Many small businesses pay salaried staff on the last working day of the month and never need a payroll accrual. The problem appears when pay is earned in one month and paid in the next: hourly staff paid on the 7th for last month’s hours, overtime and shift premiums paid a month in arrears, a weekly payroll whose last week straddles the month end, or a bonus earned now and paid in spring. Without a payroll accrual, October’s management accounts show September’s wages, and any month with five weekly pay days looks expensive for no reason.
Which pay needs accruing
Ask one question for each element of pay: has the employee already done the work that earns it, and has it been paid by the last day of the month? If the work is done and the money has not gone out, accrue it.
| Situation | Accrue at month end? |
|---|---|
| Salary paid on the 28th for the whole calendar month | No, the cost already sits in the right month |
| Hourly staff paid on the 7th for the previous month | Yes, the full month’s gross pay |
| Weekly payroll, Friday pay day, month ends on a Wednesday | Yes, Monday to Wednesday of the part week |
| Overtime worked this month, paid with next month’s salary | Yes |
| Annual bonus the business is committed to paying | Yes, the share earned so far |
| Discretionary bonus nobody has promised | No, until there is an obligation |
What goes into the figure
Accrue the full employer cost, not just the gross pay:
- Gross pay for the hours or days worked, from timesheets or the rota.
- Employer’s Class 1 National Insurance on that pay, at the rate and above the threshold HMRC sets for the tax year. HMRC publishes the current figures in its yearly rates and thresholds for employers guidance, or you can simply run the payroll software’s preview for the period.
- Employer pension contributions under your scheme’s rules.
Do not try to accrue PAYE income tax, employee NIC or student loan deductions separately. They come out of the gross pay and only matter once the real payroll journal splits gross pay into net wages and amounts due to HMRC. The accrual is a single credit to an accruals account.
Worked example: October hours paid on 7 November
A café pays its hourly staff on the 7th of each month for the previous month. At 31 October the timesheets show £18,400 of gross pay for October. The payroll software’s draft run estimates £1,850 of employer NIC, and the pension scheme’s employer rate gives £410. The figures are illustrative.
Journal dated 31 October, set to reverse on 1 November:
| Account | Debit | Credit |
|---|---|---|
| Wages and salaries | £18,400 | |
| Employer’s NIC | £1,850 | |
| Employer pension costs | £410 | |
| Accrued wages (accruals) | £20,660 |
On 1 November the reversal posts the mirror image, leaving a credit of £20,660 in November’s wage costs. On 7 November the real payroll journal for the October run posts the actual costs as debits, say £20,705. November’s P&L is left with only the £45 difference, and November’s own hours are accrued at 30 November in the same way. The balance sheet at 31 October shows the £20,660 under accruals and deferred income within creditors falling due within one year.
If you have not used auto-reversing journals before, read reversing journals after month end first; a reversal that fails to run doubles the wage cost of the following month.
Bonuses and commission
A bonus is accrued when the business has a legal or constructive obligation to pay it: a contract term, a written scheme, or an established practice that staff can reasonably rely on. Accrue the portion earned to date each month, including the employer NIC that will be due when it is paid, rather than taking the whole cost in the month it is paid. The bonus and commission accruals account page covers sub-accounts and review.
For a company’s year end there is a tax point to remember: an accrued bonus is only deductible for corporation tax in that accounting period if it is paid within nine months of the period end. If it is paid later, the deduction moves to the period in which it is paid. Keep the payment date in the year-end file.
Holiday pay is a separate accrual
Untaken holiday at the period end is also an employee cost earned but not yet paid, but it is calculated differently: days earned less days taken, per employee, at their rate of pay. It does not reverse every month; it is updated to the new balance. See holiday pay accruals in the chart of accounts for the account and the journal, and keep the two accruals in separate nominal codes so each can be reconciled on its own.
Month-end checks
- Compare the accrual to the actual run the following month. A difference of a few per cent is normal; a large one usually means missing timesheets or a rate change.
- Confirm the accrued wages account holds only the current month’s accrual after the reversal date.
- Check that the real payroll journal hits the same nominal codes as the accrual. If the accrual goes to Wages and the payroll journal to Casual labour, both lines look wrong for a month. The payroll journal entries guide shows a standard mapping.
- Keep the timesheet summary and the payroll preview with the journal as evidence.
Your accounting software should let you date the accrual, reverse it in the next period and attach the timesheet export to the journal. You can join the Nexbal beta and post the accrual journal from your payroll report there.