Understanding a payroll accrual

Definition

A payroll accrual is the period-end journal that records wages and related costs already earned but not yet paid. On the books, this is an adjusting entry, not the current liability account that stores the unpaid balance.

The entry puts wage cost on this period's Income Statement. It also raises the wages still owed on the Balance Sheet.

Cutoff is the reason it exists. Days worked after the last payday still belong in this period, even if the check prints next week.

Cash-basis books often skip this journal. Accrual books post it so the matching principle is kept.

Where it shows up

Balance Sheet: Related to the wages still owed at cutoff.

P&L: Related to wages earned this period.

See also: Accrued Payroll · Payroll Journal Entry · Adjusting Journal Entry

You will not find a line named payroll accrual on the statements. You will find the effect: wage expense on the Income Statement, and unpaid wages in current liabilities.

When the entry is large, many days of work sat between payday and period end. When it is small or skipped, the period may have ended on a payday, or the books may be waiting for cash.

The Income Statement is where the wage cost lands. The entry is what puts those earned days into this period instead of the next one.

There is no cash movement in this journal. Cash moves later, when the payroll is paid.

A payroll register supports a live pay run. This journal is the extra slice that the last register has not covered yet.

How it works

Start from the payroll calendar. Find the last payday that posted, then count the workdays from that date through period end.

Pull hours from timesheets or the schedule for those days. Multiply by the wage rate to get the unpaid gross.

Post the adjusting journal entry. Debit wage expense for the earned amount, and credit accrued payroll for the same unpaid wages.

Some shops also accrue the employer payroll taxes that attach to those wages. That extra credit sits in payroll tax liability, not in the wage line.

This journal is not the payroll journal entry for a live pay run. The pay-run entry books gross wages, withholdings, and net pay when checks are issued.

After cutoff, the unpaid days sit in accrued payroll until payday. The accrual did its job the moment it posted.

Many books reverse the entry on the first day of the next period. The live payroll run then records the full wages, and the reversal keeps those days from hitting expense twice.

Other books leave the accrual up and pay it down as part of the next payroll journal entry. Either method is fine if the same days are not expensed twice.

Tie the amount to hours and the calendar, not to a guess. A round plug with no timesheet behind it is hard to defend at close.

If payday falls on period end, you may have nothing to accrue. The live payroll journal already captured the month.

Example

A family campground pays its desk attendants every other Friday. March 31 falls on a Tuesday, four days after the last payday.

Two attendants each earned $250 in those four days, so $500 of wages belongs in March. The next check will not print until April.

The campground records the cutoff:

Debit: Payroll expense $500

Credit: Accrued payroll $500

Payroll expense hits March by $500, and unpaid wages on the Balance Sheet go up by $500. Cash has not moved.

The Income Statement now includes the days actually worked in March. Without this journal, those $500 would wait for the April paycheck and land in the wrong month.

On April 1 the campground reverses the cutoff so the live payroll can take over:

Debit: Accrued payroll $500

Credit: Payroll expense $500

The liability returns to zero, and the $500 of expense is cleared from April. When the next payroll journal entry posts, it records the full wages, including those four March days, without doubling them.

Common mix-ups

A payroll accrual is not accrued payroll. The accrual is the cutoff journal; accrued payroll is the Balance Sheet account that holds the unpaid wages.

A payroll accrual is not the payroll journal entry for a live pay run. The pay-run entry books the checks; this journal books the days the last check did not cover.

Skipping the accrual does not make the wages unpaid. It only parks the cost in the next period, which breaks cutoff.

Related terms

• Accrued Payroll: Wages earned by employees but not yet paid at the end of a period.
• 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.
• Payroll Register: The per-run report listing each employee's gross pay, deductions, and net pay.
• Employer Payroll Taxes: The payroll taxes the business owes on top of employee wages.
• PTO Accrual: The liability for earned but unused paid time off.
• Cutoff: The rule that transactions land in the period in which they actually occurred.
• Matching Principle: Recording expenses in the same period as the revenue they helped produce.