Accrued payroll refers to the amount of salary, wages, commissions, bonuses, and other forms of compensation that employees have earned during a specific period but have not been paid by the end of that period. This can occur because the payroll date falls after the period's end, such as when employees work in one month but are paid in the following month.
Accrued payroll is crucial for several reasons. Firstly, it ensures accurate financial reporting. By accounting for accrued payroll, businesses can accurately reflect their expenses and liabilities, offering a true picture of their financial health. This accuracy is essential for investors, creditors, and management to make informed decisions.
Secondly, accrued payroll helps in compliance with the matching principle in accounting. This principle dictates that expenses should be recognized in the period they are incurred, not when the payment is made. Accrued payroll ensures that labor costs are accounted for in the correct period, aligning expenses with revenues generated by those expenses.
Calculating accrued payroll involves determining the total amount of earned wages that have not yet been paid to employees. This calculation typically includes:
Accrued payroll is recorded as a liability on the balance sheet, specifically under current liabilities, as it is expected to be settled in the short term. The corresponding expense is recorded in the income statement, impacting the company's net income for the period.
When payroll is eventually paid, the accrued payroll liability decreases, and cash or bank balances are reduced accordingly, reflecting the cash outflow from the company.
Reversing accrued payroll entries is mandatory after employees have been paid their wages and other due compensations. Neglecting to reverse these entries could lead to them being mistakenly included again in the subsequent pay period. Such oversight can lead to inaccuracies in payroll, potentially affecting your income statements, balance sheets, and cash flow reports.
Payroll software automatically reverses accrued payroll entries at the onset of each new pay period, so you can streamline your payroll process efficiently.
