Your pay period ended on a Wednesday. Your month ended on a Friday. Your employees worked Thursday and Friday — and they will not be paid for those days until the next payroll run, which lands in the following month. So when you close your books, where do those two days of wages go?
If your answer is "nowhere, I'll catch them next month," your financial statements are wrong. Not catastrophically wrong, but wrong in a way that quietly distorts every month-end report you produce. The fix is a single journal entry called the accrued payroll entry, and once you understand it, you will never look at a calendar misalignment the same way again.
What Accrued Payroll Actually Is
Accrued payroll is the total of all payroll-related expenses your business has incurred but has not yet paid as of a specific date — usually the last day of an accounting period.
The key word is incurred. Under accrual accounting, an expense belongs to the period in which the work happened, not the period in which the cash left your bank account. When an employee works a shift, you owe them money the instant the shift ends. The fact that your payroll system will not cut the check for another week or two does not change when the expense was created.
Accrued payroll is a liability. It sits on your balance sheet alongside accounts payable and other amounts you owe. It is money that belongs to your employees and to tax agencies — you are simply holding it until the scheduled payment date.
A few things commonly roll into the accrued payroll figure:
- Hourly wages and salaries earned but not yet paid
- Overtime worked in the period
- Commissions and bonuses that the employee has earned, even if the payout happens later
- Payroll taxes — both the employee withholdings and the employer's matching share
- Paid time off (PTO) that employees accrued during the period
- Employer contributions to health insurance and retirement plans
If any of these were earned before your period-end date but paid after it, they belong in the accrual.
Why the Timing Gap Matters
Imagine a business with $40,000 in monthly revenue and $25,000 in monthly payroll. If two days of wages — say $3,000 — slip into the wrong month because of a calendar misalignment, your books tell two lies at once. The month you skipped looks $3,000 more profitable than it really was. The following month absorbs an extra $3,000 of expense it did not actually generate.
Over a single month, that might not feel serious. But three problems compound:
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You make decisions on bad numbers. If you are deciding whether to hire, raise prices, or take a distribution, an inflated profit figure pushes you toward choices the real numbers would not support.
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You can spend money that is not yours. Accrued payroll is a reminder that cash sitting in your account is already committed. Businesses that ignore the accrual sometimes spend funds earmarked for wages or payroll taxes — and a missed tax deposit triggers penalties fast.
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Comparisons break. Month-over-month and year-over-year comparisons only mean something if each period carries its own true costs. Accruals are what make those comparisons honest.
This is the matching principle in action: expenses should be recorded in the same period as the revenue they helped generate. The labor your employees performed in May helped earn May's revenue, so it must appear in May's income statement — regardless of when payday falls.
How to Calculate Accrued Payroll
The calculation is straightforward once you break it into components. A useful formula:
Accrued payroll = unpaid wages + unpaid overtime + unpaid bonuses/commissions + employer payroll taxes + accrued PTO + employer benefit contributions
Work through it one piece at a time.
Step 1: Wages and salaries
For hourly employees, multiply the hourly rate by the number of hours worked in the unpaid stretch. If an employee earns $30 per hour and worked 16 unpaid hours between the end of the pay period and the end of the month, that is $480.
For salaried employees, divide the annual salary by the number of pay periods, then prorate for the unpaid days. A $78,000 salary paid semi-monthly is $3,250 per pay period; if half that period is unpaid at month-end, you accrue $1,625.
Step 2: Overtime, bonuses, and commissions
Add any overtime worked in the unpaid window at the correct premium rate. Then add bonuses and commissions the employee has earned — if a salesperson closed a deal in May that pays a $1,000 commission disbursed in June, that $1,000 is a May expense.
Step 3: Employer payroll taxes
You owe more than just wages. As an employer you pay the matching half of FICA — 6.2% for Social Security and 1.45% for Medicare — plus federal and state unemployment taxes. Apply these rates to the accrued gross wages.
One trap to watch: wage base limits. Social Security tax stops applying once an employee crosses the annual wage base, and unemployment taxes have low wage bases that most employees pass early in the year. Late in the year, the employer tax portion of an accrual can be much smaller than a naive 7.65% would suggest. Check each employee's year-to-date wages before assuming the full rate applies.
Step 4: Accrued PTO
If employees earn paid time off as they work, that PTO is a real, growing liability. A common way to value it: compare PTO hours earned to hours worked, then apply that ratio to wages.
