Wages payable does not go on a company's income statement; it goes on its balance sheet. Wages payable is an accrual account, which means that the company has incurred wage expenses but has not paid them as of the reporting date. Wages payable and other payable accounts are recorded in the current liabilities section of the balance sheet because they are short-term in nature.
Companies create wages payable entries when employees have not been paid for hours worked at the end of an accounting period. Related accrual accounts include payroll taxes payable, bonus payable and commissions payable. For example, if a company pays on a biweekly basis and the latest pay period ended on the third Friday of the month, an additional seven days or so worth of salaries will have been accrued when the monthly or quarterly accounting statements are prepared at the end of the month. According to AccountingTools, companies with mainly salaried employees avoid making wages payable entries because the accrued wages of a few hourly employees have no material impact on the financial statements.
The basic journal entries are to debit (increase) the wage expense or labor expense account on the income statement and credit (increase) the wages payable account. For example, if at the end of a quarter an employee has worked five days for which he has not been paid his daily rate of $200, the quarter-ending accounting entries would debit labor expense and credit wages payable by $1,000 ($200 x 5) each. At the next paycheck, which could be five working days later for a regular biweekly payroll, the accounting entries would debit labor expense by $1,000 ($200 x 5) for the additional five days worked, debit (decrease) wages payable by $1,000 to clear the balance from the previous week, and credit (decrease) cash by $2,000 ($1,000 + $1,000) to record the employee’s salaries for two weeks.
Wages payable entries temporarily increase the current liabilities total on the balance sheet. Current liabilities and current assets are both reduced once the company pays the wages because the wages payable and cash balances are reduced simultaneously. Wages payable also temporarily increases operating cash flow because it is a non-cash expense. For example, if the net income is $200,000 and wages payable is $20,000, operating cash flow is at least $220,000 ($200,000 + $20,000). The "at least" qualifier indicates that other non-cash expenses, such as payroll taxes payable and bonus payable, could affect the operating cash flow.
The wage expense balance on the income statement is lower when a company forgets to account for accrued wages. This increases operating income, reduces taxes payable and increases net income. The adjusting accounting entry to correct this error is to debit wages expense and credit wages payable in the next accounting period. The company should also amend the prior-period statements.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.