Payroll entries accrue into payable accounts for the amounts to be paid at a later date.

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1 Overview Accruals to payroll accounts Accounting period end accruals Special accounting procedures o Unemployment o Vacation liability o Nondiscretionary Bonuses Accruals to Payroll Accounts Payroll entries accrue into payable accounts for the amounts to be paid at a later date. A processed payroll has a net payroll of $66,350 and taxes totaling $41,300. The net payroll is coded to net wages payable and the taxes are coded to various tax payables. Wages Expense 100,000 Employer s FICA tax expense 7,650 Net wages payable 66,350 Federal income taxes payable 20,000 FICA taxes payable 15,300 State income taxes payable 6,000 On pay day, the net wages payable, the liability, is reduced. Net wages payable 66,350 Cash 66,350 When the taxes are paid, the various tax payable accounts are reduced by the taxes paid. Federal income taxes payable 20,000 FICA taxes payable 15,300 Cash 35,300

2 Accounting Period End Accruals A payroll accrual is needed when the period of time covered by the accounting period does not align with the payroll period. A single pay period may be in two accounting periods. In this case, accruals are needed to correctly reflect the payroll costs in the appropriate accounting period. The last pay period in September ends on the 26 th. The next pay period, which ends October 10 th, spans the months of September and October. The accounting period is a calendar month. Payroll will accrue the payroll costs from September 27 th through September 30 th, which is 4 days of a 14 day payroll period. Wages Expense 28, Employer s FICA tax expense 2, Net wages payable 18, Federal income taxes payable 5, FICA taxes payable 4, State income taxes payable 1, To keep the expenses from being overstated, a reversal entry is required to cancel out the previous entry. The reversal entry is simply the opposite of the initial entry. The amounts stay the same while the debits and credits are reversed. Wages Expense 28, Employer s FICA tax expense 2, Net wages payable 18, Federal income taxes payable 5, FICA taxes payable 4, State income taxes payable 1,714.29

3 Procedures for FUTA/ SUTA, Vacation Expenses, and Bonus Expenses These accruals usually require special accounting procedures. Federal Unemployment Taxes (FUTA) / State Unemployment Taxes (SUTA) Federal unemployment taxes (FUTA) and State unemployment taxes (SUTA) can pose a problem for employers who want to accurately reflect these expenses on a monthly basis, since these taxes are paid on a quarterly basis. If accruals are not made on a monthly basis, but posted through the payroll entry, you will find the employer s FUTA / SUTA expenses are the highest in the first quarter and gradually decline in the later quarters as employees reach the taxable wage limits. In order to allocate reported expenses more evenly throughout the year, employers estimate the expense for the year, report an equal amount of the expenses each month, and make any necessary adjusting entries when actual unemployment expenses are known. Employer has determined 20 employees will meet taxable wages limit in first quarter and the remaining 15 active employees will meet taxable wages limit in second quarter. Expected new hires of 10 will meet taxable wages in third quarter and 5 new hires will meet taxable wages in fourth quarter. FUTA Estimated Cost: The 50 employees with a taxable wage limit of $7,000 each will be $2,800 annually. The accrual each month would be $ FUTA expense FUTA Payable When the quarterly FUTA is paid, an entry is made to record the adjustment to actual and reduce the payable account by the payment amount. FUTA expense FUTA Payable Cash 750

4 Vacation Expenses Accrual accounting requires employers to recognize and expense for vacation leave earned by employees, whether or not the employees actually takes vacation. The amounts accrue until employees take their vacation or reach the vacation cap. Rather than expensing actual vacation for each pay period, employers will record an estimate of paid vacation expense and make any necessary adjusting entry at the end of the year based on the actual amount of vacation earned by employees. Some employers will make this adjusting entry quarterly or mid-year instead of once a year. Many employees receive two weeks of vacation each year. The effect of a two week vacation is to increase the employer s expense by 4%. (2 weeks / 50 weeks =.04) The expense associated with vacation pay would depend on the rate of employee turnover, since employees might only be entitled to paid vacation after meeting a length of service requirement. If the turnover experience of the employer suggests that only 90% of employees actually would be granted vacation time, the additional expense of a two week vacation benefit would be 90% of 4%, or 3.6%. The monthly accrual entry to record vacation when the employer s payroll each bi-weekly pay period is $100,000 and turnover experience suggest that only 90% of the employees actually would be granted vacation time. (($100,000 x 3.6%) x 26) / 12 = $7,800 Vacation expense 7,800 Vacation payable 7,800 At the end of the year the balance in vacation payable is $113,600 while the vacation balance report indicated the vacation liability is $93,600. The vacation expense and the vacation payable accounts would be adjusted to reflect the current vacation liability account. ($113,600 - $93,600 = $20,000) Vacation payable 20,000 Vacation expense 20,000

5 Bonus Expenses In the same manner as accrued vacation, the nondiscretionary bonuses are recorded when earned by the employee, even though the bonus is not paid until a later date. The employer incurs the liability once the employee meets the criteria for the nondiscretionary bonus. Bonus expense 50,000 Bonus payable 50,000 Once the bonus is paid, the employer reduces the payable by the amount paid. Bonus payable 50,000 Cash 50,000 Bibliography Bloomberg BNA Payroll Administration Guide American Payroll Association 2015 Payroll Source