Accrued wages refer to compensation that remains payable at the end of the accounting period. The labor has been worked but was not paid for it. Hence, the business needs to show this expense in its accounting books to calculate accurate profit/loss for the accounting period.

The accrued wages might include salaries, bonuses, commissions, paid time off, payroll taxes, and other benefits related to employment.

If accrued expenses are not recorded in the accounting record, the business will end up understated expenses and overstated profits. Let’s examine the detailed reasoning and understanding behind recording this liability.

Why business needs to record accrued wages

1-Appropriate financial reporting– Recording accrued wages is the only way to ensure appropriate financial reporting. If the expense is not accrued accurately, it will lead to understated expenses and overstated profit.  

2-Timely closing—To close the accounting books on time, the business does not need to wait to pay salaries or other benefits. Instead, they can simply park the expense in the accrued wages account. Hence, recording accrued wages is the way towards a timely closing of the accounting period.

3-Improved budgeting and expense tracking—The concept of budgeting works on the basis of variation calculation. The variance can only be calculated when we have fully recorded accrued wages in the accounting record. This is the only way to track the numbers and improve budget optimization.

Accounting for accrued expenses

The following journal entry is recorded when recording accrued wages.

Description	Debit	Credit
Wage expenses (Profit and loss)	XXX
Accrued expenses (Liability)		XXX

The transaction’s debit impact records expenses. The credit impact records liabilities, as the business needs to settle these liabilities soon after accounting period closing.

In the above transaction, we recorded expenses against accrual, which remains in the books when the accounting year ends.

At the time of payment, the following journal entry will be posted in the next accounting period.

Description	Debit	Credit
Accrued expenses	XXX
Cash		XXX

The debit impact of this transaction removes accrued liability, which was recorded on a temporary basis. On the other hand, the credit impact reduces cash as it was paid to the employees.

Is accrued wages a temporary account?

Yes, it’s a temporary account created in the accounting record. It’s a credit account that remains in the financial record as a liability until paid to the employees. Hence, it’s a temporary account used to close the accounting record in a timely manner.

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Conclusion

Accrued wages are a temporary account balance (liability) recorded in the accounting system when the accounting period ends. The elements of this account balance include salary, bonuses, paid time off, employment taxes, and other employment-related benefits.

The business must record these wages for appropriate financial recording, timely closing, and improved budgeting.

It’s important to note that these are a temporary account that is reversed when wages are paid.