Under the accrual method of accounting, you allocate expenses when your business incurs them, which is not always when they’re paid. This allows your income statements to reflect appropriate profits and losses during the period for which you’re accounting. When it comes to payroll, it becomes necessary to allocate payroll expenses to separate months when your pay period is extended into more than one month.

Calculate the number of business or working days during the pay period that fall within the month you’re closing out. This is typically the last few days in the accounting period for which you’re allocating expenses.

Allocate the payroll expense for the period you’re closing. If the employee is paid by the hour, multiply the number of hours he worked by his rate of pay. If your employee is paid a salary, divide his regular salary by the number of business days in the pay period. The result is his daily rate of pay. Multiply his daily rate of pay by the number of days he worked in the pay period you’re allocating. For this step, you only need to include the days for the month you’re closing out in your calculation. For example, if your pay period runs from August 22 through September 5, you only need to calculate the wages your employee earns during the August portion of the pay period.

Prepare your accounting entries. To complete your allocation, you must enter the payroll expense that is earned by your employees, but not yet paid, into your accounting system. Create a debit to your “Payroll Expense” account for the amount of payroll allocated to the month you’re closing. This entry allows the expense to appear on the correct monthly income statement.

Create a credit to your “Wages or Salaries Payable” account for the same amount of your payroll expense debit entry. This places the expensed amount in a liability account (on your balance sheet) until you actually pay employees for the pay period. The balance sheet entry represents amounts you owe for the services you received from your employees.

Tip

If you use the cash-basis method of accounting, you'll record expenses only when they are paid. In this instance, it is not necessary to allocate your payroll expenses between months. You'll record the expenses only in the month you actually pay your employees.