Journal Entry for Prepaid Wages

Prepaid wage is the amount of wage that company paid to workers in advance before they complete the work for the company.

A wage is a compensation paid by an employer to an employee in exchange for their work form. The company pays the wage for the workers’ employment. Payment may be calculated as an hourly rate, or be based on piecework, commission, or a salary. Wages are part of a broader category of payments called compensation, which also includes tips, commissions, bonuses, and incentive pay. In some cases, wages are paid in goods or services instead of cash. The workers have obligation to work for the company in order to receive a wage.

Wages are the company expense that is recorded on the income statement. Companies need to spend in exchange for the tasks done by the workers. The company needs the worker to support the cooperation and so on.

Wage expense is one of the largest expenses for most businesses, and it can have a major impact on profitability. In order to control wage expenses, businesses must carefully monitor hours worked and ensure that employees are productive. Additionally, businesses can use technology to automate tasks and reduce the need for labor. By carefully managing wage expenses, businesses can improve their bottom line.

The company usually paid the wage to the employees at the end of the week or month. It means the employees have performed the work and receive cash after that. So when the company makes the payment, they also record expenses as the service already consume.

However, the company makes payments to workers before the work is performed. It is known as the prepaid wage which needs to record as the current assets instead. It will stay on the balance sheet until the work is performed.

Journal Entry for Prepaid Wages

Prepaid wage is the amount of payment that company makes to workers before completing the work. It needs to be recorded as the current assets on the balance sheet.

The journal entry is debiting prepaid wage and credit cash.

The transaction will increase the prepaid wage on the balance sheet and reduce cash.

By the time workers have completed the work, the company has to reverse the prepaid wage to the wage expense.

The journal entry is debiting wage expense and credit prepaid wage.

Example

Company ABC has employed 20 workers to complete various works on the site. Based on the agreement, the company pays the wage one month in advance to workers.

On 30 May, the company pays the wage to workers amount $ 20,000 and workers expect to do the work in June.

Please prepare a journal entry for a prepaid wages.

On 30 May, company pay $ 20,000 to workers for the June wage expense. It is the prepaid wage and needs to record as current assets.

The journal entry is debiting prepaid wage $ 20,000 and credit cash $ 20,000.

At the end of June, the workers have completed the work for the company. So the prepaid wage has to reverse to wage expense.

The journal entry is debiting wage expense $ 20,000 and credit prepaid wage $ 20,000.