unpaid as the new year starts. The company’s financial statements as of 31st December shows her wages of last week as accrued wages.
Here is what is included in her accrued wages:
Hours worked in a week = 40 hours
Hourly wage rate = 20 USD
Weekly Wages = 40 hours X 20 USD
Weekly Wages = 800 USD
Bonuses are also accrued as a part of the wages and salaries. Tina was told that she had earned a 1,000 USD bonus in the last year. On 31st December, 1,000 USD was recorded as a part of accrued wages and salaries.
Taxes And Deductions
The employee-paid taxes and deductions are subtracted from the wages expense. Therefore, keeping track of taxes and deductions is also important. The employee-paid taxes are as follow:
· 50% of Federal insurance Contributions Act(FICA) taxes = 112.6 USD
· Federal income tax = 180 USD
· State income tax = 99.8 USD
· Employee 401(k) contribution = 30 USD
Total employee paid taxes and deductions will be equal to 422.4 USD.
The amount of taxes will be deducted from the total wages expenses to get the accrued wages for Tina. The bonus and hourly wages are equal to 1,800 USD. If 422.4 USD is deducted from the 1,800 USD, we will be left with 1,377.6 USD as accrued wages of Tina.
Let’s understand the journal entries for accrued payroll by considering the same example of Leslie as we discussed above.
Let’s consider that Tina earned a 1,000 USD bonus and 800 USD wages for the final week of December. The amount of taxes and contributions identified were 422.4 USD. However, the journal entry of the wages expense will only account for the wages payable and the bonuses payable.
Any deductions to be made for tax and contribution will be made when accrued payroll entries will be made.
The journal entry in the books of account for the above example will be as follow:
|(Wages and bonuses of Tina are due and payable)
When the company converts the accrued wages into the company’s payroll account, a reversal entry will be made in books.
The final entry for accrued wages in the accrued payroll will be made as follow:
|Wages And Salaries Expense
|Federal Income Tax
|State Income Tax
|Employee’s 401(k) contribution
|The wages and salaries accrued are recorded in accrued payroll after deductions.
Impact On Accounting Equation
Let’s analyze the impact of accrued wages on the accounting equation of the business entity. We will go back to the example of Leslie.
Assets = Liabilities + Shareholders Equity
Let’s start with the entry of wages and bonuses. The entry will affect the accounting equation as follow:
Assets = Liabilities + Shareholders Equity
The upward directing arrow shows that the liabilities have increased because the wages and bonus of Leslie are a liability for the business entity. On the other hand, the downward directing arrow of shareholder’s equity signifies decreased profit. Shareholder’s equity consists of profits and the stock value. The wages are an expense for a company and, therefore, will decrease the profit.
Accrued Payroll Vs. Accrued Wages Vs. Accrued Salaries
Many people get confused between wages, payroll, and salaries. All three concepts are very similar. However, there are some differences between them. Let’s start with wages.
Wages are usually the hourly wages that are paid to the employees. Wages can be paid daily, weekly, or monthly. Let’s talk about the more objective definition. Wages are usually accounted for the direct labor or compensation of employees directly associated with manufacturing in a manufacturing concern, or let’s say, a salesman in the retail store.
Salaries are the compensation paid to employees for a pay period. Salary is usually a fixed price that is paid irrespective of hours worked. In accounting, salary is the term most commonly used for compensation of managers, marketing department employees, administration, etc.
On the other hand, payroll is a gross amount of all the wages and salaries paid or due on a business entity. The term payroll is used means that the net impact of taxes, deductions, contributions, etc has been recorded in the payroll ledger account.
In A Nutshell,
Wages, salaries, and payroll are inter-related terms, and all three are used to record the employer’s proceeds toward the employees. We hope that you will be able to calculate the accrued wages in the accounting books.