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Okay, we're gonna do another adjusting entry example, and this time we're gonna use wages payable as our example account. And this is one you are definitely gonna see on your test, so you better be ready for it. We pay employee wages of $1,000 a week for five workdays per week, Monday through Friday. December 31 is a Wednesday. Payday is a Friday. Record the adjusting entry for December 31. So before we even dive into the problem, what's going on here? So this problem is saying we've got five workdays. We'll call this Monday, Tuesday, so work all of Monday, work all of Tuesday, work all of Wednesday, all of Thursday, and all of Friday.
Okay. So we've got one, two, three, four, five workdays, just like the problem said. Now, how much are we paying these employees per day? So if we pay $1,000 a week, we've got five workdays, we're paying $200 per day. So let's go ahead and say $200 per day.
Remembering, of course, that we don't actually pay until Friday. So that's all fine and good, but what happens when the end of the year falls in the middle of a week? So we're saying that December 31 is a Wednesday, so the end of the year is at 11:59:59 on Wednesday night, right? So we're saying this is one year, and this is one year. Well, here's the problem. The employees have earned $600 in Year 1, but we don't actually pay it until Year 2 because we don't pay until Friday. Friday is our payday. So what do we do with that? And that's where this adjusting entry comes in.
Remember I said adjusting entries are mostly for when things change or for when time passes. And so here, time has passed. We have incurred $600 of wage expense, but we haven't paid it because we won't pay it until the new year. So what we end up doing is we say on 12/31, we have incurred a wage expense of $600, right? 'Cause the employees did the work, we owe them the money, and it's all... we're looking back at it. It's in the past. It's done. So that becomes an expense because we've incurred it.
But we're not gonna pay it quite yet, so we're gonna put it in this bucket called a wage payable. It's able to be paid, we're just not gonna do it quite yet. So this is the adjusting entry. This is what happens when you have a year-end that falls in the middle of the week. You have to record the expense, but you put it in this bucket of, "I'm gonna pay it soon." It's payable, but it's not paid yet. So then, I guess Thursday would be the 1st, Friday would be the 2nd. Yeah. So on January 2, what do you do then?
And you may wanna say, "Well, we reduce the payable by $600 and pay $600 cash." Well, that's close, but remember, they have now earned the whole thing, right? So you do reduce the payable, so let's take the payable down. Wage payable, 'cause we're gonna pay him. Wage payable, $600.
But we know that they've also earned the other $400, and so if they've earned it, that's an expense to us. We've incurred it. So if we were to do this entry on January 2, then we would have a wage expense of $400, and then our cash, we would take down by the full $1,000. Because this is what they earned last year, this is what they earned this year, and this is what we're paying them. We're paying them $1,000 cash, $200 times two days for this year, $200 times three days for last year. And the reason we have to do this is 'cause we have to recognize expenses in the same period that they were incurred.
These expenses were incurred in Year 1. They did the work in Year 1. These expenses were incurred in Year 2, and so we have to do this whole process of adjusting entries so that we can recognize the expense in the correct time period.