Accruing Payroll at Period-End

Why Payroll May Need a Period-End Adjustment

Employees can earn wages before a reporting date even when the employer’s scheduled payday falls afterward. Under accrual accounting, the date cash is paid does not determine when the wage expense is recognized. The expense belongs to the period in which employees provide the services; if the employer has not yet paid for those services, it also has an obligation at the reporting date.

The earlier material on accrued expenses establishes the general idea: recognize an expense when it is incurred, and recognize a liability for the amount still owed. For payroll, the practical task is to measure the gross wages attributable to work completed by the reporting date. Payroll records, agreed wage rates, and the applicable work schedule provide the needed information.

Definition: Accrued payroll is compensation employees have earned by a reporting date that the employer has not yet paid. The period-end adjustment generally debits Wages Expense and credits Wages Payable for the gross amount earned but unpaid. This treatment assumes the employees’ services have been received and the amount owed can be measured reliably.

“Gross wages” means compensation before employee deductions such as income-tax withholding or employee benefit contributions. Those deductions affect how a later paycheck is distributed, but they do not reduce the wage expense incurred for the employees’ services. The examples first isolate wages; where a later example includes withholding, it states the assumptions explicitly. Employer payroll taxes and benefits are excluded unless a problem provides them separately.

Measuring the Wages Earned by the Cutoff

The calculation begins with the reporting date, not the next payday. Determine which services were provided on or before the cutoff, then apply the relevant compensation terms. For hourly employees, use recorded hours through the cutoff and the applicable rate. For salaried employees, a daily allocation can be used when the problem specifies that salary is earned evenly over scheduled workdays.

\text{Accrued gross wages} = \sum_j (\text{hours worked by employee }j\text{ through cutoff}) (\text{hourly rate of employee }j)

For a salary that is specified as earned evenly over a fixed number of workdays, the corresponding calculation is:

\text{Accrued salary} = \text{salary for the stated period} \times \frac{\text{scheduled workdays completed by cutoff}} {\text{scheduled workdays in the stated period}}

These are measurement methods, not assumptions that apply to every payroll arrangement. Use actual time records and the stated compensation terms when available. Do not count scheduled future work, and do not assume that every calendar day is a paid workday. If pay includes overtime, commissions, bonuses, or other compensation, include an amount in the accrual only when it has been earned by the cutoff and can be measured using the stated terms.

Why the Adjusting Entry Works

The adjusting entry follows from the timing of the service and the basic accounting equation. Employees’ work is an input to the business during the period, so the associated wage cost is an expense of that period. Since cash has not yet been paid, the employer still owes the employees; that unpaid amount is a liability.

\text{At reporting date:}\qquad \begin{array}{ll} \text{Debit Wages Expense} & \text{for gross wages earned but unpaid}\\ \text{Credit Wages Payable} & \text{for the same amount} \end{array}

The debit recognizes the expense in the period when the work occurred. The credit records the obligation that remains. The two sides are equal, so the entry preserves the accounting equation: the expense reduces period income and, through retained earnings, equity; the liability increases by the same amount. When the employer later pays the accrued wages, the liability is removed. The payment should not create a second expense for work already recognized.

Set the cutoff.
Identify the reporting date and the last work completed by that date.

Measure earned gross pay.
Apply actual hours and rates, or an explicitly stated salary allocation method, to work completed through the cutoff.

Record the accrual.
Debit Wages Expense and credit Wages Payable for the measured unpaid amount.

Account for the later payment.
Clear the accrued liability. Recognize separately any wages in the paycheck that were earned after the reporting date.

Worked Example: A Weekly Payroll Cut Off Midweek

A small firm’s employee earns $2,000 of gross wages for a five-day workweek, earned evenly over the five scheduled workdays. The reporting date is Wednesday, after three workdays have been completed. Payday is Friday, after all five workdays are complete. Ignore deductions and employer payroll costs. Calculate the reporting-date accrual and record both the adjustment and the later payment.

