Accrued Bonus Journal Entry
Accrued bonus is the amount of performance bonus that company estimate before the year-end to finalize the annual financial statement.
Bonus is the additional benefit that company provides to the employee base on the performance of company and employee. it helps to encourage the employees to work harder and achieve more profit in the upcoming year. The bonus is set during the budget preparation, the company will provide a package bonus to all employees when the profit reaches a certain level. It is the link between company profit and employees’ benefit.
The bonus package will be allocated to all departments. The head of each department will share the bonus with all employees under their supervision. Each employee will receive a bonus based on the performance evaluation. It may be different depending on the company policy. Most companies use this system to motivate the employees who work hard and give them the reward they deserve.
The company will share a bonus after the year-end when the net profit is properly calculated. It will be shared within a few months after the release of the annual report. Again it depends on the company policy.
At the end of the year, company needs to prepare the annual financial statements. they have to include all the revenue and expense in the income statement. Bonus is the expense during the year, it is based on the company profit which is not yet clarified due to the audit and other issues. The bonus expense is not yet finalized due to profit while the profit depends on the bonus expense too. It seems a cycle that never ends. So managements have to estimate the accrued bonus and record it into the income statement.
This estimated amount is the accrued bonus which will record in both income statement and balance sheet. The expense will be present on income statement while the liability present on balance sheet.
Accrued Bonus Journal Entry
When the company prepares the financial statements, accountants have to include all revenue and expenses. The company needs to estimate the accrued bonus and record it as an expense on the income statement. However, company has not yet made a payment, so it is the liability which presents on balance sheet.
The journal entry is debiting bonus expense and credit accrued bonus payable.
| Account | Debit | Credit |
|---|---|---|
| Bonus Expense | $$$ | |
| Accrued Bonus Payable | $$$ |
The transaction will increase the bonus expense and current liability. It will complete the financial statement based on the best estimation. Expense is included in the income statement, the unpaid balance will record as the liability.
At the beginning of the new year, the accountant has to reverse the above transaction. It aims to remove the current liability and bonus expense. The journal entry is debiting accrued bonus payable and credit bonus expense.
| Account | Debit | Credit |
|---|---|---|
| Accrued Bonus Payable | $$$ | |
| Bonus Expense | $$$ |
This transaction will reverse the accrued transaction in the previous years. When the actual bonus is made, the company will record bonus expenses and cash paid out. The difference between the estimate and the actual amount will automatically take into account. When company makes the actual payment, the journal entry is debiting bonus expense and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Bonus Expense | $$$ | |
| Cash | $$$ |
The amount recorded will depend on the actual amount, not the estimated one. If we combine both transactions, there is no current liability on the balance sheet. The cash decreased as the company paid employees. The expense is only recorded in the previous year. If the actual payment is higher than estimated, the difference will record as an expense in the new year. If it is lower, it will reduce the new year expense. It is the accounting estimate.
Accrued Bonus Journal Entry Example
Company ABC is preparing the annual financial statement. Based on the budget, the bonus for the year is estimated to be around $ 100,000 if the profit hits the target. So management decide to record this amount as the accrued bonus for the year.
After the year-end, the audit has reviewed the financial statement and the profit is more than the expectation. The actual bonus increase to $ 120,000 and was paid two months after year-end. Please prepare the journal entry for the accrued bonus.
At the end of the year, company estimates the bonus to record in the income statement. Company has to record bonus expenses and accrued bonuses payable. The journal entry is debiting bonus expense of $ 100,000 and credit accrued bonus payable of $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Bonus Expense | 100,000 | |
| Accrued Bonus Payable | 100,000 |
The transaction will record the bonus expense based on the information available. At the end of new year, accountants have to reverse this transaction by posting the opposite.
| Account | Debit | Credit |
|---|---|---|
| Accrued Bonus Payable | 100,000 | |
| Bonus Expense | 100,000 |
This transaction will remove the accrued bonus payable from the balance sheet. It also credits the bonus expense, which will be net off with expense when recording the actual bonus.
After year-end, the actual bonus payment is $ 120,000 which is higher than the estimation. The journal entry is debiting bonus expense $ 120,000 and credit cash $ 120,000.
| Account | Debit | Credit |
|---|---|---|
| Bonus Expense | 120,000 | |
| Cash | 120,000 |
As the result of all transactions above, the bonus expense record in the previous year is $ 100,000. Additional $ 20,000 is recorded in the new year. The accrued bonus payable is reversed from the balance sheet.
