Accrued salaries are an accounting concept that refers to the amount of salaries earned by employees for work performed during a specific accounting period but have not yet been paid by the company. Accrued salaries arise in businesses that follow the accrual basis of accounting, where expenses are recognized when they are incurred, not when the cash is paid.
Accrued salaries are recorded as a liability on the balance sheet, usually under current liabilities, as they are expected to be settled within a short period, typically within a year. Recording accrued salaries ensures that a company’s financial statements accurately reflect its financial obligations and the expenses incurred during an accounting period, providing a clearer picture of its financial health for management, investors, and other stakeholders.
To record accrued salaries, a company would make a journal entry at the end of the accounting period, debiting the salaries expense account and crediting the accrued salaries account (or salaries payable). When the company actually pays the salaries to its employees, it would reverse the accrued salaries liability and reduce the cash account with a corresponding journal entry.
Example of an Accrued Salaries
Imagine a company has ten employees, each earning $4,000 per month. The employees are paid on the 5th of the following month for the work performed in the previous month. The company’s accounting period ends on December 31st.
To recognize the salaries expense incurred in December, even though the payment will be made in January, the company would record accrued salaries at the end of the accounting period. The journal entry for this would be:
Debit: Salaries Expense – $40,000 (10 employees x $4,000) Credit: Accrued Salaries (or Salaries Payable) – $40,000
This entry records the salaries expense in December and the accrued salaries as a liability on the company’s balance sheet.
When the company pays the salaries on January 5th, it would record the following journal entry to reverse the accrued salaries and decrease the cash account:
Debit: Accrued Salaries (or Salaries Payable) – $40,000 Credit: Cash – $40,000
By recording the accrued salaries, the company ensures that its financial statements accurately reflect its financial obligations and the expenses incurred during the accounting period.