Accrual of Salaries & Benefits Journal Entry

If there was no accrual-basis accounting, there would be no need for payable accounts.

Accrual-basis accounting creates the need for new statements and new accounts for an investor to understand the competitive position of a company. If there was no accrual-basis accounting, there would just be the cash-flow statement with a balance sheet that is not as complicated as it is now. One journal entry that is recorded in the accrual accounting system is the accrual of salaries and benefits.

Accrual-Basis Accounting

Accrual accounting has one big difference from cash-basis accounting: cash does not have to be disbursed or received for a transaction to occur. In accrual-basis accounting, revenue is recorded when it is earned and expenses are recorded when they are incurred. That leads to such accrual accounts as unearned revenue as well as the payable accounts. Salaries payable is one of the accounts. Accrual accounting creates the need for such asset accounts as prepaid rent and prepaid insurance.

Accrual Of Salaries and Benefits

Salary and benefit expenses accrue when they are incurred. Theoretically, after each minute worked, salaries and benefits accrue. However, a company will not update its books that often, so a company records the accruals of salaries and benefits every time it updates its books. The accruals are necessary unless the company pays its employees for salaries and benefits every time it updates its books. In that case, there is no need for a wages-payable account because the obligation is satisfied.

Journal Entry

Take the example of a company that pays its employees once every two weeks and updates its books once a week. The company has two employees who each earn $1,000 a week in salary and benefits. The journal entry after week one is as follows: a wages expense of $2,000 and an increase of wages payable of $2,000. After week two, the same transaction would be recorded again to accrue the wages. Then, the company would pay the salaries and benefits in cash of $4,000 to satisfy the obligations. The different taxes and benefit deductions would be calculated as part of the $4,000.

Need

The need for accrual entries arises to help an investor figure out what obligations a company has coming up. If there were no accrual entries, an investor would not be able to see if a company needs to pay its employees; unless cash is disbursed, there are no entries. An investor would not be able to predict payments and receipts of cash, but would only be able to see them after they have occurred.

References

• Accounting Coach: Payroll Journal Entries for Salaries