Employee advances and benefits - Year-end payroll accruals

Learning Outcomes

After reading this article, you will be able to explain how employee advances and benefits are recorded in financial accounts, apply the accruals concept to payroll at the period end, recognize common payroll-related liabilities (such as holiday pay and employee expense claims), and identify the impact of these year-end adjustments on financial statements. You will also practice typical exam tasks on calculating accrued payroll liabilities and employee benefit provisions.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand the correct accounting treatment of payroll-related items, including advances, staff benefits, and accruals at the period end. You should focus your revision on:

• The accrual basis for recording employee costs and benefits
• Preparation of year-end payroll accruals and provisions
• Identification, recording, and reporting of employee advances
• Accounting for staff benefits earned but not yet paid (e.g., accrued holiday pay, bonuses, travel claims)
• Reporting payroll liabilities as current liabilities in the statement of financial position
• The effect of these year-end adjustments on profit and net assets

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. An employee has taken an advance of $1,000 in June, which will be deducted from their July pay. How should this be recorded in the ledger at 30 June?
2. Which of the following is a correct entry to record a payroll accrual for wages earned in June but paid in July? a) Debit Wages Expense, Credit Accruals
   b) Debit Cash, Credit Wages Expense
   c) Debit Accruals, Credit Wages Expense
   d) Debit Staff Advances, Credit Accruals
3. True or false? Staff holiday pay earned but not yet taken at the year end must be included in accruals.
4. List two types of staff benefit that may require accrual at the year end.

Introduction

Employee costs and benefits are often the largest expense for many entities and require accurate year-end adjustments under the accruals concept. Payroll accruals ensure all costs relating to the current accounting period are matched against revenue—regardless of when payment occurs. This section covers how to account for employee advances, accrued wages, and staff benefits such as untaken annual leave or approved but unpaid expenses.

Accurate payroll accruals affect not just the calculation of profit, but also ensure liabilities on the statement of financial position are correct. Examiners frequently test the correct treatment and reporting of these items, especially when payments are made after the year end or when advances/expenses have been issued to staff but not yet settled.

Key Term: payroll accrual
An expense recognized for wages and staff benefits earned by employees in the accounting period, but unpaid at year end and settled in the next period.

Key Term: employee advance
A payment given to an employee before work is performed or before expenses are incurred, creating a receivable from staff until settlement.

Key Term: staff benefit accrual
A liability for employee entitlements (e.g., untaken holiday, earned bonuses, unpaid reimbursable expenses) that have been earned but not yet paid at the year end.

Accounting for Employee Advances

Employee advances are paid out prior to services being rendered or before staff incur related business expenses. Common examples are travel advances, salary advances, or emergency loans.

When an advance is issued, it must be recorded as a current asset—a receivable from the employee. When the advance is either deducted from future payroll or the employee accounts for the expenses with receipts, the receivable is cleared.

Key Term: employee advance
A payment made to an employee before the related work or expense occurs. It is treated as a receivable until cleared or offset.

Payroll Accruals at Year End

The accruals concept requires that all wages and related staff benefits earned in the period are fully recognized, even if not yet paid.

Common payroll-related accruals

• Unpaid wages and salaries up to the period end
• Bonuses/commissions earned but not yet settled
• Untaken annual leave (holiday pay) accrued
• Approved employee expenses (e.g., mileage, travel) not yet reimbursed
• Employer payroll taxes on accrued amounts

These are often grouped under "accruals" or "other payables" in the statement of financial position. They increase expenses in the statement of profit or loss for the period in which they are earned.

Key Term: payroll accrual
The liability for employee costs and benefits earned in the current period but not paid until after the period end.

Double entry for payroll accruals

• Debit: Wages/Salary or Employee Benefits Expense (profit or loss)
• Credit: Accruals (statement of financial position—current liabilities)

When paid post year-end, the accrual is cleared:

• Debit: Accruals
• Credit: Cash/Bank

Accruing for Staff Benefit Obligations

Staff often accrue legal entitlements (e.g., holiday leave, bonuses) which, if unused or unpaid at year end, require an accrual.

Key Term: staff benefit accrual
The obligation to pay for staff-earned benefits (e.g., holiday pay, bonuses, expense claims) outstanding at the reporting date.

This ensures the statement of profit or loss includes the cost of all benefits earned during the period, and the statement of financial position recognizes all unpaid obligations.

Accounting for Employee Advances at Year End

If an advance remains outstanding at year end, it must be shown as an asset—an "employee receivable." If the advance is not settled or offset, this amount is not deducted from the staff cost for the period.

When the advance is later recovered (deducted from payroll or accounted for with supported expense claims), the receivable is cleared.

Worked Example 1.1

A business has a 31 December year end. Wages for the week ending 2 January ($3,000) relate to work done in the last week of December. These wages will be paid to employees in January. How should this be recorded at 31 December?

Answer:

Debit: Wages Expense $3,000
Credit: Accruals $3,000

This records the liability for work done but unpaid. The accrual is shown as a current liability at 31 December and increases staff costs in the profit or loss for the current year.

Worked Example 1.2

During December, an employee is given a $400 travel advance. At the year end, the advance is still outstanding, with travel to occur in January. How is this shown in the financial statements at 31 December?

Answer:

Debit: Employee Advances (receivable) $400
Credit: Cash/Bank $400

At year end, the advance remains a current asset, not an expense, as travel (and supporting documentation) has not yet occurred.

Worked Example 1.3

An employee earns a $500 performance bonus in December but payment will be made in February. What adjustment is required at 31 December?

Answer:

Debit: Staff Bonuses (expense) $500
Credit: Accruals $500

The bonus is included as an expense and liability for the year it is earned.

Exam Warning

Payroll accruals and staff benefits earned but unpaid must be included in expenses for the period they are earned, not when they are paid. Failure to accrue for wages, bonuses, or holiday pay understates expenses and liabilities and overstates profit and equity.

Revision Tip

Always check the cut-off date for payroll and staff benefits. If services are rendered before the reporting date but payment falls after, an accrual is required.

Reporting Staff Advances, Payroll Accruals, and Benefits in the Financial Statements

• Employee Advances: Current asset (receivable) if not cleared at year end
• Payroll Accruals: Current liability—within accruals/other payables
• Staff Benefit Accruals: Current liability—part of accruals or as a separate line for material items (e.g., accrued holiday pay)
• Statement of Profit or Loss: Staff costs include all wages, benefits, and bonuses earned in the period (not just paid)

Accurate year-end processing ensures a fair presentation of both profit and net assets.

Summary

At year end, all employee-related costs—earned but unpaid wages, holiday, bonuses, and approved expenses—must be accrued. Employee advances are recorded as receivables until settled. This approach ensures expenses and liabilities fully reflect work performed or benefits earned in the accounting period.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain and record employee advances as receivables
• Apply the accruals concept to payroll and staff benefit obligations
• Calculate and record year-end payroll accruals and staff benefit accruals
• Present employee advances as current assets and payroll accruals as current liabilities
• Accurately report accrued staff benefit costs and their impact on profit and the statement of financial position

Key Terms and Concepts

• payroll accrual
• employee advance
• staff benefit accrual