How to Calculate Accrued Salaries and Enter Journal Entry

Hello, everyone. In today's tutorial, which is upon request by a subscriber, we are going to talk about accrued salaries, what they are, how to calculate them, and how to enter a journal entry. My name is Ronica Kenna. I'm a cpa, a CFA, and the founder of Montreal Financial, where you can find lots of resources for small businesses and you can also sign up for my newsletter. Okay, so first of all, what exactly is an accrued salary? And an accrued expense of any kind is essentially an estimate of an expense that relates to the current period, but you're not exactly sure how much it's going to be. An accrued expense could be something like some professional fees. For example, your accountant may have done some work and you know that you are going to pay them in the following month, but you're not exactly sure how much that bill is going to be, so you will estimate how much you owe them. The purpose of an accrual is to ensure that all expenses that relate to the current period are properly entered in that period. This is an important and fundamental principle in accrual based accounting.

So for an accrued salary, this is one of the most common types of accruals and essentially most pay periods will end prior to the end the last day of the month. Unless you're paying your employees monthly and you pay them on the last day of the month, that period may, if you're paying them weekly, for example, it may end a couple of days earlier. So in that case you still have a couple of days in a period where no salaries have been reflected. And so you are required to enter an accrual. In practice, if you are a small business and nobody is looking at your monthly reports, this is an adjusting journal entry that you will simply make at the end of the year or potentially at the end of the quarter, if you or somebody else are interested in your profit and loss for the quarter, as the accrual will increase the amount of expenses and make it a little more accurate. Okay, so let's look at how to set up and calculate a salary accrual or accrued salary. In this case, we are setting up an accrued salary for the Sherlock Holmes Detective Agency. Our assumptions are that the last day of the week in the month that we are preparing the accrual for is Friday.

When the last payday is. However, the last day of the month is actually Tuesday, because Monday and Tuesday are not reflected in the last salary that was paid, which was on Friday. So essentially we have to accrue two days of salary. Now, if you pay bi weekly, then this calculation might be a little different. Perhaps your Last payday is 12 days before, and in that case, you would do the calculation for the number of working days in that period. Okay, so in terms of the calculation, this is fairly straightforward. Our total weekly salary, which is for five days because it's per week and there are five working days in a week, is, for simplicity's sake, $5,000. So the daily salary is just 5,000 divided by five, which is $1,000. So our accrual, as we establish which is for two days is going to be $1,000 times two, which is $2,000. Now, once we establish what that amount is, and remember, this is an estimate, it doesn't have to be exact, it should be as close to accurate as possible, but it doesn't have to be to the penny or to the dollar. So the journal entry, which I'm also going to show you in QuickBooks Online, but remember, this works in any accounting software, essentially what you're going to do is you are going to debit, which means increase the amount of the salary or the payroll expense, and you will credit the accrued salary amount. And you might have to create a new current liability account, which we'll also look at in QuickBooks Online. To edit, enter the accrued salaries and your description essentially to reflect salaries for two days in December, assuming that is the month that you're using or whatever month that this applies to. In addition to the journal entry, there is also going to be a reversing journal entry. Reversing journal entries in this case will be made on the first day of the following month. And reversing entry, by definition, we are simply reversing this entry. So we are going to credit salary or payroll or wage expense, and we are going to debit accrued salary. So you'll see that this is an exact offset. It is made on the first day of the month following the month in which you made the journal entry. And the reason for the reversal and the reason for any reversing entry is because this is an estimate. And so your profit and loss statement will reflect an additional $2,000 in the salaries expense account, and it will thereby reduce your total profit amount. However, when you enter the salaries in the following amount, it will be for the full amount. In other words, it will include this $2,000. And the effect of the reversal is that, say you record the full salary expense of $5,000 as you normally would, potentially through just your banking Download. Then this $2,000 credit will actually reduce the $5,000 because this is in the month following. Let's say it's in January. And therefore it will accurately show that $2,000 of this $5,000 pertains to the previous period or the previous month. So hopefully that makes sense. All right, so let's look at this in QuickBooks Online. So here we are in QuickBooks Online, and let us go to + new and to journal entry.

Now, I'm going to make the date of the entry December 31, because again, that is the most common. But again, every business is different. And some businesses will record this entry monthly and some will record it once every quarter. Once every year, as mentioned. First of all, we want to debit salaries expense. You'll see salaries is an expense, so we're going to debit it $2,000. And then we want to credit accrued salaries. Now we have an accrued expenses account, but I actually want to create an accrued salaries account. So I'm just going to type in accrued salaries, and I'm simply going to choose current liabilities here. And the name of the account is Accrued Salaries, and it's not a sub account. The default tax code for salaries is always exempt, or it could be out of scope as well. I have a video on this, but the distinction between the two isn't always clear. Okay, so let's click on save and close. And now we have our accrued salaries account. Now, our description, if we go back to this, is to reflect accrued salaries for two days in December. So I'm just going to copy and paste that into this. Do it here. And that's fine. There's no sales tax. The name is really unnecessary in this, and location and class doesn't really apply. So that is essentially the entry. We are simply going to save this entry.

And for some reason, sometimes QuickBooks Online does this. You set up an account, but it doesn't retain the information, but it's here. So you just enter acute salaries. Okay, so let's save this. And now we want to reverse this entry. So QuickBooks Online makes this very easy. Most many accounting software will have this functionality where you can simply reverse the entry. So click on reverse and you'll see it automatically chooses the day after, which is the date that we want. It might be a different date in some situations, but in this date it is literally the day after, which should be the first day of the month following the accrual entry. And we have reverse of journal entry 24 in the memo. And here we can say to reverse.

And to reverse just to make sure it is as clear as possible possible. And then we can save and close this. And now if we go to reports.

And we go to our balance sheet report, you'll see the accrued salaries amount. I'm just going to choose all dates to run report because we're actually post dating this entry. And if you look at accrued salaries, it's zero. But if you click on it, you'll see December 31, 2020.

We have $2,000 and we have reversed it on January 1, 2025. Often you're actually looking at the balance sheet report at let's just say here at the end of a period. So let's choose December 31st so you can see this a little more clearly. If we scroll down, you can see crude salaries are 2,000 thousand at December 31, 2024. This improves the accuracy of the balance sheet. Similarly, if we go to the profit and loss report.

And we choose this calendar year, I'm going to do that. You'll see if you go to salaries, we have $2,000 at four. This is the only entry we've made to salaries. There should be other entries. Keep that in mind. This is just for illustration purposes. So for 2024 we have $2,000 in salaries. Now if I were to go to 2025 and run my report, you'll see I have negative $2,000 in salaries. So when I make that payroll entry into in on in January 2025, it'll be reduced by $2,000 because we have recorded the $2,000 that relates that is included in the payroll. The first payroll of 2025 in the payroll of 2024 because it was for two days in 2024. I hope all of this makes sense. Please let me know in the comments if you have any questions. I'm happy to answer them. And if you found this video useful, please like and subscribe and I will see you next time. Have a great day.