How to Calculate Accrued Payroll and Record It

Accrued payroll represents an expense a business has incurred but not yet paid to its employees. It ensures accurate financial reporting by matching expenses to the period services were rendered. This aligns with the accrual basis of accounting, which records revenues when earned and expenses when incurred, regardless of when cash changes hands.

Understanding Accrued Payroll Components

Several payroll expenses are commonly accrued for a comprehensive view of a company’s financial position. Regular wages are compensation earned by employees for time worked up to the financial reporting date, but not yet due for payment.

Paid time off (PTO) includes vacation, sick leave, or personal days employees have earned but not yet used. Companies accrue the monetary value of unused PTO as a liability, reflecting their obligation to pay employees for this time. Commissions are earnings based on sales or performance metrics achieved, even if payment is delayed until after the reporting period.

Bonuses, additional compensation tied to performance, may also be accrued. If bonus conditions are met by the reporting date, or a portion of the bonus period has elapsed, the proportionate amount is recognized as an accrued expense.

Calculating Accrued Regular Wages

Calculating accrued regular wages involves determining compensation earned by employees from their last payday up to the financial reporting date. The process identifies the end date of the last payroll period and the financial reporting date, such as month-end or quarter-end.

For hourly employees, the calculation multiplies hours worked during the partial period by their hourly rate. For instance, if an hourly employee earns $25 per hour and worked 20 hours since the last payday, the accrued wage is $500.

Salaried employees’ accrued wages are calculated by determining their daily earning rate and multiplying it by the number of days worked in the partial period. If a salaried employee earns $5,000 per month (22 working days), their daily rate is $227.27. If 10 working days passed since the last payroll, the accrued salary is $2,272.70.

This method ensures financial statements reflect wages employees have earned, even if the official payroll date falls after the reporting period. Total accrued regular wages represent a liability the company owes for services already rendered.

Calculating Accrued Paid Time Off, Commissions, and Bonuses

Calculating accrued paid time off (PTO) requires understanding the company’s policy for vacation, sick leave, and personal days. Businesses accrue PTO based on an employee’s hourly rate or daily salary, multiplied by unused hours or days earned. For example, if an employee accrued 40 hours of PTO at $30 per hour, the company accrues a $1,200 PTO liability.

Accruing commissions recognizes the portion of sales or performance targets achieved by the reporting date, even if payment is not yet due. If a salesperson earns a 5% commission on $50,000 in sales by month-end, but commissions are paid quarterly, the company accrues a $2,500 commission expense.

For bonuses, accrual depends on specific conditions and the earning period. If a bonus is tied to annual performance and the reporting period is halfway through the year, a company might accrue 50% of the expected bonus. For example, if an employee expects a $10,000 annual bonus and six months have passed, a $5,000 accrual is made.

Recording Accrued Payroll in Accounting Records

Recording accrued payroll involves a journal entry at the close of an accounting period to reflect incurred, unpaid payroll expenses. The entry debits a payroll expense account (e.g., “Wages Expense,” “Salaries Expense,” “PTO Expense,” “Commissions Expense,” or “Bonus Expense”) for the calculated accrued amounts.

The corresponding credit is made to an “Accrued Payroll Liability” account, a current liability on the balance sheet. For instance, if total accrued regular wages are $15,000, the journal entry debits Wages Expense for $15,000 and credits Accrued Payroll Liability for $15,000.

At the beginning of the subsequent accounting period, this accrued payroll journal entry is typically reversed. This prevents double-counting expenses when actual payroll is processed. When payroll is disbursed, the payment is recorded as a debit to Accrued Payroll Liability and a credit to Cash, clearing the liability.