Method. Allocate the weekly wages to the workdays completed by the reporting date. The daily amount is $ \$2{,}000 \div 5 = \$400 $. Three workdays have been completed, so the wages earned by Wednesday are $ 3 \times \$400 = \$1{,}200 $.

At Wednesday’s cutoff, $1,200 is owed for work already performed. The adjusting entry is:

Debit Wages Expense $1,200; credit Wages Payable $1,200.

The full Friday payment is $2,000. Of this amount, $1,200 was accrued at the cutoff. The remaining wages, earned on Thursday and Friday, are $ 2 \times \$400 = \$800 $. On payday, record:

Debit Wages Payable $1,200; debit Wages Expense $800; credit Cash $2,000.

Check. The two entries recognize total Wages Expense of $ \$1{,}200 + \$800 = \$2{,}000 $, equal to the full week’s wages. Wages Payable is first credited $1,200 and then debited $1,200, leaving no liability for these wages after payment. The common mistake is to debit Wages Expense for the entire $2,000 again on payday; that would count the first three days twice.

Hourly Payroll and a Payment That Spans Two Periods

For hourly payroll, the cutoff calculation is based on hours worked through the reporting date, not the number of hours eventually paid in the pay period. When the paycheck covers both pre-cutoff and post-cutoff work, split it: the pre-cutoff portion clears Wages Payable, and the post-cutoff portion is an expense of the later period. This split keeps the expense in the period in which the work was performed.

Worked Example: Accruing Hours for Two Employee Groups

At month-end, a company has not yet paid for work by three technicians and two clerks. Each technician earns $24 per hour and has worked 31 hours by the cutoff, with 9 additional hours in the pay period after the cutoff. Each clerk earns $20 per hour and has worked 27.5 hours by the cutoff, with 12.5 additional hours afterward. There is no overtime premium. Assume all listed hours are payable, and ignore deductions and employer payroll costs. Calculate the accrual and the entries when the full payroll is paid afterward.

Technicians’ wages earned by the cutoff: $ 3 \times 31 \times \$24 = \$2{,}232 $.

Clerks’ wages earned by the cutoff: $ 2 \times 27.5 \times \$20 = \$1{,}100 $.

Thus, total gross wages earned but unpaid at month-end are $ \$2{,}232 + \$1{,}100 = \$3{,}332 $. The month-end adjustment is:

Debit Wages Expense $3,332; credit Wages Payable $3,332.

Next calculate the full payroll. Each technician worked $ 31 + 9 = 40 $ hours, so the three technicians’ total wages are $ 3 \times 40 \times \$24 = \$2{,}880 $. Each clerk also worked $ 27.5 + 12.5 = 40 $ hours, so the two clerks’ total wages are $ 2 \times 40 \times \$20 = \$1{,}600 $. Total payroll is $ \$2{,}880 + \$1{,}600 = \$4{,}480 $.

The portion earned after month-end is $ \$4{,}480 - \$3{,}332 = \$1{,}148 $. When the company pays the $4,480, it records:

Debit Wages Payable $3,332; debit Wages Expense $1,148; credit Cash $4,480.

Check. The pre-cutoff and post-cutoff wages total $ \$3{,}332 + \$1{,}148 = \$4{,}480 $, matching the paycheck. The month-end expense is $3,332, not the later paycheck’s full $4,480. Applying the full-cycle hours to the month-end accrual would improperly include hours worked after the cutoff.

Gross Wages, Withholding, and the Paycheck

A payroll accrual is measured using gross wages earned, not the amount employees receive as take-home pay. When a paycheck is issued, the employer may distribute the gross obligation between cash paid to employees and amounts withheld for remittance to other parties. The exact accounts depend on the deductions and payroll arrangements in the problem. Withholding does not change the gross wage expense already recognized for the employees’ work.

