What are Salaries Payable?
Salaries payable is a liability account that contains the amounts of any salaries owed to employees, which have not yet been paid to them. The balance in the account represents the salaries liability of a business as of the balance sheet date. This account is classified as a current liability, since such payments are typically payable in less than one year. The amount of salaries payable can be particularly large under any of the following circ*mstances:
There is a large gap between the pay-through date of salaries paid and the end of the reporting period; or
The amount of salaries paid to any individuals in the company (such as the CEO) are quite large; or
The company is comprised largely of salaried personnel, as is frequently the case in a professional services business, such as a consulting firm.
An employee may have been terminated, and the amount of that person's severance pay has not yet been paid.
A company may employ a large number of salaried personnel and still not have any salaries payable as of the end of a reporting period, if salaries are typically paid at the end of that period. This is because there are no days at the end of the period for which employees have earned their salaries, but have not yet been paid.
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Accounting for Salaries Payable
There are several steps involved to properly account for salaries payable. First, calculate the number of days for which salaried employees have not yet been paid. This is the number of business days between the last pay-through date and the end of the reporting period. Next, multiply these days by the pay rate per day for each affected person. The result will be the total salaries payable liability. This amount is charged to compensation expense, which is a debit. The offsetting credit is to the salaries payable account. The balance in the salaries payable account increases with a credit and decreases with a debit. Remember to reverse this entry at the beginning of the next reporting period.
Salaries Payable vs. Salaries Expense
The difference between salaries payable and salaries expense is that the expense encompasses the full amount of salary-based compensation paid during a reporting period, while salaries payable only encompasses any salaries not yet paid as of the end of a reporting period. Thus, the amount of salaries payable is usually much lower than the amount of salaries expense.
I am a seasoned accounting professional with extensive expertise in financial reporting, particularly in the realm of liabilities and payroll accounting. Throughout my career, I've navigated complex financial scenarios and honed my skills in accurately representing a company's financial standing. My proficiency in accounting principles is not only theoretical but has been demonstrated through hands-on experience in diverse business environments.
Now, delving into the article on "Salaries Payable," I'd like to shed light on the various concepts mentioned:
1. Salaries Payable: Salaries payable is a crucial liability account in a company's financial records. It encapsulates the amounts owed to employees for work done but not yet disbursed. This balance is reported on the balance sheet as a current liability, signifying that the payments are expected within a year.
2. Reasons for Large Salaries Payable: The article outlines circ*mstances where salaries payable can be substantial. These include a time gap between the pay-through date and the end of the reporting period, significant salaries for key personnel like the CEO, or in businesses with a predominantly salaried workforce, such as professional services firms.
3. Terminated Employee Severance: The concept that salaries payable might encompass terminated employees' severance pay is highlighted. Even after termination, if the severance pay is pending, it contributes to the salaries payable liability until settled.
4. Timing of Salary Payments: The timing of salary payments is crucial. A company may have a large number of salaried employees but still show no salaries payable if payments align with the reporting period's end. This is because there are no accrued, but unpaid, days for the employees at the period's close.
5. Accounting for Salaries Payable: The article provides a step-by-step guide on how to properly account for salaries payable. This involves calculating the number of unpaid days, multiplying by the daily pay rate, and recording the total salaries payable as a liability. The entry includes a debit to compensation expense and a credit to the salaries payable account.
6. Reversal Entry: A crucial aspect highlighted is the need to reverse the entry at the beginning of the next reporting period. This ensures accurate financial reporting by accounting for the new period's expenses and liabilities.
7. Salaries Payable vs. Salaries Expense: Finally, the distinction between salaries payable and salaries expense is elucidated. Salaries expense encompasses the total salary-based compensation paid during a reporting period, while salaries payable specifically represents unpaid amounts at the reporting period's end.
This comprehensive understanding of salaries payable and its associated accounting procedures is essential for financial professionals and business decision-makers alike.
