Summary: Accrued payroll is the amount of payroll that the employer is liable to pay but has not yet paid out to employees.

Managing accrued payroll is an important obligation for all businesses. Here we explain exactly what it is, and how to calculate it. 

What Is Accrued Payroll?

Accrued payroll consists of different types of compensation owed to employees, such as salaries, bonuses, and income tax, but hasn’t been released yet. The purpose of calculating accrued payroll is to determine the total expenses the company still has to pay its staff. 

Payroll accrual helps companies identify the company’s cash flow by monitoring its existing and upcoming expenses. As payroll can account for 50% or more of operating costs, it’s fundamental for companies to keep track of these costs. This can ensure that the funds are available to pay employees in addition to operational and overhead expenses. Simply put, accrued payroll is important because it helps companies with financial planning. It is categorized according to accrual accounting as it provides an accurate reflection of the business’s financial obligations.  

Calculating Accrued Payroll

Accrued payroll is only calculated toward the end of the accounting period. Simplifying the process of employee compensation can help companies stay on top of their recurring expenses and prevent inaccuracies or a lack of compliance with labor laws.

Step-by-step process

  1. Employee gross wages must be calculated, whether hourly, weekly, or monthly. Hourly pay is calculated as the number of hours worked x hourly rates. Most companies use automation software to calculate gross wages to reduce errors. 
  2. Employee additions such as commission earned, bonuses, and supplementary pay for the period must be added to the total wages. 
  3. Deductions, including employee contributions to the pension fund, tax, and health insurance, must be tallied. 
  4. You can calculate the accrued payroll by adding employee wages, supplemental income, and benefits and then subtracting the total deductions. 
  5. The last step is to add the entry to the books by debiting the salaries/wages expense account and then crediting the accrued salaries account with the payroll accrual amount. 

Common methods and examples

The accrued payroll is calculated using the following formula:

Gross pay (number of hours worked x hourly rates) + (bonus/supplementary pay) + (employer contributions) + (overtime pay) – (deductions) = Payroll accrued. For example:

A content designer works for a marketing company and is paid weekly. She earns an hourly wage of $30 and works for 40 hours a week, giving her a wage of $1200. She’s paid overtime of $200, a bonus of $100, and deductions of $50.

($30 x 40 hours = $1200) + $100 (bonus) + $200 (overtime) – $50 (deductions) = $1450 (Accrued Payroll).

When you have calculated the accrued payroll for each employee, add the accrued payrolls for all employees, and this should reflect the total accrued payroll expense for any particular pay period.

Impact of Accrued Payroll on Financial Statements

Recognizing the impact of accrued payroll on a company’s financial statements can help businesses track where their money is going for a specific period. This includes information about the company’s liabilities. 

1. Effect on income statement and balance sheet

The accrued payroll is shown as an expense on an income statement that consists of the total costs associated with employee services for a given period. At the same time, it is reflected as a liability on the balance sheet because it represents the total sum of funds that must be paid to employees for services rendered. 

2. Reconciliation with actual payroll expenses

Performing payroll reconciliation can help you investigate whether employees are receiving the correct pay and any changes accounted for. Reconciliation is a verification process to guarantee that the information concerning employee records and compensation is accurate. Payroll reconciliation guarantees that employees are paid the right salaries on time. The information that is obtained from reconciliation with payroll expenses is verified and entered into the company’s general ledger. Payments, such as wages, are recorded as debits, and outstanding liabilities involving tax are credits. 

Best Practices for Managing Accrued Payroll

The best practice for managing payroll accrual not only minimizes errors, but it also provides a clear paper trail to pass an independent audit. Examples of these practices include: 

1. Accurate record-keeping and reporting

Keeping a record of all calculations and entries into the company’s books can help you maintain a clean slate when it comes to auditing. A detailed record will guarantee that every step and calculation adheres to compliance standards. To maintain accurate records of payroll accrual, it’s best to update details for every pay period and to check the total number of hours worked in addition to benefits for employees.

2. Strategies for minimizing errors and discrepancies

The easiest way to minimize errors and discrepancies is to utilize electronic record-keeping and automation to accurately calculate information from employee gross pay to contributions and deductions. Reliance on manual entries or Excel spreadsheets is time-consuming, and there is a high-risk of recording incorrect information. Performing regular audits can update the recorded data and maintain its accuracy to avoid discrepancies. 

Taking Care of Accrued Payroll

Accrued payroll is an important process that helps keep track of employee expenses. It provides a breakdown of where money is going for a specific pay period. Accrued payroll is a liability on the balance sheet representing employee wages that have not yet been paid. By maintaining records and updating information for auditing, companies can prevent running into financial disaster, and legal penalties by failing to pay the employees correct wages or delaying payment. Implementing the best practices in the management of accrued payroll keeps businesses compliant and in good financial standing. 

FAQ

Accrued payroll monitors cash flow, preventing unexpected costs as each stage of the labor process is recorded, from gross wages and bonuses to overtime pay. Because businesses are aware of these incoming expenses, they can ensure that funds are available to pay employees without running into liabilities. Because payroll can account for more than 50% of a business’s operating costs, it must be monitored to ensure financial health. 

When employees work overtime or take sick leave, it becomes challenging to accurately calculate accrual payroll. Additional variables, including bonuses and hourly wages, must be calculated for each employee, and this process can become confusing. Companies that operate across borders experience additional complications when capturing data from multiple sources.