Temp wages earned in one month and paid in the next
How a staffing agency shows temp wages for days worked at the end of a month when the weekly pay run that pays them falls in the next month.
By Achekam · · 5 min read · For Recruitment businesses in South Africa, Nigeria, Kenya
An agency pays its temps weekly, every Friday, for the week that ended the Sunday before. The month ends on a Wednesday. The temps worked Monday, Tuesday and Wednesday of that week in this month, but they will be paid for those days on a Friday that falls in next month.
Without an adjustment, those three days of wages simply vanish from this month's accounts and turn up in next month's. Meanwhile the agency may already have billed its clients for the same days. This month shows the income without the cost, and next month shows the cost without the income. Gross margin swings up and down for no reason except where the calendar falls.
How a weekly pay cycle misplaces wages
Weekly pay weeks and calendar months do not line up. In most months, the last pay week is split: some days fall before month end, some after. The pay run that covers that week happens after the month has closed.
The size of the distortion depends on how many days of the split week fall in the old month, and how many temps are working. For an agency with a large temp payroll, a few days of wages is a significant amount, and the error moves around from month to month as the calendar shifts.
The rule: recognise wages when the work is done
IAS 19 deals with employee benefits. It says short-term employee benefits, those to be settled within twelve months other than termination benefits, are recognised when the employee has rendered the service, and measured at the undiscounted amount expected to be paid for that service. The IFRS Foundation summarises the standard on its IAS 19 page.
Temp wages are short-term benefits. The service is rendered on the days the temp works. So the cost belongs in the month those days fall in, regardless of the date of the pay run.
AccountingTools explains the general tool for this: an accrual is a journal entry that recognises revenues earned or expenses consumed for which the related cash has not yet been received or paid. Accruals ensure revenues and expenses are recognised in the correct reporting period, whatever the timing of the cash.
Working out what is owed at month end
The accrual should be based on hours actually worked, not on a guess. For the days between the start of the last split pay week and month end:
- Take the approved timesheets for those days, for every temp who worked them.
- Apply each temp's pay rate, including overtime or shift rates where they apply.
- Add the employer's contributions on those wages: the employer-side amounts your payroll normally pays on top of gross pay in your country.
- Total it by client or branch if you report margin that way.
Where timesheets for the last days are not yet approved at month end, use the hours submitted and adjust when they are approved. If you need to estimate, base it on the same days in the previous week, and note that it is an estimate.
The accrual journal, and reversing it
In Achekam, a business can post manual journals. A journal that does not balance, or is dated in a closed month, is refused, and a posted journal is corrected only by a reversal.
At month end, post the accrual:
- Debit wages expense (and employer contributions expense) for the amount worked but unpaid.
- Credit an accrued wages liability.
Then, on the first day of the next month, post the reverse of the same journal. When the pay run for the split week is approved and posted in the new month, it carries the full week's wages; the reversal takes out the portion already recognised in the old month. The net result is that each month carries the wages for the days worked in it.
Make the reversal part of the month-end checklist, with an owner. A forgotten reversal counts the same wages twice.
How the approved pay run posts in Achekam
Pay runs in Achekam can be monthly, fortnightly or weekly, so an agency can pay temps weekly and its own permanent staff monthly. Each period's overtime, commission, allowances, reimbursements and unpaid leave are entered as variable inputs.
An approved pay run is posted to the business's own ledger as a wages journal, with amounts owed to the tax authority and funds shown as liabilities. Check the date the wages journal for the split week carries. If it falls in the new month, the whole week's wages arrive there, which is exactly why the accrual and its reversal are needed.
The management accounts then show the corrected picture: an income statement for a chosen period beside the period before, and a balance sheet at period end, both built from the business's own journals and exportable as PDF or CSV. The accrued wages liability appears on the balance sheet at month end and disappears once the reversal and the pay run have posted.
Matching the cost with the hours billed
AccountingTools explains that accruals support the matching principle, under which expenses are recognised in the same period as the revenues they help generate.
For an agency, that means the accrual for temp wages and the billing for the same days should move together. If the agency invoices clients weekly in arrears too, the hours worked but not yet billed at month end need the same treatment on the income side, so that this month shows both the income and the cost of those days. Check the two accruals against each other: the hours in the wages accrual and the hours in the unbilled income accrual should match, client by client, apart from any non-chargeable time.
A worked example in words. The month ends midweek. The payroll clerk totals approved hours for the first three days of the week, applies each temp's rate and the employer contributions, and posts the accrued wages. The billing clerk totals the same hours at each client's charge-out rate and posts the unbilled income. The margin for the month now reflects the work done in it.
Put it on the month-end list
Add the wages accrual, the matching income accrual and both reversals to your month-end checklist, with named owners. For the income side of the same days, read unbilled temp hours at month end, and for agencies running two pay cycles, weekly temps and monthly staff.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
