How does accrued payroll work?

Definition

Accrued payroll is a current liability for wages that have been earned but not paid. On the books, this line holds the unpaid slice; the related wage cost already hit the Income Statement when the work was done.

This is an account, not the cutoff journal that fills it. The balance sits until payday, then it is paid down or reversed.

If the period ends between paydays, some earned wages belong here. Cash-basis books often skip this line and wait until the check goes out.

On the accrual basis, you record the owe at period end even though cash has not left the bank.

Where it shows up

Balance Sheet: Located in the current liabilities section.

P&L: Related to wage expense already earned.

Cash flow: Decreases in this account, reported cash from operating activities decreases.

See also: Payroll Accrual · Accrued Liabilities · Payroll Register

When you look at your Balance Sheet, this line sits in current liabilities, near payroll taxes payable and other short-term amounts. When the balance is high, more earned wages are waiting for the next payday; when it is low, you have just paid, or the period ended on a payday.

The Income Statement does not list this account as a line. Related wage cost already hit the P&L when the work was earned.

On the Statement of Cash Flows, payday is the cash event. Cash from operations falls when you pay, and this liability falls with it.

A payroll register is the run-by-run list of gross pay, deductions, and net pay. This account is the leftover earned wages that have not hit a paycheck yet.

How it works

A typical path starts with time worked. People clock in, and wages build day by day even if payday is next week.

At period end, if payday has not arrived, you record the unpaid slice. Wage expense goes up, and this liability goes up by the same amount.

That cutoff journal is a payroll accrual. Accrued payroll is the Balance Sheet account that stores the unpaid balance after the entry posts.

The payroll register is not this account. It is the supporting list for a pay run; this line is what remains unpaid at the statement date.

Gross wages are the full amount earned before withholdings. This account usually holds the wage piece; tax withheld and the employer share sit in payroll tax liability.

When payday arrives, you reverse the cutoff or you pay this balance down as part of the payroll journal entry. Cash falls, and the liability for those days returns to zero.

If the period ends on payday, this account may be zero. The next cutoff rebuilds it for days worked after that check.

The matching principle is why accrual books wait for the work, not the check. Wages belong in the period the people worked, even if the bank is quiet until Friday.

At month end you should be able to tie this balance to timesheets or the payroll calendar. A round number with no hours behind it is hard to defend.

Example

A neighborhood laundromat pays its attendants every other Friday. Month end falls on a Wednesday, three days after the last payday.

Three attendants each earned $200 in those three days, so $600 of wages is owed. The work is done; the checks have not gone out.

The laundromat records:

Debit: Payroll expense $600

Credit: Accrued payroll $600

Payroll expense hits the P&L by $600, and this liability goes up by $600. Cash has not moved.

The Balance Sheet is larger on the liability side. The Income Statement already shows the wage cost in this period, which is the point of the cutoff.

On the next payday the laundromat pays those three days along with the new days. The entry that clears this slice is:

Debit: Accrued payroll $600

Credit: Cash $600

This liability for those days falls back to zero, and cash falls by $600. The new days earned in the next period are a separate wage expense, not a second hit to this $600.

Common mix-ups

Accrued payroll is not the same thing as a payroll accrual. Accrued payroll is the Balance Sheet account; the payroll accrual is the cutoff entry that fills it.

Accrued payroll is not payroll tax liability. Wages earned sit here; withheld and employer taxes sit in the tax payable lines.

Accrued payroll is not the paycheck. Gross wages are what was earned; this account is only the unpaid slice at period end.

Related terms

• Payroll Accrual: The entry that records earned but unpaid wages and related costs at cutoff.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Payroll Register: The per-run report listing each employee's gross pay, deductions, and net pay.
• Gross Wages: Total pay earned by an employee before withholdings.
• Payroll Journal Entry: The entry that books a payroll run into the general ledger.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Current Liabilities: Obligations due within the next twelve months.
• Payroll Expense: The wage cost of employees recorded on the income statement.