Salaries expense definition
/Salaries expense is a general ledger account in which is stored the cost of the salaries earned by employees. The expense represents the cost of non-hourly labor for a business. It is frequently subdivided into a salaries expense account for individual departments, such as:
Salaries expense - accounting department
Salaries expense - engineering department
Salaries expense - human resources department
Salaries expense - marketing department
Salaries expense - quality assurance department
Salaries expense - sales department
Hourly wages may also be included in this expense category, in which case the account is usually entitled "Salaries and Wages - [department name]" to show the more comprehensive nature of the account.
What is a Salary?
A salary is a fixed amount paid to an employee over a predetermined period of time; it is not based on the number of hours worked or number of units produced, and so should not change from period to period, unless a pay raise or reduction is implemented.
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Presentation of Salaries Expense
Any of the preceding accounts appear in the income statement, and may be aggregated into a larger cluster of expenses, such as a single line item of expenses for a department, or within the cost of goods sold line item.
Accounting for Salaries Expense
The amount recorded as a salary expense may vary depending on the basis of accounting used. If the cash basis of accounting is used, only record an expense when a salary is paid to an employee; this can be inaccurate, especially when there is evidence of a liability to the employee in a prior period. If the accrual basis of accounting is used, record an expense when the company incurs a liability for it, whether or not it is actually paid to the employee at that time.
If a salary expense is related to production activities, it may be rolled into a production overhead account and then allocated to the cost of goods sold or inventory. If a portion of overhead were to be charged to inventory, it will eventually be charged to the cost of goods sold, either when the goods are sold or declared obsolete. If salary expense is related to general, sales, or administrative activities, then it is charged to expense in the period incurred.
Impact of Matching Principle on Salaries Expense
The matching principle states that all expenses related to the generation of a revenue event should be recognized in the same period as the associated revenue. This can have an impact on the recognition of salaries expense, when salaries are incurred to provide services-based revenue to customers. For example, the client billings of a law firm should be recognized alongside the salaries expense for the attorneys who billed the hours to the client.