What are Wages Payable?
Wages Payable, or “accrued wages”, represent the unmet payment obligations owed to employees remaining at the end of a reporting period. On the balance sheet, accrued wages are recognized as a current liability since they are near-term cash outflows paid to employees that have earned the compensation, yet have not been paid yet in cash to date.
Wages Payable Accounting – Balance Sheet Liability
Wages payable record the outstanding payment requirements still owed to employees, most often for employees compensated on an hourly basis.
Since wages payable represent a future outflow of cash, the line item appears on the liabilities section of the balance sheet.
Furthermore, the unmet payment is expected to be fulfilled in the near term, so it is categorized as a current liability.
The duration between the delivery of the service — the employee’s completed hours — and the date of cash payment must be kept to a minimum.
Otherwise, the delay in payment could result in reduced employee retention, i.e. a higher employee churn rate.
While churn might be less of a pressing matter for certain companies, such as retail stores, the loss of key employees could have negative implications on employee productivity and operating efficiency for others.
Generally, high churn rates result in a greater negative impact for companies in industries with greater technical requirements and longer training requirements for new employees.
Accrued Wages Journal Entry (Debit-Credit)
The recognition of accrued wages is meant to record the incurred yet not paid wage expense in a given reporting period.
In order to reflect the discrepancy on the general ledger per accrual accounting reporting standards established under GAAP, accrued wages are treated as a debit to the wages account, with an offsetting credit to the accrued wages account.
- Wage Expense Account → Debit Entry
- Wages Payable Account → Credit Entry
Once the employee is paid the amount due, the entries would reverse by the start of the next reporting period.
Depending on the specific circumstances (and the timing of the accrued payroll expense), an additional entry might be necessary to record adjustments related to payroll taxes.