How Do You Account For Unpaid Wages?

How Do You Account For Unpaid Wages

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How Do You Account For Unpaid Wages

When a company owes wages to its employees at the end of an accounting period, it needs to account for this obligation. The wages that are owed but not yet paid are referred to as “accrued wages” or “wages payable”.

Accrued wages represent a liability for the company. This is because they are an obligation that the company is expected to pay in the future.

Here’s how you would typically account for unpaid wages:

  • Recognize the Expense: At the end of the accounting period, you should record the wages that have been earned by employees but not yet paid. This is done by debiting (increasing) the Wages Expense account and crediting (increasing) the Wages Payable account. The wages expense is reported on the income statement, and the wages payable is reported as a current liability on the balance sheet.
  • Pay the Wages: When you pay the wages, you debit (decrease) the Wages Payable account and credit (decrease) the Cash account. This reduces both your cash and the wages payable liability.

Example of How to Account For Unpaid Wages

Suppose a company has a biweekly payroll, meaning it pays its employees every two weeks. The company’s accounting period ends on December 31, but the company doesn’t pay its employees for the final week of December until January 7 of the next year. The total wages for this final week amount to $20,000.

Here’s how the company would account for these unpaid wages:

  • Recognize the Expense: On December 31, the company needs to recognize the wages it owes its employees. It does this with the following journal entry:
    • Debit Wages Expense $20,000
    • Credit Wages Payable $20,000
    This entry records the $20,000 wage expense on the income statement for the current year, where the employees worked for their pay. It also records a $20,000 liability on the balance sheet under Wages Payable, representing the amount the company owes to its employees.
  • Pay the Wages: On January 7 of the next year, when the company pays its employees, it records the following journal entry:
    • Debit Wages Payable $20,000
    • Credit Cash $20,000
    This entry reduces the Wages Payable liability on the balance sheet (since the company has now paid its employees what it owed them) and also reduces the Cash account by the same amount.

Remember, this example doesn’t include potential complexities like tax withholdings or other deductions from pay, which would also need to be accounted for in a real-world scenario.

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