Salaries and Wages Payable: What They Mean and How to Record Them

Salaries and Wages Payable: What They Mean and How to Record Them

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Last Updated on June 15, 2024 by Qusai Ahmad

Salaries and wages are two common types of expenses that businesses incur as they pay their employees for their work. However, not all salaries and wages are paid immediately. Sometimes, businesses owe money to their employees for the services they have already performed. This is where the concept of salaries and wages payable comes in.

In this blog post, you will learn:

What are salaries and wages payable?

Salaries and wages payable are current liabilities that represent the amount of money that a business owes to its employees for the work they have done but have not yet been paid for. In other words, they are the unpaid portion of the salaries and wages expense.

Salaries and wages payable are different from salaries and wages expense in two ways:

  • Salaries and wages expense is the total amount of money that a business pays or expects to pay to its employees for their work during a specific period, regardless of when the payment is made. Salaries and wages payable is only the amount of money that a business owes to its employees at the end of a specific period, usually a month or a year.
  • Salaries and wages expense is an income statement account that reduces the net income of a business. Salaries and wages payable is a balance sheet account that increases the total liabilities of a business.

Why are salaries and wages payable important?

Salaries and wages payable are important for both businesses and accounting for several reasons:

  • They help businesses to manage their cash flow and budget by showing how much money they need to set aside for paying their employees in the future.
  • They help businesses comply with the matching principle of accounting, which states that expenses should be recorded in the same period as the revenues they help to generate. By recording salaries and wages payable, businesses can match the salaries and wages expense with the revenues earned by the employees in the same period.
  • They help businesses to measure their profitability and efficiency by showing how much of their revenues are spent on paying their employees.
  • They help businesses to prepare accurate financial statements that reflect their true financial position and performance.

How to record salaries and wages payable?

To record salaries and wages payable, businesses need to make two journal entries: one at the end of the pay period when the salaries and wages are accrued, and one at the time of the payment when the salaries and wages are paid.

The first journal entry is to debit salaries and wages expense and credit salaries and wages payable for the amount of money that the business owes to its employees at the end of the pay period. This entry increases the salaries and wages expense and the salaries and wages payable accounts.

The second journal entry is to debit salaries and wages payable and credit cash for the amount of money that the business pays to its employees at the time of the payment. This entry decreases the salaries and wages payable and the cash accounts.

Here is an example of how to record salaries and wages payable for a monthly pay period:

Suppose a business has 10 employees who earn a total of $50,000 per month. The business pays its employees on the 15th of the following month. On December 31, the business accrues the salaries and wages payable for the month of December. The journal entry is:

AccountDebitCredit
Salaries and Wages Expense$50,000
Salaries and Wages Payable$50,000

This entry shows that the business has incurred $50,000 in salaries and wages expenses for December, and it owes $50,000 to its employees.

On January 15, the business pays its employees for December.

The journal entry is:

AccountDebitCredit
Salaries and Wages Payable$50,000
Cash$50,000

This entry shows that the business has paid $50,000 to its employees, and it has reduced its salaries and wages payable and cash accounts by the same amount.

How to calculate salaries and wages payable?

To calculate salaries and wages payable, businesses need to multiply the number of employees by their hourly or daily rate, and then multiply the result by the number of hours or days they have worked but have not yet been paid for.

For example, if a business has 5 employees who earn $20 per hour, and they have worked 160 hours each in December, but they have not yet been paid, the salaries and wages payable for December are:

Salaries and Wages Payable = 5 x $20 x 160 = $16,000

However, the calculation of salaries and wages payable can be more complicated if the pay period is not the same as the accounting period, or if the employees have different pay rates, overtime, bonuses, deductions, or other adjustments. In such cases, businesses need to use the following formula to calculate salaries and wages payable:

Salaries and Wages Payable = (Salaries and Wages Expense for the Accounting Period) – (Salaries and Wages Paid During the Accounting Period)

For example, if a business has 10 employees who earn a total of $50,000 per month, and the business pays its employees on the 15th of the following month, the salaries and wages payable for December are:

Salaries and Wages Payable = ($50,000) – ($0) = $50,000

This is the same as the example above, where the business accrues the salaries and wages payable for December on December 31.

However, if the business pays its employees on the last day of the month, the salaries and wages payable for December are:

Salaries and Wages Payable = ($50,000) – ($50,000) = $0

This is because the business has already paid its employees for December on December 31, and it does not owe them any money.

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