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Payroll accrual

What is payroll accrual?

Payroll accrual is a shorthand term for the accumulated compensation due to a company’s employees — money owed to your workers that hasn’t yet been paid. It is a crucial concept to any business that uses the accrual basis of accounting. Determining your accrued payroll requires more than simply tallying up employee wages for a specific accounting period. Essentially, accrued payroll expenses include all financial obligations a business has to its employees. In this context, payroll includes:

  • Hourly wages
  • Salaries
  • Employee benefits
  • Commissions
  • Bonuses

Why should my business track payroll accrual?

The accrual method of accounting is a useful tool for organizations to match their income to their expenses for a specific period of time. Pay periods generally draw to a close at the end of a month, a quarter, or a year, depending on the business. There is a good chance that not all employees will have received payment in full for all hours worked by the exact date on which the pay period ends.

Even if the employee has not yet physically received that payment, payroll laws require those wage-related expenses (including benefits, commissions, and bonuses along with hourly wages and salaries) to be reported for that pay period. Payroll accrual is simply a way to adjust those wage expenses to improve the accuracy of your payroll records.

Even if the actual payments have not yet taken place, payroll accrual makes sure that all of the money is accounted for. This helps to prevent accounting errors such as overpayments and underpayments, and also helps your payroll management team stay compliant with federal, state, and local payroll tax laws. Large and mid-sized businesses may need to perform payroll accrual on a monthly or quarterly basis, while most small businesses will only need to adjust for accrued payroll at the end of the year to ensure that their financial records match their actual payments.

How do I calculate my accrued payroll?

Performing a payroll accrual requires adjusting your employees’ gross wages along with any related withholdings. For most businesses, that involves debiting your wage expense account while crediting your account for accrued liabilities. Those liabilities include both the net wages owed to your employees and any withholdings that will be included in tax payments.

To determine accrued payroll for a specific pay period, your accounting team needs to compile data including:

  • All compensation your hourly employees earned from their last payday to the end of the pay period and have not yet received
  • All applicable payroll taxes owed on that unpaid compensation, including unemployment taxes and any income taxes required by state or local law
  • Any accrued payroll from salaried employees (You may not have any if your salaried employees are paid for an entire accounting period)

How do I track accrued payroll?

Your accounting team should record all unpaid compensation for a pay period as a liability in their balance sheet. Depending on what type of withholdings are being made, your payroll liability can be recorded as various kinds of payables. Be sure to record all expenses related to unpaid wages. That includes not just payroll, but also workers’ compensation, unemployment taxes, and all Social Security and Medicare taxes required under the Federal Insurance Contributions Act (FICA).

Some common withholdings include:

  • Salaries and wages payable for all employee hours worked
  • Any taxes payable (Federal and state income taxes, Social Security and Medicare taxes, etc.)
  • Retirement accounts
  • Insurance policies and health savings accounts

Do I need to reverse accrued payroll entries?

Be sure not to forget that all accrual entries must be reversed in the next period, when your employees actually receive the payments owed to them. If you do not reverse those payroll accrual records, you will end up counting those wages in both pay periods, which can lead to serious bookkeeping and payroll errors. If your business uses an automated payroll software system, you should be able to set your initial entry to be automatically reversed when the pay period switches over. That makes sure that your accounting entries reflect only the wages and liabilities applicable to your current pay period.

How do I make payroll journal entries?

Keeping a chronological payroll journal that logs all of the compensation paid to your employees is an important part of recordkeeping. The specifics of your journal may vary depending on your business model and industry, but for most businesses journal entries fall into three main categories:

Initial payroll records

Record of your employees’ gross wages, all applicable withholdings, and any additional taxes your organization may owe.

Accrued wages

Record of any wages or compensation that is owed to your employees and has not yet been paid by the end of an accounting period.

Manual payments

Record of any printed checks your business has distributed to employees for circumstances such as termination pay or a pay adjustment.

To record a payroll accrual in your accounting journal, your accounting team will need to:

  • Calculate the outstanding payroll amount for the pay period
  • Make a journal entry crediting your accrued payroll for the amount still outstanding
  • Post the debit amount to your payroll expense account

Any direct labor, salary, or wage expense should be recorded as a debit while any accrued wages, salaries, or payroll tax payments should be logged as credits.

How do I record adjusting entries?

If there is a gap between the final payroll deposit for a payment period and the date that your accounting team prepares your financial statement, you will need to make an adjusted entry. Recording an adjusting entry involves:

  • Determining the time between your payroll cutoff date and the date of your next financial statement
  • Calculating the number of employees who are owed and their daily salary rates to determine your overall accrued salary expense per day
  • Calculating your total accused expense by multiplying the number of days by your employee’s per-day accrued salary expense

What are bonus accruals?

Some businesses also choose to account for bonus accruals. Accruing a bonus means including payments for any cash bonus, paid time-off, or other extra wage-related payments you expect to make at the end of the pay period. Bonus accruals can be a risky proposition, as they require the employer to be quite certain ahead of time that bonus conditions will be met.

For example, if an employee appears to be on track to meet a productivity goal by the end of the pay period, their employer may choose to set aside a cash bonus as part of their payroll accrual for that period. If, on the other hand, something happens between the time the bonus payment is set aside and the end of the pay period that makes the employee miss their productivity goal, that bonus accrual will need to be reversed. Deciding whether or not to accrue bonus payments is up to individual employers, but many will find the chance for mistakes too great to make it an official policy.

To explore more on the topic of payroll, check out our blog post "The Most Common Types of Payroll Fraud and How To Avoid It" where we review how to avoid payroll fraud in the workplace.

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