Worked Example: Paying an Accrued Payroll With Employee Withholding

At a reporting date, a company accrues $7,200 of gross wages earned by employees. On the next payday, a check covers those accrued wages plus $4,800 of gross wages earned after the reporting date. Employee withholding is 10% of the total gross paycheck. Assume there are no other deductions and no employer payroll taxes. Find the cash payment and prepare the entries.

The reporting-date accrual is based on the $7,200 already earned. The adjusting entry is:

Debit Wages Expense $7,200; credit Wages Payable $7,200.

The full gross payroll on payday is $ \$7{,}200 + \$4{,}800 = \$12{,}000 $. Employee withholding is $ 0.10 \times \$12{,}000 = \$1{,}200 $. Cash paid to employees is therefore $ \$12{,}000 - \$1{,}200 = \$10{,}800 $.

On payday, the company clears the liability for the previously accrued $7,200. It recognizes $4,800 of Wages Expense for work performed after the reporting date, credits Cash for $10,800, and records the $1,200 withheld as a liability to be remitted. The entry is:

Debit Wages Payable $7,200; debit Wages Expense $4,800; credit Cash $10,800; credit Withholding Payable $1,200.

Check. Debits total $ \$7{,}200 + \$4{,}800 = \$12{,}000 $, and credits total $ \$10{,}800 + \$1{,}200 = \$12{,}000 $. The cash and withholding together equal the gross payroll. The common mistake is to accrue only the $10,800 net cash that employees receive. That understates the wage expense and the total payroll obligation; the withheld $1,200 is still part of gross wages and is owed to the appropriate recipient.

Common Payroll Accrual Errors

Using payday as the expense date. Wages are recognized as employees earn them. A later payday does not move the expense into the payment period.
Accruing the entire pay period. If a payroll period crosses the reporting date, include only the wages earned by the cutoff in the accrual. Wages earned afterward belong to the later period.
Using net pay instead of gross pay. Employee withholding changes the allocation of the paycheck, not the gross compensation earned.
Counting accrued wages twice. On payday, debit Wages Payable for the portion previously accrued. Do not debit Wages Expense again for that same portion.
Assuming a time allocation without support. A salary-per-workday calculation is appropriate when the period, workdays, and even-earning assumption are specified. Otherwise use the applicable compensation terms and records.

Key takeaway: At period-end, accrue gross wages for services already received but not yet paid: debit Wages Expense and credit Wages Payable. When payroll is later issued, clear the accrued portion and recognize only the wages earned after the cutoff as a new expense.

Check Your Understanding

For each problem, identify the wages earned by the reporting date and the appropriate accounting treatment.

A worker earns $1,500 for a five-day week, evenly over scheduled workdays. The reporting date follows the fourth workday, and no wages have been paid. What amount should be accrued? (Answer: $1,200.)
Two employees each earn $18 per hour. By the cutoff, they have worked 22 and 26 hours, respectively. What gross wages should be accrued? (Answer: $22 \times \$18 + 26 \times \$18 = \$864$.)
A company accrued $2,400 of wages at month-end. The next paycheck includes that amount plus $1,600 earned afterward, and there are no deductions. What entry records the $4,000 payment? (Answer: Debit Wages Payable $2,400; debit Wages Expense $1,600; credit Cash $4,000.)
A salary of $3,300 is earned evenly over 22 scheduled workdays. By the reporting date, 10 scheduled days have been completed and none of the salary has been paid. What amount should be accrued? (Answer: $ \$3{,}300 \times 10/22 = \$1{,}500 $.)
A company accrued $5,000 of gross wages. The following payday covers those wages plus $2,000 earned later. Employee withholding is 10% of total gross payroll, with no other deductions. What are the payday debit and credit amounts? (Answer: Gross payroll is $7,000; withholding is $700 and cash is $6,300. Debit Wages Payable $5,000 and Wages Expense $2,000; credit Cash $6,300 and Withholding Payable $700.)

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