The accrued salaries are the amount of salary expenses for which the employees have done work, but it has not been paid yet by the business. This issue occurs when businesses are most likely to pay their employees on a certain date, but this date may not include all the work done until the end of the accounting period. It also happens when the company pays the salary to its staff not during the month that service is performed, but in the following month.
For example, if a business pays a total of $50,000 in monthly salaries on the 28th of December, it is most likely that the salaries of the remaining 3 days until the year-end (that is, 29th, 30th & 31st of December) has not been taken in to account when total expenses for the year-end were calculated.
Another example is the company is paying the salary to its staff for the month of January 2021, in February 2021. In this case, the company needs to accrue the salary expenses for the month of January 2021.
In this case, an accrued salary account allows businesses to allocate accrued salaries correctly using the accruals concept, which means that businesses base their expenses on what has been incurred rather than on a cash basis. Therefore, an accrued salary account is important to ensure that the business’s financial records are correct in terms of accruals and in line with accounting principles.
The amount of liability that remains unpaid at the end of a financial year for the employees’ salaries is known as accrued salaries. It refers to any unpaid compensation at the end of the year that the business should record as an expense that has been incurred but has not been paid out yet to the employees.
This is based on the matching principle of accounting from GAAP (Generally Accepted Accounting Principles), whereby any expenses have been incurred during the year, whether paid or unpaid, should be included as an expense at the end of the year, and similarly, any revenues earned during a year whether received or not must be recorded at the end of the year as accrued income. Since this amount is yet to be paid by the business, it must be written down as a liability.
As it is the amount the business owes to its employees for the services they have already rendered, accrued Salaries and wages tend to occur frequently within usual business operations. An accrued salary expense is likely to affect both the income statement and the company’s balance sheet. This is because an accrued salary expense affects both the expense account and the liability account.
Accrued Salary Expense Journal Entry
The accrued salary expense journal entry is made similar to the journal entries for other accrued expenses. An entry is made to the expense account as debit and to the accrued (liability) account at the same time as credit.
Let’s discuss the accounting equation so that it might help to understand the accrued salary easily.
A typical accounting equation is written as,
Assets = Liabilities + Owner’s Equity
The recording of accrued salaries journal entry is done in line with the accounting equation, which requires a liability to be stated under the liabilities section of the balance sheet.
Simultaneously, it is also recorded in the income statement as an expense. This, in turn, affects the equity part of the balance sheet by reducing the retained earnings as the net profit declines, which is included in the equity section of the balance sheet.
A journal entry for accrued salary would comprise of an entry to the salary expense account ( in P&L) and accrued salary expense account (in BS). This is in line with the principle of double-entry, whereby the amount of salaries expenses unpaid at the end of the accounting year would be recorded by debiting the Salary Expense account and by crediting the Accrued Salary account.
|xxx||Salaries Expense (P&L)||xxx|
|Salaries Payable (Accrued) (BS)||xxx|
What Are the Journal Entries When the Salary is Paid to the Staff?
When the company pays its staff the salary that they accrued in the previous period, that means the company will have to derecognize the liabilities (Accrued salaries) as well as the assets (it can be cash in hand or cash in the bank or similar assets) for the amount that is paid to its employee.
The journal entries are as the following,
|xxx||Salaries Payable (Accrued) (BS)||xxx|
|Cash or Bank||xxx|
So as we can see, the salary payable account or accrued salary will be reduced at the same amount of cash or bank is reduced.
What are the journal entries when over accrued the salaries?
Over-accrued salary happens when the company overestimates the amount that it is expected to pay to its staff. Accrual is the accounting estimate where the error of its will be adjusted prospectively.
The salary expenses of the month, year, or period that is over accrual will not affect. Yet it will affect the following month, year, or period.
At the beginning of the following month, the company will have to reverse the original accrued salary entries of the previous period in the current period. And then record the new payable amount in the current month.
Company ABC pays monthly salaries of $30,000 to its employees on the 4th day of the next month for the previous month. On 30th June 2021, the company prepared its financial statements for the year ending on 30th June 2021. The amount of salary expense owing on this day is $30,000, which will be made on the 4th of July 2021.
In this case, Company ABC will make an adjusting entry on 30th June 2021 for the accrued salaries to be recognized and recorded in the year-end financial statements. This will be done by making the following journal entry:
|30 June||Salaries Expense||$30,000|
This journal entry will recognize the liability of the business by recording outstanding salaries.
In addition to this, the Accrued Salaries or Salaries Payable account will also be used to make an adjusting entry when the amount owing as salaries is paid off to employees. This is fine to recognize the payment of the expense and reduce the liability associated with it.
When a payment is made to clear the dues for accrued salary expense, an entry must now be made to the Salaries Payable account and cash account. In this case, the business will again make two entries by debiting the Salaries payable account with the amount of the salaries paid and crediting the cash account with the same amount.
This will be explained by an example below:
On 4th July 2021, Company ABC made a payment of $30,000 as salaries, which was outstanding at the year ending on 30th June 2021.
The following journal entry will be made to recognize the payment of this outstanding expense:
|4 July||Salaries Payable||$30,000|
This entry will enable the business to reduce the current liabilities with a corresponding reduction in the current asset and settle the outstanding expense.