What is Accrued Payroll and How to Calculate it ?

Introduction

Accrued payroll is a major accounting concept that enables a company to properly account for the obligation it has incurred with its employees. This ensures the correct accounting of employee’s wages and benefits within the incurred period, even if the actual payment occurs in a subsequent period. In this regard, an understanding of accrued payroll is very important in ensuring proper maintenance of financial statements and adherence to accounting standards. 

In this blog, we’ll discuss the intricacies of accrued payroll, understand its types and associated challenges, as well as understand how to calculate it with an example. 

What is Accrued Payroll? 

Accrued payroll refers to the accumulated wages, salaries, payroll taxes, and benefits that have been incurred by the organization but have not yet been paid at the end of an accounting period. It is recorded to match expenses with the period in which they are incurred, in accordance with the principles of accrual accounting.

Accrual payroll ensures adherence to accrual accounting, by ensuring that the expenses are recorded in the period when they are actually incurred rather than when the payment is made. This practice is very important as it gives a fair and true view of the financial health of the company. Further, accrued payroll helps companies comply with accounting standards such as Generally Accepted Accounting Principles (GAAP), which ensures accuracy in financial reporting. 

Types of Accrued Payroll

Accrued payroll includes various types of employee-related expenses that an organization needs to account for, even though the payment is yet to be done. Accurate recognition and classification of these types are essential to ensure accuracy in financial reporting. Some of the major types of accrued payroll categories are:

1. Wages and salaries

   This often forms the major bulk of accrued payroll. It represents what the employees have earned based on regular work hours but for which they have not yet been paid. This includes both hourly wages and salary earnings.

2. Overtime

   Many staff members often work extra hours for which overtime pay is given. Such overtime pay should be accrued if it has been earned in the accounting period but has not yet been paid out at the end of the accounting period.

3. Bonus and commission

   Many compensation plans include bonuses and commissions. Incentives are often paid based upon performance measures, sales, and other criteria. Since these bonuses and commissions are payable at a future date, they should be accrued in the period when they are earned.

4. Vacation and sick leave

   Each employee is entitled to vacation and sick leave. Accrued payroll with respect to leaves involves taking into consideration the monetary value of all the earned leaves that the employee has not taken.

5. Payroll taxes

   There are many payroll taxes that employers are liable for, such as Social Security, Medicare, and unemployment taxes. As the employees earn their wages, the employer is liable for the taxes that should be accrued simultaneously with the wages in order to properly present the financial statements.

How to Calculate Accrued Payroll 

Accrued payroll calculation is a methodical process , requiring various steps to be followed to ensure accuracy. A systematic approach of calculating accrued payroll ensures that an organization has accurate, compliant financial records, which is important for internal management and external reporting. Here are the steps to calculate accrued payroll:

1. Determine the pay period end date: Identify the last day of the pay period for which you are calculating accrued payroll.
2. Calculate wages earned: For hourly employees, multiply the number of hours worked by the hourly wage. For salaried employees, prorate their salary based on the number of days in the pay period.
3. Include overtime pay: Calculate any overtime pay earned during the pay period.
4. Account for bonuses and commissions: Include any earned bonuses or commissions that have not been paid.
5. Account for vacation and sick leave accruals: Account for the monetary value of any leaves that have not been taken by the employee. 
6. Add payroll taxes: Calculate the employer’s share of payroll taxes on the accrued wages.
7. Record the journal entries: Create a journal entry to record the accrued payroll. Debit the relevant expense accounts (such as Wages Expense, Overtime Expense, and Payroll Taxes Expense) and credit the accrued liability accounts (such as Accrued Wages and Accrued Payroll Taxes). This entry ensures that the expenses are recognized in the correct accounting period.

Example of an Accrued Payroll Journal Entry 

To illustrate how journal entry for payroll accrual is recorded in the financial statements, let’s consider a practical example. Suppose a company’s pay period ends on June 30, but the actual payday is July 5. By June 30, employees have earned wages and benefits that have not yet been paid out. To ensure these expenses are accurately reflected in the financial statements for June, the company must create an accrued payroll journal entry.

Let’s break down the specifics:

• Wages Earned: Assume the total wages earned by employees for the period ending June 30 amount to $10,000.
• Overtime Pay: During this period, employees have earned an additional $2,000 in overtime pay.
• Bonuses and Commissions: The company owes $1,500 in performance bonuses and sales commissions.
• Vacation and Sick Leave: Employees have accrued $500 worth of vacation and sick leave.
• Payroll Taxes: The employer’s share of payroll taxes (including Social Security, Medicare, and unemployment taxes) for the accrued wages totals $1,800.

Based on these figures, the journal entry to record the accrued payroll on June 30 would be as follows:

Journal Entry for Accrued Payroll on June 30:

This journal entry ensures that the June financial statements of the company include all the expenses related to payroll, even though the related payment will be in July. This involves debiting the expense accounts (Wages Expense, Overtime Expense, Bonuses and Commissions Expense, Vacation and Sick Leave Expense, and Payroll Taxes Expense) to represent the expense incurred during the period by the company. Further, the accrued liabilities accounts (Accrued Wages, Accrued Overtime Pay, Accrued Bonuses and Commissions, Accrued Vacation and Sick Leave, and Accrued Payroll Taxes) are credited which showcases the liabilities of the company and indicates that these are amounts owed but not yet paid.

