Employment contracts regulate the relationship between an employee and employer. It includes a signed agreement between an individual and another entity.
Usually, the entity may consist of a company or business. In some cases, it may also involve other individuals or organizations. The individual is the employee, while the other entity becomes the employer in this contract.
The employment contract establishes the rights and responsibilities of each party involved in the process. It allows both parties to understand how they must act to fulfill the criteria for those areas.
On the other hand, it also helps them clarify their expectations. Employment contracts include various crucial components or terms. These terms dictate and apply to the overall length that the relationship exists.
One of the most crucial parts of an employment contract is salaries and wages. These are the compensation an employee receives for their work.
For the employer, it is the amount paid based on several factors. Employers include these amounts in an account known as wages expense. Before discussing its accounting, it is crucial to understand this account.
What is the Wages Expense account?
The wages expense account holds the total costs of paying employees for their work. However, it can affect various areas and components. Usually, the wages expense account only includes the costs of paying employees an hourly wage. It involves calculating the time an employee has worked hours over a specific period. Then, it requires multiplying that time with the hourly rate from the employment contract.
However, companies may only maintain single wages account to record all employee-related expenses. In that case, the wages expense account can include other items. They may consist of salaries, taxes, bonuses, overtime, etc. The wages expense account can help companies consolidate all payments to employees under a single roof. However, companies may also maintain different accounts for each area.
The wages expense account is crucial in helping companies determine the amount they must pay employees. However, it does not constitute the actual payments. Under the accruals concept, the wages expense account only holds the costs incurred for employees. Accounting principles do not require a settlement for these amounts to record the related expenses.
The wages expense account is a crucial part of the income statement. It increases the expenses recorded in that statement. However, companies must segregate those expenses into several headings. For example, they must separate wages paid to production staff from the administrative staff. This step is crucial in reporting expenses under the accurate headings in the income statement.
Overall, the wages expense account helps companies record the hourly compensation paid to employees. It requires two crucial components. The first is the hours worked by employees for a specific period. Usually, it comes to form the timesheets or other internal records within a company. The second is the hourly rate for each employee. This information comes from the employment contract.
What are the types of expenses in the Wages Expense account?
The wages expense account includes the hourly rate paid to employees based on their work. However, this definition only covers the most common type of expense in the wages expense account. It is known as time wages. For some companies, other costs may be a part of this account.
Some companies may pay wages based on the units produced by a worker. In that case, it falls under the piece wages type of expense in the wages expense account. In this type, a company calculates the wages expense by determining the units produced by a single employee. Then, they multiply that amount with the per-piece rate to determine their wages.
Lastly, companies may also pay wages based on other criteria. This process may involve a specific calculation based on the contract with the workers. It is known as the contract wages type of expense in the wages expense account. In this type, companies pay their employees for every job they complete. For example, they reimburse them per house built in a house development contract.
What is the accounting for the Wages Expense Account?
The accounting for the wages expense account is straightforward. It is a part of a double-entry to record an increase in the wages incurred during a period.
Usually, companies use this account to create an expense during a financial period. On the other hand, accounting also involves another side. This site records the different accounts impacted by the wages expenses.
The wages expense account is the debit entry for the accounting for wages incurred. This accounting process increases the balance within that account.
Subsequently, companies transfer the total expense recorded in that account to the income statement. At each period-end, companies reset this account to cover one period only.
On the other hand, accounting for wages expense also involves a credit entry. However, this part is not as straightforward. Usually, companies incur the wages expense before paying for them.
In those cases, the credit entry will be an accrued expense account. Companies may name this account as wages payable or other similar terms. This entry will increase liabilities.
However, companies may also pay wages simultaneously as they incur them. In those cases, the credit entry will involve cash/bank accounts.
However, companies rarely pay their employees for the costs incurred. The bank or cash account may still be a part of the process. When companies pay their employees later, they will use these accounts to reimburse them. However, those entries won’t involve the wages expense account.
Is the Wages Expense Account an Asset, Liability, Equity?
The above accounting for the wage expense may create confusion. Some people may wonder if it is an asset, liability or equity. However, the most straightforward answer to that question is none of those. As the name suggests, the wages expense account is an expense in nature. In accounting, it represents the outflow of economic resources during a period. Therefore, it constitutes an expense.
The wages expense account isn’t an asset because it does not meet the definition. An asset is a resource that companies own or control. However, the wages expense account does not represent a resource. It shows the outflows of economic benefits during a period. In contrast, assets involve an inflow of those benefits in the future. Therefore, the wages expense account does not constitute an asset.
The wages expense account isn’t a liability either. Liabilities create an outflow of economic benefits in the future. Therefore, some may think that the wages expense account falls within that category. However, it does not. The wages expense account may create a liability. However, that comes through a credit entry to the wages payable or accrued expenses accounts.
The wages expense account isn’t a component of equity either. Equity represents the residual interest in a business after deducting its liabilities from its assets. Essentially, it shows the rights of a shareholder in a company if it goes under liquidation. However, the wages expense account merely represents an outflow of economic resources.
However, the wages expense account may impact equity indirectly. It occurs since this account increases the expenses for a specific period. These expenses reduce the profits for that period. Consequently, it decreases the retained earnings for that period. It impacts the equity on the balance sheet. However, the wages expense account does not constitute equity in accounting.
The wages expense account holds the total hourly costs for employees for their work done. It involves calculating the hours worked and hourly rate for those employees. However, some companies may also formulate those amounts based on other criteria. The wages expense account is neither an asset nor a liability or equity. Instead, it falls under an expense account, as the name suggests.