## 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
• Company’s year-end is 12/31
• For fiscal year 2010, the company’s 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?

Let’s 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 didn’t provide any services:

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 ÷ 10 = 0.3 or 30%

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