Keeping track of payroll is more than just watching the funds go in and out. Because of the amount of capital involved and the process involved in ensuring that it happens smoothly, it is important to identify what your current funds are earmarked for. In terms of payroll accounting, this is often referred to as accrued payroll.
How It Works
So what is accrued payroll? Any form of compensation, including base, incentive, ancillary and deferred payment, that are owed to an employee fall under the umbrella of accrued payroll. Some of the most common monies owed are as follows.
– Wages: This includes both hourly and per-unit payment. This payment type often makes up the bulk of an accrued payroll report for most companies. Statistically, most workers are paid according to wages. Also, unlike salaries, wages need time in order to be calculated, so these payments are more likely to be deferred.
– Salaries: These are fixed annual amounts. Typically, they are divided up and paid out on a bi-weekly or monthly basis. For example, a salary of $120,000 a year would equal a monthly pay of $10,000 or a bi-weekly pay of $5,000 (minus deductions). Accrued salaries include any amounts still owed to an employee “at the end of a reporting period.”
– Commissions: Common with salespersons, these and other forms of incentive pay often take a time to calculate. They are usually based on a flat fee, per-unit sale or an overall percentage of sales.
– Bonuses: If a bonus is negotiated, for instance as a performance incentive, then it can be counted as part of accrued payroll. If the company owner, in an act of generosity, suddenly gives everyone an extra hundred dollars for the holidays, then it is not.
– Payroll Taxes: These are “owed” to an employee in the sense that they are paid to the government by the company on behalf of the employee. These funds can be money withheld, matched or paid by the employer and include Social Security, unemployment and Medicare.
An Example of Accrued Payroll
Consider a contractor who is paying her workers each Friday for the hours they put in the week before.
The hours her employees worked from Monday, Jan. 11 to Friday, Jan. 15 will be calculated after the 15th when all of the numbers are in. Then paychecks will be processed and delivered for that time frame on the following Friday, Jan. 22.
Let’s say the total hourly wages for the five workdays Jan. 11 through Jan. 15 come to $8,000. However, the contractor also needs to account for payroll taxes and fringe benefits totaling $2,000. This brings the total accrued payroll to $10,000.
A Legal Definition
At first glance, creating an accrued payroll may seem like a meaningless paper trail, but there are very practical reasons for doing so.
Accrued payroll is an accounting liability. Recording these funds in this way may be necessary for auditing purposes and also prevents companies from over-spending their capital they need to pay their employees.
Essentially, accrued accounting measures are a self-assessment of your payroll responsibility and one strong indicator of your business’ overall health.
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