Managing Payroll has seen a lot of improvements with the advent of technology. But most of these tools and solutions follow the same accounting principles that organizations have observed for years.
Accrued Payroll is one such method that has existed for almost a hundred years. And yet, businesses worldwide still observe this approach to keep track of their labor costs and have more insight into their operational expenses.
Tech tools like a PEO and EOR solution can only do so much. To use them effectively would take a skilled payroll manager to be familiar with the basic accounting methods and complement them with these tools.
In this blog, we will take you through the Accrued Payroll method and talk about its definition, advantages, challenges, and some best practices you can observe. Let the following sections guide you through its basic concepts and help your organization manage Payroll optimally with technological solutions.
Understanding the Accrued Payroll Methodology
What is Accrued Payroll?
Accrued Payroll is an accumulation of your employees’ salaries, bonuses, compensations, and benefits over a definite pay period. This is an outstanding amount, making it an employer’s liability.
Listing these expenses is to track a company’s labor cost better before it is even released. It allows businesses to anticipate the outlay, prepare the funds, and ensure that Payroll is paid regularly to employees.
Accrued Payroll follows the same principle as accrual accounting: businesses file all possible expenses and payments once the transaction is made, not when they are received or spent.
Examples of Payroll Accruals
Now that we have established how accrued Payroll generally works, let us dissect and specify the factors that make up these accruals. Below are examples of payroll accruals that employers must include in their accounting records:
- Base Salary – refers to the Employee’s gross salary in a definite period. It can be expressed on an hourly, weekly, or monthly rate.
- Income Taxes – refers to the government-levied tax on an individual’s income.
- Social Security contributions – refer to mandatory payments paid by employers and employees to the government for future benefit entitlements.
- Bonuses – refers to additional compensation paid by employers as a reward for their performance or simply a job well done.
- Commission – refers to incentives that employees earn through sales.
- Statutory Leaves – refers to Employee paid and unpaid leaves mandated by the law. Examples of these benefits are maternity leave, paternity leave, sick leave, vacation leave, and bereavement leave.
Accrued Payroll Alternatives
A direct opposite of accrued payroll accounting is cash accounting. In cash accounting, any cash assets transacted within a definite pay period will be recorded upon their release or receipt.
This method of accounting is relatively simple. However, companies will not have a general idea of their company’s finances. Cash Accounting will only record the company’s current assets, thereby limiting the view of its financial health. This will potentially affect future business decisions and even their growth.
Advantages of Tracking Payroll Accruals
Accrued Payroll provides a more transparent view of the company’s payroll finances. It protects employers from any shortages on the labor expenses front and ensures that employees get their entire month’s wages.
The accrual method also improves finance reporting of employee costs. By approximating the cost of labor in progress, businesses will have a more excellent idea of what to prepare for a definite payment period. They can better plan for the succeeding ones. It also prevents payroll errors that affect how employees are paid on a scheduled basis. Itemizing all of the payroll costs in advance will help accountants prepare for any last-minute hiccups in their books.
Steps on Calculating Accrued Payroll
Now that we have established the details surrounding Accrued Payroll, we will discuss how it is calculated. To give you a picture of how it is being done, consider this example:
Let us say you have Employees A and B working in your company. Both of which are entitled to 10 days of vacation each year. But Employee A earns $15 per hour and has worked for 80 hours in two weeks. Employee B, on the other hand, earns $3,000 per month.
Below are the steps to calculate based on the situation above
Step 1: Determine the Employee Pay Period
This is the amount of time over which the Employee’s wages are calculated. It can be determined daily, weekly, bi-weekly, monthly, or annually.
* For the example above, suppose we have two monthly pay periods. We will be using those metrics to perform the next step.
Step 2: Calculate the Employee’s wages
This is the calculation of each of the employees’ wages based on their hourly rate and the number of hours they have performed.
*In the case of the example above, the following will be done to calculate their bi-weekly earnings:
Employee A: $15 x 80 hours = $1,200
Employee B: $3,000 / 2 = $1,500
Step 3: Calculate for Employee Benefits
This is to calculate other compensation that employees are entitled to on top of their salary. This could include paid leaves, health insurance, social security contributions, etc.
*To simplify the above example, we have only indicated the ten days of vacation leave that employees are entitled to. This means that their accrued leave credits per pay period will be:
(10 paid leaves/ 12 months) / 2 pay periods = 0.42 days
Employee A is earning $15 x 8 hours = $120 per day. This means $120 x 0.42 = $50.40 is the leave accrual per pay period.
Employee B, on the other hand, is earning $1,500 / 10 = $150 per day. That means Employee B is earning $150 x 0.42 = $63 with leave accruals per pay period.
Step 4: Calculate total payroll expense:
This is the total cost of wages and benefits for all the employees
*In this case:
Employee A: $1,200 + $50.40 = $1,250.40
Employee B: $1,500 + $63 = $1563
Total Payroll: $2,813.40
Step 5: Determine the Accrual Period
This period varies depending on the company’s accounting policies. This could be at the end of each month or quarter.
*In the example above, suppose the company records monthly payroll accruals. We only need to multiply $2,813.40 by two to get the monthly amount of $5,626.80.
Step 6: Recording Accrued Payrolls
This step is vital when recording your journal entries in the books. To do this, you debit the payroll expense account and credit the accrued liability account to do this.
Using the example above, here is how the expenses are recorded:
| Payroll Expense Account | $5,626.80 | — |
| Accrued Liability Account | — | $5,626.80 |
This entry will show that you have recorded the expenses for the month and created a liability for the amount still owed to your employees.
Manage your Payroll Processes with Multiplier
Knowing the basic tenets of payroll accounting may be essential in streamlining your company’s payroll processes. But Multiplier will allow for quick and risk-free transactions that will help your business track our labor finances.
Multiplier’s PEO and EOR solutions help employers have a glimpse of the cost of maintaining employees even upon onboarding. Our SaaS-based platform automates payroll calculations, all while ensuring compliance with local labor laws.
Accounting for your accruals can be easily done through our customizable payroll features. You can indicate your pay period cut-offs, compensation inclusions, and salary expenses upon onboarding and have your settings roll out every time you release your Employee’s Payroll. Moreover, all your payroll records can easily be accessed on the same platform!
You can book a free demo here to learn more about how Multiplier can help manage your Payroll.
