Wages expense is the hourly compensation cost incurred by a business for its hourly workers. This can be one of the largest expenses incurred by a business, especially in the services and production industries where there are many hourly employees.
The amount recognized as wages expense in an organization's income statement varies, depending on whether it uses the accrual basis or cash basis of accounting. Under the accrual basis, the amount of wages expense recognized is the amount earned by workers during the reporting period. Under the cash basis, the amount of wages expense recognized is the amount paid to workers during the reporting period.
Wages expense may be reported separately for numerous departments of a business, but is most commonly used in the production area, where there is the greatest concentration of employees who are paid on an hourly basis. Those wages paid in the production area may be aggregated in the income statement into the cost of goods sold line item.
Wages expense can vary considerably by period, depending on the amount of overtime paid. If there is overtime, the associated additional expense is usually included in the wages expense - overtime is not charged to a different expense account. Wages expense can also vary by period, due to differing numbers of work days in each month. Some months may have as few as 18 work days, while others have 23 work days, depending on the presence of holidays and the total number of days in the month.