Accrued Payroll

Accrued payroll is the amount of wages, salaries and related costs that employees have earned by working, but that the company has not yet actually paid, as of the date of the balance sheet. It arises from a near-universal timing mismatch: pay periods and pay dates almost never line up exactly with the end of an accounting period, so some amount of earned-but-unpaid wages almost always exists at any given cutoff date.

A company that pays its hourly employees every other Friday for work performed through the preceding Sunday will, at virtually any month-end or year-end close, have several days of wages that employees have already earned but that will not actually be paid until the next scheduled payday. Under accrual accounting, those earned wages belong in the period in which the work was performed, not the period in which the check is issued, which is exactly what accrued payroll is designed to capture.

Accrued payroll typically covers more than just the base wages or salary earned; it also includes the employer's related payroll tax obligations — Social Security and Medicare taxes, federal and state unemployment tax — that accrue alongside the wages themselves, along with any accrued vacation pay or other earned but untaken paid time off, and any accrued employer contributions to benefit plans such as a 401(k) match. A comprehensive accrued payroll entry at period end should capture all of these components, not just gross wages.

At period end, the company debits the appropriate wage or payroll tax expense accounts and credits Accrued Payroll, a current liability, for the estimated amount earned but unpaid. Many companies set up a reversing entry dated the first day of the following period so that when the actual payroll run processes shortly afterward, the full gross pay can be expensed normally without double-counting the days already accrued in the prior period.

Skipping the accrued payroll adjustment would understate both expenses and liabilities for the period in which the work was actually performed, overstating reported profit. Because payroll is frequently one of the largest expense categories for any labor-intensive business, auditors routinely test whether a company's accrued payroll calculation is reasonable and complete, since even a modest understatement here, multiplied across every pay period and every reporting date, can add up to a material misstatement over time. Companies that pay on an irregular or infrequent schedule, or that operate across multiple pay groups with different cutoff dates, generally need to track accrued payroll with particular care, since the gap between work performed and cash paid out can stretch considerably longer than it would under a standard biweekly cycle.

If a company's biweekly pay period ends on a Sunday but its fiscal month closes the preceding Thursday, four days of wages have been earned but will not be paid until the following week. A payroll of $700,000 for the full two-week period, evenly spread across ten working days, translates to roughly $280,000 of accrued payroll for those four days — an amount debited to wage expense and credited to Accrued Payroll at month end, then reversed once the real payroll run processes the following week.