A term used in accounting that refers to employees’ time off with pay for vacations, holidays, and sick days. Companies that are obligated to pay for these days off are required by the matching principle to record the expense for these fringe benefits when the employees are working, since the benefits are a part of the employees’ compensation.
The expense is recorded each accounting period that an employee works by debiting expense (fringe benefit expense, compensated absences expense, etc.) and crediting a liability account (fringe benefits payable, compensated absences payable, etc.) When the employees actually take time off, the liability account is debited instead of an expense account.
To learn about the details in accounting for compensated absences you should read FASB Standard No. 43, Accounting for Compensated Absences. The standard is available at www.fasb.org by selecting FASB Pronouncements in the left panel of the home page.
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