Accrual Example: Salaries Payable (Updated 2016)
Why do businesses need to know about salaries payable?
Accounting experts and business owners must be aware of the amount due for salaries in order to pay employees on time and stay within budget. There are numerous reasons why a company might not have paid an employee’s entire salary by the end of an accounting period, resulting in a balance for salaries payable. Some common reasons companies record salaries payable include:
What is salaries payable?
A type of entry known as “salaries payable” in business accounting journals details how much a company owes its employees. When a manager or accountant owes their staff salary pay but hasn’t yet distributed the funds, they record salaries payable. Salaries payable increase in accordance with an employee’s earnings as they accumulate pay through work. When they receive paychecks, salaries payable decreases by that amount.
In a liability account where they track debts, accountants typically record their company’s or clients’ payable salaries. Debit entries reduce the total balance of a company’s salaries payable, while credit entries increase the amount. To accurately reflect a company’s financial situation, you typically record salaries payable at the conclusion of the accounting period.
Salaries payable in accrual accounting
Accounting professionals only have to keep track of salaries payable if their department or client uses the accrual accounting method to keep track of their finances. When a business uses accrual accounting, all revenue and expenses are recorded immediately, even if employees won’t receive payment until later.
When a company uses the accrual accounting method, sometimes the actual expenses paid do not match the accrued expenses. This implies that salaries payable and accrued expenses may not always equal the same amount. For instance, if an employee leaves suddenly, the company’s accrued salary expense may not match the salaries due. This is due to the possibility that the business recorded their full salary for a pay period during which they actually earned only a small portion of their usual paycheck prior to leaving.
Salaries payable vs. salaries expense
Although the concepts of salaries payable and salaries expense are similar, they play different roles in accounting. Salaries expense is how much an employee earned in salary. Only the amount of salary pay that employers have not yet given to employees is included in the term “salaries payable.” Although salaries payable fluctuates according to financial agreements between a company and its employees, salaries expense remains constant. For budgeting purposes, most businesses typically track salaries payable in a separate ledger while recording salaries in expense accounts.
How to record salaries payable
Following are the steps for recording payable salaries in your accounting records:
1. Use the right accounts
To maintain organization, it’s critical to enter salary information in the appropriate section of your company ledger. Accounting managers and experts frequently include accrued and payable salaries in the current liabilities account on the balance sheet. Additional current liabilities could be federal taxes, state income taxes, and employee health insurance. Date, liability description, whether or not money is being debited or credited, and total amount should all appear in separate columns.
2. Find out accrued salary expenses
Finding out how much each employee made is the first step in figuring out how much a company owes its employees. Determine the accrued salary expenses, or the amount of money your business anticipates owing its employees in wages based on the number of hours they work and the pay rate. To indicate that there is an outstanding balance, enter this number in the credit column.
3. Record completed salary payments
Next, find out how much an employer has already paid its staff. Record this amount in the debit column if employers have paid any of the accrued salary. For instance, if an employer paid half of an employee’s anticipated $5,000 salary in advance, you would enter $2,500 in the debit column to reflect that payment.
4. Calculate salaries payable
Add up the totals for the credit and debit columns and record them. The business does not currently have any salaries payable if the credit and debit totals are equal. Subtract the debit total from the credit total if the total in the credit column is greater than the total in the debit column. The salaries payable, or the amount of wages the business is currently owing, is the difference between the two totals. If the company’s salary debits are higher, it means that the employees were overpaid.
5. Update books after payroll period
Update the accounting records to reflect the new outstanding balance for salaries after employers have paid their employees. By routinely updating salaries payable to reflect paychecks, the business can maintain an accurate record of all past and upcoming wage payments.
6. Remember to record cash
Remember to factor in the cash portion of an employee’s salary if a business or client pays any portion of the employee’s salary in cash. Cash payments represent a reduction in the company’s obligation to pay its employees, so they belong in the debit column. Gather receipts for all cash payments so you have proof that the employer made the payment to the employee.
Example journal entries
Several illustrations of accounting journal entries for salaries payable are provided below.
Although their payroll period ends on July 15th, Crestwood Dentistry’s reporting period ends on June 30th. Crestwood Dentistry owes its employees $10,000 in wages as of June 30. The information recorded on June 30th would look like this:
*Date****Description**Credit**Debit* *6/30Salaries expense*
$10,000 6/30Salaries payable$10,000
An employee from Pleasant Cafe unexpectedly resigns on February 1st. Since the 15th of each month marks Pleasant Cafes’ payroll period, the employee has not yet received payment for the 10 workdays between January 16 and January 31. The company owes the terminated employee half of the typical monthly salary of $4,000 that employees receive. The information recorded on February 1st would look like this:
*Date****Description**Credit**Debit* *2/1Salaries expense*
Redtech Solutions owes a total of $50,000 in salary costs for the month of October. On October 31st, Redtech Solutions will pay $20,000 of this total salary expense, leaving $30,000 in unpaid salaries. The information recorded on October 31st would look like this:
*Date****Description**Credit**Debit* *10/31Salaries expense*
Are salaries payable an expense?
Although the concepts of salaries payable and salaries expense are similar, they play different roles in accounting. Salaries expense is how much an employee earned in salary. Only the amount of salary pay that employers have not yet given to employees is included in the term “salaries payable.”
Is salaries payable a current liability?
Using assets listed on the current balance sheet, the company expects to pay a current liability in the near future. Accounts payable, salaries, taxes, and deferred revenues (services or goods yet to be delivered but for which money has already been received) are examples of common current liabilities.
How do you find salaries payable?
All remaining or unpaid wages at the end of the accounting period are contained in the salary payable account, which is a current liability account. At the end of the month or year, the balance sheet includes the amount of unpaid wages; the income statement does not.