What are Salaries Payable?
Salaries payable refers to the amount a company owes to its employees due to their past work. This amount represents an obligation for the company to pay those employees in the future. Primarily, salaries payable come from the salaries calculated for employees at each calculation date. Companies record this amount in their books due to the timing difference in payments.
Salaries payable arise due to the time it takes for companies to compensate their employees. If a company calculates and pays them simultaneously, the amount will not be recordable. Practically, most companies compensate their employees later than when their salaries are due. This timing difference between the expense incurring and the payment causes salaries payable.
The primary reason companies record salaries payable is the accruals concept in accounting. This concept requires a company to recognize an expense when it occurs. However, it does not consider the payment for that expense. Therefore, companies will record expenses as liabilities although they paid for those expenses yet. Once they compensate the underlying parties, companies can remove that amount as a liability.
The same occurs for salaries payable. Companies calculate employee expenses at regular intervals. Usually, this process occurs weekly, biweekly or monthly. However, the payment may occur a few days later. This process also requires clearance and authorization from management. Therefore, it may cause a timing difference between the expense occurring and the payment. In these cases, companies record the salaries expense while also creating a liability against it.
Overall, salaries payable refers to an obligation to pay employees at a future date. Companies calculate this amount at regular intervals. However, the payment may not occur until a later date. This difference in the timing creates an obligation, which requires companies to record salaries payable. Subsequently, when a company compensates its employees, it can remove the salaries payable balance.
How to Calculate Salaries Payable?
The calculation of salaries payable will differ based on a company and its contracts with employees. Some companies calculate those salaries once and use it as a base to formulate future amounts. Usually, companies use the following salaries payable formula.
Salaries payable = Salaries and wages + Bonuses + Overtime + Employment benefits
The above formula for salaries payable is not a standard equation used by every company. Instead, it represents how companies may calculate this amount based on common items that go into it. From the above formula, it is crucial to extract various components. An explanation of each of these components is as below.
Salaries and wages
Salaries and wages define the money paid to employees for their work. Usually, salaries refer to a fixed monthly amount that employees receive based on their contracts. On the other hand, wages are hourly rates multiplied by the hours worked by an employee. This rate also comes from the employment contract signed by both parties.
Bonuses are extra amounts paid beyond salaries and wages. Usually, bonuses do not relate to the quantity of work put in by employees. Instead, companies pay these amounts based on the quality of their work. For example, companies may distribute bonuses if profits exceed a specific limit. For most companies, bonuses are common during the year-end.
Overtime is an amount based on an employee’s work and their salaries and wages. Usually, over time depends on the number of hours an employee works beyond a set limit. This limit comes from their contract. For example, an employee may work 8 hours every day as a part of their employment contract. If they put in 9 hours, the additional hour will qualify as overtime. Overtime rates differ based on various factors.
Employment benefits are other amounts paid to employees that do not relate to their work. Some of these benefits may be mandatory, while others can be optional. Either way, employment benefits increase the chances of retaining an employee. These also provide employees with an incentive to improve the quality of their work. Some companies include these benefits as a part of salaries payable.
What is the Difference Between Salaries Payable and Salaries Expense?
Salaries payable and salaries expense are usually the same amounts. However, if paid in cash, these amounts may differ. On top of that, salaries payable represents an obligation to pay employees in the future. On the other hand, salaries expense is an income statement item that shows the cost incurred for employees. These figures relate to each other. However, they also represent different aspects of the salaries paid to employees.
Salaries payable primarily refers to the obligation toward employees. This amount comes from the accruals concept in accounting. As mentioned above, this concept requires companies to record expenses when they occur. If companies do not pay those amounts in cash, they must create an obligation in the financial statements. This obligation comes through the salaries payable account.
On the other hand, salaries expense represents the cost incurred on employees. This expense also comes from the accruals concept in accounting. However, once recorded, companies cannot change it. Similarly, it does not refer to an obligation to pay employees in the future. It only represents an outflow of economic benefits in the accounting period.
Another difference between salaries expense and salaries payable comes after some time. When a company records salaries expense, the payable amount will also match. In some cases, if a company has disbursed advance amounts, their values won’t be the same. After a while, when a company pays some of its employees, the salaries payable amount will change. However, the salaries expense remains unchanged in the income statement.
Is Salaries Payable a Liability?
As mentioned above, salaries payable represents an obligation to pay employees in the future. In accounting terms, this payment results in an outflow of economic benefits. Similarly, it arises from an employee working for a company. Therefore, it comes from past events. These features meet the definition of liabilities set in accounting through the contextual framework.
When a company calculates its salaries expenses, it must record them in the books. This transaction increases expenses through salaries expense. Usually, this expense is the same amount companies use to record salaries payable. Consequently, it may confuse some into thinking salaries payable is an expense. However, the subsequent transactions qualify salaries payable as a liability.
The initial journal entries to record salaries payable are as follows.
In this scenario, the salaries payable is the same as salaries expense. However, the debit side of the transaction goes directly into the income statement account. This amount cannot change in normal circumstances. However, the salaries payable account will hold this amount until a company pays its employees. Once that transaction occurs, the company can remove the balance from the salaries payable account.
The subsequent journal entries for the salaries payable account include the following.
|Cash or bank||XXXX|
Therefore, salaries payable is a liability. This amount goes under current liabilities in the balance sheet. Usually, this amount does not stay under that heading for long. Once companies pay their employees, they remove it from current liabilities.
A company, ABC Co., calculates its salary expense to be $10,000 for a month. The company records this amount in its books as follows.
Five days later, ABC Co. pays salaries to its employees through their banks. The company uses the following journal entries to record this transaction.
Salaries payable refer to an obligation toward employees that companies have due to past events. This definition differentiates salaries payable from salaries expenses. Usually, the amount for both is the same in the initial transaction. Therefore, some people may think salaries payable is an expense. In contrast, salaries payable is a current liability in the balance sheet.