Ahh...Happiness!

Happiness means different things to different people.

For some, it may be playing the Piano...

For some, it's collecting stamps...

For some, it's jumping out of a plane (with a parachute of course! )

For most employees...

It's SALARY DAY.

The day that employees work for and wait for.

Their hard work turns into cash and shows up in their bank account on SALARY DAY.

When most employees work... their daily toil gets accumulated in on the EMPLOYERS BOOKS as a LIABILITY to the Business.

The Liability accumulates because the Business needs to pay the Salary Amounts due on Salary Day.

This amount DUE to Employees, but NOT YET PAID is called SALARIES PAYABLE. 

The Foundation of Salaries Payable is ACCRUAL BASED ACCOUNTING (vs. Cash Based Accounting).

I'll quickly summarize both of these for those of you who are new to the accounting world. 

There are two ways in which a company can handle its Accounts.

Cash Accounting OR Accrual Accounting.

By far, the more popular one is Accrual Based Accounting. 

In Cash Based Accounting, transactions are only recorded when money moves in the company, i.e., when money comes in, or money goes out.

In Accrual Based Accounting, a company recognizes revenue when the money is earned or when expenses are incurred even though the actual movement of money may not be happening until much later.​​​​​

(To learn more about Cash Vs. Accrual Based Accounting in a fun and easy manner.  Check out our video course).  

Companies have different payment structures.

Some companies pay daily, some weekly, some bi-weekly and some monthly.

In most cases though - Salaries are payable in less than a year and are therefore reported in the CURRENT LIABILITIES Section of the Balance Sheet.

There are two steps to think about when we think about Salaries Payable.  

Step 1: The first step being the Accrual of Salaries on the company books for all the time that the employees have worked.

The Journal Entry, in this case, would be

Now, remember, when Salaries accrue, there is NO CASH EXCHANGE that actually takes place, and therefore you don't see Cash in the Journal Entry. 

Since Salaries are an expense, the Salary Expense is debited.

Correspondingly, Salaries Payable are a Liability and is credited on the books of the company.

Step 2: The next Journal Entry would take place during the actual disbursement of the Salaries

The above journal entry wipes the slate clean by removing ANY Salary that is to be paid from the books.

The Debiting of Salaries Payable in the above Journal Entry removes the Salary Payable Liability on the Balance Sheet. 

There is a Salaries Expense Debit entry because, during the ACTUAL disbursal of Salaries, there may be a certain amount of Salary that has accrued but has NOT been reflected in the Salaries Payable.   

In such cases, Salaries are expensed directly.

(In case you're confused, don't worry. Example 3 below will help clarify this concept.)

Widget Inc. closes it's books on Dec 31st 20X7 and has $60,000 due in Salaries which are to be paid in January 20X8.

The Journal Entry for the above transaction would look something like this.

Now, let's add a little bit of complexity to the above transaction.

QUESTION

Widget Inc. prepares it's Financial Statements every year end which is Dec 31, 20XX.

Salaries are paid to on the 26th of every month and the last Salaries paid were on Dec 26, 20X7.

Let's assume that all days between 26th and 31st have been working days.

Salaries accrue at $2,000 per day. 

What would the Journal Entry be now for the above transaction on Dec 31st, 20X7?

ANSWER

For the above transaction, we would have to record a Journal Entry on Dec 31st for the Salaries that have accrued from Dec 26,20X7 to Dec 31st, 20X7.

The number of days the salary has accrued are 26, 27, 28, 29, 30 and 31 (6 days)

Each Day $2,000 of Salary accrues, therefore $2,000 x 6 days = $12,000.

Therefore our Journal Entry is ...

Drumroll, please....

Remember, there is NO CASH DISBURSAL happening on the 31st of Dec, and therefore cash does not play any part in the Journal Entry. 

Let's round off Salaries Payable with this final example.

The year ends as described in Example 2.

The Salaries due to be disbursed in the next year on Jan 26, 20X8 are $60,000. 

What Journal Entry would you record for the above transaction?

Keep in mind that Salaries are not simply Salaries.

There may be Insurance Premiums and other deductions specific to your country.

There are many tax implications to keep in mind such as Federal Tax, State Tax based on where you live.