At the end of the accounting period, you need to make adjustments in some revenue and expense accounts so that your financial records adhere to the matching principles of accounting. In the case of accrued wages, you're matching wages and salaries to the accounting period in which they were earned. For example, your accounting period may end December 31, but wages earned by your employees in the last days of December may not actually be paid until the next accounting cycle that begins in January. Failure to make these adjustments has the effect of understating your wages expense and overstating your net income and retained earnings.
1. Review payroll records to determine the dates for which employees were paid for the work they performed. Add the total wages, salaries and/or commissions earned by your employees after the most recent pay period up through the end of the accounting period. This total represents your accrued wages that won't be paid until the next period.
2. Make a journal entry for the accrued wages. Debit (increase) Wages Expense and credit (increase) Wages or Salaries Payable equal to the amount of the accrued wages.
3. Post to the Wages Expense ledger account. Enter a debit for the same amount of the journal entry. Add the debit amount to the existing Wages Expense account balance. If you made a $3,000 debit for accrued wages, for instance, and the debit balance was already $32,000, adding the two gives you an ending balance of $35,000 for the accounting period.
4. Post to the Wages or Salaries Payable ledger account. Credit the ledger account for the same amount of the journal entry. For most companies, the adjusting credit entry in the Wages or Salaries Payable ledger account also represents the ending balance for the accounting period, since previous payments to employees would have reduced the Wages Expense account to zero.
5. Transfer each of the Wages Expense and Wages or Salaries Payable ledger account ending balances to the Adjusted Trial Balance.
Items you will need
- Payroll records
- AccountingCoach; How Do You Calculate the Payroll Accrual?; Harold Averkamp, CPA
- CliffsNotes: Accrued Expenses
- CliffsNotes: Adjusting Entries
- Harper College; Accounting 101 -- Chapter 3: Preparing Financial Statements; July 2008
- American Institute of Professional Bookkeepers: Accrued Expenses (Accrued Liabilities)
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