Payroll Accrual

Payroll accrual is the accounting entry that records wages and related payroll costs employees earned but were not paid by the end of a reporting period. The cost is booked as an expense, and the amount owed is booked as a liability.

It does not add a new cost. The same wages are expensed once, in the period the work happened, even though the cash leaves in the next period.

Why Do Employers Accrue Payroll?

Accrual accounting records an expense when it is incurred, not when cash leaves the bank. OpenStax's accounting text describes matching expenses incurred to the revenues they helped earn.

Cash basis works the other way. IRS Publication 538 (revised January 2022) says cash-method businesses deduct expenses when paid, while accrual-method businesses deduct them when incurred, and economic performance for compensation generally occurs as the employee renders service.

What Costs Get Accrued?

Four items usually belong in a period-end payroll accrual, depending on your accounting policies and plan terms.

• Wages and salaries for days worked before the period ended.
• The employer's share of employer payroll taxes on those wages, which OpenStax records as an expense with a matching payable.
• Bonuses and commissions employees earned under plan terms but have not been paid.
• Vacation pay earned but not yet taken or paid.

Accrued vacation is a related liability, and readers who mean how employees earn paid time off should see our time-off glossary entry.

How Does a Payroll Accrual Entry Work?

Pay cycles such as a biweekly paycheck often cross month end. Suppose 10 employees earn $200 a day, and the month ends after 3 workdays that belong to the next payroll. The accrual is 10 x 3 x $200 = $6,000.

The month-end entry debits Wages Expense $6,000 and credits Accrued Wages Payable $6,000. Add the employer's payroll taxes on that amount as a second entry.

OpenStax's textbook example follows the same pattern, debiting Salaries Expense and crediting Salaries Payable for pay incurred but not paid.

How Do Reversing Entries Work?

Many companies reverse the accrual on day one of the next period. OpenStax says reversing entries made at the start of a new period reduce the risk of counting expenses twice.

Continue the example. The reversal debits Accrued Wages Payable $6,000 and credits Wages Expense $6,000. The next payroll covers 10 workdays, so it totals 10 x 10 x $200 = $20,000.

Expensing the full $20,000 leaves $14,000 in the new month, which equals the 7 workdays actually worked. BYU posts an automatic reversal on the first day of the following month.

What Mistakes Happen With Payroll Accruals?

Four errors are easy to make at each close.

• Leaving out employer payroll taxes on accrued wages.
• Counting calendar days instead of workdays. BYU's method uses unpaid weekdays and the pay rate.
• Skipping the reversal, which can count the same wages twice.
• Estimating hours instead of using approved timesheets.

This page is educational, not accounting advice. Confirm entries and methods with your accountant.

How Does HR Cloud Help With Payroll Accrual?

HR Cloud's pages do not describe journal entries or accrual calculations, so your accounting system books them. HR Cloud's time tracking software covers the data behind them: employees enter time on the platform or a mobile device, and managers approve timesheets.

Its payroll integrations send time collected in HR Cloud to your payroll vendor. To see how that works, request a demo.

Discover how our HR solutions streamline onboarding, boost employee engagement, and simplify HR management

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Frequently Asked Questions

Q: Where does accrued payroll appear on financial statements?

A: Wages expense appears on the income statement, and the unpaid amount sits in the liability section of the balance sheet. BYU's accrual, for example, posts to a balance sheet liability account.

Q: Does accruing payroll change what employees are paid?

A: No. BYU's payroll office states the accrual process will not affect the timing or actual amount of salaries and wages paid.

Q: How do you accrue pay for hourly employees?

A: Multiply unpaid hours by each hourly rate. BYU does this for hourly staff using hours recorded in its timekeeping system, so accurate time records make the accrual exact.

Q: How is accrued payroll different from withheld taxes?

A: Accrued wages are earned but unpaid. Withheld taxes are collected from pay and remain a liability until paid. See gross versus net payroll.

Q: Can accrued vacation pay be deducted on a tax return?

A: Under IRS Publication 538, vested vacation pay is deductible for the year if paid within 2½ months after year end. Later payments are deducted when paid.

Q: How often do companies record payroll accruals?

A: At the end of each reporting period. BYU's biweekly payroll process, for example, records an accrual at each month end for days not yet paid.