Wages are one of the largest and most important expenses nearly all businesses have to budget for.
The thing is, wages aren’t typically paid out to employees as soon as they earn them. More commonly, businesses have payroll periods wherein they pay employees once a month or every two weeks.
This creates an accounting problem:
If you’re using the accrual accounting method (as opposed to cash accounting), you need to account for expenses as and when you incur them.
As a business, you’ve incurred the wage expense the moment the time is worked. But you haven’t them yet, so the cash hasn’t gone out of your account.
To solve this and keep your books accurate and aligned with the matching principle, you’ll need to use wages payable.
In this article, we’ll discuss what wages payable are, outline common scenarios under which they arise, how to treat them in journal entries, and best practices for managing this accrued expense.
What are wages payable?
Wages payable is the amount of money your business owes to its employees for the work they’ve performed but for which they have not yet been paid.
They are a liability and typically appear on the balance sheet under current liabilities, representing salaries and wages that are still outstanding at the end of the account period but are expected to be paid in the following period (which is why they are current and not non-current liabilities).
Wages payable are important for accurate financial reporting. They help businesses align with the principles of accrual accounting and give business owners and finance leaders a better understanding of the company’s short-term obligations.
Failing to properly record wages payable can lead to misleading financial statements and even legal compliance issues.
It's important to distinguish wages payable from other payroll liabilities.
Wages payable refers strictly to unpaid employee compensation. Other payroll liabilities, such as payroll taxes, employee benefits, and deductions like health insurance premiums, are separate obligations that the employer must also track and settle.
Here are a few examples of common scenarios that lead businesses to use wages payable:
- Employees work the last few days of the month, but payday falls in the following month
- Payroll processing is delayed due to weekends or holidays
- An employee’s final paycheck is pending after resignation or termination
- Overtime hours are approved but not yet processed in the current pay cycle
Accounting for wages payable on the balance sheet
Wages payable is found on the balance sheet as a current liability.
This means that it represents a short-term financial obligation the company is expected to settle within the next accounting period (usually in the following pay cycle or month).
From a financial reporting perspective, wages payable increases the total liabilities of a business.
As a result, this reduces the owners’ equity or retained earnings until those wages are paid. When the wages are paid, the liability is removed from the balance sheet, and cash flows out of the business, decreasing cash on hand and increasing owners’ equity or retained earnings.
Stakeholders like investors, lenders, and internal business leaders rely on accurate reporting, and they use of wages payable is part of this.
Accurate reporting of wages payable helps present a true and fair view of the company’s financial position and ensures expenses are properly matched with the period in which the work was performed.
It provides transparency into the company’s short-term obligations, supports effective cash flow management, and ensures compliance with accounting standards. Misstating this liability can lead to incorrect assumptions about a business’s profitability and financial health.
Accrued wages journal entries
In order to record wages payable in your accounting system, you’ll use journal entries. These entries ensure that payroll expenses are recognized in the correct accounting period.
In double-entry accounting, each journal entry requires one credit entry and one debit entry to maintain balance. In this case, the wages expense will be debited, and the wages payable liability will be credited:
- Debit: Wages Expense
- Credit: Wages Payable
This entry increases expenses on the income statement and adds a liability on the balance sheet, and follows the basic accounting principle that expenses increase with debits and liabilities increase with credits.
Let’s explore a few examples to illustrate.
Examples of wages payable journal entries
Example 1
A company accrues weekly wages of $5,000. At month-end, this amount is unpaid. The following journal entries are recorded:
- Debit: Wages Expense $5,000
- Credit: Wages Payable $5,000
Example 2
Employees at a company rack up $1,200 in overtime wages, which aren’t approved until after payroll cutoff and, therefore, fall into the following period.
The accountant records the accrued expense:
- Debit: Wages Expense $1,200
- Credit: Wages Payable $1,200
Example 3
Employees at a company earn bonuses monthly, but they are paid out quarterly. The business accrues $10,000 in employee bonuses in January, to be paid out at the end of March.
They’ll need to record this as wages payable using the following journal entries:
- Debit: Bonus Expense $10,000
- Credit: Wages Payable (or Bonus Payable) $10,000
What happens when accrued wages are paid?
In all three of the above examples, when the wages are eventually paid, the liability is cleared with the following entry:
- Debit: Wages Payable
- Credit: Cash/Bank
Best practices for managing wages payable
Managing wages payable effectively is essential for maintaining accurate financial records, ensuring timely payments, and avoiding compliance issues. Here are five best practices to help you stay on top of payroll liabilities.
1. Design a strategy for accurate tracking of wages payable
Getting on top of wages payable starts with designing an effective process for tracking them. Here are a few tips:
- Establish a consistent process for tracking hours worked, overtime, bonuses, and any unpaid compensation
- Use cutoff dates aligned with your accounting periods and reconcile wages payable regularly to prevent discrepancies.
- Maintain clear documentation of all wage-related accruals and cross-reference with HR or time-tracking systems to ensure accuracy.
2. Look to avoid common errors in payroll accounting
Payroll errors can lead to issues with unpaid wages, driving up wages payable unnecessarily. Common errors include:
- Incorrect wage calculations
- Missed overtime
- Duplicate entries
To avoid these errors, double-check wage rates and classifications, set up automated checks for anomalies, and review journal entries at the end of each period. Regular internal audits and having a second pair of eyes on payroll reports can also help catch issues early.
3. Use tools and software to streamline wage management
Modern payroll and accounting software can significantly reduce manual effort and errors. Features like automated wage calculations, journal entries, and real-time reporting are all helpful here
Integrating time-tracking apps and HR systems with your accounting platform ensures seamless and accurate data flow.
4. Reconcile payroll on a regular basis
Reconcile your payroll records at least monthly (preferably at each pay cycle) to match wage expenses with actual payments and clear any outstanding liabilities.
This will help you detect overpayments, missed accruals, or payment delays before they become bigger issues.
5. Communicate payroll timelines clearly with employees
Clear communication around pay periods, overtime approval, and bonus schedules can reduce misunderstandings and help ensure all earned wages are properly recorded.
Set expectations for when wages are earned versus when they are paid, especially around month-end or holidays, to maintain trust and reduce administrative confusion.
Wages payable is an important part of accrual accounting
Wages payable reflect earned but unpaid employee compensation. Keeping on top of wages payable is essential for accurate accrual accounting and financial reporting.
Using financial management software like BILL helps you streamline payroll accuracy and keep on top of accrued expenses with powerful features like:
- Automated approvals and payment workflows
- Real-time tracking and audit trails
- Seamless accounting software integrations
Streamline your accounts payable today.
FAQs
What’s the difference between wages payable and salaries payable?
The terms wages payable and salaries payable are essentially synonyms.
Wages typically refer to hourly compensation for employees who work varying hours, and salaries refer to fixed, regular payments for salaried employees.
In practice, these are both the same thing: money you pay to employees for the time they work. They just reflect different types of pay structures.
Businesses may choose to call the liability wages payable or salaries payable based on how they pay their employees, but both represent a short-term obligation to pay employees for the time they’ve worked.
Is wages payable an accrued expense?
Yes, wages payable is one type of accrued expense.
How do you calculate wages payable?
To calculate wages payable, you simply total the wages earned by employees during the accounting period in question that remain unpaid at the end of that period, including:
- Regular hours
- Overtime
- Bonuses
