What Is Accrued Payroll and Why You Should Track It

Accrued payroll is a more accurate and up-to-date way to track employee wages, salaries, and expenses. Learn the basics of the accrual method.

Stefana Zaric
Written by Stefana Zaric
March 17, 2022
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Accrued payroll (or payroll accrual) is kind of a 3-in-1 concept:

  1. It is an accounting method where you record the amount of money you owe to the workers in advance
  2. It is a payroll liability for a company until they pay off accrued payroll, along with any delayed payroll taxes and employee benefits
  3. It is a building block of successful business planning—matching your reporting record to actual amounts paid is key to understand and forecast cash flow

Today, we’ll break down payroll accrual. You’ll understand its definition and benefits (with real-life examples) as well as how to calculate, track, and record it. By the end of the article, you’ll be ready to factor payroll accrual into your accounting process with ease.

What is accrued payroll?

Accrued payroll is an accounting method that records the accumulated money an employer owes to employees and independent contractors, including pending amounts.

Instead of tracking expenses once they go through, accrued payroll includes pending expenses to give you a more accurate understanding of money flow each pay period. These debits include invoices from independent contractors, paychecks that haven’t been cashed yet, pending credit charges from expense accounts, and other forecasted payroll that goes through at the end of the month.

Like any type of payroll, accrued payroll accounts for all types of compensation (not just gross wages). This includes:

  • Salaries or hourly wages
  • Commissions and bonuses
  • Paid time off (PTO)
  • Payroll taxes and employee benefits: FICA (Federal Insurance Contributions Act) taxes (Medicare and Social Security Taxes), pensions, retirements, state income taxes, unemployment taxes

Accrued payroll technically tracks debts (or accrued liabilities). Thinking in terms of “what do we owe?” (rather than “how much got taken out of the account?”) helps CEOs and payroll managers understand and allocate business costs. It helps avoid unexpected payments and helps you invest resources into company development and growth with more confidence.

The alternative to payroll accrual is cash accounting. Cash accounting is a form of accounting in which transactions only get recorded upon cash coming in or out. It is simpler than the accrual method but shows a lagging, incomplete picture of the company’s financial standing.

3 reasons to track accrued payroll

Tracking accrued payroll minimizes the possibility of human errors and makes business planning easy by keeping the cash flow transparent and safe.

1. Simplify wage-related expense reporting

With the accrual basis of accounting, bookkeepers record wage expenses when the labor was performed, rather than when the check goes through. This way, you won’t face an “unexpected expense” if an employee cashes their past six paychecks at the same time.

2. Prevent accounting errors

By calculating wage expenses in advance instead of last-minute, the chances of making rushed payroll mistakes significantly decrease. Accountants have a complete balance sheet laid out in front of them at any given moment, so slip-ups are less likely—especially when combined with powerful payroll software.

Before you hire an accounting coach, check out our payroll processing guide and guide to small business payroll and taxes.

3. Improve business planning

Payroll accrual helps CEOs and budget managers keep track of current and incoming employee expenses, giving them a more up-to-date understanding of company cash flow.

Accrued payroll shows the amount of money due for employees and independent contractors, which helps decision-makers set the course of action regarding company spending.

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How to calculate accrued payroll?

Here we’ll show you how to calculate accrued payroll step by step—use the section below as a checklist. To illustrate the example, let’s say you have an employee named B.B.

Calculate salaries and hourly wages

B.B. is an hourly employee with an $18 hourly wage. He’s paid once a month (payday comes on the last workday of the month), and works 40 hours per week, five days a week.

Let’s calculate his gross wages payable for January 2022:

21 working days * 8 working hours/day = 168 working hours in a month
168 hours * $18 per hour = $3024 January gross wage

Account for bonuses

B.B. received a $100 bonus in January. So, according to the accrual basis of accounting, you’ve accrued $3124 in gross wages.

Factor in employer-paid taxes and benefits

As an employer, you’re obliged to pay the following taxes:

We’ll spare you the math, but at the end of the month, you’ve accrued $4164.77 in B.B.’s payroll. You’ll add this total to your payroll when you send the amount to B.B. (and spell it out in his pay stub) rather than waiting for him to cash his paycheck.

FAQs

In this section, we’ll answer the remaining questions you might have about accrued payroll—mainly about accounting and payroll journals.

What are accrued payroll journal entries?

A payroll journal entry represents each written account of a transaction related to payroll accrual.

Each time an accountant records accrued salaries and salary expenses into a general ledger, it’s a journal entry.

The best way to keep the payroll journal organized is to make entries in chronological order. Journal entries varies depending on the industry and business model but there are three main categories all journal entries fall into:

  • Accrued wages: payable wages you owe the employees and haven’t yet paid to them by the end of the accounting period
  • Manual payments: printed checks given to workers
  • Initial payroll records: gross wages, withholdings, and payroll tax expense

How to record adjusting payroll entries?

Adjusted payroll entries bridge the gap between the last payment for a certain pay period and the date the accountants prepare the company’s financial statements.

Here’s how to record adjusting entries:

  1. Note the time frame between the last payment and the date of the next financial journal statement (or the end of an accounting period)
  2. Count the employees owed daily wages and calculate the accrued wage cost per day
  3. Calculate total accrued expenses with this formula:
    Number of days * Employees’ daily accrued wage cost = Total accrued payroll expense

Do you need to reverse accrued payroll entries?

Yes! You must reverse all entries once the employees receive the wages (and other payments) you owe them. If you forget to reverse accrued payroll entries, they’ll be counted again in the next pay period and cause payroll errors.

Luckily, payroll software automates most manual labor and decreases the chance for human error. Just set the software to automatically reverse accrued payroll entries when the next pay period comes, and you’re good to go.

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