Accrued payroll might sound like accounting jargon, but it’s a crucial concept for keeping your business finances in check. Understanding accrued payroll can help you present a true picture of your company’s financial health and make better financial decisions.
What is Accrued Payroll?
Think of accrued payroll as a tab at your favorite coffee shop. You’ve had your lattes and muffins, but the bill hasn’t been paid yet.
In the business world, it represents the wages your employees have earned but haven’t been paid. On the balance sheet, it’s a liability—showing salaries and wages owed to employees for work done but not yet compensated. This includes wages, payroll taxes, benefits, and any other payroll-related debts.
Accrued payroll ensures your financial records are accurate and complete.
Here’s when it’s particularly useful:
- Month-End and Year-End Closings: Helps in reflecting all liabilities accurately.
- Financial Reporting: To comply with Generally Accepted Accounting Principles (GAAP) and present an accurate financial snapshot.
- Budgeting and Forecasting: Ensures that you have accounted for all expenses in your projections.
- Performance Metrics: Necessary for evaluating true labour costs.
Accrued Payroll vs. Accrued Wages
Accrued wages are just a piece of the puzzle. They represent the salary an employee has earned during a pay period that hasn’t been paid out yet.Â
Accrued payroll, on the other hand, includes all types of compensation a business owes but hasn’t paid, like bonus pay, commissions, paid time off (PTO), payroll taxes, and employee benefits.
Types of Accrued Payroll
Accrued payroll includes all payroll expenses in a company’s compensation strategy. Key types include:
- Salaries and Wages: The largest part of accrued payroll, including invoices from contractors and uncashed paychecks.
- Commissions and Bonuses: Additional pay earned during a pay period.
- Paid Time Off (PTO): The value of paid leave, even if not taken.
- Income Tax and Payroll Taxes: Employer’s responsibility for withholding various taxes.
- Employee Benefits: Annual leave, parental leave, pensions, and healthcare contributions.
How to Calculate Accrued Payroll
Calculating accrued payroll involves adding up all outstanding payroll liabilities:
- Calculate Employee Wages: Multiply hours worked by the hourly wage.
- Add Supplemental Pay: Include bonuses, commissions, and overtime pay.
- Include Employer Contributions: Account for payroll taxes, social security, pensions, unemployment, and health insurance contributions.
- Factor in PTO: Add earned paid time off and leave days.
Formula:Â
(Hours worked x hourly wage) + (supplemental pay) + (payroll taxes + employer contributions) + (PTO)
Example Calculation
Let’s look at a sales company example:
- Hourly Wage: $30
- Hours Worked: 80 hours (40 hours per week for 2 weeks)
- Commission and Bonuses: $300 commission + $500 bonus
- Employer Contributions: $600
- PTO: 2 days (16 hours) at $30/hour
Accrued Payroll Calculation:
- Gross Pay: $30 x 80 hours = $2,400
- Commission and Bonuses: $800
- Employer Contributions: $600
- PTO: $30 x 16 hours = $480
Total Accrued Payroll: $2,400 + $800 + $600 + $480 = $4,280
Let's Sum It Up
Accrued payroll might seem complex, but mastering it is essential for accurate financial management. By keeping a close watch on unpaid wages and using the right tools, you can ensure your company’s financial records are always up to date.
FAQs
Is accrued payroll included in an employee's paycheck?
No, accrued payroll accounts for salaries and wages earned but not yet paid out.
How often should companies calculate accrued payroll?
Ideally, at the end of each accounting period—whether that’s monthly or annually, depending on your financial reporting schedule.
What happens if accrued payroll is not recorded accurately?
Inaccurate recording can give a false sense of your company’s financial health, leading to poor financial decisions and compliance issues.
Are payroll taxes included in accrued payroll?
Yes, payroll taxes should also be accrued to get an accurate liability record.
Can accrued payroll affect company forecasts and budgets?
Yes, accruing all expenses ensures accurate forecasts and prevents financial surprises.
Is accrued payroll the same as deferred payroll?
No, accrued payroll accounts for wages not yet paid, while deferred payroll involves intentionally postponing payment to a future period.
