Employees are the backbone of a company. They serve the company in various ways and help achieve its goals. On top of that, they manage every task within a company and can fulfill many duties and roles. In exchange, they receive compensation.
This compensation may come in the form of salaries and wages. On top of that, they may also include bonuses, overtime, benefits, etc.
Employees get paid after they provide their services for a specific period. This period may differ based on the type of the company and its financial process.
Usually, these may occur weekly, monthly, biweekly or semi-monthly. At the end of each period, companies calculate the compensation they must pay employees. Once they do so, they send out the payments to their employees through paychecks.
However, companies may require some time to process those payments. It creates a timing difference between the wage calculation and the payment process.
This difference may be a few days. However, it is highly crucial in accounting for wages as it creates accrued wages. This process falls within the accruals concept in accounting. However, the journal entry for accrued wages is straightforward.
Before discussing that, it is crucial to understand accrued wages and their meaning.
What are Accrued Wages?
Accrued wages refer to a liability recorded for any wages due to the employees. This liability gets created to recognize the wage expense for a specific period.
However, it does not involve paying the related employees at that stage. Therefore, accrued wages represent a liability for wages earned by employees but not yet compensated. It is a part of the accounting for wages in companies.
However, accrued wages do not represent the expense record in the income statement. While it gets created due to that expense, it does refer to the outflow of economic benefits. Instead, accrued wages are an obligation that companies must settle at a future date.
This settlement can result in the outflow of economic benefits. However, it may occur at a later period.
Accrued wages exist due to the timing difference between wages and payments. When companies calculate their wage expense at the end of each period, they must create liability for it.
This process conforms to the accruals concept in accounting. Although the payment may not occur at that time, accrued wages help complete the journal entries.
Accrued wages help companies recognize the wage expense for a specific period. It also allows them to report an accurate amount for that expense in the income statement. On the other hand, it also creates a liability on the balance sheet. Once companies pay the wages to the employees, they can remove any balances in the accrued wages account.
What is the accounting treatment of Accrued Wages?
The accounting treatment of accrued wages falls under the accruals concept in accounting. This concept requires companies to record an expense when it occurs.
However, it does not consider if a company pays for that expense. Therefore, companies must increase that expense regardless of the settlement date. The same applies to accrued wages and covers its accounting.
As stated above, companies specify a period after which they pay their employees. At the end of each period, they calculate the wages their employees are eligible to receive.
Once they have the accurate figures, companies process the payments to their employees. However, the accruals concept does not consider if those payments occur. Instead, it applies as soon as companies can estimate the wage expenses.
Therefore, companies must record accrued expenses when calculating the amount at the end of each period. This process involves increasing the expenses within the income statement.
This expense will include any wages calculated for payment to employees based on their work. On top of that, it will consist of other considerations that the employees are eligible to receive during that period.
On the other hand, the accounting treatment of these wages involves creating a liability. This liability includes the obligation to pay the employees at a future date. In accounting, it falls under the term accrued wages.
Companies may also have other names for this account, for example, salaries and wages payable. Nonetheless, the underlying type of this account remains the same. This liability will appear on the balance sheet as a current liability.
The accounting treatment of accrued wages also considers the payment aspect of wages. Although it is not crucial in recording expenses, companies must still account for those payments.
Therefore, companies must track when they eventually pay their employees for their work. Once they do so, they can remove the associated liability from the accrued wages account. This process concludes the accounting for accrued wages.
How to record Accrued Wages journal entries?
Accrued wages do not involve one set of journal entries. Instead, the process falls under different stages. As stated above, it includes two steps.
The first is when a company calculates the wages expense that employees are eligible to receive. At this point, the company must record an expense while creating a liability in the accounts.
The first stage of the accrued wages journal entry is straightforward. Based on the terms used, the journal entries may differ. However, the underlying principle remains the same. Overall, the journal entries to record accrued wages are as below.
The second stage of the accrued wages journal entry is to track the payment. When this payment occurs, a company must remove the liability created in the first step.
Similarly, it must track whether employees receive their compensation in cash or through the bank. Based on that, the company must record the journal entries for accrued wages in their accounts.
Nonetheless, the journal entries for accrued wages in the second stage will be as follows.
|Cash or bank||XXXX|
The above journal entries for accrued wages use primary assumptions when recording expense and liability.
Practically, this process may be more complex and require several more stages. On top of that, other factors can also contribute to the recording process. These may include further wage-related expenses and deductions from wages, etc.
A company, ABC Co., calculates its wage expenses at the end of each month. However, it compensates its employees a week after the end of that month.
Therefore, ABC Co. records an accrued wages liability until that payment occurs. The company recognizes this expense to conform to the accruals concept. ABC Co. then reports that liability in the balance sheet at the end of that month.
For one month, ABC Co. calculates its wages expense to be $10,000. Therefore, the company used the following journal entries to record it.
Next week, ABC Co. pays its employees for that amount in full. This payment occurred through the bank. Therefore, the company used the following journal entries to record the transaction.
Accrued wages are an expense incurred related to the wages employees have earned. However, it does not consider if a company has paid for those wages at that time. Companies record the journal entries for accrued wages in two stages.
First, they create an expense and a liability when the wages are due. Second, they remove the accrued wages liability when the payment occurs to the employees.