What are Wages Payable? Explanation with Examples

Wages payable are wages that you have earned but haven’t received any payment yet. It is a temporary account. It is eventually closed to cash account. This payable account arises because of the accrual basis of accounting. We will explain this in detail in this article.



What are the Wages Payable?

It is a combination of two words:

  1. wages which are the compensation of hourly paid employees. Wages is a term used for short term and temporary employees.
  2. Payable which means money owed by the business to someone.

So, it is actually the compensation owed by the business to its employees.

Wages-Payable
Definition of Wages Payable

Wages Payable Definition

Wages payable is the wages that the employees have earned but have not received the payment yet. It means they have completed their hourly duties, but the company has not paid them yet. That’s why the company record it as a liability in its accounts.

Wages Payable Journal Entry

The following journal entry is recorded:



Wages Payable Adjusting entry

When payment is made, the following adjusting entry is recorded:

Is Wages Payable a Debit or Credit?

Of course, it is a credit. It’s recorded as a liability in the books of accounts. As evident from the journal entry, we debit the wages expense account and credit the payable account.

Example

Suppose there are 20 employees working with NHIRKM Engineers that are paid the next day. Each employee is getting $10 per hour. Its 31 December of 2020 and NHIRKM Engineers is closing its books, how should they record the wages of those 20 employees? (as they are going to pay them the next day i.e. 1 Jan 2021)

Under the accrual basis of accounting, the expense should be recorded in the period it is incurred irrespective of whether it is paid in that period or not. As 20 employees performed their duties on 31 December, so they should record it as an expense in 2020. They should record the following journal entry on 31 December:

On next day i.e. 1st June 2021, when they pay the employees (cash), they should record the following journal entry:

Is wages payable a Current Liability?

Yes, it is a current liability. Current liabilities are liabilities for a short period, usually less than 12 months. As we stated in the introduction, it’s a temporary account. We record these payables in our balance sheet as a current liability. After we have made the payment, we reverse the payable account by debiting it and crediting cash.

Also, Read Audit Assertions.



Where are wages payable in the balance sheet?

The balance sheet shows the financial position of a business. It shows assets, liabilities, and capital of the business. Wages-payable, as you know, is wages owed by the business to its temporary employees. That’s why it is showed as a liability in the balance sheet.

Wages Vs Wages Payable?

  1. Wages are the hourly compensation earned by temporary employees whilst wages payable is the number of wages earned by employees but not yet received by them.
  2. Wages relate to profit and loss statement whilst the other one relates to the balance sheet.
  3. Wages are an expense whilst wages payable is a liability.
Wages-vs-Wages-Payable
Wages Versus Wages Payable

What type of account Wages payable is?

  • It is a temporary account.
  • It is credit in nature.
  • It is increased when credit is made whilst when we pay it, it is debited and is decreased.

Wages payable T account?

The following T account is used for wages which are payable:

Wages-Payable-T-account
T account of Wages Payable

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