Definition of Accrued Payroll

Accrued payroll refers to employee wages, salaries, bonuses, and payroll taxes that have been earned but not yet paid by the end of an accounting period. These amounts are recorded as current liabilities on the balance sheet, ensuring that financial statements accurately reflect outstanding payroll obligations.

Accrued payroll is a critical part of the accrual method of accounting, which is required under the International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) in Canada.

For example, if a Toronto-based company’s employees work from December 28 to December 31, but their paychecks are issued on January 5, the company must record the unpaid wages as accrued payroll in December to match the period when employees performed the work.

Purpose of Accrued Payroll in Business and Accounting

Recording accrued payroll ensures financial accuracy and regulatory compliance, benefiting businesses by:

1. Recognizing Payroll Liabilities Accurately– Ensuring all employee wages are recorded in the correct period.
2. Matching Payroll Expenses with Revenues – Aligning labor costs with the income they generate.
3. Supporting Financial Planning – Helping businesses track short-term payroll obligations.
4. Ensuring Compliance with Canadian Accounting Standards – Required under IFRS and ASPE financial reporting.
5. Facilitating CRA Tax Compliance – Ensuring proper withholding and remittance of payroll taxes.

Components of Accrued Payroll

1. Accrued Wages and Salaries

Employee wages that have been earned but not yet paid by the reporting date.

Example: A company’s hourly workers complete their last shift on December 31, but payroll is processed on January 4. The wages are accrued in December.

2. Accrued Bonuses and Commissions

Bonuses and commissions that employees have earned but will be paid at a later date.

Example: A company offers a year-end performance bonus but issues the payment in February. The bonus is accrued in December.

3. Accrued Payroll Taxes

Employer obligations for CPP (Canada Pension Plan), EI (Employment Insurance), and other payroll taxes that have been incurred but not yet remitted.

Example: A business processes payroll on January 3, but the related CPP and EI deductions for December wages are remitted to the CRA later in January. These amounts are accrued in December.

4. Accrued Vacation and Paid Time Off (PTO)

Vacation days or PTO earned by employees that have not yet been used or paid.

Example: An employee earns 10 vacation days per year but has only used 3 by year-end. The remaining balance is accrued as a payroll liability.

5. Accrued Retirement Contributions

Employer contributions to pension or retirement savings plans that have been earned but not yet deposited.

Example: A company contributes 5% of an employee’s salary to an RRSP but delays the payment until the following month. The contribution is accrued in December.

How Accrued Payroll Works in Financial Reporting

1. Identifying Unpaid Payroll Liabilities

Businesses review unpaid wages, benefits, and payroll taxes before closing their books.

2. Recording Accrued Payroll

Accrued payroll is recorded by adjusting journal entries at the end of an accounting period.

Example of an Accrued Wages Journal Entry (for unpaid salaries of $10,000):

Salaries Expense   10,000
Salaries Payable   10,000

3. Adjusting the Entry When Payroll Is Paid

Once the wages are paid, the liability is reduced.

Salaries Payable   10,000
Cash   10,000

This ensures that payroll expenses are properly recorded and cleared when settled.

Accrued Payroll vs. Accounts Payable

Category	Accrued Payroll	Accounts Payable
Definition	Employee wages, taxes, or benefits incurred but unpaid	Expenses incurred with an invoice already received
Recording Method	Estimated and adjusted when paid	Recorded when the invoice is received
Examples	Unpaid wages, bonuses, payroll taxes	Supplier invoices, contractor payments
Financial Impact	Ensures payroll liabilities are recognized on time	Tracks vendor and supplier obligations

For example, accrued payroll includes employee wages earned but not yet paid, while accounts payable include supplier invoices awaiting payment.

Advantages and Disadvantages of Accrued Payroll

Advantages

• Ensures Financial Accuracy – Reflects outstanding payroll liabilities.
• Improves Cash Flow Planning – Helps businesses prepare for upcoming payroll expenses.
• Required for IFRS Compliance – Necessary for proper financial reporting in Canada.

Disadvantages

• More Complex to Track – Requires businesses to reconcile wages, taxes, and benefits frequently.
• No Immediate Cash Impact – Represents expenses that will be paid in the future.
• Requires Adjusting Entries – Businesses must update payroll records each reporting period.

Related Terms

• Accrued Salaries vs. Accounts Payable: Accrued salaries are wages earned but not yet paid, while accounts payable are supplier invoices waiting for payment.
• Deferred Payroll vs. Accrued Payroll: Deferred payroll is delayed compensation, whereas accrued payroll is earned wages awaiting payment.
• Matching Principle: Ensures payroll expenses are recorded in the same period as the related work performed.

Interesting Fact

Did you know that many Canadian businesses use payroll software, such as QuickBooks, Wagepoint, or ADP, to automate accrued payroll tracking and tax remittances?

Statistic

According to CPA Canada, nearly 80% of Canadian businesses use automated payroll systems to efficiently manage accrued wages and tax liabilities.

Frequently Asked Questions (FAQ)

1. Why is accrued payroll important in accounting?

It ensures all outstanding employee wages and payroll liabilities are correctly recorded, preventing financial misstatements.

2. How do businesses record accrued payroll?

They create adjusting journal entries for unpaid wages, taxes, and benefits at the end of an accounting period.

3. Are accrued payroll taxes required under IFRS?

Yes, all businesses following IFRS or ASPE must recognize accrued payroll and related liabilities for accurate reporting.

4. What happens if a company does not record accrued payroll?

The company’s liabilities will be understated, leading to potential tax compliance issues and incorrect financial statements.

5. How does accrued payroll affect cash flow?

It represents future payroll obligations, helping businesses plan for salary and tax payments.