Recording of Business Transactions
Should employee vacation pay be recorded in the period during which the vacation privilege is earned or during the period in which the vacation is taken? Use and discuss accounting principles to support your answer.
- Your initial post should be 200-300 words, formatted and cited in current APA style.
- You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts.
Classmatec 1 post
Vacation time is a fringe benefit that is a type of benefit companies offer to their employees in addition to salary and wages earned. It can also take other forms such as pension plans, health, life or disability insurance coverage. If the employer pays part or all the cost of the fringe benefits, these costs should be considered as expenses. In order to match revenues and expenses, the estimated cost of these benefits should be recorded as an expense during the period in which the employee earns the benefit, in this case the vacation time. In recording the expense, the related liability is also recorded. According to the matching principle, the expense should be recognized when it is actually incurred, doesn’t matter, payment is made or not, in this case whether the employee took the vacation or not. This principle ensures that the expenses incurred in the current period are matched against the revenues earned in the same period. This concept is important because it gives a more accurate appraisal of the results of operations, helps to avoid any misrepresentation of the real financial position of the business.
If we go back in time, we also learned in previous chapters how the accrual basis of accounting is designed to record accounting transactions in the period in which they actually occur and thus affect the accounting equation (assets, liabilities and stockholder’s equity), rather than the period in which the cash flows related to them occur. In other words, following these principle and concepts, employee vacation should be recorded in the period during which the privilege is earned.
Warren, Carl (2018) Survey of Accounting: Chapter 8. Liabilities and stockholders’ equity. Page 322
Warren, Carl (2018) Survey of Accounting: Chapter 3. Basis Accounting systems: Accrual Basis. Page 87-88
Classmare post 2
Vacation time is an important part of the compensation and benefits package for employees. However, employees do not automatically use vacation as it is accrued. Employee vacation pay should be recorded during the time period in which the vacation privilege is earned, not when it is taken. This is in accordance with the accrual basis of accounting. Under this method of accounting, revenues are reported on company income statements when they are earned. When accrual of vacation time is required, there is no specific process or set of guidelines set by the Financial Accounting Standards Board (FASB), so companies vary in regard to practices (Nguyen, 2019). Vacation time can be recorded monthly or quarterly instead of each pay period. The time in which the vacation is taken means that the employee has already accrued the time, which had to be approved prior to leaving. Unused vacation time can become a liability, however, according to the FASB. If an employee leaves the company voluntarily or is terminated, the unused pay must be accrued and paid out in accordance with FASB criteria.
Recording employee vacation pay in the period in which it is earned is also consistent with the matching principle of accounting, which requires that companies record expenses that are in accordance with the expenses matched with related revenues. The matching principle reinforces that the expenses should be recorded when they occur and not when it is being used for vacation. It is the responsibility of the business owner, human resources director, etc. to properly record and account for vacation time, whether it is used or unused. These officials must decide when to record as well and book the vacation accrual as the respective debits and credits. Accrued vacation must be debited in the vacation expense account of a company.
Nguyen, T. (2019, January 25). Accounting for Vacation Accrual. Retrieved March 30, 2020, from https://smallbusiness.chron.com/accounting-vacation-accrual-63739.html