Accrued payroll is an accounting method that tracks a company’s outstanding debts and liabilities related to employee compensation. Instead of only recording expenses once they have been processed and paid out, accrued payroll includes pending expenses and debits. This approach provides a more accurate understanding of the company’s financial obligations and cash flow in each pay period.
What is Included in Accrued Payroll?
Accrued payroll encompasses all types of employee compensation, not just gross wages. This includes:
- Salaries and hourly wages
- Commissions and bonuses
- Paid time off (PTO)
- Payroll taxes and employee benefits, such as:
- FICA (Federal Insurance Contributions Act) taxes (Medicare and Social Security)
- Pensions and retirement plans
- State income taxes
- Unemployment taxes
By accounting for these various components, accrued payroll helps business owners and payroll managers think in terms of “what do we owe?” rather than simply focusing on the amount deducted from the company’s account.
Benefits of Accrued Payroll
Tracking payroll using the accrual method offers several key benefits for businesses:
1. Simplified Wage-Related Expense Reporting
With accrual accounting, bookkeepers record wage expenses as labor is performed, rather than waiting until the paycheck is actually processed and distributed. This helps avoid unexpected expenses that can arise if, for example, an employee cashes multiple paychecks at once.
2. Reduced Accounting Errors
By calculating wage expenses in advance instead of at the last minute, the likelihood of payroll mistakes significantly decreases. Accountants have access to a complete balance sheet at any given moment, reducing the chances of slip-ups, especially when combined with robust payroll software.
3. Improved Business Planning
Accrued payroll helps CEOs and budget managers keep track of current and incoming employee expenses, providing a more up-to-date understanding of the company’s cash flow. This information is crucial for decision-makers when setting the course of action regarding company spending and resource allocation.
Calculating Accrued Payroll
To calculate accrued payroll, follow these steps:
- Calculate salaries and hourly wages: Determine the gross wages payable for the pay period based on the number of working hours and the employee’s hourly rate or salary.
- Account for bonuses: Add any bonuses received by the employee during the pay period to the gross wages.
- Factor in employer-paid taxes and benefits: Calculate the employer’s portion of payroll taxes (e.g., FUTA, SUTA, FICA) and benefits (e.g., 401(k) match, insurance premiums) and add these to the total accrued payroll.
Accrued Payroll Journal Entries and Adjustments
An accrued payroll journal entry represents each written account of a transaction related to payroll accrual. These entries should be recorded in chronological order and fall into three main categories:
- Accrued wages: Payable wages owed to employees that haven’t been paid by the end of the accounting period.
- Manual payments: Printed checks given to workers.
- Initial payroll records: Gross wages, withholdings, and payroll tax expenses.
Adjusted payroll entries bridge the gap between the last payment for a particular pay period and the date the accountant prepares the company’s financial statements. To record adjusting entries:
- Note the time frame between the last payment and the date of the next financial journal statement or the end of the accounting period.
- Count the employees owed daily wages and calculate the accrued wage cost per day.
- Calculate total accrued expenses using the formula:
- Number of days × Employees’ daily accrued wage cost = Total accrued payroll expense
It is essential to reverse all accrued payroll entries once employees receive the wages and other payments owed to them. Failing to reverse these entries can lead to double-counting in the next pay period, causing payroll errors that may impact income statements, balance sheets, and reported cash flow. Payroll software can automate much of this process and reduce the risk of human error.
Conclusion
Accrued payroll is a valuable accounting method that provides businesses with a more accurate and up-to-date view of their financial obligations related to employee compensation. By tracking pending expenses and debits, companies can better allocate costs, avoid unexpected payments, and make informed decisions about resource allocation and growth. Implementing accrued payroll, along with the use of payroll software, can help streamline financial reporting, reduce errors, and improve overall business planning.
