How do I calculate accrued vacation pay?

Accrued vacation pay is the amount of vacation time that an employee has earned as per a company's employee benefit manual, but which he or she has not yet used or been paid.

The calculation of accrued vacation pay for each employee is:

1. Calculate the amount of vacation time earned through the beginning of the accounting period. This should be a roll-forward balance from the preceding period.
2. Add the number of hours earned in the current accounting period.
3. Subtract the number of vacation hours used in the current period.
4. Multiply the ending number of accrued vacation hours by the employee's hourly wage to arrive at the correct accrual that should be on the company's books.
5. If the amount already accrued for the employee from the preceding period is lower than the correct accrual, then record the difference as an addition to the accrued liability. If the amount already accrued from the preceding period is higher than the correct accrual, then record the difference as a reduction of the accrued liability.

For example, there is already an existing accrued balance of 40 hours of unused vacation time for Fred Smith on the books of ABC International. In the most recent month that has just ended, Fred accrued an additional five hours of vacation time (since he is entitled to 60 hours of accrued vacation time per year, and 60 / 12 = five hours per month). He also used three hours of vacation time during the month. This means that, as of the end of the month, ABC should have accrued a total of 42 hours of vacation time for him (40 hours existing balance + 5 hours additional accrual - 3 hours used).

Fred is paid $30 per hour, so his total vacation accrual should be $1,260 (42 hours x $30/hour). The beginning balance for him is $1,200 (40 hours x $30/hour), so ABC accrues an additional $60 of vacation liability.

What if a company has a "use it or lose it" policy? This means that employees must use their vacation time by a certain date (such as the end of the year), and can only carry forward a small number of hours (if any) into the next year. One issue is that this policy may be illegal, since vacation is an earned benefit that cannot be taken away (which depends on the law in each state). If this policy is considered to be legal, then it is acceptable to reduce the accrual as of the date when employees are supposed to have used their accrued vacation, thereby reflecting the reduced liability to the company as represented by the number of vacation hours that employees have lost.

What if an employee receives a pay raise? Then you need to increase the amount of his entire vacation accrual by the incremental amount of the pay raise. This is because, if the employee were to leave the company and be paid all of his unused vacation pay, he would be paid at his most recent pay rate.

Related Topics

Benefits accrual
Bonus accrual
Payroll accounting
Wage accrual
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