Question

What is the purpose of payroll-related accrual and reversal entries on financial statements?

Answer 1

Answer: It is an expense which is generally not paid in the month of accrual but in the following month.

For Example- Employee who has worked in the month of June, being paid in the month of July for the work done by him in the month of June.

According to accrual concept, one has to record expense on accrued basis and not on payment basis. Payroll expense being for the month of March will be paid in the following month pertaining to next financial year. So, to compute actual profit or loss and tax liability, this expense is recorded at the end of each accounting period on accrual basis and then this entry is then reversed in the following accounting period, so that the initial recordation entry can take its place.

For Example; Suppose the payroll expense amounted per month is Rs. 20,000. Employees have worked for 12 months, but amount paid during the year just for 11 months. So, for the month of March, expense is recorded on accrual basis. Amd in the following month pertaining to next year, the entry will be reversed and payment entry will be recorded.