Is salaries expense debit or credit? Salaries expense is normally recorded in a company’s income statement as part of the cost of goods sold or indirect cost. The portion of salaries expense that was directly spent on the production of goods or services is listed as part of the cost of goods sold while the portion spent on other business operations such as bookkeeping is listed as indirect cost on the income statement.
The income statement is a financial statement that records the company’s total revenue and total expenses and further records the difference between the revenue and expenses as its net profit or loss. Individuals generally work a 9-5 job with the expectation that they receive payment for the work done either at the end of each working day, weekly, or monthly. This payment received for the job completed is called a salary.
Although the salary is not directly listed on the company’s balance sheet, it is part of the company’s current liabilities. This is because salaries usually have to be settled within a year; thereby affecting the numbers on the balance sheet. Salaries expense has to be properly accounted for such that the assets of the company will be equal to the sum of the company’s liabilities and equity. Here, we shall discuss what salaries expense means and also look at its debit and credit journal entry so as to ascertain whether salaries expense is a debit or credit.
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What is salaries expense?
Salaries expense is a specified amount that employers pay their employees. This amount is not based on the number of units produced or hours worked by an employee, hence it is a non-hourly earning of employees. For the company, it is considered a non-hourly labor payment.
The salaries expense is generally unchanged from one accounting period to another as it is a fixed recurring expense. It can only change if the company implements a pay reduction or pay raise. Using the accrual accounting method, Whether the salaries have been paid or are yet to be paid is inconsequential. The salaries expense account reports the amount that has been earned by employees within the period indicated in the income statement heading.
Unlike the accrual accounting method where the salary expense is recorded once it is earned, companies that use the cash accounting method only record the salary expense when it is actually paid to the employee. A lot of accountants consider this method inaccurate especially when there is a prior liability to the employee. Salaries expense is usually reported as operating expenses and depending on the job performed by the employee, the salaries expense could be classified as selling or administrative expense.
The salaries expense is usually broken down into the payments for the various departments that make up the company and is listed as part of the expenses for the department. In simple terms, the accrual accounting method recognizes salaries expense once employees have earned their salaries even before the actual moment of cash while the cash accounting method recognizes salaries expense only when the cash is paid out to employees.
When the salary expense is for payments to employees who are part of the manufacturing process, it might be recorded as part of the production overhead. This means it will be included in the cost of goods sold and is recorded either when the goods are declared obsolete or get sold. Although the salary expense does not directly appear on a company’s balance sheet, it still affects the balances on the balance sheet since the amount spent on the salaries expense reduces the company’s assets and increases its current liabilities.
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Is salaries expense a debit or credit?
Just like other expenses, salaries expense is a debit and not a credit, this is because it reduces the assets of a company and increases its liabilities. When employers pay their employees salaries, it is recorded as a debit to the salaries expense account and a credit to the cash account. Therefore, salaries expense is a debit.
Companies have diverse payment structures for their employees with some paying daily, others paying weekly and some paying monthly. Irrespective of how salaries are paid, they are all recorded as salaries expense.
Accounting for salaries expense as debit
Salaries expense spent by companies on employees that are part of the manufacturing processes is charged as part of the cost of goods sold. When these goods or services are sold, they are usually sold for more than the cost incurred in the production of the goods and services. This is so in order for the company to make a profit from their sales. The sales generally translate into assets that add to the net worth of the company.
However, companies that are just starting up or those whose business model is ineffective may be spending more on expenses than they are making. These will then result in the reduction of their assets and net worth and an increase in their liabilities, thus, they will be incurring losses instead of profits. The company’s balance sheet will show this reduction in assets and increase in liabilities while the income statement will show the operating loss.
When accounting for salaries expense, it is usually done using the double-entry bookkeeping method. The double-entry bookkeeping method records transactions as equal but opposite entries for every financial transaction. This means that if a debit of $100 is made for the salaries expense account, there will be a credit of the same amount from another account as exemplified below.
| Account | Debit | Credit |
|---|---|---|
| Salaries expense | $100 | |
| Cash | $100 |
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Journal entries for salaries expense
- Cash accounting method
- Accrual accounting method
As mentioned earlier, a company could use the cash or accrual accounting method when recording its salaries expense. We shall discuss each of these journal entries below.
The cash accounting method for salaries expense
When companies use the cash accounting method to record salaries expense, the journal entry is straightforward and involves a debit to salaries expense and a credit to the cash account. For example, if Walmart pays its employees weekly and its salaries expense between Monday, October 24, 2022, and Friday, October 28, 2022, is $40,000. If the payment was made from its cash account, the journal entry will be as the one below
Journal entry for salaries expense using the cash accounting method
| Date | Account | Debit | Credit |
|---|---|---|---|
| 28/10/2022 | Salaries expense | $40,000 | |
| Cash | $40,000 |
Accrual accounting method for salaries expense
When companies use the accrual accounting method to record their salaries expense, journal entries are made once the employees have earned the salary even before it gets paid. Thus, it involves making two different journal entries to account for the salaries expense. First when the employees earn the salary and second when they actually get paid.
The first journal entry made when the salary is earned involves the salaries expense and the salary payable accounts. For instance, if Amazon pays their employees monthly and the salaries to be paid for the month of October amount to $1,000,000 but this amount will be paid on November 1, 2022. It will be recorded as a debit to the salaries expense and a credit to the salary payable as seen in the table below
Journal entry for salaries expense using the accrual accounting method
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31/10/2022 | Salaries expense | $1,000,000 | |
| Salary payable | $1,000,000 |
The second journal entry will be made when the salary gets paid, this journal entry involves three accounts; the salaries expense, salary payable, and the cash accounts and will be recorded in the table below
Debit and credit journal entry for payment of salaries expense
| Date | Account | Debit | Credit |
|---|---|---|---|
| 1/11/2022 | Salaries expense | $1,000,000 | |
| Salary payable | $1,000,000 | ||
| Cash | $2,000,000 |
The sum of the salaries expense and the salary payable is summed up and credited to the cash account so that all salaries liabilities for the month of October are wiped from the company’s account.
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Conclusion
Based on our discussion, we have seen that the salaries expense is a debit and not a credit. This is because salaries expense is a liability. The relationship between how much a company earns and spends as recorded on its income statement and its assets, liabilities, and equity as recorded on its balance sheet work side by side.
Although the salaries expense is recorded on the income statement under the cost of goods sold or other operating expenses, it also affects the company’s current liabilities and assets. This is because the salaries expense is a liability that must be settled within a year and usually translates to a reduction in assets.
The accounting method used to record salaries expense determines whether the expense is recorded once the employees have earned the salary; irrespective of its being paid or not or if it gets recorded after it is paid. However, for either of the accounting methods, salaries expense is recorded as a debit and not a credit.
Last Updated on November 4, 2023 by Nansel Nanzip Bongdap
Blessing's experience lies in business, finance, literature, and marketing. She enjoys writing or editing in these fields, reflecting her experiences and expertise in all the content that she writes.
