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February 18, 2022

Accrued Vacation Pay: Meaning and Calculation

Reading Time 3 mins

Overview

Every employee deserves to get some rest from work. Many employers offer their employees paid vacation time. This means that the employee will continue to receive their salary or be paid wages as if they worked a normal day without interruption even when on vacation and not working.

Depending on the employment agreement, vacation may accrue slowly. For instance, an employee may go on a vacation only after three months of working in a company and get one vacation day every month or after working for a certain amount of hours. For every single vacation day earned, the employer will have to make a payment. The payroll process would involve calculation of the amount the employees should get during their vacation leave and recording in the books of the accrued vacation pay.

In the employment policies, the employers typically also have a statement about the time period during which these vacation days should be used. For example, employers can give two years to use the accrued time or it will expire. Accordingly, accrued vacation pay refers to the amount of money the employee has accumulated so far as part of the vacation benefits but the employer has yet to pay the money.

When drawing up their vacation policies, employers should ensure that they adhere to applicable state and federal laws. These laws are often forgotten by employers. However, they not only typically tell when the accrued vacation expires and how much the employee can accrue, among other details.

Accrued Vacation Pay: Meaning and Calculation

Calculation

Accrued vacation pay, in most cases, is based on the wages or current salary of the employee at the time the payment is made. Employers are usually required to pay at least the amount equal to what the employee is currently making. Although there are several variables that should be accounted for, the calculation is pretty straightforward. Follow the steps described below to find out how much you should pay your employee or how much vacation pay you have accrued.

Your first step would be finding out what the company’s policies are on the vacation pay. What you are looking for is how the payment is accumulated. Some employees set a specific amount of time hours per pay period while others calculate it based on the number of hours the employee has worked.

In any case, you would need to calculate the vacation time accumulated during the period since you were last paid the vacation benefits or since you were hired. To arrive at the final number, you would need to the number of hours earned during the current period to what has been accrued in the previous accounting period. Next, you would need to make sure to subtract any vacation time that has already been used.

Your next step would be to multiply the number of hours you arrived at by the dollar amount of your hourly wage or the amount of vacation pay stated in your agreement with the employee. If you are an employer, this accrued vacation pay will be recorded in your accounting books as vacation pay liability. Accordingly, you will need to increase or decrease the balance in this account as the employee earned more vacation pay or uses a portion of it and you actually pay them wages or salary for the time they spent (or going to spend in the near future) away from work.

Example

John&Co. business has a vacation policy that states employees are entitled to one paid vacation day (8-hour workday) every month. You have used one week or 7 days of your vacation time last year, so 5 days (since you have a total of 12 days a year and you already used 7 days) from the last year would be added to this year’s balance.

Today is the end of June and you want to know how much vacation pay you have earned so far. You have 5 days from the last period and 6 days from this period, which gives you a total of 11 days. So far, you have taken 2 days of your vacation time. If you make $50 an hour, your accrued vacation pay as of the end of June would be 9 days multiplied by $50 or $450.

As an employer, you would have already recorded the payment for the two days of vacation taken so far, reducing vacation pay liability for this employee. At the end of June, the accrued vacation pay liability balance for this employee will be $450.

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Author: Charles Lutwidge

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