Accrued payroll: What is it, and how do you track it?

For small businesses, managing finances with precision is key to ensuring smooth operations, regulatory compliance, and a strong cash flow.

Among these financial responsibilities, accrued payroll (also known as payroll accruals) plays an important part in keeping your employee payments and budgets aligned.

However, payroll accruals can be challenging to understand and track effectively without the right tools in place. In this guide, we’ll walk through the concept of accrued payroll, how it works in practice, and how the right software solution can help streamline the entire process.

What is accrued payroll?

Accrued payroll is the wages, salaries, and employee benefits that your business owes but has not yet paid. Essentially, it's an accounting method that records employee expenses as they are incurred — even if payday hasn't yet arrived.

Why is accrued payroll important?

For small businesses, accrued payroll isn’t just about recording liabilities; it’s about transparency and financial accuracy. Accruing payroll expenses on time provides an accurate picture of current costs, helping you track payroll expenses as part of your company’s cash flow.

This ensures you’re not blindsided by payroll expenses, even if payday falls after the current accounting period ends. This transparency also supports compliance with accounting standards, which require businesses to report liabilities accurately.

When and why to accrue payroll costs

Payroll accruals aren’t limited to basic wages; they encompass all earned but unpaid employee expenses. As a result, common payroll accruals can include:

1. Regular wages and overtime: The amount employees earn during each pay period, including any overtime.

2. Bonuses and commissions: Additional amounts that are typically paid out at the end of a period or upon meeting specific targets.

3. Paid time off (PTO) and vacation accruals: The cost of paid time off that employees have earned but haven’t yet taken.

4. Benefits and withholdings: Any retirement benefits, health insurance, or tax withholdings that accrue alongside wages.

In a small business setting, each of these accruals adds up, impacting payroll costs more than anticipated if left untracked. By accurately accruing these payroll costs, you can prevent budget surprises and maintain smoother financial operations.

Payroll accrual example

To better understand payroll accruals, consider the following example:

• Scenario: Your business has a biweekly payroll schedule. The pay period ends on Friday, September 15, but employees aren’t paid until Tuesday, September 19.

• Accrual entry: On September 15, you accrue payroll expenses to reflect the total wages owed for this pay period, even though payday hasn’t arrived. This might include base wages, taxes, and any PTO accrued.

By entering these accrued expenses as a liability in your books, you ensure that financial statements accurately capture your payroll obligations. When payday arrives, you can update the liability by converting it into an expense, reflecting payment completion.

What are the benefits of managing payroll accrual accurately?

Understanding and managing your accrued payroll leads to stronger budgeting, a more predictable cash flow, and — importantly — happier employees. Key benefits include:

1. Budgeting precision. By tracking payroll expenses as they occur, you get a much clearer picture of where your money is going each month.

2. Enhanced cash flow control. By recording payroll accruals, you anticipate costs and avoid surprise expenses that could disrupt your cash flow. This is especially important for growth startups.

3. Increased employee satisfaction. Regular and accurate payroll management fosters trust and ensures your employees are paid on time without hiccups. This helps you build a more productive relationship with your people.

4. Accounting compliance: In the US, small businesses need to meet Generally Accepted Accounting Principles (GAAP) to ensure accurate, legal financial reporting. Payroll accrual management aligns with these standards.

For small business owners, the time saved by automating and accurately managing payroll accruals can be directed back into growth efforts and business development.

Accrued payroll and cash flow management

As mentioned, cash flow is a significant challenge for many small businesses and growth startups. Payroll is often one of the largest expenses for any company, and overlooking payroll accruals can make cash flow management difficult. Regularly accruing payroll expenses allows you to prepare for upcoming pay cycles, making it easier to allocate funds for payroll without disrupting other expenses.

Accurate payroll accruals also help prevent cash flow “bottlenecks,” allowing small businesses to pay employees on time without affecting other financial commitments. This ensures the business runs smoothly and can invest funds where they’re needed most.

How does payroll software simplify payroll accrual tracking?

While accrued payroll is essential, managing it manually can be time-consuming and prone to error. For small businesses, investing in payroll software is an efficient way to automate and streamline the process.

With Remote Payroll, for instance, you benefit from:

• Automated payroll accrual tracking, removing the need for manual calculations and minimizing errors.

• Real-time financial reporting, enabling you to monitor payroll costs accurately and adjust as needed.

• Compliance and regulatory adherence, with our built-in Remote Watchtower software keeping you up to date and fully in the loop.

• Time-saving efficiency, enabling you and your team to focus on other critical tasks.

Whether you’re managing a handful of employees or growing your team, payroll software simplifies accrued payroll tracking, helping you maintain accuracy and compliance with ease.

To learn more and to see how Remote Payroll can make your entire payroll process quick and painless, speak to one of our friendly experts today.

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