Journal Entry for Salary
Salary is the expense that company paid to the employees in exchange for employment over a period of time. The company usually recruited employees to work in various departments such as sales, production, accounting, and so on. In exchange for their services, company needs to pay the monthly salary based on their work complete and level of competency.
The company needs to pay fixed monthly expenses unless there are bonuses or increments. The salary is mostly fixed from month to month, however, the company can increase it once per year to motivate the employee to work harder and achieve higher targets. Some employees may be promoted to a higher position which is a higher salary as well. In general, the total salary that the company paid to employees is mostly fixed, it only a small change due to new recruit or staff resign.
This expense is managed by the humane resource department for a big company. For a small company, the payment process can be handled by the accounting department or the owner himself. And it is the big part of the expense for most of the company which will present in the income statement.
Journal Entry for Salary Expense
Company records salary expenses in the monthly income statement regardless of the payment. As we know, the recording in the financial statement is based on the accrual basis, so the revenue and expenses must record regarding their occurrence. It is not necessary to wait for the cash payment.
At the end of the month, the company should make journal entry by debiting salary expenses and credit cash or salary payable.
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | $$$ | |
| Cash/Salary payable | $$$ |
Salary expense will impact the income statement and similar to other expenses it will reduce the company profit. The company will record cash if they paid the employee on the same date. If the payment is made in the following month, they can use the salary payable account. The salary payable will be reversed when company pays cash to the employee.
Journal Entry for Salary Expense Example
Company ABC employs many staffs to work in various departments. Every month they need to spend around $ 10,000 on the salary expense. They usually pay the salary at the end of the same month.
On 31 January, they pay a salary expense of $ 11,000. It increases from prior month due to new staffs. Please prepare the journal entry for the January salary expense.
As the company makes payment at the end of the month, so they can make journal entry by debiting salary expenses and credit cash of $ 11,000.
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | 11,000 | |
| Cash/Salary payable | 11,000 |
The salary expense $ 11,000 will appear on the income statement and cash $ 11,000 will deduct from the cash account on balance sheet.
Salary Paid in Advance Journal Entry
Most of the company pays employees at the end of the month or even the beginning of next month. However, the company may pay the employees in advance if there are any special requests.
The company needs to make journal entry by debiting salary advances and credit cash to employees.
| Account | Debit | Credit |
|---|---|---|
| Advance Salary | $$$ | |
| Cash | $$$ |
The transaction will decrease the company cash when paid to employees and increase the advance salary which is the current assets on balance sheet. The company does not record expenses as they do not yet consume the employee work yet. They need to reverse the advance salary to salary expense at the end of the month or the time which employee completes the work for company.
When the employees have completed the work for company, they need to reclass the advance salary to salary expense for the month by:
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | $$$ | |
| Advance Salary | $$$ |
When the company enjoys the benefit from staffs’ employment, so they record expense into the income statement. Advance salary will be removed from the balance sheet as well and they do not need to pay the employees again.
Example 2
Company XYZ always paid salary expenses at the end of the month. However, on 01 April the staffs request to the owner to pay the salary in advance as it is a national holiday during the month. The employee needs the cash to go on holiday. Management to decide to pay the April salary on the 1st day of the month to motivate the employees to work hard for the company. The salary paid is $ 12,000. They do not expect to have any resign during the month.
As the company pays the employees before providing the service, so they should record it as advance salary and reverse it to expense at the end of the month.
On 01 April, they should make a journal entry by debiting advance salary and credit cash $ 12,000.
| Account | Debit | Credit |
|---|---|---|
| Advance Salary | 12,000 | |
| Cash | 12,000 |
On 30 April, the employees have work for a whole month, so it is the time to record expenses. Company can make revere the advance account by debiting salary expense and credit advance salary.
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | 12,000 | |
| Advance Salary | 12,000 |
Accrued Salary Journal Entry
Many company pays the current month’s salary in the subsequent month. Yes, it is just a few days late and the staffs do not mind the practice. However, it is a problem in accounting that requires recording revenue and expense in the current month’s financial statement.
Accountant needs to record salary expense in the current month even the cash is not yet paid. So we have to record using the accrued salary expense. It means we estimate the amount of salary paid and record salary expense verse accrued salary. The estimated amount based on the prior month adjusted with other information such as resign, new recruit, increment, and so on.
The company records the transaction by debiting salary expenses and credit accrued salary.
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | $$$ | |
| Accrued Salary | $$$ |
Example 3
Company EFG usually pays the employee’s current month salary in the next month. However, the accountant needs to prepare the monthly financial statement. On 02 February, the company make a payment for January’s salary amount $ 15,000.
Please make the journal entry for January’s salary.
The company makes payment of January salary in February, however, we need to record the expense in January to prepare the financial statement.
The journal entry is debiting salary expenses and credits the accrued salary.
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | 15,000 | |
| Accrued Salary | 15,000 |
The salary expense will impact the income statement while accrued salary is the liability on balance sheet. It represent the liability of the company to its employees.
On 02 February, the company making payment to the staffs, it will not impact the expense again. The journal entry is debiting accrue salary and credit cash $ 15,000
| Account | Debit | Credit |
|---|---|---|
| Accrued Salary | 15,000 | |
| Cash | 15,000 |
Accrued salary will be removed from the balance sheet as the company pays employees and cash have decreased the same amount.