Accrued salaries are salaries which has been incurred but not yet recorded in the accounting ledgers at the end of the accounting period. This issue arises in a business as the salaries are often paid to a date which does not necessarily coincide with the accounting period end date.
The use of accruals in accounting ensures that expenditure is allocated to the correct accounting period. Adjusting the accounting records for accruals ensures that financial statements are prepared on an accruals and not cash basis and comply with the matching concept of accounting.
Suppose for example a business pays monthly salaries of 55,000 on the 28th of each month. Assuming the accounting period ends on the 30th of the month, there will be two days in which work has been carried out by the employees (29th and 30th) which the payment on the 28th of the month did not take into account.
In order to correct this situation an accrued salaries journal entry is required and the amount is calculated as follows:
Monthly salaries = 55,000 Unpaid days = 2 Accrued salaries = Monthly salaries x 12 x Unpaid days / 365 Accrued salaries = 55,000 x 12 x 2 / 365 = 3,616
Accrued Salaries Journal Entry
At the end of the month the business needs to record the unpaid salaries for that period with the accrued salary expense journal entry is as follows:
The Accounting Equation for Accrued Salaries
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction.
For this accrued salaries transaction the accounting equation is shown in the following table.
In this case the balance sheet liabilities (accrued salaries) have been increased by 3,616, and the income statement has a salaries expense of 3,616. The expense reduces the net income, retained earnings, and therefore owners equity in the business.
Popular Double Entry Bookkeeping Examples
Another double entry bookkeeping example for you to discover.
- Bad Debt Write Off Journal Entry
- Incorporation Expenses
- Certificate of Deposit in Accounting
- Utilities Expense
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.