If you run payroll every two weeks, you’ve probably noticed something strange in your monthly financial statements.
Most months have two payrolls. But a couple of months each year have three.
If you record payroll expense when the cash leaves the bank, those three-payroll months can make labor costs look really high and profitability really low.
The problem isn’t that payroll suddenly increased. It’s a timing problem.
The Fix: Accrue Payroll
Payroll accrual simply means recording payroll expense when your employees earn it, rather than when you pay it.
For example, if a payroll paid on August 7 includes wages earned during the last week of July, that portion of payroll really belongs on the July P&L.
A simple month-end payroll accrual fixes the timing.
Each month:
- Determine how much payroll has been earned but not yet paid.
- Record that amount as payroll expense and accrued payroll at month-end.
- Reverse the accrual on the first day of the following month.
- Let your regular payroll transactions post normally.
Once the process is in place, your monthly payroll expense essentially becomes:
Payroll Paid + Ending Payroll Accrual – Beginning Payroll Accrual = Payroll Expense
Why This Matters
Accruing payroll gives you a much more accurate picture of your monthly financial performance.
Instead of labor expense bouncing up and down based on the payroll calendar, you’ll see the actual cost of the labor used to operate the business during that month.
That makes it easier to:
- Compare payroll expense from month to month
- Measure labor as a percentage of sales
- Compare actual results to your budget
- Evaluate monthly profitability
- Spot real labor cost problems instead of timing differences
Best of all, this doesn’t need to be complicated. Once you establish the process, payroll accrual can become one more simple item on your monthly financial closing checklist.
I’ve put together a short explainer video below and payroll accrual template to help you get started.
Use this template each month to calculate the accrual, record the journal entry, and create more accurate monthly financial statements.
