How to calculate accrued payroll

4. Example of payroll accrual based on hours worked

The second way of calculating payroll accrual that we will look at uses hours worked by employees to determine payroll expenses and accrual. Some companies have a good computerized system to track the number of hours worked by each employee. Information from such time-tracking system may be used to calculate the accrued payroll amount at the period end.

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
  • Employees donít necessarily work the same amount of hours every
  • Company has a good time-tracking system showing that employees
  • 350 hours were worked before 1/31/2011 and 350 were worked after 12/31/2010

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

One aspect of this scenario which is different from the first scenario we looked at is that employees donít necessarily work the same amount of hours every day. That can easily be noted by looking at the hours worked before and after year-end. During the three days before the end of 2010 employees worked 350 hours and during the remaining 11 days in 2010 employees worked 350 hours. So, there was heavy workload before the end of the year (e.g., effort to sell and ship as many goods as possible before the end of the year).

The company could use the number of business days approach to calculate the payroll accrual, but it would not provide a very accurate estimate of employee services provided to the company before and after year-end. Instead, the company can use the number of hours worked to make a more accurate calculation.

Employees worked 350 hours before 1/1/2011, which is 50% of the total number of hours worked by employees during the two-week period:

Percentage of Hours Worked in 2010 = 350 hours ų 700 hours = 50%

The total payroll amount for the two-week period was $750. So, the estimated accrued payroll is 50% of that amount:

Accrued Payroll @ 12/31/2010 = $17,000 x 50% = $8,500

Hours Worked

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

Account Titles

Debit

Credit

Wage and Salary Expense

$8,500

 

      Accrued Wages and Salaries

 

$8,500

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

  • This method may provide a more accurate estimate of accrued
  • This method may be more difficult to implement as it requires a summary of hours worked by date which may not be easily available (e.g., a request may need to be made to a service provider like ADP to receive such summaries)
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