Wages Payable Journal Entry

Wage payable is the amount of cash that company owes to the workers regarding their service. The company usually hires the workers to work for them and pays those workers based on an hourly rate. At the month-end, any amount that the worker already works but has not yet paid must record as wages payable. It is the company obligation to pay for service that has already been consumed.

Wage refers to the employee remuneration that the company paid based on the hourly rate. They multiply the number of hours work with the hourly rate and make payments based on the agreed term.

Salary is the employee remuneration that company pays base on the monthly basis. The company pays the employee depending on the monthly work and it is mostly consistent from month to month.

The company needs to record both revenue and expense base on the accrued basic. The expense and revenues are recorded when they are incurred not paid or receive. So when the worker performs the work, the company needs to record expense (wage expense) and obligation to pay which is the liability (wages payable).

Wages payable is classified as the current liability on the balance sheet. The company expects to settle them within a year after the reporting date. It is not practical to keep the wages payable for more than a year unless there are some specific reasons.

The company will reverse the wages payable when they make payment to the worker. Similar to other types of liability, wages payable will be debited when company makes payment to the employees.

Wages Payable Journal Entry

At the month-end, the accountant needs to calculate the amount of wage that worker has already performed but has not yet paid. Most companies use the clock in and out machine to keep a record of the worker arriving and leaving the company. It is the control that company puts to ensure the time in and time out of the employees.

The company simply extract the unpaid hour from the clock machine and multiply the hour with the rate.

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

The transaction will record the wage expense on the income statement. Wage payable will present as current liability on the balance sheet.

When the company makes a payment, accountants need to reverse the wages payable and record cash out. The journal entry is debiting wage expense and credit cash.

The wage payable will be removed from the balance sheet. And cash is reduced for the paid amount.

Wages Payable Journal Entry Example

ABC is a restaurant that serves various types of food to the local people. The company hires 5 people and pays base on the hourly rate of $ 20 per hour. They usually pay the workers every Friday.

At the month-end, company needs to prepare a financial statement. And they have figured the unpaid wage is 80 hours.

On 3rd next month, company has paid wages for all employees. The payment amount is $ 3,600 which represents 180 hours. Please prepare the journal entry related to wages payable.

At the end of the month, company needs to prepare the income statement which includes all revenue and expense. The employees have worked for 80 hours but have not yet received payment. Company needs to account for this expense even the payment is not made.

Wage Expense = 80 hours * 20 per hour = $ 1,600

Company must record an expense of $ 1,600 and wage payable as it has not yet been paid. The journal entry is debiting wage expense $ 1,600 credit wage payable $ 1,600.

It will increase the wage expense by $ 1,600 on the income statement. Wages payable $ 1,600 is classified as the current liability on the balance sheet.

During the 1^st week of next month, company makes a payment of $ 3,600 for the work of 180 hours. This payment covers the wage in both the previous month and the new month. So we need to separate the payment into two parts. One part to cover the previous month’s expense and another part to record into the new month’s expense.

The cash payment of $ 3,600 needs to settle the previous month’s liability (wage payable) and the remaining balance must record as wage expense.

The journal entry is debiting wage payable $ 1,600 and credit cash $ 3,600. The difference between cash paid and wage payable is recorded as a wage expense of $ 2,000 in the new month.

Wage payable decrease by $ 1,600 as the company already make payments to employees. Wage expense of $ 2,000 present the cost of an employee in the new month, and it is recorded on income statement of the new month. Cash is reduced by $ 3,600 to present the cash out to employees.