Vacation benefits journal entry

Overview

In business, the company usually provides vacation benefits to employees when they meet certain conditions of employment (e.g. they have worked for a period of time). Likewise, at the period-end adjusting entry, the company needs to record the accrued vacation benefits that the employees are entitled to receive with a proper journal entry.

Vacation benefit is a type of paid absence that the company needs to accrue for. Hence, if the company doesn’t record the accrued vacation benefits at the period end adjusting entry, both total expenses on the income statement and total liabilities on the balance sheet will be understated.

Vacation benefits journal entry

The company can make the journal entry for the vacation benefits it provides to the employees by debiting the vacation benefits expense account and crediting the vacation benefits payable account.

Account	Debit	Credit
Vacation benefits expense	$$$
Vacation benefits payable		$$$

Later, when the employees receive their vacation benefits, the company can make the journal entry by debiting the vacation benefits payable account and creating the cash/wages payable account.

Account	Debit	Credit
Vacation benefits payable	$$$
Cash/wages payable		$$$

Vacation benefits example

For example, the company has a policy that provides one day of paid vacation to employees for each month of work that they have done.

At the month-end of March 2021, the company ABC estimates that the employees have earned $2,000 of vacation benefits in March 2021.

In this case, the company ABC can make the journal entry for the vacation benefits in the March 31 adjusting entry as below:

Account	Debit	Credit
Vacation benefits expense	2,000
Vacation benefits payable		2,000

If this journal entry is not made, both total expenses on the income statement and total liabilities on the balance sheet will be understated by $2,000 in March 2021.

It is useful to note that, even with a proper vacation policy, the company usually still needs to estimate the amount of vacation benefits that it needs to accrue at period end adjusting entry. This is because of turnover and rules regarding terms of employment, not all employees will take or be able to take vacation benefits.