Journal Entries to Account For Employee Vacation

[ptownbro]

I've been searching and cannot find a complete example of how to account for employee vacation. Including recording the vacation expense, when the employee takes vacation, and when the vacation is paid out to the employee as cash when they leave the company (or at year-end if company policy).

Can someone help tell me what all the journal entries are related to vacation?

Here's a basic example illustrating what I think it is. I think I have it all correct except am unsure about item #3.

1. Employee Payroll	Dr. Wages	10,000
	Cr. Salary Payable		8,000	Employee Net Paycheck
	Cr. Taxes Payable		2000	Employee Federal & State Withholding, FICA, etc...
	Dr. Payroll Taxes	600		Employer Federal & State FICA, etc...
	Cr. Taxes Payable		600
2. Record employee vacation accrual	Dr. Vacation Expense	900
	Cr. Vacation Payable		900
3. Employee takes vacation	Dr. Wages	400		Is this correct?
	Cr. Vacation Payable		400
4. Payout the remaining vacation to employee	Dr. Vacation Payable	500
	Cr. Cash		500
5. Pay out paycheck, taxes, etc...	Dr. Salary Payable	8,000
	Dr. Taxes Payable	2,600
	Cr. Cash		10,600

Is the above correct?
Are there any other relevant entries needed for vacation?

 

[Werner Reisacher]

I assume that the employee involved received his regular payroll check during the time he was on vacation. Consequently, at the end of that accounting period, the "Vacation Payable" liability got reduced by the amount of money the employee got paid while on vacation.
Debit: Vacation Payable will reduce that liability
Credit; Wages will reduce the payroll expenses during that period since you set up an "accrual" in the prior periods for that payment.

 

[Kat Maple]

Hi Ptownbro

I read the response you received and I saw that response is not correct. The expense side of the accrual you set up was in Vacation Expense and the response said to credit Wages, which is a totally different account.

I think the best way to think about this is to mentally separate the payroll accounting from the vacation accrual accounting. At payroll time you would make the entry similar to entry no 1 and then read a report telling you how much is to be accrued as vacation liability and you accrue that which you did in entry 2. You have those two perfect so far!

For entry #3 - When the employee takes a vacation, it will simply be an entry like Entry #1. Only difference you might want is if you want to record the wages not to just "Wages" but to "Wages - Vacation". Not a major thing because you will have payroll reports to track this anyway.

The key thing is the next step. I prefer to reverse the prior month vacation accrual entirely then record the entire amount of the new total vacation accrual. The new accrual will be have been reduced by the amount "used" by the employee as vacation.

I hope that helps!!

Kat

 

[Werner Reisacher]

Thanks, Kat for giving your feedback. Totally agree with you on all points. Since we are talking about a better definition of the accounts, I would prefer Vacation Accrual instead of Vacation Payable.

 

[ptownbro]

Thanks everyone for your help.

So If I understood you, entry 3 should be as follows:

3. Employee takes vacation	Dr. Wages - Vacation	400
	Cr. Vacation Payable		400

Then what is missing is the reversal of the accrual (point taken by Warner on potentially renaming the account, but for now left as-is).

3A. Reversal of previous accrual	Dr. Vacation Payable	900
	Cr. Vacation Expense		900
3B Addition of new accrual at the remaining balance	Dr. Vacation Expense	500
	Cr. Vacation Payable		500

If true, this doesn't make sense to me because I should end up with a $0 Vacation Payable balance at the end. However, this still shows that I owe $400.

I think I should expect to see

Cash	($1,000)
Wages	$10,000
Vacation Expense	$500
Payroll Taxes	$600
Net (s/b 0)	0

 

[Werner Reisacher]

# 3 is debit: Vacation payable (reducing the liability accrued for)
credit: Wages - vacation (expense - to compensate for the wage paid during the same period)

The only issue in the original example was that I picked the word "wages" and Kat correctly said that it should be "wages-vacation" since it is this expense account you used to set up the accrual in the first place.