Accrued Vacation Journal Entry

Overview

It is a normal practice that the company makes the vacation payment to its employees for they have worked during the period. Likewise, the company needs to account for it by making proper accrued vacation journal entry at the period-end adjusting entry.

Accrued vacation is a type of accrued expense that incurs through the passage of time that the employees perform the work for the company. Likewise, if the company does not make the journal entry for the accrued vacation at the period-end adjusting entry, both expenses and liabilities will be understated.

The company usually estimates the accrued vacation based on past experience. Likewise, the estimation may be different from an actual vacation payment itself. However, as it is considered an accounting estimate, there is no requirement for the company to make retrospective adjustments.

Likewise, to have a fair value of assets and liabilities in the balance sheet as well as have a realistic view of the profit in the income statement, the company should account for all accrued expenses which also include accrued vacation.

Accrued vacation journal entry

The company can make accrued vacation journal entry by debiting vacation expense account and crediting vacation payable account.

Account Debit Credit
Vacation expense 000
Vacation payable 000

In this journal entry, the expense increases (debit) to record the cost that incurs as the employees have worked for the period. On the other hand, the liability also increases (credit) to recognize the payment obligation that the company needs to fulfill at the end of the period.

When the company makes the payment, it will eliminate the vacation liability that it recorded in the previous period. In this case, the company can make the journal entry by debiting vacation payable account and crediting cash account.

Account Debit Credit
Vacation payable 000
Cash 000

Example

For example, the company ABC Ltd. has the policy of paying 2 weeks of vacation pay to its employees that work for 50 weeks at the end of the period. Hence, it needs to make accrued vacation each week which is equivalent to 4% per week (2/50).

In the first week of Jan 2020, it has the payroll amount to $5,000. And based on its past experience, only 80% of employees (e.g. due to turnover and employment rule) will collect the vacation payment at the end of the period.

What is the journal entry for accrued vacation in the first week of Jan 2020?

Solution:

On the first week of Jan 2020, ABC Ltd. can make accrued vacation journal entry with the amount of $160 (5,000 x 4% x 80%) as below:

Account Debit Credit
Vacation expense 160
Vacation payable 160

It is useful to note that the accrued vacation is an estimate, so the amount may be different from the actual payment. However, it is not required for the company to restate the amount in the previous period. Any difference can be adjusted at the current accounting period unless the difference too significant which could be classified as an error or fraud.

For instance, assuming the company ABC Ltd. recorded the $8,320 of total accrued vacation during the period but the actual payment of vacation was $8,500.

In this case, the company can make the journal entry at the payment date by eliminating the $8,320 vacation liability and adding the $180 (8,500 – 8,320) difference to the vacation expense account as below:

Account Debit Credit
Vacation payable 8,320
Vacation expense 180
Cash 8,500

In this journal entry, the $180 of vacation expense would be in a different period from the period it actually incurred. However, as the accrued vacation is an accounting estimate and the amount is only $180, there is no need to adjust it in the previous period.