Outstanding Salary Journal Entry

Outstanding salary is the amount of salary expense that company has not yet made payment to the employees.

Salary is one of the most important expenses present on the income statement. It represents the expense company hiring employees to work for them.

Based on the accounting rule, the company must use the matching principle to record both revenue and expense. The expense that company spends to generate revenue must record in the same period. It is easy for the reader to match the expense and revenue to reflect the profit. It will not mislead the financial user.

The company will record the payroll expense at the end of the month when employees perform the work for them. The company usually prepares a monthly financial statement, so the payroll is recorded during the month as well. The recording will depend on the accrual basis, so it is not related to the payment.

Comapny can record salary expenses on the income statement but not yet make payments to the staff. It depends on the company policy, the payment can be made in the following week.

The salary outstanding is considered as the liability on the balance sheet while the expense is recorded on the income statement.

Journal Entry for Outstanding Salary

At the month-end, the company has to prepare a monthly financial statement. They have to include all revenue and expense.

They have to record the salary expense even if it is still outstanding. The company has not yet made payments to the employees.

The journal entry is debiting salary expense and credit salary payable.

When the company makes a payment, they have to reverse the salary payable and reduce cash balance.

The journal entry is debiting salary payable and credit cash.

Example

ABC is a service company which employs around 100 staff. The company is required to prepare a monthly financial statement. At month-end, the salary expense is $ 50,000 but the company has not yet made payment to employees. Please prepare the journal entry for outstanding salary.

ABC has to record the salary expense base on the time that employees work for the company. It is not related to the payment.

The journal entry is debiting salary expense $ 50,000 and credit salary payable $ 50,000.

On the payment date, the company pays the employees and reverses the salary payable.

The journal entry is debiting salary payable $ 50,000 and credit cash $ 50,000.

The transaction will reverse the salary payable from the current liability on the balance sheet. It also reduce the cash balance.