Accounting Online Program Certification Practice Test

How is the wages expense calculated according to accounting principles?

1. Gross salary plus employer's NIC

2. Net salary minus employer's NIC

3. Cash paid to employees only

4. Gross salary only

The correct answer is: Gross salary plus employer's NIC

Wages expense represents the total cost incurred by a company for employing its workers. According to accounting principles, it is typically calculated as the gross salary of employees plus any additional costs that the employer must bear, such as the employer's National Insurance Contributions (NIC). Gross salary includes the full amount earned by employees before any deductions such as taxes or retirement contributions. Adding the employer’s NIC reflects the total liability that the employer has regarding employee compensation, as this contribution is not directly received by the employee but is nonetheless a cost of employing them. This comprehensive view ensures that the wages expense accurately reflects all financial commitments linked to employee compensation. The other options do not fully encompass the totality of the employer's responsibility associated with employee wages, either excluding certain costs or focusing solely on cash transactions, which could misrepresent the overall expense incurred by the company.