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Vacation Accurals
Posted by JimboGoodski on 06/03/2008 - 15:04
I recently started working for a small business that grants vacation time on an upfront basis. e.g. - Jan 1 each employee has 2 weeks (80 hrs) of vacation available and can use it starting Jan 1.
The question is, can the company list that entire 2 weeks per employee as an liability that is reduced with the use of vacation time by employees, or does the vacation accrual have to be developed on a monthly or payperiod basis?
James Gooding
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vacation accrual
I've handled this 2 ways in the past.The technical answer is - if the employee gets 2 weeks up front and if they are required (depending on state law)to be paid any remaining unused vacation time if they leave employment, this is a liability on January 1 which is reduced as the employee uses the time or leaves employment. Unfortunately this shows a large expense every January.
The other method I will explain only works if you are not a public company, require the employee use the vacation or loose it by year end, you auditors approve and, if you have bank covenants that state you must follow GAAP, you bank approves also. What I did was put a small liability on the books on January 1 based on the average historical turnover so that the company is accrued for what they might end up paying out for terminations. This was reduced over time as people left but would be $0 at year end. Since the audit was only done at year-end and the bank agreed to not showing an accrual on unaudited monthly finanicals, I was able to show a smaller liability. There should be no accrual for vacation at year end when the audit is done since it was a use or lose policy.