A benefits accrual occurs when a benefit-related expense is recognized despite the absence of a supplier invoice. By doing so, a business is properly recognizing this expense in the period in which it is incurred, rather than the period in which the related supplier invoice is paid. This approach is required under the accrual basis of accounting.
The proper way to account for the accrual of employee benefits is to use a journal entry template to record the amount of any benefits that have been consumed by employees, and for which a supplier billing has not yet arrived. Conversely (and more likely), an employer may pay an insurer in advance of the full consumption of benefits, and so must record the unconsumed portion as a prepaid expense.
Certain types of insurance may be billed after the fact, when the insurer has sufficient information about employees to create an invoice. For example, an employer might send employee information to its insurer at the end of each month, so that the insurer can devise an accurate billing that is issued in the next month, but which applies to the preceding month. In this case, the company accrues the estimated cost of the insurance in the current month, and sets the entry to automatically reverse in the next month, when the insurer's invoice arrives. A sample of this transaction is:
|Medical insurance expense||xxx|
|Dental insurance expense||xxx|
|Disability insurance expense||xxx|
|Life insurance expense||xxx|
|Accrued benefits liability||xxx|
Most benefit providers issue billings in advance of a reporting period, so there may be few benefit accruals to record. Also, if a proposed accrual is a small one, it may make little sense to record it, on the grounds that it has no material impact on the financial statements, requires accounting labor, and introduces the risk of incorrectly recording or reversing the transaction.