Accounting for Signing Bonus
The signing Bonus is the payment that company pays to the employees when they agree to work for the company. It is not related to their performance or the company’s profit. The employee will enable to receive this bonus after the sign the contract to work for the company.
The company tries its best to attract talented employees to work for them. The chance of getting talented people is very hard for a higher position. Those employees are also the key players in the current employer as well, so they are also being taken care of by their current employer as well.
The new employer will try their best to persuade the talented people to move from their current company to join them. They will promise to increase the salary, performance bonus and other benefits to attract potential staff. However, these benefits will link with the company performance and profit. It will be hard to keep the promise when the company is not doing well, and the potential candidate understands this.
The company comes up with an incentive that is not related to the other factors. It is the signing bonus that entitles employees after they agree to work for the company. The company is mostly liable to the employee on the day they sign an employment contract. The payment will be made subsequently.
The signing bonus will be recorded as the expense on the day the employee is eligible for the bonus. It is usually the signing date of the employment contract. The bonus is provided without any conditions attached.
Some signing bonuses come with conditions that require the candidate to work for a certain period of time. It prevents the candidate to enjoy the signing bonus and resign to the new place. If the bonus requires the employees to work over a certain period of time and fail to do so will require to pay back the partial amount. So the bonus will be allocated over the period required.
Journal Entry for Signing Bonus
When the company signs an employment contract with a new employee, the company has to record the signing bonus as an expense on the income statement. This bonus will not be refundable or attached to other conditions. The company does not require employees to work over a certain period.
The journal entry is debiting signing bonus expense and credit bonus payable.
| Account | Debit | Credit |
|---|---|---|
| Signing Bonus Expense | 000 | |
| Bonus Payable | 000 |
The entry will record the signing bonus expense on the income statement and the current liability on the balance sheet.
When the company makes payment to the employee, they have to reverse the bonus payable and cash paid.
The journal entry is debiting bonus payable and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Bonus Payable | 000 | |
| Cash | 000 |
The entry will reverse the bonus payable from balance sheet and record a cash decrease.
Example
Company ABC is negotiating with a new production manager to work for them. The company promises a signing bonus of $ 30,000 after the signing date and it is paid without any commitment.
On 01 June, the company signed an employment contract with a new production manager.
On 15 June, the company make a payment $ 30,000 to him. Please prepare an accounting record for the signing bonus.
This signing bonus does not require the employee to work over a certain period of time. It is also not refundable if an employee resigns at any point in time. So it is recorded as an expense when the company has obligation to pay the employee which is on the signing date.
On 01 June, the company signed an employment contract and they also have the obligation to make payment to the employee.
The journal entry is debiting signing bonus expense $ 30,000 and a credit bonus payable $ 30,000.
| Account | Debit | Credit |
|---|---|---|
| Signing Bonus Expense | 30,000 | |
| Bonus Payable | 30,000 |