Unpaid wages are wages which have been earned by an employee but which have not yet been paid at the end of the accounting period. Under the accruals accounting concept expenses should be matched to revenues, so an adjusting entry is required to post the unpaid wages for the period.
Suppose for example a business pays its employees weekly every Monday, but its accounting period ends on the last day of each month. Unless the month happens to end on a Monday, there will be hours which the employees have worked but which they will not be paid for until the first Monday in the following month.
If for example, the accounting period (month one) ended on a Thursday, the business would need to accrue for unpaid wages for three days, Tuesday, Wednesday, and Thursday. To find the unpaid wage accrual needed, the hours worked on the last three days of the month are multiply by the wage rate for each employee.
If the unpaid wages were calculated to be say 2,000, at the end of the accounting period (month one) the journal to post the unpaid wages accrual would be as follows:
|Gross Wages expense||2,000|
The debit to the wages expense is the cost to the business of the hours the employees have worked for the last three days of the month. The credit to the accrued wages account establishes a liability for the unpaid wages which will be paid the following Monday after the accounting period has ended.
The accrued unpaid wages liability is included in the balance sheet of the business under current liabilities, as it is due to be paid within twelve months of the balance sheet date.
In the next accounting period (month two), the total wages for the week will be posted as normal. The posting of wages is discussed in our payroll accounting tutorial. Suppose the total wages for the week were, 6,000, and taxes were 1,800. The journal to post the weekly wages in month two would be as follows:
|Net Wage Control||4,200|
However, the total gross wages for the week (6,000) includes the last three days of the previous month (2,000) already posted by the accrued unpaid wages journal. To correct this the adjusting entry needs to be reversed in month two as follows:
|Gross Wages expense||2,000|
The debit reduces the balance on the gross wages account to 6,000 – 2,000 = 4,000, which is the wages for the week for month two. The credit clears the accrued wages as they are now included on the net wage control ready for payment as normal
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. 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 degree from Loughborough University.