Your hardworking employees need a vacation every now and then. Many employers provide vacation time to employees, but employees might not use their earned vacation right away. When employees have accrued vacation time, you must create a vacation accrual journal entry. Read on to understand the basics of vacation accrual and how to calculate and record accrued vacation in your books.
What is vacation accrual accounting?
Vacation accrual is vacation time that an employee earns, depending on your paid time off policy. As an employer, you must determine how to treat an employee’s unused vacation time. You are responsible for calculating vacation accrual and creating a vacation accrual journal entry to update and balance your books.
Vacation accrual may not be required. Check your business’s liabilities for vacation accrual with the Financial Accounting Standards Board (FASB). Depending on the FASB’s criteria, vacation accrual might not be necessary.
Many employers establish a “use it or lose it” vacation accrual policy. This requires employees to use vacation time by a certain date, such as the end of the year. Employers can also determine if any of the accrued vacation time can carry over to the following year. How you handle vacation accrual accounting depends on the FASB, your state’s laws, and your vacation accrual policy.
When to record a vacation accrual journal entry
You must record vacation accrual as a journal entry for your business. Determine if you plan to record the vacation accrual each pay period, monthly, quarterly, or annually.
Evaluate your vacation accrual methods at least once per year to ensure accuracy, and account for any changes in pay rates or unused vacation time. Stay organized by setting up a schedule with reminders to record vacation accrual in your books.
How to calculate vacation accrual
Now that you know more about vacation accrual accounting, you need to know how to calculate accrued time off. Follow the steps below to calculate accrued vacation pay for each employee:
- Calculate the earned vacation time from the beginning of a period. You can maintain this information in a database, such as a timekeeping or payroll software.
- Add the number of vacation hours earned.
- Subtract the number of vacation hours used by the employee.
- Multiply the number of accrued vacation hours by the employee’s hourly rate to get the total vacation accrual you should list in your books.
Example of calculating vacation accrual
Let’s say an employee has 50 hours of unused vacation time. The employee receives an additional five hours of vacation time and used 10 hours during the month.
The accrued total is 45 hours (50 hours + 5 additional hours – 10 hours used). The employee makes $20 per hour. The total vacation accrual would be $900 (45 hours x $20 per hour).
Recording journal entries
After you calculate the vacation time accrued for each employee, you will need to record them in your business’s books. Be sure to record vacation accrued at the end of your accounting period.
You will debit one account and credit the opposite account. The accounts you debit and credit depend on if the vacation is accrued or used by the employee.
Adding vacation accrual
When adding in vacation accrual, you will debit your Vacation Expense account and credit your Vacation Payable account.
Credit Vacation Payable because vacation accrual is considered a liability. Liabilities are increased by credits and decreased by debits. Record the opposite by debiting the Vacation Expense account.
Account for any accrued vacation time by creating journal entries. When the employee uses vacation days, you must reverse the accrual in your books with an additional journal entry.
Employee uses vacation time
After an employee uses or cashes out vacation time, you will create a journal entry by debiting your Vacation Payable account and crediting the Cash Account.
Cash is an asset account, which increases by a debit and decreases by a credit. You will decrease your Cash account since an employee is using or cashing out their vacation time.
Examples of vacation accrual journal entries
Record a journal entry when you add vacation accrued.
Using the example about calculating vacation accrual, find out how to record journal entries.
The employee accrued 45 hours and makes $20 per hour. The total vacation accrual would be $900 (45 hours x $20 per hour).
Record $900 as a journal entry by debiting Vacation Expense and crediting Vacation Payable.
Say the same employee wants to use 5 hours of accrued vacation time. Record $100 as a journal entry by debiting Vacation Payable and crediting the Cash account (5 hours x $20 per hour).
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