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How do you calculate accrued vacation pay?

Author:
Harold Averkamp, CPA, MBA

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.

Balance Sheet: Retail/Wholesale – Corporation

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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