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PostPosted: Thu Jul 21, 2011 4:55 am 
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I'm not really an accountant nor a bookkeeper but I'm the one maintaining the book of accounts for our company. So your advise on how to properly account for such transaction is very much needed.

Say employee A completed his one year and earned his 30 days vacation by August end. He is entitled to one month vacation salary of example, US3000. He plans to take his vacation later on. I researched on the entry and this is what I did for now. Is this correct?

Debit Vacation Expense (3,000 US$)
Credit Vacation Payable (3,000 US$)
To accrue vacation payable as of August end

How about after one month, do I need to accrue the additional US$ 250 he earned? Should I be making entries on monthly basis for this earned vacation salary?

Is there any other adjustments I need to make to complete this cycle?

Is the term accrual the right term for this or should it be payable?

I have the same queries on gratuity earned. It is also done on a monthly basis and what should be the entries?

Again, I'm not an accountant so please bear with me.


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PostPosted: Fri Jul 22, 2011 1:45 pm 
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You are correct in your conclusions.
Accrue payroll when all the following criteria have been met:
1.Employee services have been rendered.
2.The pay has been vested meaning the employer has an obligation to pay them if the employee leaves the company.
3. Payment of the liability is probable
4.The amount of accrued liability can be accurately determined.

Now, for income taxes, the rules are different:
Accrual-basis taxpayers can normally deduct salaries accrued at year-end if they are paid within 2 1/2 months. If salaries are paid later than 2 1/2 months after year-end, they are only deductible when paid. Among the common items affected by this are bonus plans and accrued vacation pay arrangements. You can run into same problem if you accrue salaries to stockholders if they are not paid by last day of the year.

Not familiar with the term gratuity as relates to accrued payroll.


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PostPosted: Wed Jul 27, 2011 8:04 am 
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You have the correct journal entry OP.

I would make the additional $250 every month, or whenever it is earned.

Accrual accounting is the method you are using and you are correct on that as well.

For not being an accountant or a bookkeeper you did solid research and it looks like you are doing everything right and more importantly thinking correctly. Good job.

Welcome to the forum.


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PostPosted: Wed Jul 27, 2011 10:28 am 
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One last thing: If the company has been in business more than one year and accounted for vacations when paid in prior years, adopting the method you suggest (which is in accordance with GAAP) is a change in accounting method. It also affects the comparability of financial statements. So, if your company has an outside accounting firm, you need to receive their blessings because a change in accounting method has both accounting and tax implications. Also, as I stated in earlier post, you should never accrue vacations until the employee has been employed long enough for the benefit to vest. Also, you need to get approval from the boss because of athe possibility of additional outside accountants fees.


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PostPosted: Wed Jul 27, 2011 11:43 am 
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Those are some good additional points wfclyon. You can never be too careful and it is worth mentioning.


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PostPosted: Mon Aug 20, 2018 3:10 am 
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One can attain various benefits working with one employer for many years. You attain gratuity and it is payable on various conditions and all this is based on the gratuity rules. I simply got it in form of a group gratuity plan by my ex employer.


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