## **Learning Outcomes**

After reading this article, you will be able to explain the concept of accrued wages and payroll liabilities, distinguish between payroll expenses and liabilities, and understand the double-entry bookkeeping required. You will be able to identify typical payroll accruals, record relevant accounting entries, and prepare for common payroll-related exam questions in ACCA FA1.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand how payroll costs—including accrued wages—are processed and recorded in the accounting system. In particular, this article addresses the following syllabus points:

- The distinction between payroll expenses and payroll liabilities
- Recording accrued wages and other payroll accruals in the general ledger
- Accounting for the payment and clearing of payroll liabilities
- Preparing double-entry transactions for payroll accruals and payments
- Understanding the impact of accruals on the preparation of period-end accounts

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which general ledger account is credited when wages for the final week of the period are accrued but not yet paid?
   a) Wages expense
   b) Accrued wages (liability)
   c) Bank
   d) Trade payables

2. When accrued wages are paid at the start of the next period, what is the correct double-entry?
   a) Debit Bank, Credit Accrued wages
   b) Debit Accrued wages, Credit Bank
   c) Debit Wages expense, Credit Bank
   d) Debit Bank, Credit Wages expense

3. True or False? Accrued wages at period-end are shown as a liability in the statement of financial position.

4. Briefly explain why payroll accruals are important in financial accounting.

## **Introduction**

Payroll costs make up a significant share of business expenses. However, not all wage and salary costs are paid immediately; some accrue at the end of a period before the cash leaves the business. For accurate financial reporting, these unpaid but earned wages must be recognised as liabilities, known as accrued wages, along with any other outstanding payroll-related amounts.

Businesses must ensure payroll expenses are matched to the period when the employees earned them, not just when they are paid. This section explains how to identify accrued wages, record payroll liabilities, and process their eventual payment.

> **Key Term: accrued wages**
> Payroll expenses that have been earned by employees but remain unpaid at the period end. They represent an obligation for the employer.
>
> **Key Term: payroll liability**
> Any amount owed by the business to employees or third parties (such as tax authorities) in relation to payroll, including unpaid wages, payroll taxes, and deductions.

## ACCOUNTING FOR ACCRUED WAGES

### Recognising Accrued Wages

At the end of each accounting period, it is likely some wages or salaries have been earned by employees but have not yet been paid out. Examples include:

- Salary for the final days of a month paid in the next month
- Unpaid overtime at period end
- Deductions due to tax authorities but not yet remitted

These amounts must be recognised as liabilities so that expenses are not understated in the period where the work was performed.

### Recording the Accrual

When wages are accrued, a business must increase its wage expense and create a corresponding liability.

- Debit: Wages Expense (Income Statement)
- Credit: Accrued Wages (Payable on Statement of Financial Position)

This entry ensures the wage cost is included in the correct period, even though payment has not yet occurred.

### **Worked Example 1.1**

A business prepares monthly accounts. At 31 January, employees are owed \$2,300 for wages earned during the last three days of the month, payable on 3 February. No payment has yet been made.

**Question:** What is the correct entry at 31 January?

> **Answer:**
>
> - Debit Wages Expense \$2,300
> - Credit Accrued Wages \$2,300

This recognises the cost in January and records the unpaid obligation.

## PAYROLL LIABILITIES: BEYOND UNPAID WAGES

Payroll liabilities include not only unpaid wages but also amounts withheld from employees’ pay (such as tax or pension contributions) and employer's payroll taxes not yet paid to relevant parties.

Examples:

- Unpaid wages/salaries
- Employee income tax deductions
- Employee pension contributions withheld
- Employer payroll taxes due but unpaid

These must all be recognised as liabilities if unpaid at period end.

> **Key Term: payroll accrual**
> The total of all payroll-related expenses earned by employees in a period but unpaid at the statement date, including wages, taxes, and deductions.

## PAYING OUT ACCRUED PAYROLL LIABILITIES

When amounts previously recognised as payroll liabilities are paid, the liability is cleared:

- Debit: Accrued Wages or Payroll Liability
- Credit: Bank

The expense was already recognised at period end, so only the liability reduces.

### **Worked Example 1.2**

Following from Example 1.1, the business pays the \$2,300 owed on 3 February.

**Question:** What is the correct double-entry at payment?

> **Answer:**
>
> - Debit Accrued Wages \$2,300
> - Credit Bank \$2,300

The liability is eliminated as cash leaves the business.

## JOURNAL SUMMARY FOR PAYROLL ACCRUALS

Below is a typical sequence for payroll accruals:

1. Recording earned but unpaid wages at period end:
   - Debit Wages Expense
   - Credit Accrued Wages (or Payroll Liability)

2. Recording the actual payment:
   - Debit Accrued Wages/Payroll Liability
   - Credit Bank

If payment in advance is made, the process may differ.

## IMPACT ON FINANCIAL STATEMENTS

- Statement of Profit or Loss: Wages expense includes both paid and accrued wages for the period.
- Statement of Financial Position: Accrued wages and other payroll liabilities appear as current liabilities.
- Bank: Only reflects amounts actually paid, not total payroll expense.

### **Worked Example 1.3**

On 31 March, a company owes \$1,800 in accrued wages and \$600 in payroll taxes (deducted but not yet paid to authorities). Both remain unpaid at period end.

**State how these items appear on the statement of financial position.**

> **Answer:**
>
> - Current liabilities show Accrued Wages of \$1,800 and Payroll Taxes Payable of \$600.

Both amounts appear separately or combined, depending on the business’s policy.

### **Exam Warning**

> Mixing up payroll expenses and payroll liabilities is a common mistake. Remember: expenses appear in the profit or loss statement and record all wages earned; liabilities record unpaid amounts owed at period end. Only the liability is removed when payment is made, not the expense.

## CONTROL AND RECONCILIATION OF PAYROLL LIABILITIES

When managing payroll, businesses must reconcile balances regularly to ensure liabilities, such as accrued wages and tax deductions, are paid promptly and obligations are not understated. Delays in paying payroll liabilities can result in penalties and interest.

### **Revision Tip**

> When revising, practise preparing both the accrual and payment entries. Check that you can show how accrued amounts move from expense to liability and then are cleared from the accounts when paid.

## **Summary**

Accrued wages are payroll expenses earned but not yet paid at period end. They are recognised as current liabilities, along with other payroll-related liabilities (deductions and taxes unpaid). The accrual process ensures wage expenses are matched to the correct period, and the double-entry bookkeeping ensures financial statements accurately reflect both expenses and obligations.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define accrued wages, payroll liabilities, and payroll accruals
- Identify when wages and payroll deductions must be accrued
- Record correct double-entry for wage accruals and payments
- Show the impact of payroll accruals on financial statements
- Recognise the importance of reconciling payroll liabilities and clearing them when paid

## **Key Terms and Concepts**

- accrued wages
- payroll liability
- payroll accrual

Accounting for payroll - Accrued wages and payroll liabilities