Have you ever started to review your financials at the end of the month and noticed that labor and wages are really, really high? What was the reason? If the answer was that you were coming to the end of a month with five pay periods, and that “it’ll balance out next month,” you have an issue with your month end process. Labor and wages are a huge part of your expenses, and without an accurate figure it will be difficult to truly gauge your business’s performance.
Thankfully, there’s an easy way to get these figures right. To avoid these conversations and be able to review accurate numbers each month you’ll need to accrue your payroll. Accruing payroll is the process of linking payroll information to the month it was incurred. This is a standard practice and one of the basic principles of accrual accounting. There’s a reason the most successful companies all practice accrued payroll in their accounting department.
Typically, there’s one full pay period that falls into the next month. This is the payroll from the second to last week of the month. A lot of times, that whole amount posts in the first few days of the next month. To get the proper figures, this whole amount should be moved back to the month where the work actually took place.
You can make this happen by creating a journal that will go in on the last day of the previous month and reverse back out on the first day of the next month. The payroll is posted to the same expense accounts it would normally hit with the offset going to a payroll accrual account on the balance sheet. Again, this entry needs to be set up as a reversing entry where it “backs out” the first day of the following month. This will ensure that the next month’s payroll expenses will reflect the fact that you’ve already paid out for work done late last month.
There’s almost always a partial week as well, where payroll needs to be accrued to get the figures accurate. If all of your payroll information is available, this can be used and moved back to the prior period. If all of your payroll information is not available, it’s a good practice to use the numbers from your last full pay period, assuming they will reflect the period accurately. The most efficient way of handling this is to take the full payroll and divide that number by the number of days in the pay period, then multiply that amount by the number of days in the prior month. This will give you your daily rate and then the prorated amount to move back.
This journal entry is set up to go to the same expense accounts your payroll would normally hit, with the offset account going to payroll accrual, the same as the full period entry. Again, this entry is a reversing entry, and will go in on the last day of the prior month and be backed out the first day of the new month.
If this process is followed, the conversation about pay period expenses and how they fell on your bank statement and profit and loss statement no longer need to take place. You’ll be able to review your financials with much more confidence and know that your labor and wages aren’t misstated.
Never disregard the importance of maintaining accurate payroll figures at your company. Start accruing your payroll today!
Publication date: 12/31/2018