Definition:
Salary payable is the amount of liability or payment of the company towards its employees against the services provided by them but not yet paid at the end of the month, year, or for a specific period. These amounts include the basic salary, overtime, bonus, and Other allowance.
These payables are required to recognize the salaries expenses in the company’s financial statements at the end of the period.
Salary payable is a current liability account containing all the balance or unpaid wages at the end of the accounting period.
The amount of salary payable is reported in the balance sheet at the end of the month or year and is not reported in the income statement.
This account is a current liability because its balance is usually due within one year. The balance of this account increases with credit and decreases with debit entries.
Difference between the salary expense and salary payable:
The difference between the salary expense and salary payable is the same that lies between an expense account and a liability account.
Salary expense is the wage that an employee earns during the period, irrespective of whether it is paid or not by the company.
In other words, it is all the company’s expenses during the period. For example, if you read the income statement from 1 Jan to 31 December 2021, then in the line of salary expenses shown in the income are all of the expenses that the company incurred.
For example, a waiter’s salary for a KFC branch after he serves for the whole Year. The salary expense account is nominal and closes in the profit & loss statement.
Salary payable is a liability account keeping the balance of all the outstanding wages. If the salary expenses during the year are USD100,000,000, but out o this amount, only USD80,000,000 were paid at the end of the year, then the different amount of USD20,000,000 should be the salary payable.
Every company doesn’t need to maintain salaries payable account because some companies pay their employees at the end of every month, so in that situation, there is no liability present at the end of the month.
In short, the difference between salary expense and salary payable is that the salary expense is the total expense for the period while the salary payable is only the amount of remuneration that is due.
We also have an additional example with journal entries to illustrate this.
Accounting treatment of salary payable:
Salary payable is classified as a current liability account under the head of current liabilities on the balance sheet. All the general rules of accounting are also applicable to this account.
When the salaries expenses are recognized, but the company has not paid yet to its staff, the following journal entries should be recorded:
Dr Salary expenses XXXX
Cr Salary payable XXXX
And if the salaries are pay to its staff, then the following journal entries should be recorded:
Dr Salary payable XXXX
Cr Cash or bank XXXX
Salary expenses are the income statement account, and it records all of the salary expenses that occur during the period or year. However, the salary payables account is the balance sheet account that reports only the unpaid amount.
The same as other liabilities accounts, salary payables increase is recorded on the credit side, and when it is decreasing is recorded on the debit side. The recording is different from the recording of assets or expenses, which is the same as revenues and equity.
Salary payable Vs Accrued salary expenses:
Accrued salary expenses are different from the salaries payable. The company knows the exact amount of payment to be paid and actually incurred in the salaries payable.
However, the company’s accrued salary expenses are the expenses that the company is expected to incur based on its best estimate. However, the company does not yet know the exact amount incurred. The company needs to accrue the expenses.
Types of Accounts
Salary expenses are the income statement account. It is sometimes recorded under the cost of goods sold, cost of services, or operating expenses depending on how the staff is involved in the operation.
Salary payable and accrued salaries expenses are the balance sheet account and are recorded under the current liabilities sections. This account decreases when the company makes payments to its staff.
Can the Salary Payable be treated as a non-current liability?
Commonly, it will be paid within 12 months from the year-end of financial statements, and it is not generally more than that. Therefore, salary expenses are not classified as a non-current liability unless there is an agreement between the company and staff that the salary expenses are paid within more than 12 months. As of the reporting date, the unpaid amount, which will be paid in more than 12 months from that date, is classified as non-current liabilities.
Are Salary Expenses on the Balance Sheet?
No, salary expenses are not reported or recorded in the balance sheet. Salary expenses are only recorded in the company’s income statement for the period they are incurring.
However, if the company does not make the payment on time during the month that the service is provided, salary expense is considered payable and reported on the balance sheet.
Example:
Pass the journal entries and make salaries payable ledger account for the following transactions of Abdan & Co on 30th January 2019.
The opening balance of salary payable amounts to USD30,000.
- The total salary expense for January is USD20,000. Out of which, USD10,000 was paid on 30th January, while the remaining balance is still unpaid.
- During the month, USD5,000 is paid against the previous month’s salary.
- Wages of 30th January are still unpaid due to a cash shortage at the office amounting to USD2,000.
Solution:
Journal Entries:
- Entries
Dr. Salary Expense $20,000
Cr. Cash $10,000
Cr. Salaries & Wages Payable $10,000
2) Entries
Dr. Salaries & Wages Payable $5,000
Cr. Cash $5,000
3) Entries
Dr. Wages Expense $2,000
Cr. Salaries & Wages Payable $2,000
Ledger for Salaries & Wages Payable:
| Description | Dr | Cr | Balance |
| Opening Balance | $30,000 | ||
| Salary Expense | $10,000 | $40,000 | |
| Cash | $5,000 | $35,000 | |
| Wages Expense | $2,000 | $37,000 | |
| Ending balance on 30th January | $37,000 |
The balance sheet of Abdan & Co will show a balance of $37,000 in their salaries and wages payable account under the head of current liabilities.
Most big companies further divide the salaries payable account as per demography or department to get a clearer picture of their salary payable account.
But for small to middle size organizations, one ledger account is more than enough to record all their payables related to their employees.
Should the Bonus Payable be Included in Salary Payable?
From an accounting perspective, Bonbus Payable is also included or the same accounting classification as salary payable. And in most cases, it is also treated as the same from the tax perspective.
So when the company decides to pay the bonus to its employees, then those accounts should be treated as the bonus expenses under the salary expenses classification and then recognized as payable at the same time on the balance sheet.
What if Salary Payable Subsequently Not Pay to Staff? How to Account for It
As we discussed, the salary payable is the amount subjects pay to employees for the service they provide to the company. And this amount will be paid within 12 months.
In most cases, within 1 month. But, sometimes this amount is not required to pay based on the company and staff’s different reasons.
It might be because of over accrual, wrong calculation, staff not coming to collect, and other reasons.
Assuming the conclusion is not to pay to staff, the unpaid amount should be reversed from the payable and then recognized as other income or offset with the current period salary expenses. We should not touch on the expenses that already records in the previous period if the previous period is closed or audited.
