What is Salary Payable?
The term “salary payable” refers to the liability created to account for the number of salaries owed to the employees but are yet to be paid to them. For example, a company records the salary expense in its book immediately after determining the gross payroll but pays it off later, creating a liability account known as salary payable.
When the payroll for the period is recognized in the books, it increases salary expense and salary payable account. However, when the gross payroll is paid to the employees by the company, it decreases the payable salary account along with the cash balance. Therefore, the amount of salaries payable is usually relatively small, but it can be substantial in case of the following circumstances:
- If there is a large gap between the end of the reporting period and the payment date of the salaries.
- Some employees have been terminated, but their severance payments are yet to be cleared.
Examples of Salary Payable
Different examples are given below:
Let us take DFG Inc.’s example, which closes its books on March 31 of every year. As of the last reporting date, i.e., March 31, 2020, the company has $50,000 due in salaries which it had to pay the following month, i.e., April 2020. Show the journal entry for the given transaction on March 31, 2020.
The journal entry for recording the transaction on March 31, 2020, is as follows:
|Mar. 31, 2020||Salaries expense A/C||$50,000|
|Mar. 31, 2020||Salary payable A/C||$50,000|
Let us take the example of another company ASD Inc. that prepares its financial statements on December 31 of every year, while the salaries are paid to the employees on the 27th of every month. So, the last salaries before the end of the reporting period were paid to the employees on December 27, 2019. Show the journal entry for the above transaction on December 31, 2019, if all the days between the 27th and 31st were working days costing salaries at a rate of $3,000 per day.
In this case, the record would be passed to the journal entry on December 31, 2019, for the salaries accrued from December 28, 2010, to December 31, 2019. Therefore, the total number of days during the period is four, i.e., 28, 29, 30, and 31.
The total salaries accrued during the 4 days at the rate of $3,000 per day = 4 * $3,000 = $12,000
The journal entry for recording the transactionforDecember 31, 2019, is as follows:
|Dec. 31, 2019||Salaries expense A/C||$12,000|
|Dec. 31, 2019||Salary payable A/C||$12,000|
In the above example, the salaries due that will be paid in the following month on January 27, 2020, are $50,000. Then, show the journal entry for the above transaction on January 27, 2020.
In this case, a cash balance will also be involved as the transaction is for the disbursement day. The journal entry for recording the transaction for January 27, 2020, is as follows:
|Jan. 27, 2020||Salaries expense A/C||$12,000|
|Jan. 27, 2020||Salary payable A/C||$38,000|
|Jan. 27, 2020||Cash A/C||$50,000|
Accounting Treatment of Salary Payable
The accounting treatment of it involves two steps, as shown below:
Step 1:Firstly, when the company recognizes the salaries of all the employees on an accrual basis, i.e., the salaries expenses have been booked but not yet paid, the journal entry would be as follows:
|Salaries expense A/C||XX|
|Salary payable A/C||XX|
In this step, the salaries expense is debited as an expense, while the salaries payable are credited in the books as a liability.
Step 2: Next, when the company disburses the salary to the employees on the payment day, the journal entry would be as follows:
|Salaries expense A/C||XX|
|Salary payable A/C||XX|
In this step, the salaries payable are debited, and so the value reduces on the Balance Sheet. Thesalariesexpense is debit here as there may be some amount of salaries that have accrued but haven’t been yet reflected in the salaries payable.
Where to Record Salaries Payable?
The amount in the salary payable account represents the business’s liability owed to the employees as of the balance sheet date. Further, such payments are usually made within less than a year, and the payable salary account is reported under current liabilities on the balance sheet. Theoretically, the salary payable account balance increases with credit and decreases with a debit.
Salary Payable vs Salary Expense
The main differences between salary payable and salary expense are:
- Salaries payable indicate the number of salaries accrued but not yet paid as of the balance sheet. In contrast, salary expense captures what the company pays in full as salary-based compensation during a given period.
- It is a line item in the balance sheet, while salary expense is featured in the income statement.
- In most cases, the amount of salaries payable is substantially lower than the amount of salaries expense.
Some of the major advantages are as follows:
- It helps in portraying the true picture of the company’s financials as it accounts for the accrued expenses.
- It follows the matching principle and recognizes the salary expenses during the period when they occurred.
- The trend of the salary payable can indicate a company’s liquidity position.
Some of the major disadvantages are as follows:
- It doesn’t form part of most debt metrics, so that analysts might ignore its impact on the financials.
- A higher salary payable can be the reason for employee discontentment.
This is a guide to Salary Payable. Here we also discuss the introduction and accounting treatment of salary payable along with advantages and disadvantages. You may also have a look at the following articles to learn more –
- Appropriate Retained Earnings
- Diluted Earnings Per Share
- LIFO Reserve
- Statement of Retained Earnings Example