Wages payable is the liability incurred by an organization for wages earned by but not yet paid to employees. The balance in this account is typically eliminated early in the following reporting period, when wages are paid to employees. A new wages payable liability is created later in the following period, if there is a gap between the date when employees are paid and the end of the period.
For example, a company pays its hourly employees once a month, on the last business day of the month. In order to have sufficient time to process payroll, the payroll staff only pays wages based on hours recorded through the 26th day of the month, leaving as many as five days at month-end that will not be paid until the following monthly payroll. In March, this unpaid amount is $25,000. The company controller records this amount as a debit to wages expense and a credit to the wages payable liability account. The entry is set up as a reversing entry, so the accounting software automatically reverses it at the beginning of the following month. The net effect of the entry is to recognize the unpaid wages as an expense in the same period in which employees earned the wages.
When a business pays its employees salaries as of the end of a reporting period, there is no wages payable liability, since salary payments match the amount earned by employees through the payment date.
Wages payable is considered a current liability, since it is usually payable within the next 12 months. In the rare cases where the payment is due in later than 12 months, it is classified in the balance sheet as a long-term liability.
If the amount of the wages payable liability is minor, a company that only produces financial statements for internal purposes might consider not recording the liability at all during interim reporting periods. However, it may still be necessary to recognize the liability for the year-end financial statements, in order to issue more accurate audited financial statements.