Salaries and Wages Payable – A credit or a debit? All you need to know!

Salaries and Wages are considered as the expenses that are incurred as a result of human capital that is hired by the company for purposes of the operation of the company.

Therefore, salaries and wages are considered to be fixed operating expenses, that are incurred by the company regularly. Normally, these expenses are paid on a monthly basis.

Salaries and Wages can either be fixed or variable. They can be variable in the cases where the employees are paid in proportion to the total output that is derived as a result of these goods and services.

However, if salaries are not conjoined with the output that is produced in the company, they are then treated as fixed expenses.

Nature and Classification of Salaries and Wages

Salaries and Wages are expenses, which are declared in the Income Statement. Under the Matching Principle of Accounting, all expenses for a current year should be matched with revenues in a current year.

By this definition, if any wages are incurred in a year corresponding to the revenues that have been earned in the given year, they are then declared as expenses for the current period only.

Since it is an expense, it is also recorded under operating expenses in the Income Statement of the company.

Journal Entries to record Salaries and Wages

The journal entries that are required to record salaries and wages (that are paid) are as follows:

ParticularDebitCredit
Salaries and Wagesxxx 
  Bank xxx

The journal entry above shows that salaries and wages are paid to the employees. Since it is an expense, it is debited in the Income Statement, with the corresponding entry being a credit to the bank account.

What is Meant by Salaries and Wages Payable?

Salaries and Wages Payable imply that the organization owes money to its employees. In other words, it means that the organization needs to pay its salaries and wages to its employees, and they have already rendered services (or work) against this amount.

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Therefore, salaries and wages payable are considered as payments that need to be made to the employees of the company in order to make sure that the company settles these accounts.

Salaries and Wages Payable are defined as such because of their underlying characteristic of the services rendered by the organization, but not yet paid for. Hence, it is important to consider wages and payables like any other expense, that has been incurred but has not yet been paid for by the company.

Nature and Classification of Salaries and Wages Payable

Salaries and Wages Payable are considered as a Current Liability on the Balance Sheet of the Company. This is because this is a short-term accrual, which needs to be settled on an earlier basis, in order to avoid any confusion that might otherwise occur.

Salaries and Wages Payable have a similar treatment as compared to any other Accrued Expense. In accordance with the Matching Principle of Accounting, Salaries, and Wages Payable (even if they are unpaid) are debited as expenses in the Income Statement.

This is because these are the expenses that are relevant to the current month, and therefore, they should be recorded as such in the financial statements.

In the same manner, the corresponding credit entry, in the case of payables would be an increase in the liability of the business, since this amount needs to be paid to the employees at the earliest.

Journal Entries to record Salaries and Wages Payable

When an organization incurs a liability in the form of salaries and wages payable, the following journal entries are recorded:

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ParticularDebitCredit
Salaries and Wages Expensexxx 
  Salaries and Wages Payable xxx

Subsequently, once these salaries have been settled and paid to the employees, the following journal entries are required:

ParticularDebitCredit
Salaries and Wages Payablexxx 
  Bank xxx

Example of Salaries and Wages Payable

The concept of Salaries and Wages Payable is illustrated in the following example:

Penthouse Co. is a manufacturing concern, which sells furniture to different retailers. They have a total payroll expense of $40,000 a month, and it is settled on the 10th of every following month. For the year ended 31st December 2020, they had outstanding salaries and wages equivalent to $40,000 a month. These were the salaries incurred in December, which were supposed to be paid in the month of January.

In the scenario mentioned above, it can be seen that Penthouse Co. is a manufacturing concern that pays salaries on the 10th of every month. In order to record these transactions, the following journal entries will be made in the financial statements:

ParticularDebitCredit
Salaries and Wages Expense$480,000 
  Bank $440,000
  Salaries and Wages Payable   $40,000

Since the salary expense is incurred in the month of December 2020, it will still be disclosed in the financial statements, since it is relevant to the current year. However, since it was not paid out of the bank until 10th January 2021, it would be declared as a Current Liability (Salaries and Wages Payable), in the financial statements prepared on 31st December 2020.

Once these salaries are settled on 10th January 2021, the following journal entries will reflect the transaction:

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ParticularDebitCredit
Salaries and Wages Payable$40,000 
  Bank $40,000

Once the salaries are paid and settled, the amount of Salaries and Wages Payable will no longer appear in the Balance Sheet of the company as an accrued expense or a liability.

Salaries and Wages Payable – Debit or Credit?

The question that arises pertaining to salaries and wages being a debit transaction or a credit transaction clouds the judgment of several different accountants.

The correct answer to this question is BOTH.

This is because salaries and wages that get accrued, or are payable mostly incur as a result of services that are already utilized by the company. Therefore, it will be debited in the Income Statement as an expense relevant to the current year.

However, since this amount is unpaid, it will continue to be treated in the Income Statement as a Current Liability, which needs to be settled by the company.

Alternatively, the corresponding transaction would have been a credit to the bank account in order to reflect the payment that was made in lieu of salaries and wages.

Hence, the only differential when it comes to Salaries and Wages (Expensed) and Salaries and Wages Payable, is the credit entry. This credit entry is either made to the bank account, or to the Current Liability Account.                                                                                                                                           

Salaries and Wages Payable – The impact on Financial Statements

Between salaries accrued and salaries paid, the impact on the financial statement is not that significant. Since salaries and wages incurred are declared on the Income Statement regardless of the payment schedule, it is important to note the fact that the impact on profitability is zero.

This is primarily because of the fact that there are no charges incurred in the financial statements, whatsoever.

Furthermore, it is also important to note the fact that the change that is incurred is mostly in the Balance Sheet. They are declared as Current Liabilities in the Balance Sheet of the company.

Alternatively, if paid, the amount is deducted from the bank balance of the organization. Therefore, as a result, salaries and wages payable only impact the Balance Sheet and not the Income Statement.

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