On the actual date of the payroll payment, July 5, the organization would make a reversing entry to clear these accrued liabilities and recognize the cash outflow. The two-step process of accruing payroll expenses and then reversing the accrual when the related payment is made helps in maintaining very accurate financial records and in compliance.

Challenges of Managing Accrued Payroll 

Accrued payroll management has several challenges for businesses in terms of accuracy, timely recording, and maintenance of accounting standards. It is a resource-intensive process with room for errors, especially in bigger organizations with a huge workforce. Understanding such challenges gives insight into the proper ways of managing payrolls to ensure accuracy in reporting. Some of these challenges are:

1. Accuracy

   The financial integrity of an enterprise demands that all wages earned, along with the related expenses, are captured accurately. Even a small mistake in arriving at accrued payroll will result in massive variances in the financial statement, thus impacting the financial health of the business and therefore its decision-making process.

2. Timing

   This could be the case where a correct accounting period has to be aligned with varying pay cycles and cut-off dates. That all expenses have been recorded correctly at the proper time calls for rather minute coordination and tender attention to detail.

3. Compliance

   Accounting standards, such as GAAP or IFRS, should be adhered to; otherwise, non-compliance may result in financial misstatements and fines, thus affecting the company’s reputation. The need to comply with the changing regulations, further increases the process complexity.

4. Resource-intensive

   Manually done calculations and entries are time-consuming and error-prone. With an increase in the number of employees in the organization, this process becomes all the more cumbersome. The result would be inefficiency and the need to shift accounting resources away from more strategic activities.

5. Payroll system integration

   Proper integration between the payroll systems and accrued payroll calculations for a company ensures accuracy and efficiency. In case of a mismatch in both systems, it will lead to errors and misstatements. Integrating and synchronizing these systems requires considerable effort and technical expertise.

6. Employee turnover and variability 

   In addition, high employee turnover or variable hours of work, a seasonal workforce, for example further complicates the matter of accrual. This requires systems and processes in place to ensure that all records are properly maintained and accounted for. 

How HighRadius Can Help?

Accurate payroll journal entries are fundamental to maintaining a company’s financial health and ensuring compliance with tax and employment regulations. While manual entries are sometimes necessary for adjustments and special transactions, they are prone to errors and can be time-consuming. Automating these entries with HighRadius’Record-to-Report solutions, particularly its No-Code LiveCube platform, can significantly streamline the process. In fact, by utilizing our R2R solutions, we were able to slash ourpayroll journal entry processingtime from 40 to 8 man-hours, boosting productivity across the A/R team by 20%.

LiveCube Task Automationautomates the mapping of transaction details in journal entries, reducing the manual effort required and minimizing the risk of errors. It ensures that all payroll-related transactions are accurately recorded and reconciled, making the payroll process more efficient and reliable. By leveraging the No-Code platform of LiveCube, businesses can improve the accuracy of their payroll journal entries, ensure compliance, and save valuable time.

Further enhancing efficiency, Transaction Matchingenables rapid matching of large volumes of transactions across different accounts. This capability significantly speeds up the reconciliation process, ensuring discrepancies are identified and addressed swiftly. TheMaker-Checker Workflow adds a robust layer of verification by implementing a dual control mechanism, where one team member prepares the entry and another approves it. This process helps prevent mistakes and ensures the integrity of your accounting system.

By integrating these innovative tools, HighRadius not only enhances the accuracy of payroll journal entries but also ensures a seamless, efficient reconciliation process. 

FAQs

1) When should a company pay off accrued payroll?

A company should pay off accrued payroll by the next scheduled payday following the end of the accounting period. This ensures employees are compensated timely for their work and helps maintain accurate financial records, aligning expenses with the period in which they were incurred.

2) Why is accurate accounting for payroll and reporting so important?

Accurate payroll accounting ensures compliance with tax laws and financial regulations, prevents costly errors, and maintains employee trust. It provides a clear financial picture for stakeholders, aids in decision-making, and ensures that financial statements accurately reflect the company’s financial health.

3) Is accrued payroll a current liability?

Yes, accrued payroll is a current liability. It represents wages and benefits owed to employees for work performed within the accounting period but not yet paid. As it is expected to be settled within the next financial period, typically within a few weeks, it is classified as a current liability.

4) What is the difference between accrued expenses and accrued payroll?

Accrued expenses are a broad category of costs that a company has incurred but not yet paid, including utilities, interest, and rent. Accrued payroll is a specific type of accrued expense that pertains exclusively to wages, salaries, and related benefits earned by employees but not yet disbursed.

5) Where should accrued payroll appear on a balance sheet?

Accrued payroll should appear under current liabilities on the balance sheet. This section lists obligations that the company needs to settle within the next fiscal year, indicating short-term financial commitments such as unpaid wages, overtime, bonuses, and payroll taxes.

6) Can you deduct accrued payroll on taxes?

Accrued payroll can be deducted for tax purposes if it is paid within a specified time frame after the end of the tax year, typically 2.5 months. This ensures the expenses are recognized in the correct tax period, aligning with IRS regulations and helping to accurately match expenses with revenues.