Definition of Accrued Vacation Pay
Accrued vacation pay is the amount of vacation pay that a company's employees have earned, but the company has not yet paid.
Example of Accrued Vacation Pay
Let's assume that a company has a formal agreement that provides its employees with 120 hours of paid vacation in the year following the employees' full-time employment. Let's also assume that the company has only one full-time employee who began working at the company on January 1 of the current year and has an hourly pay rate of $26. In the current year, this employee will earn vacation pay of $3,120 (120 hours x $26), or $60 per week ($3,120 per year divided by 52 weeks). This means that in the current year the company must record vacation pay expense and a related liability at a rate of $60 per week.
In our example, the company has only the one full-time employee, so the company's December 31 balance sheet must report a current liability of $3,120.
Vacation pay is an example of an accrued expense and an accrued liability that is required by the matching principle.