Salary Payable

Salary payable refers to the liability of the company towards its employees against the amount of salary of a period that became due but has not been paid yet to them by the company, and it is shown in the balance of the company under the head liability.

When the salary is paid, it can be paid via various methods, including bank, cash, online modes, etc., and the same must be entered in the journal entry. When the salary figures are clear, the payroll people can better track the financial inflows and outflows. Making a salary payable entry is a crucial affair and must be done carefully.

Salary payable can be attributed to the type of payroll journal entry that shall be used to record in the books of account the compensation which shall be paid to the employees. It is usually included in the current liabilities on the balance sheet as it is expected to be paid within one year.

When doing a journal entry for salary payable, there are always two types of account involved - the first one is an expense account, and another would be a liability account, as stated in the above examples.

All the Taxes account types like social security, state Income tax, health insurance, etc., payables accounts are created to record the withheld amounts and reconcile the same with relevant tax authorities.

Medicare and Social Security will not be recorded or recognized as payroll tax or salary expenses by the firm, the company, or the business as those will be paid by an employee of the company from their paycheck by deducting those amounts.

Payroll taxes include the employer's contribution and not the employee's contribution.

Below is the basic journal entry that shall be passed into the books of account for accruing the salary payments.

And upon payment of salary, below journal entry shall be made.

When it comes to recording salary payable, there are a series of steps that accounting and payroll people have to follow. Let us have a look at them:

Choice of account

The first and foremost thing is to select the right account for the right entry. The transaction data obtained is crucial and it becomes confusing to determine where it belongs. Thus, sorting the figures appropriately is a must. When the information is correctly specified in the company ledger, it becomes organized and easier to identify. Salary payable and accrued salary, both fall under the current liabilities column, which also include tax figures, like employee health insurance, state and federal taxes, etc.

Identifying accrued salary expenditure

This is the next and very important step where the accrued salaries are calculated. Such salary figures reflect the amount that the companies owe to employees based on their payment conditions and pay rates. This figure is shown under the credit section as it reflects the company’s outstanding amount.

Checking paid figures

While the credit section mentions the outstanding payment to employees, there is a need to record what is already paid to them. This helps the payroll professionals to compute the remaining amount to be paid. The paid figures should be recorded under the debit column of the accounting book.

Calculating the salary payable

After the amount owed and the amount already paid are known to companies, they calculate the remaining amount to be paid to employees. In case the columns, i.e., the credit and debit column shows an equal amount without any difference, this indicates the company has no outstanding salaries to be paid to employees.

Updating the record books

The accounting professionals, then, ensure that the book of accounts is updated based on the figures obtained. This keeps the professionals and management on the same page.

Keeping cash records

Most often, the professionals miss out on recording the cash payment done to the other party, i.e., the employees in this context. It must be recorded in the debit column to calculate what is paid in cash form to the employees. Cash receipts must be collected for future reference. If you need to generate paystubs for reference or testing purposes, you can use a fake paystub generator.

The major kinds of payroll or salary payment journal entries can be:

#1 - Initial Recordation

The main salary journal entry will be recorded for the initial payroll. This entry shall record or recognize the gross salary or gross wages earned by employees, along with the withholdings from their paycheck, and if any additional taxes would be owed to local authorities or government by the firm. These scenarios have been discussed in the examples above.

#2 - Accrued Wages

There may be accrued salaries or wage entry, which shall be recognized or recorded at the end of every accounting period, and that might be intended to recognize or record the salaries or wages amount that is owed to employees of the firm but has not been paid yet. This journal entry will then be reversed in the next accounting period so that the initial recognition or the initial recordation entry can take its place. This entry also can be ignored or avoided if the salary or wage amount is not material.

#3 - Manual Payments

An organization or the firm may, on a given occasion, pay employees’ manual paychecks, either because of employment terminations or any other pay adjustments (e.g., any retrospective amendment in the law, causing an outflow of additional wages to the existing employees for prior periods).

Let us consider the  following  examples to understand the salary payable meaning in a better way. In each example, creating a paystub would provide employees with a clear breakdown of their earnings and deductions, reinforcing trust and clarity in the payroll process.

Example #1

Vanilla Bond Private Limited company incorporated in the US has just started a brokerage business with equity capital of $1.5 million. It has recently hired Regina as an accountant for the firm. She was asked to make journal entries for the following salary payable scenario in the accounting software.

Consider the following details of salary and taxes, which is due on the 1^st of April; you are required to pass journal entries for accrual in the books of account of Vanilla Bond Private limited.

Solution:

The journal entries for the above example as on accrual in books of account would be as follows:

Example #2

Continuing with the above example and details, consider now that Vanilla Bond Pvt Ltd pays its employee's salary every 29^th month via NEFT from the Chase Bank account. You, as the firm's accountant, are required to post the journal entries while making payment of salary in the books of account of the firm.

Solution:

The salaries payable journal entries for the above example as on the date of payment in books of account would be as follows:

It can be noted that all the payables accounts have been cleared to 0 since they were paid out. And finally, while posting a retained earnings journal entry, the salary expense sitting with the debit balance will be credited, and the Retained earnings account will be debited. After that, salary expense a/c will also be cleared out to 0 balance at the end of each month.

Both salary payable and salary expense are similar concepts in accounting but their role differs. Let us check a list of differences between the two:

• Salary payable is the amount that a company owes to its employees, i.e., what they are yet to receive, while salary expense is the figure that the employees earn over a period.
• The former changes as and when a company pays its employees some amount. On the contrary, salary expense always remains unchanged as it reflects the total earnings of the employees.
• The salary payable is recorded in a separate ledger, while the salary expenses are recorded in the expense account to help companies decide on budgeting.

This article has been a guide to what is Salary Payable. Here, we explain its differences with salary expenses, discuss how to record them, and their examples. You can learn more about accounting from the following articles –

• Gross Salary vs. Net Salary - Differences
• Prepaid Insurance Meaning
• Accounts Payable Definition
• Journal Entries of Interest Receivable