Employees are normally entitled to paid annual vacation from a business. The amount of vacation accrual necessary is usually based on the employees annual entitlement and the length of time they have worked for the year.
For example, if an employee is entitled to 20 days paid vacation each year, by the end of say month 3, the employee will have earned 20 x 3/12 = 5 days paid vacation.
If by the end of an accounting period employees have earned but not taken vacation then the business has a liability which it must accrue.
Vacation Accrual Example
A business has 4 employees who are each paid 13,000 annually and are entitled to 4 weeks (20 days) paid annual vacation. By the end of the accounting period, two of the employees have taken their full entitlement, one has taken 16 days, and the other has taken only 5 days.
Assuming a 5 day working week, the vacation accrual is calculated as follows:
Annual working days = 52 weeks x 5 = 260 days Daily pay rate = 13,000 / 260 = 50 per day Days earned not taken = (20-16) + (20-5) = 19 days Vacation accrual = Days earned not taken x Daily rate Vacation accrual = 19 x 50 = 950
Vacation Accrual Journal Entry
At the end of the accounting period the business needs to record the vacation accrual of 950 with the following journal entry:
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction.
In this case a balance sheet liability (vacation payable account) is increased by 950, representing the vacation pay liability. The accounting equation is balanced by the debit entry to the wages expense which reduces the net income, retained earnings, and therefore the owners equity in the business by the same amount.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.