Accrued compensation: Overview, definition, and example
What is accrued compensation?
Accrued compensation refers to wages, salaries, bonuses, or other benefits that an employee has earned but not yet received. This typically includes unpaid salaries, unused vacation days, commissions, or bonuses that are owed but will be paid at a later date.
For example, if an employee works the last week of December but doesn’t receive their paycheck until January, their wages for that week are considered accrued compensation.
Why is accrued compensation important?
Accrued compensation is important because it ensures that employees receive all the money they have earned, even if payment is delayed. It also plays a key role in business accounting, as companies must record these unpaid wages as liabilities on their financial statements.
For businesses, tracking accrued compensation helps with cash flow management, financial reporting, and ensuring compliance with labor laws. It is especially relevant during transitions, such as employee terminations or business acquisitions, where all earned but unpaid compensation must be settled.
Understanding accrued compensation through an example
Imagine a marketing agency pays its employees on the 15th and last day of each month. An employee works from January 1 to January 15 but does not receive their paycheck until January 15. The company records these unpaid wages as accrued compensation until the payment is made.
In another example, a company offers an annual bonus based on performance. Employees earn the bonus throughout the year, but it is only paid out in March of the following year. Until it is paid, the company records the unpaid bonus as accrued compensation.
An example of an accrued compensation clause
Here’s how an accrued compensation clause might appear in an employment contract:
“The Employee shall be entitled to all accrued but unpaid compensation, including wages, bonuses, and benefits, up to the termination date, payable in accordance with the Company’s standard payroll schedule.”
Conclusion
Accrued compensation refers to wages and benefits that an employee has earned but not yet received. It ensures employees are fairly compensated for their work while helping businesses maintain accurate financial records.
For employees, understanding accrued compensation helps ensure they receive what they are owed. For businesses, properly tracking these obligations helps with financial planning and legal compliance.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.