A past employee is repaying wages that the employer overpaid over multiple years. The repayment is occurring over a 4 year period. I know the total amount they are going to repay. How is this situation accounted for in the general ledger? I am thinking a receivable has to be established for the total amount that will be repaid, and the payments from the past employee are applied to the receivable. What I am not sure about is what account the credit goes to when setting up the receivable. Dr Notes/Accounts Receivable $ Cr ??? $ What account would I credit?
Accounting for Wage Repayments
Answers
Credit a liability acct "Deferred Refund"
and not income because the 4 year receipt of payments is not assured, so be conservative.
Then on receipt of each payment, say $100
Dr Cash $100 and CR Salaries Expense - Contra (Refund) ($100)
And also reduce the balance sheet accts by the payment
DR Deferred Refund $100
CR Deferred Refund ($100)
Going from memory, this item is a PAST/PRIOR period item, so I believe GAAP would say that your credit entry needs to go to Retained Earnings (i.e. past period earnings), because, in effect your past period earnings were misstated by the amount of the wage error. In addition, technically, any time in the future that you are asked to provide past period financials, you are required to at least provide footnotes that explain the adjustment to said financials (i.e. the correction made for the subject wages that aren't reflected in past period financials).
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