What is the purpose of the payroll accrual entry?

• A. To recognize expenses in the period in which they were incurred
• B. To reverse an entry made in error
• C. To recognize expenses in the period in which they were paid
• D. To reverse an entry from a previous period

Answer: (A)

Payroll accruals are used to apply the matching principle in accrual accounting by recording labor costs in the period the employees earned the wages, even if the pay hasn’t been issued yet. This keeps expenses tied to the service period and reflects the actual obligation on the books. For example, at period end, employees may have earned wages that won’t be paid until the next period; you would debit payroll expense and credit wages payable. When the pay occurs, you would then debit wages payable and credit cash, removing the liability.

This isn’t about reversing entries or about recognizing expenses only when cash is paid; those are separate actions. The main purpose is to recognize the expense in the period it was incurred.