Accrued payroll is a major accounting concept that enables a company to properly account for the obligation it has incurred with its employees. This ensures the correct accounting of employee’s wages and benefits within the incurred period, even if the actual payment occurs in a subsequent period. In this regard, an understanding of accrued payroll is very important in ensuring proper maintenance of financial statements and adherence to accounting standards.
In this blog, we’ll discuss the intricacies of accrued payroll, understand its types and associated components, as well as understand how to calculate it with an example.
Related questions:
- Definition of Accrued payroll
- What are the components of Accrued payroll?
- What are the types of Accrued payroll?
- How to calculate Accrued payroll?
Definition of Accrued payroll
Accrued payroll includes wages, salaries, commissions, bonuses, and other payroll-related expenses that have been earned by a company’s employees but have not yet been paid or recorded in the company’s ledger accounts.
Let’s assume that a company in India pays its hourly-wage employees every Friday for the hours worked during the previous week. As of March 31, the hours worked from March 27 to March 31 will be included in the payroll processed in early April and paid to the employees on Friday, April 7. The wages for these five days, from March 27 to March 31, are calculated to be ₹4,00,000. Additionally, the company incurs payroll taxes and employee benefits amounting to ₹80,000. Therefore, the total accrued payroll amounts to ₹4,80,000.
Components of accrued payroll:
- Salary and wages
- Overtime pay
- Commission and bonuses
- Paid time off
- Benefits
- Taxes and deductions
Types of Accrued payroll
Accrued payroll includes various types of earnings that employees have accumulated over a specific period that have not yet been provided by the company. Here are a few examples:
- Accrued salaries and accrued wages reflect the earnings employees have collected within a particular period, whether they’re salaried or paid hourly wages.
- Accrued bonuses and commissions are typically based on individual or company performance, pending payment until the month or year-end close.
- Accrued vacation and sick pay represent the monetary equivalent of earned time off that the employee has not taken.
- Accrued benefits are costs incurred by the company for employee benefits like health insurance, and retirement plan contributions during a period, but to be provided.
How to calculate Accrued payroll?
Accrued payroll calculation is a methodical process, requiring various steps to be followed to ensure accuracy. A systematic approach of calculating accrued payroll ensures that an organization has accurate, compliant financial records, which is important for internal management and external reporting. Here are the steps to calculate accrued payroll:
- Determine the pay period end date: Identify the last day of the pay period for which you are calculating accrued payroll.
- Calculate wages earned: For hourly employees, multiply the number of hours worked by the hourly wage. For salaried employees, prorate their salary based on the number of days in the pay period
- Include overtime pay: Calculate any overtime pay earned during the pay period.
- Account for bonuses and commissions: Include any earned bonuses or commissions that have not been paid.
- Account for vacation and sick leave accruals: Account for the monetary value of any leaves that have not been taken by the employee.
- Add payroll taxes: Calculate the employer’s share of payroll taxes on the accrued wages.
- Record the journal entries: Create a journal entry to record the accrued payroll. Debit the relevant expense accounts (such as Wages Expense, Overtime Expense, and Payroll Taxes Expense) and credit the accrued liability accounts (such as Accrued Wages and Accrued Payroll Taxes). This entry ensures that the expenses are recognized in the correct accounting period.
