Last Updated on March 18, 2024 by Qusai Ahmad
Do you know the difference between salaries and wages, and how to record them in the accounting books? If not, don’t worry. In this blog post, I will explain these concepts in a fun and friendly way, and show you some examples of journal entries for salaries and wages expense and payable. By the end of this post, you will have a better understanding of these important accounting terms and how to use them correctly.
Salaries vs Wages: Fixed vs Variable Compensation
Salaries and wages are two types of compensation that employees receive for their work. But they are not the same thing. There are some differences between them, and they affect how we account for them. Let’s see what they are.
Salaries are fixed amounts of money that employees earn per month or year, regardless of how many hours they work. For example, a manager might earn $6,000 per month as a salary. Salaries are usually based on a salary scale, which is a system that determines the pay level of each employee based on their position, experience, education, and performance.
Wages are variable amounts of money that employees earn per hour, day, or week, depending on how many hours they work. For example, a cashier might earn $15 per hour as a wage. Wages are usually based on an hourly rate, which is the amount of money that an employee earns for each hour of work. Wages are subject to wage laws, which set the minimum standards for pay and working conditions, such as the minimum wage, overtime, and living wage.
Salaries and Wages Expense: The Cost of Paying Employees
Salaries and wages expense is the cost of paying employees for their work during a specific period. It is an expense account that reduces the net income of the business. For example, if a business pays $10,000 in salaries and wages to its employees in January, it records a salaries and wages expense of $10,000 for that month.
Salaries and wages expense is also known as payroll or gross income, which is the total amount of money that the business pays to its employees before any deductions are made. Deductions are the amounts that are subtracted from the gross income to calculate the net pay, which is the amount of money that the employees receive in their bank accounts. Deductions include things like income tax, payroll taxes, withholding, employee benefits, and wage garnishment.
How to Record Salaries and Wages Expense
To record salaries and wages expenses, we need to make a journal entry that debits salaries and wages expenses and credits cash. A journal entry is a way of recording the transactions that affect the accounts of the business. It consists of a debit and a credit, which must always balance. A debit increases an asset or expense account and decreases a liability or revenue account. A credit does the opposite.
Let’s look at an example. Suppose a business pays $4,000 in salaries and $6,000 in wages to its employees on January 15th for the first half of January. How do we record this transaction? Well, we debit salaries and wages expense for $10,000, because we incur an expense of paying our employees. And we credit cash for $10,000 because we reduce our cash by paying our employees. The journal entry would look like this:
Dr. Salaries and Wages Expense $10,000
Cr. Cash or Bank $10,000
Salaries and Wages Payable: The Amount Owed to Employees
Salaries and wages payable is the amount of money that the business owes to its employees for their work at the end of a period. It is a liability account that increases the total liabilities of the business. For example, if a business pays its employees on the 15th of each month, it will have a salary and wages payable of $5,000 on January 31st, representing the amount it owes to its employees for the second half of January.
Salaries and wages payable are also known as employee salary or taxable income, which is the amount of money that the employees earn for their work that is subject to taxation. Taxable income may include not only salaries and wages, but also other forms of compensation, such as bonuses, commissions, profit sharing, and piece rates.
How to Record Salaries and Wages Payable
To record salaries and wages payable, we need to make a journal entry that debits salaries and wages expense and credits salaries and wages payable. This journal entry recognizes the expense of owing our employees and the liability of paying them in the future.
Let’s look at an example. Suppose the business owes $5,000 in salaries and wages to its employees on January 31st for the second half of January. How do we record this transaction? Well, we debit salaries and wages expense for $5,000, because we incur an expense of owing our employees. We credit salaries and wages payable for $5,000 because we increase our liability of owing our employees. The journal entry would look like this:
Dr. Salaries and Wages Expense $5,000
Cr. Salaries and Wages Payable $5,000
Conclusion
And that’s how we record salaries and wages expenses and payable in the accounting books! As you can see, it’s not that hard once you understand the concepts and the rules. I hope you enjoyed this blog post and learned something new. If you did, please share it with your friends and colleagues who might find it useful. And don’t forget to leave a comment below if you have any questions or feedback. Thanks for reading and see you in the next post!
Bonus: How to Use a Salary Calculator
If you want to know how much you earn or how much you should pay your employees, you can use a salary calculator to estimate your net pay or gross income based on your salary or wage, deductions, and location. A salary calculator is a tool that can help you plan your budget, compare different job offers, or negotiate your salary. There are many online salary calculators that you can use for free, such as [this one].
To use a salary calculator, you need to enter some information, such as:
- Your salary or wage, either annually, monthly, weekly, or hourly
- Your pay frequency, either monthly, biweekly, weekly, or daily
- Your filing status, either single, married or head of household
- Your state and city of residence
- Your number of allowances, which are the exemptions that reduce your taxable income
- Your pre-tax deductions, such as retirement contributions, health insurance premiums, or flexible spending accounts
- Your post-tax deductions, such as child support, alimony, or garnishments
The salary calculator will then calculate your net pay or gross income, and show you a breakdown of your deductions, taxes, and benefits. You can also see how your net pay or gross income changes if you adjust any of the inputs, such as your salary or wage, your deductions, or your location. This can help you make informed decisions about your career and finances.
Disclaimer
Please note that this blog post is for informational and educational purposes only, and does not constitute professional accounting or tax advice. You should always consult a qualified accountant or tax professional before making any financial decisions or filing your taxes. The information and examples provided in this blog post are based on general assumptions and may not apply to your specific situation. The salary calculator is also a tool that provides estimates and may not reflect the actual amount of your net pay or gross income. You should always verify the accuracy and completeness of the information and calculations with your employer, payroll provider, or tax authority.
