Finance departments use accrued payroll to ensure accurate financial reporting and employee compensation. The concept refers to the salaries employees have already earned but haven’t received payment for yet. The amount may also include commissions and other employee benefits. 

This may sound complex, but business owners, accountants, and employees need to understand accrued payroll. Let’s define accrued payroll, understand its importance, and how to calculate it. 

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Understanding Accrued Payroll

Accrued payroll is the compensation an employee has earned but has yet to receive. This happens when the payroll period overlaps with the company's financial reporting period. In this case, there may be a gap in time between the work an employee performs and the payments a company releases.  

For example, a company's accounting period ends on the last day of the month. Meanwhile, the employee worked until the fifth of the following month. Their salaries and wages for those five days would be part of accrued payroll.

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Why Is Accrued Payroll Important?

Accrued payroll is essential for accurate financial reporting and maintaining transparency in a company's financial statements. For any company, compliance with proper accounting standards is critical. Accuracy is also a crucial factor in managing payroll and calculating the wages payable. 

Accurate Financial Statements
Calculating total accrued payroll helps companies ensure that their financial statements accurately reflect their liabilities. It can also help them plan their payroll expenses at the end of an accounting period. If companies fail to account for accrued payroll, they may understate their liabilities. This, in turn, can create misleading financial statements.

Compliance with Accounting Standards
There are key standards that accountants follow like the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). These require that businesses recognize and report accrued payroll. 

The process helps businesses maintain consistency, comparability, and transparency in financial reporting. Note that there will be different requirements and standards depending on the country of payroll processing. 

Employee Compensation
In addition to compliance, accrued payroll ensures that employees receive the correct compensation for their work. Even if there is a delay in payments due to accounting procedures, they receive the backpay they are owed. 

This makes sure that your company is treating employees with respect. It also helps you stay compliant with the salaries and wages you owe. 

Calculating Accrued Payroll
To calculate accrued payroll, finance departments estimate the earned wages or salaries for the period between the end of the pay period and the end of the accounting period. To do so, companies must follow several important steps that help ensure accuracy and compliance. 

1. Determine the payroll period: Identify the payroll accrual period. For example, you can base your calculation on weekly, bi-weekly, or monthly payroll periods.
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2. Collect time and attendance data: Record employee attendance and the number of hours worked. Also, add any applicable overtime or commission earnings for the period after the last payroll cycle.
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3. Calculate the accrued amount: Multiply the days or hours worked by the employee’s daily or hourly rate respectively. For salaried employees, you can divide their annual salary by the number of pay periods. The result will give you the per-period salary. 
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4. Account for deductions and withholdings: Subtract any applicable deductions or withholdings from the accrued amount. This could include things like taxes, benefits contributions, or retirement plan contributions.
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5. Document and report: Record the accrued payroll amount on the balance sheet as a liability. Also, record it as an expense on the income statement. Make sure to classify accrued payroll and report it to accounting guidelines properly.

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Compliantly Manage Your Global Payroll with Borderless

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