What is payroll accrual?

A payroll accrual is an accounting entry that recognizes wages and related expenses earned by employees but not yet paid at period-end. For professional service firms using accrual accounting, payroll accruals ensure labor costs match the period in which the work was performed.

Key characteristics

• Recognizes unpaid wages

• Matches expense to period

• Creates liability until paid

• Part of the month-end close

• Reversed when paid

• Includes employer taxes

Why it matters for professional service firms

Without payroll accruals, labor costs are recorded in the wrong period based on the pay date rather than the work date. Accruals ensure accurate monthly financials. Professional service firms should accrue payroll at month-end for days worked but unpaid.

Real-world example

Sarah's pay period ended January 2, but the month-end was December 31. Payroll accrual: 3 days of December wages ($28,000) plus employer taxes ($2,500) accrued at December 31. Journal entry: debit payroll expense $30,500, credit accrued payroll liability $30,500. December financials reflected December labor costs. Reversed January 2 when paid.