A wage expense is the expense a company incurs due to paying employees' salaries and benefits. Generally, the term applies to non-manufacturing employees, regardless of whether they are considered hourly employees or salaried employees. Manufacturing wages are typically treated in a slightly different way, and do not factor into wage expenses. The wage expense listed by the company may not equal the actual amount of gross wages an employee receives due to benefits, and possibly other taxes.
Employees who may be part of this calculation could include secretaries, supervisors, and administrators. In some cases, supervisors who work on the line, or participate in the manufacturing process, may have all or part of their wages accounted for in another way, as value added to the product. Whether the expense for the wages are split depends on the company, and possibly on the amount of time the supervisor spends in the manufacturing of goods.
Manufacturing employees are generally not included in wage expenses simply because the cost of their labor is factored into the price of the item being made. While non-manufacturing employees may add value to the company, they do not directly add value to the product the company is manufacturing. That is why their expenses are usually accounted for in a different way.
Usually, companies calculate a wage expense in one of two different ways. The expense may be calculated at the time the expense incurs, such as when the work is done. It may also be calculated based on when the payment is made to the employee. These two types of accounting methods may have other implications as well.
The accrual accounting method is the name for the method of accounting that accounts for wages as work is being performed. It is often seen in larger companies. In this method of accounting, the wage expense is generally reported as an amount the employees earn, not as an amount paid by the company. Despite the terminology used, it is still an expense to the company.
If the calculation is done at the time wages are paid, it is known as the cash method. Generally, small businesses find this method easier and more preferable to the accrual method of accounting. The wage expense, and any other expense, is not counted until the actual check is issued, or the transfer of money takes place. The same also applies to income. Nothing is counted as income until the check is received.
