How to calculate accrued payroll

3. Example of payroll accrual based on prorated pay periods

The first way of calculating payroll accrual that we will look at relies on proration of a pay period. Assume the following information is available:

  • Company pays its employees every two weeks
  • Companyís year-end is 12/31
  • For fiscal year 2010, the companyís last full pay period ended on
  • The next pay period ran from 12/29/2010 to 1/11/2011 and the
  • Total payroll expense for the period 12/29/2010-1/11/2011 amounted to $14,000

In this scenario, how much should the company accrue for the payroll expense for the period from 12/29/2010 to 12/31/2010?

Letís analyze this scenario. There are 14 days in each pay period. There were ten business days during which employees provided services and four non-business (weekend) days during which employees didnít provide any services:

Payroll Accrual Calendar

The picture above shows that three of ten business days were in December 2010 while seven business days were in January 2011. Assuming employees worked approximately the same amount of time on each business day, we can determine the prorated period of business days in 2010:

Prorated Business Days in 2010 = 3 ų 10 = 0.3 or 30%

Prorated Business Days

So, 30% of the total payroll expense relates to 2010 and 70% of the total payroll expense relates to 2011. By using this percentage, we can calculate the portion of the $14,000 payroll expense which should be accrued as of 12/31/2010:

Accrued Payroll @ 12/31/2010 = $14,000 x 30% = $4,200

†At the end of 2010 the company would record the following adjusting journal entry:

Account Titles

Debit

Credit

Wage and Salary Expense

$4,200

 

      Accrued Wages and Salaries

 

$4,200

A few points about this method of estimating accrued payroll are presented below:

  • Sometimes employees provide services on weekends. In this case the weekend days will be treated as regular business days in calculating the
  • This method assumes that employees work approximately the same amount of hours per day. If employees charge a different amount of hours every day, then the method described below (based on hours worked) may be more
  • The payroll expense for the pay period started in one year and ended in the next year is assumed to be known from payroll reports (e.g., ADP summaries). Sometimes that is not the case; for example, a company may need to close the books quickly after the period ends and payroll reports are not available. In this situation, the company can look at several recent pay periods to understand what the payroll expense per pay period may be. If the company knows about some significant changes between the current period and several recent pay periods (e.g., a significant number of employees was hired during the current period), then such changes should be considered in estimating the payroll expense.
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