Accrued Wages
Accrued wages refer to the amount of money a company owes its employees for work that has been performed but not yet paid. In other words, it is the salary or wages earned by employees during a specific accounting period, but not yet paid by the company at the end of that period. Accrued wages represent a liability for the company, as they are an obligation that the company must fulfill when the employees receive their paychecks.
Accrued wages are typically recorded at the end of an accounting period when preparing financial statements, as part of the accrual basis of accounting. This method records financial transactions when they are incurred, rather than when cash is exchanged. By recognizing accrued wages, a company ensures that its financial statements accurately reflect the expenses incurred and obligations outstanding during a specific period.
To record accrued wages, a company would make a journal entry at the end of the accounting period, debiting the wages expense account and crediting the accrued wages account (or wages payable).
Example of Accrued Wages
Suppose a company has 30 employees, and the total wages earned but not yet paid by the end of the accounting period amount to $15,000.
To recognize the accrued wages, the company would record the following journal entry at the end of the accounting period:
Debit: Wage Expense – $15,000 Credit: Accrued Wages (or Wages Payable) – $15,000
This entry records the wage expense and the accrued wages as a liability on the company’s balance sheet.
When the company eventually pays the employees their earned wages, it would reverse the accrued wages liability and record the cash payment:
Debit: Accrued Wages (or Wages Payable) – $15,000 Credit: Cash – $15,000
By recording accrued wages, the company ensures that its financial statements accurately reflect its financial obligations and the expenses incurred during the accounting period.
