Accounting for Accruals

2.2.4 Recording salary payable transaction analysis

4) Liabilities and corresponding expenses can also be recorded before cash is paid (the same accrual accounting). Mr. Candely would recognize salary obligations and expenses in the amount of $1,500 in 20X6.

Salary payable represents amounts of future cash payments to employees for work that has already been performed.

Such accruals as salary payable are also called accrued expenses.

Accrued expenses are expenses incurred but not yet paid in cash. When recorded, such expenses are usually shown in the liabilities section of the balance sheet.

The transaction to record the accrued salary is shown as follows:

Illustration 2-5: Effect of recognizing liability and expense

	Assets			=	Liabilities	+	Equity
	Cash	+	Accounts Receivable	=	Salaries Payable	+	Contributed Capital	+	Retained Earnings
Beginning Balances	$5,500	+	$800	=	$ 0	+	$3,500	+	$2,800
Recognizing Liability / Expense					+1,500				(1,500)
Ending Balances	$5,500	+	$800	=	$1,500	+	$3,500	+	$1,300

Liabilities increase (Salaries Payable) and the equity decreases (Retained Earnings) by $1,500. However, total claims remain unchanged. The expense recognition is a claim exchange transaction.

Claim exchange transactions occur when only claim accounts are engaged and impacted. For example, recording salaries payable is an example of a claim exchange transaction.

2.2.5 Cash payment on salary payable transaction analysis

5) Cash payment to creditors (an employee, in our example) is an asset use transaction. When the employee is paid the salary, both Cash (asset account) and Salaries Payable (liability account) decrease by $1,000:

Illustration 2-6: Effect of cash payment

	Assets			=	Liabilities	+	Equity
	Cash	+	Accounts Receivable	=	Salaries Payable	+	Contributed Capital	+	Retained Earnings
Beginning Balances	$5,500	+	$800	=	$1,500	+	$3,500	+	$1,300
Cash Payment	(1,000)				(1,000)
Ending Balances	$4,500	+	$800	=	$500	+	$3,500	+	$1,300

Again, notice that the cash payment does not cause expense recognition. The expense was already recognized in full when we recorded the salary liability. Doubling of the expenses would take place if we recorded the expense again.

Finally, the summary of all transactions is presented below. If you would like to check whether your understanding of these transactions is correct, try to perform their reverse identification. That means you look at the accounts and try to identify the type / nature of the transaction without looking at its description.

Illustration 2-7: Summary of transactions for Candely Services for 20X6

	Assets			=	Liabilities	+	Equity
	Cash	+	Accounts Receivable	=	Salaries Payable	+	Contributed Capital	+	Retained Earnings
Beginning Balances	$ 0		$ 0	=	$ 0		$ 0		$ 0
1) Capital Acquisition	+ 3,500						+ 3,500
2) Recognizing Assets / Revenue			+2,800						+2,800
3) Cash Collection	+ 2,000		(2,000)
4) Recognizing Liability / Expense					+1,500				(1,500)
5) Cash Payment	(1,000)				(1,000)
Ending Balances	$4,500	+	$800	=	$500	+	$3,500	+	$1,300

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