Posted on Wednesday, July 15, 2015
A common benefit provided by many organizations for employees is paid time off for vacation. Vacation policies vary by organization. The policy may be based on a calendar year, fiscal year or anniversary year. Vacation may or may not be carried over to the following vacation year, or it may or not be paid out in cash upon termination. The number of hours awarded can vary, and it may be awarded all at once or accrued over the year. No matter the vacation policy, a liability should be accrued for employees’ compensation for future absences if the following conditions are met.
1. The employee’s right to be paid for future absences is attributable to services he or she has already performed.
A new employee will be awarded two weeks paid vacation at the beginning of his or her second year of employment. Because the employee provided one year of service, he or she has earned two weeks of vacation. Two weeks of vacation should be accrued and expensed at the end of year one.
2. The employee’s right to be paid for future absences vests or accumulates.
An employee is allowed to carry over up to 40 hours of earned but unused vacation time to the next year. This unused amount should be accrued because it has been earned.
3. It is probable that the compensation will be paid.
Normally it is probable that the compensation will be paid as it is assumed that individual will continue working as an employee for the organization.
4. The amount that will be paid is reasonably estimated.
Using the employee’s hourly rate in effect at the balance sheet date is a reasonable estimate for accruing vacation.
There are normally two parts to an accrued vacation balance: the amount that will be awarded in the following year for working the current year (#1 above) and the earned but unused portion that carries over to the next year (#2 above). Sometimes the amount that is earned but will be awarded in the following year is inadvertently left out of the calculation, resulting in an understated liability balance. It is important that the correct amount of liability that has been incurred be recorded so that the financial statements can be properly stated in accordance with generally accepted accounting principles.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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