Wages

Wages Expense with Cash

Scenario: On March 24th, you pay your employees their wages for the work they've done in March, totaling $3,000.

The blue underlined text signals...

  • We're pay[ing] your employees their wages. ➡️ We'll be working with Wages Expense.
  • We're paying right now (instead of creating a liability and paying later). ➡️ We'll be using Cash.

Wages = $3,000

TransactionDebitCredit
Wages Expense$3,000
     ??????

The reason is...

  • We have incurred an expense (+) for our employees wages.
  • This is represented through Wages Expense.
  • Which is an expense account, and therefore has a normal debit balance.
  • So, to increase it by $3,000, we'll debit it.

ACCRUAL BASIS REMINDER: These wages are for March... a.k.a. the current period, which is why we're recording them right now (through Wages Expense) to follow accrual basis accounting.

TransactionDebitCredit
Wages Expense$3,000
     Cash$3,000

The reason is...

  • We have spent (-) cash to pay these wages.
  • This is represented through Cash.
  • Which is an asset account, and therefore has a normal debit balance.
  • So, to decrease it by $3,000, we'll credit it.

Wages Expense with Wages Payable

Scenario: On March 31st, write the adjusting entry for the last 5 days of March (after March 24th) that your employees worked, but won't be paid for until April's paycheck.

You have 5 employees working 8 hours per day at a $10/hour rate.

The blue underlined text signals...

  • We're recording wages for our employees for the last 5 days of March. ➡️ We'll be working with Wages Expense.
  • Our employees won't be paid for until April's paycheck... in other words we owe them and have created a liability. ➡️ We'll be using Wages Payable.

Number of Employees = 5
Hours per Day = 8
Hourly Wage = $10

Daily Wages = Number of Employees x Hours per Day x Hourly Wage
Daily Wages = 5 x 8 x $10
Daily Wages = $400

Each day, we incur $400 worth of wages.

So, to calculate this for the last 5 days of March...

March Wages = $400 x 5 days
March Wages = $2,000

TransactionDebitCredit
Wages Expense$2,000
     ??????

The reason is...

  • We have incurred an expense (+) for our employees wages these last 5 days of March.
  • This is represented through Wages Expense.
  • Which is an expense account, and therefore has a normal debit balance.
  • So, to increase it by $2,000, we'll debit it.

ACCRUAL BASIS REMINDER: Even though these wages won't be paid until April's paycheck... they occurred in the current period (March), therefore we must record them right now through Wages Expense to follow accrual basis accounting!

TransactionDebitCredit
Wages Expense$2,000
     Wages Payable$2,000

The reason is...

  • We now owe (+) our employees the wages for the last 5 days of March and are liable to pay them.
  • This is represented through Wages Payable.
  • Which is a liability account, and therefore has a normal credit balance.
  • So, to increase it by $2,000, we'll credit it.

Paying off Wages Payable

Scenario: On April 2nd, you pay your employees their next paycheck. This includes 2 days of work in April and the 5 days at the end of March.

The blue underlined text signals...

  • We're paying wages for our employees 2 days of work in April. ➡️ We'll be working with Wages Expense.
  • It also includes the 5 days at the end of March (from last journal entry). ➡️ We'll be paying off our Wages Payable balance.
  • We're paying this paycheck in its entirety right now. ➡️ We'll be using Cash.

Number of Employees = 5
Hours per Day = 8
Hourly Wage = $10

Daily Wages = Number of Employees x Hours per Day x Hourly Wage
Daily Wages = 5 x 8 x $10
Daily Wages = $400

Each day, we incur $400 worth of wages.

So, to calculate this for the 2 days of work in April...

April Wages = $400 x 2 days
April Wages = $800

TransactionDebitCredit
Wages Expense$800
??????
     ??????

The reason is...

  • We have incurred an expense (+) for our employees wages these first 2 days of April.
  • This is represented through Wages Expense.
  • Expenses, like Wages Expense, have a normal debit balance.
  • So, to increase Wages Expense by $800, we'll debit it.

ACCRUAL BASIS REMINDER: These wages are occurring in our current period (April) at the time of writing this journal entry... so we must record them right now to follow accrual basis accounting!

The following adjusting journal entry was written on March 31st:

TransactionDebitCredit
Wages Expense$2,000
     Wages Payable$2,000

We'll be paying off this Wages Payable balance of $2,000 in this journal entry.

TransactionDebitCredit
Wages Expense$800
Wages Payable$2,000
     ??????

The reason is...

  • We are paying off (-) the amount we owed to our employees for the last 5 days in March.
  • This amount was stored in Wages Payable.
  • Which is a liability account, and therefore has a normal credit balance.
  • So, to decrease it by $2,000, we'll debit it.
TransactionDebitCredit
Wages Expense$800
Wages Payable$2,000
     Cash$2,800

The reason is...

  • We are spending (-) cash to pay our employees for the last 5 days of March ($800) and the first 2 days of April ($2,000). This sums to $800 + $2,000 = $2,800.
  • This payment is represented through Cash.
  • Which is an asset account, and therefore has a normal debit balance.
  • So, to decrease it by $2,800, we'll credit it.
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