Accrued payroll at period end

Paydays rarely line up with the end of a month. When a month ends in the middle of a pay week, employees have already earned some wages that will not be paid until the next payday. Accrued payroll is the adjusting entry that puts those wages, and the employer's taxes on them, in the month the work was done. This page counts the days, records the accrual, and then clears it on payday.

Why payroll is accrued

Under accrual accounting, an expense belongs to the period in which it was incurred, not the period in which it was paid. Wages are incurred as employees work. If a month ends on a Thursday and payday is Friday, four days of wages were earned in the old month and only one in the new one.

Without an adjusting entry, the whole week would land in the new month on payday. The old month would show too little expense and no debt to its employees, and the new month would show too much expense. The accrual fixes both: it records the expense in the right month and shows the amount owed as a liability, Wages Payable, on the month-end balance sheet.

Accrued wages are one kind of accrued expense. For the general idea, with other examples such as interest, see accrued expenses adjusting entries. This page goes deeper into payroll: the day count, the employer's taxes on accrued wages, and what happens on payday.

Counting the days

The exercises use a simple pattern. Employees work a five-day week, Monday to Friday, and are paid every Friday for that week. To find the accrual:

1. Find the weekday the month ends on.
2. Count the working days from Monday up to and including that day. These are the days earned but not yet paid.
3. Work out one day's wages: the weekly wages divided by 5.
4. Accrued wages = one day's wages × the days counted, rounded to the cent.

If the month ends on a Monday, one day is accrued. If it ends on a Wednesday, three days. If it ends on a Friday, there is nothing to accrue, because that day is payday and the whole week has been paid.

Worked example 1: accruing wages at month end

Northside Print Shop's employees earn $5,787.55 for a five-day week, paid every Friday for that week. July ends on a Thursday.

Step 1: count the days

Since the last payday, employees have worked Monday, Tuesday, Wednesday and Thursday: 4 days in July.

Step 2: work out the daily wages

$5,787.55 ÷ 5 = $1,157.51 per day.

Step 3: multiply

$1,157.51 × 4 = $4,630.04.

Step 4: record the adjusting entry on July 31

No cash moves. The employees have earned the money, and the business owes it to them. Withholding is ignored in this exercise, so the whole accrual goes to Wages Payable; the split between take-home pay and amounts withheld is made when the payroll is actually run on Friday.

Worked example 2: accruing wages and employer taxes together

Employer payroll taxes are owed on wages as they are earned. If four days of wages belong to July, so do the employer's taxes on those four days.

Same facts as example 1, and Northside Print Shop also owes employer payroll taxes at an example combined rate of 6.5% of wages, rounded to the cent.

• Accrued wages: $4,630.04, as before.
• Employer taxes: $4,630.04 × 6.5% = $300.9526, which rounds to $300.95.

One adjusting entry covers both. Each expense has its own liability: the wages are owed to employees, and the taxes are owed to the tax agency.

The tax is worked out on the accrued wages only, not on the full week. The tax on Friday's wages belongs to August, with Friday's wages. A single combined example rate keeps the arithmetic short; with separate example rates, you would work out each tax on the accrued wages, round each to the cent, and add them, as shown in employer payroll taxes in Excel.

Worked example 3: payday after the accrual

On Friday, August 1, Northside Print Shop pays the full week's wages of $5,787.55 in cash. It does not use reversing entries, so the July accrual is still sitting in Wages Payable.

Split the payment into what was already recorded and what is new:

• Already recorded: the $4,630.04 accrued in July. That is a debt being paid, so debit Wages Payable.
• New: Friday's wages, $5,787.55 − $4,630.04 = $1,157.51. That is August's expense, so debit Wages Expense.
• Cash: the full week, $5,787.55.

After this entry Wages Payable is back to zero, and the week's wages are split correctly between the two months:

The accrued employer taxes from example 2 are not touched on payday. They stay in Payroll Taxes Payable until the business pays the tax agency, as covered in paying payroll liabilities.

What if the business uses reversing entries?

Some businesses reverse the accrual on the first day of the new month: Dr Wages Payable, Cr Wages Expense for $4,630.04. Then payday is recorded the usual way, Dr Wages Expense $5,787.55, Cr Cash $5,787.55. The reversal leaves a credit of $4,630.04 in August's Wages Expense, so August still ends up with only $1,157.51. Both methods give the same result. The exercises use the method without reversing entries, so you have to split the payday entry yourself. For the other method, see reversing entries.

Accruals and the regular payroll entry

An accrual is not the same as recording a payroll before payday. When a pay period ends and the payroll is recorded the next morning, the whole period is finished, the register is complete and the withholdings are known; the net pay goes to Wages Payable for a day or two. An accrual is an estimate of part of a period that is not over yet, made only because the month ended. That is why the accrual exercises ignore withholding: the register for that week does not exist yet. For recording a finished payroll, see how to record a payroll journal entry.

Common mistakes

The exercises check for each of these and tell you which one you made.

Accruing the whole week

Dr Wages Expense $5,787.55, Cr Wages Payable $5,787.55 puts Friday's wages into July. Friday has not been worked yet when July closes. Only the four days already worked belong to July: $4,630.04.

Crediting Cash in the accrual

An accrual records wages owed but not yet paid. Crediting Cash says the money left the bank on July 31, which it did not. Credit Wages Payable.

Expensing the whole week on payday

Dr Wages Expense $5,787.55, Cr Cash $5,787.55 on Friday counts the four accrued days twice: in July through the accrual, and again in August. It also leaves $4,630.04 in Wages Payable for a debt that has been paid. Debit Wages Payable for the accrued part.

Putting the whole week in Wages Payable on payday

Dr Wages Payable $5,787.55 clears more than was ever accrued and pushes the account negative. Wages Payable holds only $4,630.04. The $1,157.51 for Friday is new Wages Expense.

Leaving out the employer's taxes

Recording only the wages in example 2 leaves $300.95 of July's cost in August. The employer owes payroll taxes on wages as they are earned, so the taxes on accrued wages belong in the same month.

Putting the taxes in Wages Payable

Cr Wages Payable $4,930.99 says the employees are owed the tax too. They are not; the tax is owed to the tax agency. Credit Wages Payable $4,630.04 and Payroll Taxes Payable $300.95.

How to check your accrual

• Accrued days are fewer than five, and match the days worked in the old month since the last payday.
• Accrued wages are the daily wages times those days.
• The accrual has no Cash line.
• Employer taxes, if any, are worked out on the accrued wages only and go to Payroll Taxes Payable.
• On payday, the Wages Payable debit equals the accrual, and Wages Payable plus the new Wages Expense equals the cash paid.