2. Payroll accrual methodology
The payroll accrual methodology is pretty simple. At the end of a fiscal period a company records adjusting entries to recognize expenses which had been incurred, but not paid for yet. Note that we are talking about companies that apply accrual accounting here. Companies that utilize cash accounting don’t use accruals and adjusting entries related to them.
A fiscal period can refer to a calendar month, quarter, or year, depending on how often the company prepares financial statements. While larger companies may want to accrue for payroll expenses monthly, mid- or small-size companies may want to do that quarterly or annually.
There are many ways to determine how much a payroll expense accrual should amount to, but the result should be approximately the same. The accrual should estimate the amount of services provided by employees before the end of the period, but that will be paid for after the end of the period. Note that we didn’t say that the result should be exactly the same. That is because in many cases an accrual is an estimate. Different
ways of estimating it will result in somewhat different accrual amounts, which is fine as long as the accrual is not materially misstated.
Accruals are normally recorded by posting adjusting journal entries at the end of a period. An adjusting journal entry impacts at least one balance sheet account and one income statement account. In the case of payroll accrual, the accounts affected may be Accrued Wages and Salaries (balance sheet) and Wage and Salary Expense (income statement).
Depending on peculiarities of a company’s accounting system and processes, adjusting entries may be reversing or non-reversing. A reversing adjusting journal entry is one that is recorded at the end of a fiscal period and reversed at the beginning of the following fiscal period. So, the purpose of such an entry is to accrue for an expense at the end of the period and reverse the accrual at the beginning of the next period. Subsequently when the actual expense is recorded simultaneously with a cash payment, no accrual will be on the books:
Record payroll accrual at the period end: