To use the salaries payable formula, you must first understand accrued wages and account for them in company reports.
How you account for the money that leaves your organization may be at odds with when you pay it since there is usually a lag time. For example, your employees may earn their wages in a given period. However, at the time of reporting, those wages may be unpaid. And that is where accrued wages and salaries payable amounts come in.
What Are Accrued Wages?
Accrued wages refer to the money your employees have earned within a specified accounting period that you haven’t paid out yet. As a result, their earnings are a liability. Therefore, you must report them as such in the liability section of your business balance sheet.
Accrued wages usually consist of hourly wages, bonuses, employee deductions and employee taxes, such as FICA taxes and federal income taxes, among others.
Read More: What Is Included on a Balance Sheet?
Accounting for Accrued Wages
Salaries payable is a liability account that shows the accrued wages. It may also be referred to as wages payable. The balance within this account represents what has not been paid at reporting time.
Typically, salaries or wages are a business expense. As a result, you can find wages payable in income statements as part of wages expense under operating expenditure. However, wages expense represents all wages and salaries earned within an accounting period regardless of whether they were paid or not. You will also find salaries payable on the balance sheet under current liability.
You will debit the wages expense account and credit the accrued wages account when accounting for accrued wages. But at the beginning of the next accounting period, you will credit the wages expense account and debit the accrued wages account. A credit will increase the balance in the accrued wages account, while a debit will decrease it.
It is also worth noting that some companies don’t have a salary payable account because they pay employees monthly and thus, don’t have any liability at the time of reporting.
Read More: Difference Between Debt & Liabilities
Current or Noncurrent Accrued Wages
All accrued salaries that are payable within one year are categorized under current liability. But those that are payable after one year are a noncurrent liability.
Salaries Payable Formula
The salaries payable formula is straightforward:
Salaries payable = Unpaid (Salaries + Wages + Employment Benefits + Bonuses + Overtime + Additional Allowances)
Read More: Why Are Income Statements Important?
How to Calculate the Ending Balances of Accrued Wages and Salaries Payable
Below are the steps you would take to calculate the ending balances of accrued wages and salaries payable.
1. Determine the last time the employees were paid for their work. Compare that to the dates that mark the end of the accounting period. Use the payroll expense records.
2. Calculate the accrued wages owed to each employee from the last pay period to the end of the accounting period. The amount should include the hourly wages, commissions, bonuses, overtime and any other allowances due to them. And if they earn a monthly salary, prorate the salaries based on what you pay daily.
3. Add up all the accrued wages of all the employees who have yet to be paid. Then add the sum of accrued wages to any existing amount in the debit section of the wages expense account and credit it in the accrued wages and salaries payable section.
4. Find the ending balance. The sum of all the amounts credited in the accrued wages and salaries payable section represents its ending balance.
Suppose your company pays employees at the end of each month for work done until the 20th and you keep monthly records. So, for February 2022 the accounting period ends on February 28, 2022, and anyone who gets paid for work done until the 20th will not be paid for the remaining eight days.
Also, suppose you have three employees who each earn $20 per hour and work 40 hours during weekdays and 10 hours of overtime at $30 per hour during the weekend from February 21 to February 27. And on February 28, they earned the regular $20 per hour for eight hours.
In that case, each of them worked 48 hours at $20 for a total of $960 each, which is equal to $2,880 for all three. In addition, they each earned $300 for overtime, which equals $900 for all three.
Based on the salaries payable formula, the accrued wages are the sum of the regular earnings and the overtime pay. For this example, you would calculate $2,880 + $900 to obtain a total of $3,780.
Therefore, when making a journal entry, you would debit $3,780 in your wages expense section and credit the same amount in your salaries payable section. Assuming the existing amount in the debit section of the wages expense account is $0, you would add the $3,780 to it. And the ending balance of accrued wages and salaries payable would remain $3,780.
When you don’t account for accrued wages in your income statement, your operating and net income will increase. So, you must rectify the matter during the next accounting period by making an adjusting entry that debits the wages expense while crediting the wages payable.
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.