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Payroll

Small business owner’s guide to accrued payroll

By QuickBooks Australia
June 27, 2023

Accrued payroll is the money that a business owes its employees for work performed during a given pay period but has not yet paid out. It is one of the ways that a business can track its expenses over time to help plan ahead, better understand its liabilities and forecast financial planning into the future.


It’s smart to keep a close eye on the payroll expenses that have accrued over a pay period, even if the cheques haven’t gone out yet. That way, no matter when in the month it is, you know where your payroll situation stands, and you won’t be blindsided by unexpected expenses later.


In this post, we’ll walk you through the basics of payroll accrual. Keep reading to learn what it means for your business, how to calculate it and a few tips to help you manage your payroll responsibilities. Or, you can use the links below to navigate the post.

What is accrued payroll?


Accrued payroll is the process in which the amount of money a business owes or is owed accumulates over time. For example, you may have heard of accrual accounting, which differs from cash accounting. Payroll accrual refers to the payable funds that accumulate and that a business must pay their workers on payday.


Accrual accounting basics


Accrual accounting allows businesses to record expenses that are still pending the receipt of cash. So, if clients pay with a cheque or credit card, accrual accounting allows business owners to record the amount as money in. Similarly, if a business expenses something, it can still be accounted for in their expense account even before the money is withdrawn from the account. This differs from cash accounting, which only takes into account money that has actually come in or actually gone out when updating a general ledger.


Curious to find out more? Read more about accrual accounting on our blog. Or, if you’re new to managing employees, read up on how to do payroll.

Types of accrued payroll


Payroll accrual can take into account many different sources of expenses for businesses. This might be employee salaries, payroll tax or super contributions. To keep tabs on accrued payroll and gain insight into your business’s finances, keep in mind these sources of payroll accrual.


Salaries and wages


The largest source of accrued payroll is likely to come from salary and wages payable to employees. What are accrued wages? These are wages that are owed for the labour performed by your employees and are accounted as a liability until payday, when they become an expense. However, it’s a good idea to understand the size of your liabilities as a business owner. So, keeping track of accrued salary as part of accrued payroll is critical.

Note: remember to record gross wages in this category. Gross pay is the amount that employees are paid before income tax withholdings. Net pay is what employees receive after payroll deductions for taxes (along with any other garnishments) are taken out.


Annual leave


Annual leave for employees should also be accounted for in accrued payroll. That’s because, even if the employee doesn’t take time off that particular month, your business still owes them the value of their leave. This is especially true in workplaces where employees accrue paid leave each month.


It’s also important to mark paid leave under accrued payroll in case an employee decides to leave the company. In that case, you will likely owe the employee the value of their unused paid leave in cash as part of their final pay cheque.


Payroll tax


Payroll tax is another source of liability for a business. When accounting for payroll expenses, be sure to also record the portion of your payroll budget that must be directed toward:


  • Commonwealth tax
  • State income tax
  • Employee superannuation
  • Employer payroll tax


As the employer, payroll tax expenses and the withholding amounts are your responsibility. It’s essential to account for payroll taxes in order to remain in compliance with the ATO.


Bonuses


If your employees received any bonuses, commission or other forms of payment in addition to your usual wage expense, it’s smart to record it too.

How to calculate accrued payroll


Curious how to calculate accrued payroll yourself? Here are three items to consider:


1. Hours worked x hourly wage = outstanding payroll


First, calculate the number of hours a given employee worked. Then, multiply that by their hourly wage. That is the total amount that you owe them for that pay period.


Be sure that you add together only the hours that they’ve worked that they have not been paid for. It’s a good idea to pay your employees on a regular basis. That way, they know when to expect a pay cheque, and you know the period to calculate their pay for. Plus, the required pay frequency is at least monthly.


2. Factor in bonuses, commission and overtime


If your employee has earned any extra wages apart from their regular hourly rate, be sure to add that to the total. 


If any bonuses, cash prises or commissions were awarded to employees immediately, then these will not be counted in accrued payroll.

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3. Paid leave


Lastly, be sure to add the total amount that you offer your employees in monthly paid leave to your accrued payroll costs. Because you are accounting for accrued payroll – rather than payroll that’s been paid out – paid leave that hasn’t been used yet still counts. After all, you still owe this to your employee, so it’s still part of the accrued liabilities that your business has on record.


To sum up, you can calculate your payroll accrual using this formula:

(Hourly wage x hours worked) + (bonuses + commissions + overtime) + (payroll tax + super) + (paid leave)


It’s easier to understand payroll accrual with an example.

Accrued payroll example

Let’s assume you have an employee named Pedro. He gets paid $20 an hour and works 40 hours a week, and he gets paid once every two weeks. This pay period, he earned a $200 commission. His payroll accrual will look like this:

  • Gross pay: $20 x 40 x 2 = $1600
  • Commission: $200
  • Employer contributions: $200 tax + $100 super
  • Paid leave: $80
  • Total: $2,330

Once all the various expenses associated with payroll are accounted for, the total accrued payroll is $2,330.


After calculating the accrued payroll for one of your employees, you’ll have to repeat the process for every employee and contractor on your payroll. This will give you the total accrued payroll for your business. With a well-organised system for income statements, taxes, etc., it is possible for small businesses to stay on track. However, there are other solutions.


Keeping track of payroll entries, credits and debits for every employee in your organisation as well as the many other expenses you face leaves room for error. If something goes wrong, adjusting entries can become a huge chore – you’ll have to dig through potentially hundreds of records. Keeping up with a journal entry for every employee can be challenging, which is why many employers have begun opting for automated payroll management solutions.

How to record accrued payroll and taxes


After calculating your accrued payroll, you must record it within your accounting software like QuickBooks. Cloud payroll software integrates with accounting solutions, allowing you to create a report in one, centralised entry. The following should be recorded


  • Employee wages and pertinent deductions
  • Employer payroll tax and contributions
  • Any paid leave accrual




Accrued payroll journal entry


Within QuickBooks, you can prepare a single journal entry to record all salaries. Save the entry, then press “Reverse” to create a reversing entry on the first day of the present month. This will ensure your accrued payroll is reported in the appropriate period.



Key takeaways for accrued payroll


Here’s what to remember about accrued payroll:


  • Payroll accrual is the payroll process of adding up the liabilities your business incurs that are related to payroll.
  • This includes wages, employer payroll tax, benefits, etc.
  • Accrual accounts for liabilities even if they haven’t been paid out yet.
  • To calculate accrued payroll, add together the different sources of liability for each employee. Then, add together all the sums of all the employees for a given pay period.
  • Accounting for payroll accrual on your balance sheet can be tricky—but there are tools that can help.

Streamline your payroll processes


QuickBooks Payroll makes managing payroll accounting easier for everyone from small business owners to larger-scale organisations. Sign up today to see how you can get started managing employee payroll for your enterprise with much more efficiency.


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