At the end of each accounting period, a company will have to account for various liabilities that represent the lines of loss and expenses. They are various in nature, hence the neutral word ‘liability’ is used in these instances.
The accrued payroll is one of these liabilities. Simply put, it represents the money not paid by the employer to the employees during the accounting period. So, if during this period some part of salaries or wages and other money hasn’t been paid and is now owed, then it is part of the accrued payroll.
What is Accrued Payroll?
The ‘accrued payroll’ line in an accounting report represents the precise amount of money the company still owes to the employees. This unpaid money can be one of these several types:
- Monthly salaries
- Hourly wages
- Bonuses and other awards
The hourly unpaid wages are the most common type of accrued payroll. Although they won’t specify just how much of the unpaid payroll is owed for hourly work, it still makes up a major part of it for most businesses. That being said, some companies don’t even give the owed payroll its own line – some of them are just too big for that.
Instead, it is often accounted for as ‘other liabilities’. It’s not really crucial for external analytical purposes – this number exists so that the business itself could manage its debts. If the company always pays everything on time, they won’t bother specifying it separately.
How does it happen?
The accrued payroll can come into being for different reasons. They vary from case to case, and the chief similarity is that this money stays debited to the workers who already earned this money but didn’t yet receive it. You can’t always know what exactly causes the pay to be late, but they are all united into this umbrella term.
Some forms of it can be natural, but some can be simple one-offs when the worker simply couldn’t receive the pay on time. Generally, you’ll want to keep an account of accrued pay for your own sake, regardless of how the payroll gets debited. After all, a fully-paid worker is a happy worker.
Why account it?
The reason why these are accounted for in the first place is that, although the company still has the money, it is technically not theirs already, and it’ll have to be paid as soon as possible. Hence, they record these as a liability.
There’s no telling when the company is going to pay thus accrued payroll, although this should be a short-term liability. If this liability line keeps increasing each new report, however, then it’s likely they aren’t paying the accrued amount in full or at all. This provides you a glimpse into the company’s reliability and management capabilities, although it’s not reliable.
The money that doesn’t end up being paid to the workers through the month gets accounted as accrued payroll in the early days of the next month. These don’t just include the salaries, wages and other pay. Associated expenses, like payroll tax, can also be part of it.
For instance, if the workers didn’t get paid their due $10,000 the last week of the month, they’ll have to be accounted as accrued at the beginning of the next month. Add to that the payroll tax of, say, $2,000, and the accrued payroll ultimately grows to $12,000.