#Accrual entry how to
#Accrual entry professional

These amounts are considered an acknowledgment of the necessary expense to be recognized as a result, the amount should materially estimate the actual costs to be incurred. When dealing with unpaid wages to be accrued in your books and financial statements, many companies choose to approximate the amount based on hours worked or percentage of salaries earned for a specific period. Now, let’s jump into what we face when the books utilize the accrual basis of accounting. This entry or some derivation is what you might see on a set of books using the cash basis of accounting. As previously noted, this set of entries can take many forms, but you get the idea. 1 records the payment of the salary/wage expense and the corresponding withholding amounts, while the second part of the entry books the payment of the withholding amounts and the corresponding employer payroll taxes (FICA and Medicare). As long as the net effect on the balance sheet and income statement accounts is accurate, how you get there is not necessarily the most important aspect of this lesson. Consequently, if your entries look different than those below, don’t fret. Whatever your particular circumstances may be, know that that there are a number of ways to accomplish the same end result for these entries. You may wish to consolidate or expand the line items in your accrual entries, or you may be restricted to the auspices of your chosen accounting software. Before we go into the examples, it is important to note that these illustrations represent my preference in preparing and recording accrual entries associated with payroll. For the sake of identification, I’ll call the examples used below the “Simple Accrual” and the “Complex Accrual.” We’ll take a look at both methods, and hopefully clear up any basic confusion these entries might hold.

These accrual entries can take the form of rather simplistic journal entries with corresponding reversing entries in the next period, or can be somewhat complex for those companies wanting to get very specific with their accruals.

As a result, businesses using accrual-based accounting must identify and record payroll and payroll-related costs as they are earned rather than when actually paid. The payroll issue is, in almost all cases, financially material in nature and reoccurring.

I’ve been asked to address this issue in particular, the accrual entries related to payroll and payroll-related items.

#Accrual entry how to

But, let’s face it, if you are tasked with the job of preparing an accrual-based financial statement, whether you’re an in-house accountant or an independent professional, you’d better know how to get the job done.

#Accrual entry professional

Finally, if a business owner has outsourced the preparation of financial statements and income tax returns, they want to minimize their exposure to professional fees, and the cash basis is typically more compatible with this goal than the accrual basis of accounting. Second, accrual accounting is more complex than the cash method, and most small business owners want to keep it simple. First, since most small businesses prepare their income tax returns using the cash method, preparation of the underlying financial statement under the cash method is fairly logical and precludes a necessary method conversion. As noted in previous articles, small businesses generally gravitate toward the cash (or income tax) basis of accounting when preparing their financial statements for a variety of reasons.