Journal Entry for Unpaid Wages

Unpaid wages are the amount of wage that company owes to the employees or worker.

Wage is an hourly form of payment that company pays to the workers. A worker will be paid a wage for every hour they work. Employers often use wages as the sole compensation for workers because it eliminates the need to make complex calculations involving bonuses, profit sharing, and other benefits. This may reduce costs in the short term but is not a very good idea in the long run because it can lead to disputes over entitlement and lower morale.

The company is required to pay the worker on a weekly or monthly basis. They can not owe the employees for a long time.

At the end of accounting period, some amount of wage may not yet be paid to the employee as it is not reached the payment schedule yet. However, the company has to record it as an expense to comply with accrued basics.

The company must record wage expenses on the income statement. Another side of the transaction will impact the wage payable on the balance sheet under the liability section.

Journal Entry for Unpaid Wage

At the end of accounting period, the accountant has to prepare the financial statement. They have to include all the revenue and expenses. Wage is one of the expenses that company pays to the worker base on the number of work that workers have performed.

Even though the company has not yet made payment to workers, they have to include the unpaid balance in the income statement. This balance is the amount that company owes to the workers, they have already completed the work but have not yet received payment. The journal entry is debiting wage expense and credit wage payable.

The transaction will record the wage expense on the income statement. At the same time, it increases the balance that company owes to workers which is the current liability. The company expects to settle the liability within a short time.

When the company settles the wage to the worker, the accountant has to reverse the wage payable and record cash outflow. The journal entry is debiting wage payable and credit cash.

it will reverse the wage payable from the balance sheet as the cash decrease. If the cash paid is higher than the wage payable, they have to debit additional wage expenses during the new year.

Example

ABC is a construction company that employs many workers and is paid based on their hour’s work. The company pay the worker on a weekly basis. At the end of the year, company prepares the financial statement. The wage for worker over the last week is not yet paid. The amount is $ 5,000 which expect to settle on the first week of new year. Please prepare the journal entry for unpaid wages.

At the end of year, company has to include the wage expense even it is not yet paid. Expenses are record when they incur rather than paid. The company has to include the unpaid amount in the income statement. The journal entry is debiting wage expense of $ 5,000 and credit wage payable of $ 5,000.

Wage expense has to increase $ 5,000 on the income statement and record the lialbity on balance ehseet.

When ABC make payment in the first week of new year, they have to reverse the wage payale from the balance sheet a long side with cash. The journal entry is debiting wage payable $ 5,000 and credit cash $ 5,000.

The transaction will not impact the income statement in new year as we already include in the prior year expense. It only reverse the wage payable and cash.