I came across the term “accrued wages” on a balance sheet, and I’m not entirely sure what it means.
Can someone explain what accrued wages represent, why they are recorded, and how they affect a company’s financial statements? Examples would be helpful!
Accrued wages on a balance sheet represent wages employees have earned but have not yet been paid by the company as of the balance sheet date. These wages are recorded under “current liabilities” because they are obligations the company needs to settle soon, typically within the next payroll cycle.
For example, if a company’s pay period ends on the 25th of the month, but the balance sheet is prepared on the 31st, the wages earned from the 26th to the 31st are considered accrued. These amounts are not yet paid but are owed to employees, so they are accounted for to provide a complete and accurate picture of the company’s financial position.
Accrued wages are essential because they align expenses with the correct reporting period, following the accrual basis of accounting. This ensures the company’s expenses reflect what has been incurred, even if cash hasn’t been disbursed yet.