Vacation Accrual Journal Entry

Employees are normally entitled to paid annual vacation from a business. The amount of vacation accrual necessary is usually based on the employees annual entitlement and the length of time they have worked for the year.

For example, if an employee is entitled to 20 days paid vacation each year, by the end of say month 3, the employee will have earned 20 x 3/12 = 5 days paid vacation.

If by the end of an accounting period employees have earned but not taken vacation then the business has a liability which it must accrue.

Vacation Accrual Example

A business has 4 employees who are each paid 13,000 annually and are entitled to 4 weeks (20 days) paid annual vacation. By the end of the accounting period, two of the employees have taken their full entitlement, one has taken 16 days, and the other has taken only 5 days.

Assuming a 5 day working week, the vacation accrual is calculated as follows:

Annual working days = 52 weeks x 5 = 260 days
Daily pay rate = 13,000 / 260 = 50 per day
Days earned not taken = (20-16) + (20-5) = 19 days
Vacation accrual = Days earned not taken x Daily rate
Vacation accrual = 19 x 50 = 950

Vacation Accrual Journal Entry

At the end of the accounting period the business needs to record the vacation accrual of 950 with the following journal entry:

Vacation accrual journal entry
Account Debit Credit
Wages expense 950
Vacation payable 950
Total 950 950

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction.

For this transaction the Accounting equation is shown in the following table.

Vacation Accrual – Accounting Equation
Assets = Liabilities + Owners Equity
= Vacation payable + Wages expense
0 = 950 + -950

In this case a balance sheet liability (vacation payable account) is increased by 950, representing the vacation pay liability. The accounting equation is balanced by the debit entry to the wages expense which reduces the net income, retained earnings, and therefore the owners equity in the business by the same amount.

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