For example, if an employee earns 4 hours of PTO for every 80 hours worked, their PTO accrues at 5% of wages. On $2,000 of earned wages, that is $100 of accrued PTO.
Step 5: Benefit contributions
Add the employer's share of health insurance premiums and retirement plan contributions attributable to the unpaid period.
A worked example
Chris earns $50 per hour, worked 40 unpaid hours at month-end, and also earned $900 in commissions during that stretch. Chris accrues half a vacation day per pay period.
- Wages: $50 × 40 = $2,000
- Commissions: $900
- Employer FICA (7.65% of $2,900): $222
- Accrued PTO (4 hours earned on 40 worked = 10% of wages): $200
Total accrued payroll for Chris: $3,322.
The Journal Entry
Once you have the total, recording it takes one entry on the last day of the period.
At month-end (the accrual):
| Account | Debit | Credit |
|---|---|---|
| Wages and Salaries Expense | $2,900 | |
| Payroll Tax Expense | $222 | |
| PTO Expense | $200 | |
| Accrued Payroll Liabilities | $3,322 |
The debits push the expense into the period where the work happened. The credit creates the liability — the obligation you are carrying into next month.
Your income statement now reflects the true labor cost of the period, and your balance sheet shows the matching obligation. The books are honest again.
Reversing the Entry Next Month
Here is where many small-business bookkeepers get tangled. When the next payroll actually runs, your payroll system records the full paycheck as an expense — including the days you already accrued. If you do nothing, those accrued days get counted twice.
There are two clean ways to handle this.
Option 1: The reversing entry. On the first day of the new month, post an entry that is the exact opposite of the accrual:
| Account | Debit | Credit |
|---|---|---|
| Accrued Payroll Liabilities | $3,322 | |
| Wages and Salaries Expense | $2,900 | |
| Payroll Tax Expense | $222 | |
| PTO Expense | $200 |
This wipes out the liability and creates a small negative balance in the expense accounts. When the real payroll posts a few days later at full value, the negative and the full amount net out to exactly the portion that truly belongs to the new month. You never have to think about which days were pre-accrued.
Reversing entries are the standard approach because they are foolproof: the system does the math for you, and there is no risk of double-counting. In fact, many accountants consider an accrual not fully complete until it has a matching reversal.
Option 2: The non-reversing adjustment. Alternatively, you can leave the accrual in place and, when payroll runs, split the paycheck manually — debiting Accrued Payroll Liabilities for the pre-accrued portion and Wages Expense for the rest. This works, but it requires you to remember the split every period and calculate it correctly. For most small businesses, reversing entries are simpler and safer.
Whichever you choose, the principle is the same: each dollar of payroll expense gets counted exactly once, in exactly the right month.
Common Mistakes to Avoid
Skipping the accrual entirely. The most common error is simply not doing it. If your pay periods align perfectly with month-ends every single month, you might get away with it — but they almost never do.
Forgetting the employer tax share. Accrued payroll is not just the wages employees see. The employer's matching FICA and unemployment taxes are a real expense that belongs in the same period.
Ignoring wage base limits. Applying a flat 7.65% employer tax rate late in the year overstates the accrual for high earners who have already passed the Social Security wage base. Check year-to-date figures.
Leaving out bonuses and commissions. If the employee earned it in the period, it accrues in the period — even if the payout is months away.
Accruing but never reversing. An accrual without a plan for the following month leads straight to double-counted expenses. Decide upfront whether you are reversing or adjusting, and be consistent.
Treating PTO as an afterthought. Unused PTO is a liability that grows quietly. If you never accrue it, the day a long-tenured employee cashes out a large balance, your books take a sudden, unexplained hit.
Keep Your Finances Organized from Day One
Accrued payroll is a small entry with an outsized effect on whether your monthly numbers tell the truth. Getting it right depends on clear, traceable records — knowing exactly which days were accrued, what rate applied, and when the reversal posts. Beancount.io provides plain-text accounting that makes every journal entry transparent, version-controlled, and easy to audit — no black boxes hiding how a number was built. Get started for free and see why developers and finance professionals are switching to plain-text accounting. You can also explore the documentation to learn how recurring entries like payroll accruals fit into a plain-text ledger.
Sources: ADP — Accrued Payroll, QuickBooks — What is accrued payroll?, Eddy — Payroll Accrual: 3 Steps to Calculate, PLANERGY — Reversing Entries in Accounting.