Accrued vacation pay definition
/What is Accrued Vacation Pay?
Accrued vacation pay is the amount of time-off pay earned by employees, but not yet used by them. The amount of accrued vacation is a benefit to employees, and a liability to the employer. If an employee does not use accrued vacation time by the end of his or her employment, the remaining unused amount is paid by the employer, based on the last hourly rate paid to the employee.
How to Account for Accrued Vacation Pay
The accrued vacation pay entry is a debit to the compensation (or salaries) expense account, and a credit to the accrued wages (or salaries) account. When employees use their accrued vacation pay, this results in a reduction (a debit) of the accrued wages liability account.
Presentation of Accrued Vacation Pay
The accrued wages account is a liability account, and so appears in the balance sheet. If the amount is payable within one year, then this line item is classified as a current liability on the balance sheet. When you want to present a summarized balance sheet, the accrued vacation pay line item is typically combined into the accrued expenses line item.
Related AccountingTools Courses
FAQs
Can Accrued Vacation Pay be Reversed?
Accrued vacation pay can be reversed if employees forfeit unused vacation under company policy, union agreements, or state law exceptions. When this happens, the liability on the balance sheet is reduced, and the reversal is recorded as a reduction in expense or an adjustment to income. However, in many jurisdictions unused vacation must be paid out at termination, so reversals depend on the legal environment and company policy.