Step by Step on How to Records Vacation Benefits Journal Entry With Example

Employees are one of the most crucial parts of the operations of most companies. They include individuals who provide services to a company in exchange for compensation.

Usually, they work throughout the year and help in achieving organizational goals. Every once in a while, employees will also take time off work. This time off may be for personal, recreational, or other reasons.

Companies must account for vacation time through vacation benefits. There are several steps involved in accounting for these benefits. Before discussing that, it is crucial to understand what vacation benefits encompass.

What is Vacation Benefits?

Employees receive benefits in many forms based on their employer. Some benefits may be prevalent among all employers. One of these includes vacation benefits.

Usually, companies allow employees a specific number of days off each year. Although employees do not work during this period, they will get paid by the company. These payments fall under vacation benefits.

However, some employees may not take time off and work during a period. These work for the same period that other employees take off and receive payments.

Therefore, companies may compensate them through vacation benefits. Essentially, companies pay these employees extra for working and not taking a vacation. For companies, these payments also fall under vacation benefits.

For the latter type, companies may set specific eligibility rules. Usually, companies set these rules in their policies. On top of that, companies may allow employees to transfer unpaid vacation time to another period. In that case, they will not be eligible to receive vacation benefits. Nonetheless, vacation benefits are crucial to the employer and employees.

Vacation benefits include the monetary value of work employees have done during vacation time. Companies may also refer to these benefits as accrued.

In accounting, this definition applies when those benefits become payable to employees. For the employee, it is an earned amount. They receive these payments at the end of each year.  

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What is the accounting treatment of Vacation Benefits?

The accounting treatment of vacation benefits is similar to the salaries expense paid to employees. Usually, it includes payments in exchange for vacation time that employees earn.

However, companies attach specific conditions to those benefits. If employees fail to meet those conditions, they are not eligible to receive any vacation benefits from the company.

Before accounting for vacation benefits, companies calculate the payable amount. This calculation helps companies gauge the amount they must pay to their employees.

However, the conditions may differ from one company to another. Based on their requirements, companies will estimate the vacation benefits payable. This process occurs regularly, usually quarterly or annually.

However, the accounting treatment may involve various stages. Like salaries, companies do not pay vacation benefits as they accrue. Instead, companies usually wait until the next paycheck day to distribute the amount to their employees.

This date usually falls on the same day when companies pay salaries and wages. The accounting treatment on both days will differ. As stated above, it uses the same process as for recording salaries.

When companies calculate the vacation benefits payable, they must record it as an accrued expense. This treatment is mandatory under the accruals concept in accounting.

Essentially, it requires them to record expenses when they occur rather than when the payment occurs. Therefore, companies must recognize the vacation benefits journal entry as soon as they estimate the amount.

Subsequently, when companies pay for those vacation benefits, they must record the payment. In the first stage, they will create a liability to pay the employees in the future.

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They will also increase their expense for that period. For the second stage, companies remove the liability balance from their accounts. Instead, they can record the payment from the related account.

How to record Vacation Benefits journal entries?

Vacation benefits do not include a single journal entry. As stated above, it involves various stages. Based on that, the journal entries to record vacations benefits may differ.

The primary requirement in recording the expense is to estimate the amount. Once companies calculate the vacation benefits payable, they can record the journal entries.

Companies can use a step-by-step guide on recording vacation benefits journal entries. The first step within this process is to estimate the vacation benefits.

1. Estimate vacation benefits

Companies must estimate the vacation benefits payable to employees at the end of each period. Usually, this process requires calculating the number of eligible employees and their vacation days.

Based on that, companies must calculate the vacation benefits payable by multiplying them with a predefined rate. Companies can use the following formula to estimate it.

Vacation benefits = Number of eligible employees x Earned vacation time x Predefined vacation benefit rate

After estimating vacation benefits, companies can move to the next step to record vacation benefits journal entries.

2. Record vacation benefits payable

Once companies estimate vacation benefits, they must record them. At this stage, companies only record the expense. The payment may not have occurred.

Therefore, companies must use the accrued vacation benefits account to recognize the expense. They may also call this account vacation benefits payable. Either way, the journal entries at this stage will be as below.

DateParticularsDrCr
 Vacation benefits expenseX,XXX 
 Accrued vacation benefits X,XXX

At this stage, the company only records the liability, including the payable amount. Subsequently, companies will pay their employees the accrued amount.

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At that point, they will move to the next step in recording vacation benefits journal entries.

3. Record paid vacation benefits

When companies pay employees the vacation benefits, they must record the transaction. At this stage, companies will have already accounted for the expense.

Therefore, they will have an obligation for the vacation benefits in their accounts. The journal entry in this step will remove that liability for the paid amount. Usually, it involves the same amount as the previous transaction. The journal entries will be as below.

DateParticularsDrCr
 Accrued vacation benefitsX,XXX 
 Cash or bank X,XXX

This step will conclude the accounting for vacation benefits.

Example

A company, ABC Co., pays employees vacation benefits based on its policies. During the period, the company estimates 20 employees earned these benefits.

ABC Co. calculates the unused vacation time to be 10 hours for each employee. Similarly, the company pays its employees an hourly rate of $15 for that time. ABC Co. estimates the vacation benefits payable as follows.

Vacation benefits = Number of eligible employees x Earned vacation time x Predefined vacation benefit rate

Vacation benefits = 20 employees x 10 hours x $15

Vacation benefits = $3,000

ABC Co. uses the following journal entries to record vacation benefits payable.

DateParticularsDrCr
 Vacation benefits expense$3,000 
 Accrued vacation benefits $3,000

At the start of the next month, ABC Co. pays its employees their accrued salaries through the bank. These salaries also include the vacation benefits payable estimated above. Therefore, ABC Co. records that payment using the following journal entries.

DateParticularsDrCr
 Accrued vacation benefits$3,000 
 Bank $3,000

Conclusion

Vacation benefits refer to the amount paid to employees for the time they could have taken off for vacations. It includes the monetary value of any unused vacation time.

Usually, companies pay employees for these benefits after a specific period. Once companies can estimate the payable amount, they must record the expense. Subsequently, they must also account for the payment for vacation benefits.

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