Journal Entry for Salaries Paid

Introduction

In business, the company usually makes the salary payment to its employees at the end of the month in order to pay for the works that the employees have done. In this case, it needs to make the journal entry for salaries paid at the end of the month to account for the expense that has occurred as well as to account for the cash outflow at the end of the month as a result of salaries paid.

However, some companies may have the policy to pay the salaries to its employees at the beginning of next month of the work instead. If this is the case, the cash payment for the salaries will not flow out from the company yet at the end of the month of work. However, the company still needs to make the journal entry for the salaries expense in the form of accrued expense if it follows the accrual basis of accounting.

This is due to, under the accrual basis of accounting, the company is required to record the expenses when they occur regardless of whether they have been paid for yet or not. And in this case, even though, the salaries have not been paid out at the end of the month yet, the employees have already been working for one month which means that the expense has already occurred.

Likewise, the company will also need to make another journal entry for salaries paid at the beginning of the month to account for the cash outflow from the company. However, this journal entry will not be made to account for the salaries expense as in this case the salaries expense should have already been recorded in the prior month.

Journal entry for salaries paid

Salaries paid at the end of the month

The company can make the journal entry salaries paid by debiting the salaries expense account and crediting the cash account when it paid salaries to the employees at the end of the month.

In this journal entry, the debit of salaries expense account is the result of the expense that has occurred during the month for the work the employees have performed. At the same time, the credit of the cash account is a result of cash outflow from the company in form of salaries paid.

Likewise, total expenses on the income statement increase while total assets on the balance sheet decrease by the same amount as a result of the salaries paid at the end of the month.

Accrued salaries at the end of the month

As mentioned, some companies may make the salary payment at the beginning of the next month instead. In this case, they need to make the journal entry for accrued salaries at the end of the month to account for the expense that happens due to the works that the employees have performed.

Likewise, the company can make the journal entry for the accrued salaries with the debit of salaries expense account and the credit of salaries payable account.

In this journal entry total expense on the income statement and total liabilities on the balance sheet increase by the same amount. This journal entry is made to recognize the liability (salaries payable) that the company has obligation to fulfil in the new future as well as to record the expense (salaries expense) that has occurred during the period.

This journal entry is required in this case if companies follow the accrual basis of accounting. So, if they use the cash basis instead, this journal entry is not required. However, it is useful to note that in many accounting rules as well as in many accounting scenarios, the cash basis is not allowed.

This is due to the cash basis usually goes against the matching principle of accounting. In other words, when the cash basis is applied, the period that expenses are recorded usually does not match the period that the revenues are generated.

Salaries paid for the accrued amount

As mentioned, if the company pays the salaries at the beginning of the next month, it needs to make two journal entries. One is for the accrued salaries at the end of the month of work as in the journal entry above and another one is when the payment is made.

Likewise, when the company makes payments to employees at the beginning of the next month of work, it can make the journal entry for salaries paid by debiting the salaries payable account and crediting the cash account.

This journal entry is made to eliminate the liability (salaries payable) that has been recorded in the prior month as well as to record the cash outflow of the company. Likewise, there is no expense account in this journal entry as the company has already recorded salaries expense in form of the accrued expense in the prior month already.

Hence, there is no impact on the income statement in this journal entry and the impact of the balance sheet is the decrease of one asset and one liability at the same time.

Salaries paid example

For example, on November 30, the company ABC make the salary payment to employees amounting to $50,000 for the works that they have done during the month of November.

In this case, the company ABC can make the journal entry for salaries paid of $50,000 on November 30, by debiting the $50,000 into salaries expense account and crediting the same amount into the cash account as follow:

In this journal entry, total assets on the balance sheet of the company ABC decrease by $50,000 while total expenses on the income statement increase by the same amount of $50,000 as of November 30.

Example 2:

For another example, the company XYZ follows the accrual basis of account and it has the policy to make the salaries payment on the second day of the next month of work. And on December 31, it finds out that the total amount of salaries expense for the month of December is $30,000. However, the salaries payment will only be made on January 2, of the following month.

In this case, the company XYZ needs to make the journal entry on December 31, for the accrued salaries expense amounting to $30,000 by debiting this amount into the salaries expense account and crediting the same amount into the salaries payable account.

Accrued salaries on December 31:

This journal entry increases both total expense and total liabilities of the company XYZ by $30,000 as of December 31.

Later, when it makes salaries payment on January 2, for this accrued amount of $30,000, it can make the journal entry for salaries paid with the debit of salaries payable account and the credit of cash account as below:

Salaries paid on January 2:

This journal entry will eliminate the liability of $30,000 that the company XYZ has recorded in the prior period in form of a cash payment of $30,000. Likewise, on January 2, total assets and total liabilities decrease by $30,000 in this journal entry.