Accrued payroll is an accounting method that tracks debts (or accrued liabilities). Instead of tracking expenses once you’ve processed them, accrued payroll includes expenses or debits that are still pending. Including these pending expenses gives you a more accurate understanding of the money flow in each pay period.
The business term for debits is current liabilities. Current liabilities might include:
Invoices from independent contractors
Pending credit charges from expense accounts
Other forecasted payroll
Like any type of payroll, accrued payroll accounts for all types of compensation (not just gross wages). This includes:
Salaries or hourly wages
Commissions and bonuses
Paid time off (PTO)
Payroll taxes and employee benefits: FICA (Federal Insurance Contributions Act) taxes (Medicare and Social Security Taxes), pensions, retirements, state income taxes, unemployment taxes
Accrued payroll helps business owners and payroll managers to think in terms of “what do we owe?” rather than “how much got taken out of the account?” With this approach, you can better allocate business costs and avoid unexpected payments, which will help you invest resources into company development and growth more confidently.
What is an alternative to payroll accrual?
The alternative to payroll accrual is cash accounting. Cash accounting is a form of accounting in which transactions only get recorded upon cash coming in or out. It is simpler than the accrual method but shows a lagging, incomplete picture of the company’s financial standing.
Should you track using accrued payroll?
Accrued payroll is a more accurate and up-to-date way to track employee wages, salaries, and expenses. It minimizes human errors and simplifies business planning by keeping the cash flow transparent and safe. Tracking with accrued payroll helps to:
Simplify wage-related expense reporting: With the accrual basis of accounting, bookkeepers record wage expenses as labor is being performed rather than when the check goes through. This helps to avoid “unexpected expenses” if, for instance, an employee was to cash their past six paychecks all at once.
Prevent accounting errors: By calculating wage expenses in advance instead of last-minute, the chances of making payroll mistakes significantly decrease. Accountants will have a complete balance sheet in front of them at any given moment, so slip-ups are less likely—especially when combined with powerful payroll software.
Improve business planning: Payroll accrual helps CEOs and budget managers keep track of current and incoming employee expenses, giving them a more up-to-date understanding of company cash flow.
Accrued payroll shows the amount of money due for employees and independent contractors, which helps decision-makers set the course of action regarding company spending.
How do you calculate accrued payroll?
We’ll show you how to calculate accrued payroll step by step. To illustrate the example, let’s say you have an employee named B.B.
Step 1: calculate salaries and hourly wages
B.B. is an hourly employee with an $18 hourly wage. He’s paid once a month (payday comes on the last workday of the month) and works 40 hours per week, five days a week.
Let’s calculate his gross wages payable for January 2022:
21 working days, 8 working hours/day = 168 working hours in a month
168 hours at $18 per hour = $3024 January gross wage
Step 2: account for bonuses
B.B. received a $100 bonus in January. So, according to the accrual basis of accounting, you’ve accrued $3124 in gross wages.
Step 3: factor in employer-paid taxes and benefits
As an employer, you’re obliged to pay the following taxes:
The Federal Unemployment Tax Act (FUTA) taxes: 6.0% of the first $7,000 you pay to each employee each calendar year
The State Unemployment Tax Act (SUTA) taxes: These vary state by state. In B.B.’s state, the employer doesn’t pay any SUTA taxes
The employer’s portion of FICA taxes: 7.65%
The employer’s 401(k) match: 3.5%
The employer portion of insurance premiums: $415 (83% of the monthly $500 cost)
We’ll spare you the math, but at the end of the month, you’ve accrued $4164.77 in B.B.’s payroll. You’ll add this total to your payroll when you send the amount to B.B. (and spell it out in their pay stub) rather than waiting for them to cash their paycheck.
What are accrued payroll journal entries?
An accrued payroll journal entry represents each written account of a transaction related to payroll accrual.
When an accountant records accrued salaries and salary expenses into a general ledger, this is called a journal entry.
The best way to keep the payroll journal organized is to make entries in chronological order. Journal entries vary depending on the industry and business model. Still, there are three main categories all journal entries fall into:
Accrued wages: payable wages you owe the employees and haven’t yet paid to them by the end of the accounting period
Manual payments: printed checks given to workers
Initial payroll records: gross wages, withholdings, and payroll tax expense
How do you record adjusting payroll entries?
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.
Here’s how 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 an accounting period)
Count the employees owed daily wages and calculate the accrued wage cost per day
Calculate total accrued expenses with this formula:
Number of days * Employees’ daily accrued wage cost = Total accrued payroll expense
Do you need to reverse accrued payroll entries?
Yes. You must reverse all accrued payroll entries once the employees receive the wages (and other payments) you owe them. If you forget to reverse accrued payroll entries, they’ll be counted again in the next pay period. This can cause payroll errors, which could feed into your income statements, balance sheets, and reported cash flow.
Luckily, payroll software automates most manual labor and decreases the chance of human error. Just set the software to automatically reverse accrued payroll entries when the next pay period comes, and you’re good to go.