Payroll is one of the largest and most recurring expense heads, and salary accruals are among the most frequently examined year-end adjustments.Any weakness here immediately raises questions on expense accuracy, statutory compliance, and internal controls.
1. Introduction — Why Payroll Accruals Are High-Risk
Salary and payroll-related costs impact:
Profit & Loss account
Statutory liabilities (PF, ESIC, PT, TDS)
Cash flow timing
Employee trust and compliance posture
Incorrect payroll accruals overstate or understate profit and invite audit and tax scrutiny.
2. Objective
To ensure that at year-end:
Salary expenses are recognised in the correct period
All payroll components are fully accrued
Statutory deductions are properly provided
Accrual workings are documented and reversible
Audit and assessment risks are minimised
3. What Are Payroll & Salary Accruals?
Payroll accruals represent:
Salary for March payable in April
Incentives / bonuses earned but unpaid
Leave encashment (where applicable)
Employer contributions to PF/ESIC
Performance-linked pay accrued
Accruals ensure matching of employee cost with the period of service.
4. CABTA Framework — “The 6-Step Payroll Accrual Working Model”
Step 1 — Identify Payroll Period Covered
Confirm:
Payroll month end date
Salary payable cycle
Components payable post year-end
Accrual should cover only services rendered till 31 March.
Step 2 — Compile Salary Component Break-Up
Include:
Basic + allowances
Overtime / incentives
Bonus (earned portion)
Employer PF / ESIC
Professional tax
Missing any component understates liabilities and expenses.
Step 3 — Compute Accrued Payroll Expense
Use:
Payroll register
HR policies
Attendance / performance data
Prepare employee-wise or summary-level working.
Step 4 — Pass Salary Accrual Entry
Salary Expense A/c Dr
To Salary Payable A/c
Statutory components should be accrued separately where required.
Step 5 — Statutory Deductions & Compliance Review
Verify:
PF / ESIC accrual and payable
PT accrual
TDS applicability and timing
Accrued salary may trigger TDS obligation.
Salary expense without corresponding statutory accruals is a major audit red flag.
Step 6 — Reversal & Settlement Tracking
In the next year:
Reverse accrual
Match against actual payroll payment
Clear differences
Failure to reverse leads to duplication.
5. Common Payroll Accrual Mistakes
Accruing only net salary
Ignoring employer contributions
Accruing bonus without basis
No reconciliation with payroll register
No reversal control
These mistakes lead to audit adjustments and statutory mismatches.
6. Audit Perspective
Auditors verify:
Payroll accrual workings
Consistency with payroll records
Statutory deduction linkage
Subsequent payment evidence
Payroll accruals are a key audit testing area.
7. Case Example — Defending Salary Accrual
Issue:AO proposed disallowance of ₹24 lakh salary accrual.
CABTA Action:
Produced payroll register
HR policy and computation
Payment and reversal evidence
Outcome:
Accrual accepted
No disallowance
8. Tools & Templates (Application Layer)
Payroll Accrual Working Sheet
Salary Accrual Register
Reversal & Settlement Tracker
Statutory Accrual Checklist
9. CABTA Insight
“Payroll accruals must mirror payroll reality — anything else is indefensible.”