Accrued vacation is a vital concept in accounting for businesses. To understand accrued vacation, you may have to first realize that employee vacation is necessary for every organization. Not only does it give your hardworking workers the opportunity to unwind, but the organization also benefits so much from it.
A stressed-out employee may not give out their best. Most organizations carve time each year for each worker to take a little break from work and refuel. However, not every employee takes this vacation at the time it comes up. Some employees may accrue vacation time for a period of time.
It is therefore important that these accrued vacation days are properly recorded. The need for recording accrued vacations gave birth to a vacation accrual journal. This article outlines a step-by-step method of calculating and recording accrued vacation.
Accrued vacation is the monetary equivalent of employee unused vacation time. The monetary value of an accrued vacation is mostly determined by the company’s vacation policy that is operational at each point. It falls within the jurisdiction of an employee to decide on how unused vacation will be treated in the books.
Accrued vacation is more or less a debt the organization owes its employees. The organization must therefore keep an updated accrued vacation journal where unused vacation time will be recorded. Keeping an accurate record of unused vacation time will go a long way in ensuring that the accounting books of the organization balance at each point.
How you treat unused vacation time depends on the policy the organization operates. The criteria for vacation accruals are spelled out by the Financial Accounting Standard Boards (FASB). Accrued vacation may not be required for your organization based on the FASB criteria.
In some organizations, an employee loses vacation time if they fail to use it within a specified period. Some employees may carry over unused vacation time to the next year. Whatever the case may be, FASB criteria, the law of the state where the business operates as well as company’s vacation time policy determine how accrued vacation is treated.
To maintain balance in the accounting books of the business, an accrued vacation should be recorded in the journal. It is still the responsibility of the employer to decide on how best to go about this. The journal entry could be done annually, quarterly or monthly.
Beyond understanding how accrued vacation works, you need to also know how to calculate it for each of your employees. The steps for calculating accrued vacation are straightforward and outlined below:
Start by determining the vacation time that each employee has earned from the beginning of an accounting period. To get accurate data for this purpose, it is important that you record this information in a separate database. This could be done with the aid of timekeeping software.
Sum up the vacation hours that have been earned by the employee within the period in question.
From the total get in step 2, subtract the vacation time that was put into use by the employee.
Once you have gotten the actual accrued hours that the employee did not use, multiply it by the hourly work rate for that employee. This will give you the accrued vacation to be recorded in the books.
You need to ensure that whoever is in charge of your books records accrued vacation at the end of each accounting period. This helps to ensure that the financial reports are relevant, reliable, and a true picture of the company’s financial standing.
The recording of accrued vacation like every other journal entry follows the principle of double-entry. This means that one account will be debited while the other is credited. The account to be debited or credited depends on if the vacation hours were used or accrued.
When you are dealing with unused vacation time, the journal entries are made in two accounts; the vacation payable account and the vacation expense account. In this situation, credit the payable account and debit the expense account.
The vacation payable account gets a credit entry because accrued vacation is a liability to the company. When the liabilities of a business increase, it is recorded as a credit entry. However, when there is a decrease in the liability of a business, it is recorded as a debit entry. However, when employees make use of their vacation hours, you need to make a reversal entry in your books to reflect this.
How do you record accrued vacation when employees make use of their vacation hours either by taking a paid leave or cashing out? To create a journal entry for this transaction, credit cash account, and debit vacation payable account. Cash as you well know is an asset to a business. An increase in cash is debited while a decrease in cash is credited.
When you pay employees for vacation hours, you are reducing the cash available to the business. This decrease in cash is recorded as a credit entry in the cash account. The vacation payable account however gets a contra entry in adherence to the accounting principle of double entry.
An employee working in company X accrued a total of 60 hours in vacation time. If the employee’s hourly rate is $30, how much is the value of the accrued vacation and how will it be recorded in the journal?
Accrued hours: 60
Hourly rate: $30
Total vacation accrual = Accrued hours X hourly rate.
60 hours × $30
To make a journal entry, credit the vacation payable account and debit the expense account.
If the same employee decides to use 10 hours of the vacation time and wants to cash out the rest, how much is the company going to pay? How will this change be entered into the journals? To calculate the amount, subtract the used vacation time from the total, and multiply by the hourly rate.
Accrued vacation time: 60 hours
Used vacation time: 10 hours
Hourly rate: $30
60 – 10 = 50 hours
50× $30 = $1500
For the journal entry, debit the cash account and credit the vacation payable account.