Are Wages Accounts Payable?
Whenever you operate an enterprise, it is necessary to manage the cash you receive and the cash you spend. One of that is is the identification of a liability that the business has to other parties, or the accounts payable. This brings us to the next question, do wages that a business pays to the employees fall under accounts payable? Ok, let’s look at the two terms more closely.
What are Accounts Payable?
Accounts payable is debt due to the suppliers, creditors, or other vendors in the course of business. Common accounts payable expenses include:
- Opening stocks of raw materials and consumables that have been bought on credit
- Utility bills
- Leases of equipment or other forms of property
- Accounting, legal, etc.
- Reimbursements for traveling and other expenses are some of the rewards owed to employees.
In general, accounts payable refers to all the short-term sources of funds and obligations that the business entity needs to pay in the short term. It is the amount of cash that suppliers and vendors expect in return for the merchandise and services they sell to the company. The business documents the IOUs in the accounts payable sub-ledger.
Key Features of Accounts Payable:
- These are closed for a short period normally a year or within a month.
- They are due to third parties not related to the central business activities of the organization.
- They are based on the fact that certain expenditures are required in given intervals of time and are directly associated with the operations of the business.
This raises the question of whether employee wages are regarded as accounts payable.
Although employees offer permanent services to a business, the wages due to them are not categorized as accounts payable assets. Wages and compensation that have been paid to the employees; salaries, wages, and other hourly rates are not owed to any external creditors or suppliers. This group of stakeholders is essential to the running of the company as they are its employees.
However, wages are categorized in the accrued liabilities. This represents a cost that has been accrued by the business but has not made any cash payment regarding that cost. Common examples include:
- Wages and salaries of employees and other salesmen commissions.
- Payroll taxes
- Accrual of paid time off
- Benefits contributions
- Bonuses
While AP is adjusted for using the accounts payable concept, wages are adjusted for using the accrued payroll concept. They represent accruals for the employee benefits that the firm has incurred but has not yet paid employees. While AP is a liability owed to third parties, payroll refers to the liability that ends up being paid to internal staff members of the business.
They believe that since wages are payable obligations, they should be classified as accounts payable.
Wages don't meet the definition of accounts payable for a few important reasons:
Employees are internal stakeholders on the other hand accounts payable means money which is owed to outsiders. Employees work in and execute activities within the strategic business.
No direct operating expenses – Payroll, while crucial as it is ensures that the company functions, and does not in like manner have a direct relationship to the operating expenses such as inventory or supplies.
Voucher and Payroll – These two aspects of managing a company’s finances are treated differently: Payroll and labor costs are processed as separate accounts payable to the vendors. These are recognized both under accrued expenses on the balance sheet and as a part of selling, general, and administrative expenses on the income statement.
Lack of external overdraft – Creditors and suppliers may approach a company with an invoice that has not been paid. This means that employees cannot lay a claim to assets if their wages are left unpaid.
Finally, wages are an example of an internal accrued liability, accounts payable on the other hand are short-term liabilities to people outside the business. There is a distinction made even on the compensation of employees about accounting and financial reporting.
Wages and Accounts Payable are two accounts that play a significant role in the accounting process of businesses.
To summarize, here is how wages and accounts payable are treated:
Wages:
- Recognized by way of accrued liabilities on the balance sheet
- Considered as a part of SGA in the payroll line item in the income statement.
- Pay out money to employees from the cash available within the company
Accounts Payable:
- They are reported in the balance sheet, under the current liabilities section, as short-term debt.
- This account represents the expenditures incurred for supplies, inventories, services, etc.
- Payouts to external creditors & vendors
These elements must be put in the right accounting classification. They help prepare financial statements that can differentiate internal human resource costs from external operating costs.
Another thing that should be noted is that wages and accounts payable are the two related financial obligations, yet they are different in terms of classification. It is also important to note that the treatment of employee’s wages does not occur under money owed to outside suppliers and creditors. But here, one has to understand that wages are not something that can be included under the accounts payable list.