Wages Payable | Definition of Wages Payable

Date

Dear Mr. Smith,

Last week your loan request was presented to the bank’s loan committee. The outcome of the committee’s vote resulted in a non-renewal of the loan. The loan committee focused on positive and negative year to year cash flow trends. The more significant trends reviewed by the committee include:

Wages Payable:

In the accounting concept of Expense accruals, wages payable are the wages that the company’s employees but are yet to be paid. The accrued expenses must be indicated in the accounting period in which they occurred, though the payments will be paid at a later date or in the subsequent accounting period. Following the accrual concept, expenses are matched with the revenue generated within the accounting period. This ensures a balance of the cash flow. The accrued wages payable are therefore added to the company income for the accounting period which the wage accrual occurred.

The wages payable show a positive trend, with an increase from $7,862 in the year ending 2016 to $14,487 in the year ending 2017. This is an increase of $6,625. Based on the accounting concept of accrual, the wages accrued in the year 2016 were paid on in the following year. These were added to the income for the year 2016. Conversely, the wages accrued in 2017 will be paid out in the following year (2018). This will, therefore, be debited to the income for the year it has been accrued (2017). The wages payable for the period ending in December 2017 is $14,487 and is added to the total income of for that year. As earlier indicated, this represents an increase of $6,625 from the previous year (2016). The overall effect is a positive change in the cash balances for the year 2017.

The increase in the wages payable and the consequent increase in the income cash for the year 2017 is a positive trend for the company that has to be upheld to improve its financial position. The increase for the accounting period 2017 is however too low with respect to the requirement for increasing your cash balance to $70,000 from 2016 to 2017. This increase can be sustained by increasing the company workforce to enhance productivity. Consequently, the company will accrue more payable wages in that year (2018). This will be added to the income, thereby increasing the year to year cash balance for the following year. A higher cash balance will put the company in a good position for loan approval in the next year.

Given the above recommendations, the team looks forward to meeting again in after six months with the hope of approving your loan request.

Regards.