Question

A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $63,600.

	Required:
A.	Journalize the adjusting entry required on January 31, the end of the first month of the current year, to record the accrued vacation pay. Refer to the Chart of Accounts for exact wording of account titles.
B.	How is the vacation pay reported on the company’s balance sheet? When is this amount removed from the company’s balance sheet?

Answer 1

Ans a- Vacation Pay Expense   dr.   5300
           Vacation Pay Payable ($63600 × 1/12)= 5300

Ans-b Accrued vacation does not appear on the balance sheet as its own line item but as a component within the “Accrued Wages” line in the “Liabilities” section. Not all companies report “Accrued Wages” separately, and accrued vacation may be bundled into a larger “Accrued Expenses” line item.

Paid vacation is a fringe benefit that many employers offer their employees. As a fringe benefit, paid vacation is not factored into the employee’s salary or hourly wage. However, the company includes the cost of fringe benefits when calculating the total compensation package of an employee. As such, accrued vacation appears as a wage- or compensation-related expense on the company’s balance sheet.

Company accountants record all accrued vacation in its own account in the company’s ledger. When generating a balance sheet, the total in that account is added to the totals in other fringe benefit accounts – sick leave, insurance premiums, etc. – and added into the “Accrued Wages” line on the balance sheet. “Accrued Wages” is an account payable, and forms part of the “Current Liabilities” group at the beginning of the “Liabilities” section.

Accounting laws differ from state to state, and some line items are irrelevant for some companies. As a result, accrued vacation does not appear in precisely the same way on every balance sheet. Vacation can also appear as part of an “Operating Expenses” line item or under another term that references wages or daily operational costs. Some companies may just roll all compensation expenses into one large “Accounts Payable” line item that also includes supplier invoices, company credit card expenses and other costs.

Companies can use either accrual accounting or cash accounting. Many use an accrual system, which records expenses as the company incurs them. Cash accounting records transactions as the company receives and spends cash. Accrual accounting reports accrued vacation in the way described in Section 2. However, accrued vacation does not exist on the financial statements of companies that use a cash system because the company recognizes the expense only once an employee takes vacation.