Every business should use the accrual method of accounting, which matches the revenue it earns with the expenses it incurs. The accrual method records payroll expenses in the month that you incur them, regardless of when you pay for the expenses. The matching concept presents a more accurate picture of company profit. This accounting method does not post expenses based on cash outflows.
Assume that a restaurant owes workers $3,000 in payroll for the last five days of March and that the next payroll date is April 5. Using the accrual method, the $3,000 wage expense posts on March 31, along with a $3,000 increase in wages payable.
When the business owner processes payroll on April 5, cash decreases by $3,000, and wages payable decreases by $3,000. The expense posts in March, when employees worked those hours. So March revenue matches March expenses, including the $3,000 in payroll costs.
Meanwhile, the accrual method posts payroll liabilities and expenses in the same period. The restaurant example shows a $3,000 wage expense and a $3,000 wage liability balance post on March 31. When the business owner pays cash on April 5, the liability balance decreases.