Question

Mr. Mohammed has a big service company called Intaj in Ma’abila. He hired an accountant at the rate of 350 OMR per a week. The person is to start work on May 1st. Explain if the business has a liability in respect of the accountant’s salary as at May 1st

Answer 1

This is a case of Unpaid Salaries or Salaries Payable or Outstanding Salaries or Accumulated Salaries or Accrued Salaries.

Salary must be recorded as an accrued expense first as per the Accrual Concept of Accounting because most companies do not pay employees on a daily basis. Thus, each day employee’s work, they accumulate salary that must be paid to them on payday as per the negotiated terms. The accumulated salary thus becomes a liability item until the company pays it off. If a company did pay employees on a daily basis, salary would be listed as a direct expense rather than as an accrued expense.

Computation: (in OMR)

1. Salaries Expense A/C.....Dr 350*

To Salaries Payable A/C.....Cr 350**

Note —

(a) *The above Debit entry is made in the Income Statement.

(b) **Since the company (Intaj) has not yet paid those salaries on May 1st, it has a liability to his accountant the very same day he joins and must accrue them by recording an equivalent credit entry to its Salaries Payable Account, which is a current liability account on the company's balance sheet.