At the end of an accounting period, the amount of liability that remains for salaries that have been earned by employees but not yet paid to them is reported as Accrued salaries. Salaries expenses are an example of accrued expenses that require adjusting entries. The adjusting entry for accrued salaries is very important because the date on which the salaries are paid doesn’t necessarily match the last date of the accounting period. Hence, accrued salaries payable must be recorded in the books to account for the salaries earned by employees but yet to be paid as of the end of the accounting period.
The adjusting entries for accrued salaries are done under the accrual accounting method which is based on the revenue recognition and matching principle. In this article, we will discuss the adjusting entry for accrued salaries with examples.
What are accrued salaries?
Accrued salaries (accrued wages) is the amount of liability that remains at the end of an accounting period for salaries that have been earned by employees but not yet paid to them. This accounts for unpaid compensation that has not yet been paid to employees for the services that they have already provided to the company. Hence, accrued salaries are categorized as a liability under the accrued expenses line item on the balance sheet. Unpaid salaries are recorded as a liability because it is an expense that the company has incurred but is yet to pay for.
Generally, you accrue a salary expense in one period and pay for it in the next period. This means that you record the accrued salary expense in your books at the end of an accounting period. Hence, the accrued salaries journal entry would be a debit to the salaries expense account and a credit to the accrued salaries (or wages) account. Then, when you pay the salaries in the next period, you reverse the initial accrued salaries journal entry. This adjusting entry for accrued salaries shows the expense has been paid eliminating the initial recorded owed salaries.
See also: Adjusting entry for bad debt expense
Adjusting entry for accrued salaries explained
The adjusting entry for accrued salaries expense is one of the common types of adjusting entries in accounting. When employee salaries are paid, the entry is usually a debit to an expense account and a credit to the Cash account. However, if a company doesn’t pay salaries on the last day of an accounting period, a pay period that ends on that date, then it must make an entry to record accrued salaries (for salaries incurred but not yet paid). Then, when the salaries are eventually paid, the company makes an adjusting entry for accrued salaries.
In order to record accrued salaries, you debit the salaries expense and credit the salaries payable account (or accrued salaries account). The salaries expense account is an income statement account that reduces the company’s net income for the period, whereas salaries payable is a balance-sheet short-term liability account. However, when you make the payroll deposit, the adjusting entry for accrued salaries is to debit the salaries payable account and credit the Cash account by the amount of the payroll deposit.
That is the initial accrued salaries expense journal entry would be:
The accrued salaries expense journal entry above is made to recognize the cost that has already been incurred with the services that employees have rendered to the company during the accounting period. It is very important that a company records the liability that exists at the reporting date in order to recognize the expenses that have occurred in the current accounting period.
Assuming the company follows through with payment on time, an entry is made at the beginning of the following reporting period to reverse the initial journal entry. That is, when the company makes the payment to the employees, it makes an adjusting entry for accrued salaries to eliminate salary liabilities by debiting the salaries payable account and crediting the cash account. That is:
The adjusting entry for accrued salaries expense is, therefore, made to eliminate the liabilities that had been recorded in the previous period-end adjusting entry.
Read also: Accrued revenue adjusting entry
Examples of adjusting entry for accrued salaries
Let’s look at some examples to have a better understanding of adjusting entries for accrued salaries:
Accrued salaries adjusting entry: example 1
Let’s assume a company pays wages for the work done by its employees in the next month. Say, the accrued wages total is $15,000. The wages accrued but not paid journal entry will be recorded as:
|31 Jan||Wages expense||$15,000|
Then, when the wages are paid in the next month an adjusting entry for accrued wages will be made by debiting the Accrued wages account and crediting the Cash account. That is:
|2 Feb||Accrued wages||$15,000|
Adjusting entry for accrued salaries: example 2
Jotscroll Media company has a policy to pay the current month’s salaries to its employees on the 3rd day of the next month’s period. Let’s say the amount of salary in December 2022 is $20,000 and the payment will be made on January 03, 2023. In such an instance, in the December 31 end-of-month records, the company needs to make journal entries for accrued salaries to report the salary expense that has already occurred. That is, the wages accrued but not paid adjusting entry would be:
|31 Dec||Salaries expense||$20,000|
This journal entry is to recognize the liabilities that Jotscroll media company owes to its employees for the work that they have done in December 2022. If this accrued salaries journal entry is not done, the company’s total expenses and total liabilities will be understated by $20,000.
Nonetheless, the $20,000 amount of salaries payable will be eliminated when the company pays its employees on January 03, 2023. That is, on January 03, 2023, Jotscroll Media Company will make an adjusting entry for accrued salaries to report the salaries paid as:
|3 Jan||Salaries payable||$20,000|
This accrued salaries adjusting entry is to eliminate the $20,000 of liabilities that Jotscroll media company has recorded in the December 31 adjusting entry. Hence, it is to settle the salaries payable that the company owes its employees for work they have done in December 2022.
Accrued salaries adjusting entry: example 3
A firm pays monthly salaries of $40,000 to its employees on the 4th day of the next month for the previous month. On 30th June 2022, the company prepared its financial statements for the year ending. The amount of salary expense owing on 30th June 2022 is $40,000, which will be made on the 4th of July 2022. In this case, the firm will make an adjusting entry on 30th June 2022 to recognize and record the accrued salaries in the year-end financial statements. That is, an adjusting entry to report accrued salaries would have to be made as:
|30 June||Salaries expense||$40,000|
Then, when the firm makes payment to clear the accrued salaries expense, an accrued salary expense adjusting entry must be made to the Salaries Payable account and Cash account. That is:
|2 July||Salaries payable||$40,000|