There has often been a confusion among students/learners when the term “Wages and Salaries” and “Salaries and Wages” appears while solving a question in the Topic – Final Accounts. Though prima facia both the terms appears to be same as in both the cases one word appears first and another afterwards, actually there is a difference in the accounting treatment of both the terms.
Before we differentiate these two terms and reach out at the accounting treatment of these terms, we need to understand the meaning of these terms “Wages” and “Salaries” with the help of following points –
- Wages are the remuneration paid to workers for the work performed by them and are usually paid either on hourly or daily basis. In some instances, wages are also paid on the basis of output rendered by the worker.
- Salaries are the remuneration paid to employees for the services rendered by them to the Entity.
- Often there is a perception that Wages are paid for Blue Collar Jobs and Salaries are paid for White Collar Jobs but in practice it is not the truth. Wages are the remuneration paid for services rendered or work performed to a person who is working in independent capacity whereas Salaries are paid to people with whom a contract for employment exists, whether oral or written.
- So in order to constitute any payment or remuneration as Salary, the relationship between the payer and the payee should be that of Employer and Employee. Else the remuneration will have a different name, Wages, Fees, Commission and so on depending upon case and the context.
- Now we come to the accounting treatment of the term Wages and that of the term Salaries.
- Wages are considered as Direct Expenses – expenses that are necessary to make the product ready for sale. Wages are expenses which are incurred in order to make the goods into existence or to make it ready for sale. For, eg: Manufacturing Wages, wages paid for finishing or packing of goods without which they could not be made available for sale. They are part of Cost of Goods Sold and hence charged to Trading Account in order to determine the Gross Profit of the business.
- Now, the expenses incurred for making the product ready for sale should not be confused with the Selling and Distribution Expenses which are incurred to facilitate the sale of goods ready for sale. Example of Selling Expenses are Advertisement Expenses, Discount Allowed, and Carriage Outwards etc. These are Indirect Costs associated with running the business and are therefore charged to Profit and Loss Account in order to determine the Net Profit of the business.
- Salaries are also considered as Indirect Expenses as they are paid generally for Office and Administrative work in the business and not directly associated with the production of goods or to make them ready for sale. But if Salaries are paid for manufacturing of goods or transformation of raw materials into finished goods, it should be considered as direct expenses are charged to Trading Account of the business. Similarly if the wages are paid for some activity not associated with the production of goods or to make them ready for sale, they should be considered as Indirect Expenses and should be charged to Profit and Loss Account of the business.”
Now what if in a particular question you find term “Wages and Salaries” or “Salaries and Wages”? What will be the accounting treatment in both of these cases?
- If in the question the term is Wages and Salaries and a single figure for both the terms is given, it means that it is a Direct Expense and it should be charged to Trading Account and in case of the term Salaries and Wages with single figure given for both the terms, it should be considered that they are incurred as Indirect Expense and should be charged to Profit and Loss Account.