Definition of Payroll Accrual
The payroll accrual is the amounts a company owes for work done by employees, but the amounts have not yet been recorded in the company's general ledger accounts.
The related expenses and the liabilities for the employees' work must be recorded for the company's financial statements to reflect the accrual basis of accounting.
Example of Calculating the Payroll Accrual
Assume that a company prepares monthly financial statements as of the last day of every month. Its hourly-paid employees are paid on Fridays for the hours worked in the previous workweek of Sunday through Saturday.
Now assume that the last day of the month is Monday, June 30. This means that the hourly-paid employees were last paid on Friday, June 27 for the hours they worked through Saturday, June 21. Therefore, as of June 30 the company owes its hourly-paid employees for the amounts they earned between June 22 and June 30.
Prior to issuing its June 30 financial statements, the company must record an accrual adjusting entry dated June 30 to record the amounts owed to its hourly-paid employees for working from June 22 through June 30. (The amount for the workweek of June 22-28 might be calculated by the time the adjusting entry is prepared in early July and only the amounts for June 29 and 30 will need to be estimated.)
The important point with the accrual method/basis of accounting is:
- The liabilities reported on the June 30 balance sheet must report all of the amounts owed for work performed up to midnight of June 30.
- The expenses reported on the income statements for the month and year-to-date ended on June 30 must include all the payroll related expenses through midnight of June 30.