Expert: Arthur Naman - 5/7/2009

Question
When the payroll period ends on the 28th of the month and the payroll check date is on following 5th of the next month, in which month is the payroll recorded?

Answer
First question, is the accounting on the accrual basis or cash basis. Cash basis, of course, is the simplest.

Under cash basis entries are recorded with the cash is received or paid out. Thus the payroll would be recorded on the 5th of the next month. Payroll tax returns are on the cash basis so the monthly accounting agrees with the payroll tax returns.

Under accrual accounting, income and expenses are recorded when incurred even if they are paid at a later date. Thus the payroll would be recorded as an expense on the 28th of the month. There would be an accrued expense as a result. Then the following month when the payroll is paid, there would be an offset to the accrued expense account:

In month one:
Wages expense                   debit
Deferred compensation                   credit

In the following month:
Deferred compensation            debit
Cash                                    credit

BTW, all this ignores payroll taxes which would need to be treated similarly.  Also, payroll tax returns are *ALWAYS* on the cash basis. So, the entries would need to be recornciled with the quarterly and annual tax returns.