Course Outline
Join PRO

What if an employee's actual vacation payment is greater than the amount that has been accrued?

Author:
Harold Averkamp, CPA, MBA

Let’s assume that a company’s accounting year ends on December 31 and the company has only one employee who worked the full year. The company’s handbook specifies that the employee earns 10 hours of vacation for each month worked. However, the vacation hours for the year accumulate. The total vacation hours earned as of December 31 will be paid to the employee on June 1 of the following year by using the employee’s June 1 pay rate.

Next, let’s assume that each month the company records an accrual adjusting entry that debits Vacation Expense for $200 (10 hours X $20 per hour) and credits Vacation Liability for $200. As a result, the balance in the balance sheet account Vacation Liability at December 31 is $2,400 (12 months X $200, or 120 hours X $20).

On the following June 1, the employee’s pay rate is $20.50 which means the employee’s gross vacation pay will be $2,460 (120 hours X $20.50). The June 1 journal entry to record the vacation payment is:

  • Debit Vacation Payable $2,400 (to eliminate the December 31 liability)
  • Debit Vacation Expense $60
  • Credit Cash, Payroll Withholdings, etc. for a total of $2,460

Note that the $60 difference was recorded as Vacation Expense in the year of the payment. The financial statements of the prior year were not restated for the $5 monthly differences. The reason is the prior year’s monthly amounts were estimates (not mistakes) and the difference is immaterial.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

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.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus