What Are Accrued Wages? How to Calculate and Report Them

Accrued wages are compensation employees have earned for their work but have not yet received payment for. Understanding them is important for businesses to accurately reflect financial obligations and for employees to comprehend their earnings. This concept helps maintain clear financial records and ensures compliance with accounting principles.

Understanding Accrued Wages

Accrued wages represent compensation, such as wages, salaries, commissions, or bonuses, that employees have earned for services rendered up to a specific date, typically the end of an accounting period. The actual cash payment for these earnings has not yet been disbursed by the company. This situation commonly arises because payroll cycles often do not perfectly align with a company’s accounting periods, such as month-end or year-end.

For a business, accrued wages are considered a current liability on its balance sheet. This is because the company has an obligation to pay these amounts within one year or its normal operating cycle. Accrued wages differ from “unpaid wages” in that they are not overdue; rather, they are earnings for which the payment date falls after the accounting period closes. The recognition of these wages aligns with accrual accounting principles, which require expenses to be recorded when incurred, regardless of when cash changes hands.

Calculating Accrued Wages

Calculating accrued wages involves determining the compensation earned by employees from the last payroll date up to the end of the current accounting period. This ensures all labor costs are recognized in the period they were incurred, even if not yet paid. For hourly employees, the calculation involves multiplying their hourly pay rate by the number of hours worked since the last payday until the accounting period’s end. For example, if an employee earns $20 per hour and works 32 hours between the last payday and month-end, the accrued wages would be $640.

For salaried employees, accrued wages are calculated by prorating their salary based on the number of days worked within the accrual period. If an employee earns $5,000 per month and the accounting period ends five days before the next payday, the accrued amount would be calculated for those five days. This methodology also extends to other forms of earned compensation, such as overtime, commissions, and bonuses, which must be included if earned during the period but remain unpaid. The employer’s share of payroll taxes, such as Social Security and Medicare, and other benefits like accrued paid time off, are also factored into the overall accrued payroll liability.

Accrued Wages in Financial Statements

Accrued wages are presented on a company’s financial statements as a current liability on the balance sheet. They are often listed under a broader category such as “accrued expenses” or “accrued liabilities” if specific line items are not used. This classification signifies that the company owes these amounts to employees for work performed and expects to pay them within the upcoming year.

On the income statement, the full wage expense, including the accrued portion, is recognized in the period the employees earned it, adhering to the matching principle of accounting. This principle ensures that expenses are matched with the revenues they helped generate in the same accounting period, providing a more accurate picture of the company’s profitability. To record accrued wages, a journal entry is made where the wage expense account is debited, increasing expenses, and an accrued wages payable account is credited, increasing the liability. When the actual payment occurs in the subsequent period, the accrued wages liability is debited, and the cash account is credited, reducing both the liability and cash. This accounting practice supports transparent financial reporting and accurately reflecting a company’s financial position and performance.