Accrued Vacation: Definition, Meaning, Accounting, Journal Entry, Calculation, Example

Follow us on LinkedIn

Companies pay compensation to their employees in many forms. The primary source comes from salaries and wages that the employee earns from their work. However, companies may also provide additional benefits. One includes vacation pay which involves employees getting paid for their entitled vacation time. However, accounting for these benefits may be complex.

One such complexity stems from recording accrued vacation. Before discussing its accounting treatment, it is crucial to understand what it is.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

What is Accrued Vacation?

Accrued vacation is the amount of vacation pay an employee has earned but not yet claimed or received. It comes from vacation pay that companies may offer in several forms. Usually, it differs from one company to another based on their policies. However, when accounting for these amounts, companies must calculate them for each pay period. In most cases, vacation pay is a percentage of an employee’s gross wage.

An accrued vacation represents an earned income from the employee. For the employer, it is an expense. Despite the payment not occurring at the date, accounting standards require companies to account for these amounts once they accrue. Therefore, companies must recognize the expense regardless of when the settlement occurs. Companies must also update the accrual at the end of each accounting period.

How to account for Accrued Vacation?

The accounting treatment for accrued vacation falls under the accrual concept in accounting. Under this concept, companies must record expenses when they occur rather than when settling the amount. However, it may require various calculations. Usually, companies must track the following information for each employee to record the accrued vacation.

  • The accrued vacation amount already recorded for the employee.
  • The accrued vacation pay amount earned during the period, depending on the company’s policies and employment contract.
  • The accrued vacation amount settled during the year.

Based on these amounts, the company can then calculate and record the accrued vacation balance in total.

What is the journal entry for Accrued Vacation?

There are two stages to recording the journal entry for accrued vacation. The first occurs when an employee becomes entitled to vacation pay during the period. At this point, the employee has earned the amount but has not received payment for it. The company must record it using the following journal entry.

Dr Salaries and wages expense
Cr Accrued expenses

During the period, some employees may also receive a payment for vacation pay they have earned before. The company does not have to record it since it has already been recognized. At this point, the company only accounts for the payment made and the decrease in vacation accrual. The journal entry is as follows.

Dr Accrued expenses
Cr Cash or bank

Example

A company, Red Co., pays 4% of gross wages as vacation pay. During the period, the gross wages for all employees was $20,000, bringing the vacation pay amount to $8,000. Red Co. recorded this amount as follows.

Dr Salaries and wages expense $8,000
Cr Accrued expenses $8,000

During the same period, Red Co. paid $5,000 cash to employees for vacation accruals accumulated previously. The company used the following journal entry to record the amount.

Dr Accrued expenses $5,000
Cr Cash $5,000

Conclusion

Vacation pay is the amount employees become entitled to for their vacation time. Companies record this amount when the employees earn it. At this point, the entitlement is known as accrued vacation. Companies must track various aspects to report an accurate vacation accrual on their statements. Companies account for this amount in two stages.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSCanadians showing more support for striking workers amid inflation, corporate profits
Canadians showing more support for striking workers amid inflation, corporate profits

It was Samantha Henry’s first time on strike, and one that made headlines across the country. “Some people thought the strike would only last a week, a couple of days. And we went into almost five weeks,” said Henry, one of some 3,700 Metro employees…

Stay up-to-date with the latest news - click here
LATEST NEWSInflation likely gained pace in August, economists expect, reversing progress
Inflation likely gained pace in August, economists expect, reversing progress

OTTAWA — Economists are forecasting inflation reaccelerated to around four per cent last month, reversing previous progress made as gasoline prices push inflation higher. Statistics Canada’s August consumer price index report set to be released Tuesday is expected to show the annual inflation rate rose…

Stay up-to-date with the latest news - click here
LATEST NEWSUS national security adviser meets with Chinese foreign minister
US national security adviser meets with Chinese foreign minister
Stay up-to-date with the latest news - click here
LATEST NEWSShiba Inu (SHIB) Profitability Is Finally Back at Double-Digit Level
Shiba Inu (SHIB) Profitability Is Finally Back at Double-Digit Level
Stay up-to-date with the latest news - click here
LATEST NEWSA Fed decision, FedEx earnings and the UAW strike: What to know this week
A Fed decision, FedEx earnings and the UAW strike: What to know this week
Stay up-to-date with the latest news - click here

Leave a Reply