Definition and Explanation

Accrued liabilities result from non-transaction economic events. Their recognition is generally triggered not by transactions but when a financial statement date is passed.

Typically, accrued liabilities are very short-term in nature. Indeed, many are paid by the time financial statements are released.

Unless there is special significance concerning the nature of the accrual, all accrued liabilities are summarized as a single item on the balance sheet.

Payments to employees for holidays, vacations, and sick leave are better matched with the periods in which they actually work rather than those in which absence occurs.

The implementation of the approach requires the accrual of liability for the difference between the payroll expense (including compensated absences) and the amount actually paid.

Then, when a compensated absence occurs, payment to the employee represents a settlement of the accrued liability rather than an additional expense.

Example of Accrued Liabilities

Consider this simple example for a single employee for a year.

The terms of employment allow 20 days of paid vacation per year and salary of $26,100. After allowing for 104 weekend days, there are 261 (365 less 104) compensated days even though the employee works only 241 days out of the year.

Thus, the compensation is $100 per compensation day ($26,100 divided by 261 days), but the employer’s expense is $108.30 per working day ($26,100 divided by 241 days).

The $8.30 difference is accrued every working day as a vacation liability. When vacation days are taken, the liability is debited instead of Payroll Expense.

The following entry would be made in the journal for a 10-day pay period (ignoring payroll taxes and withholdings) in which no vacation is taken:
Journal Entry Example 10-Day Period
The expense is computed for 10 days at $108.30 per day.

For a pay period in which the employee works for 4 days and takes 6 days of vacation, the following journal entry would be made:
Journal Entry For 4-Day and 6-Day Period
The payroll expense is computed for 4 days at $108.30. The debit to the vacation liability is computed for 6 days at $100; the cash payment is for 10 days at $100; finally, the credit to vacation liability is computed for 4 working days at $8.30.

 

Frequently Asked Questions

What are the types of compensated absences?

There are two types of paid time off/absences for employees. These are known as compensable absences and non-compensable absences. Compensable absences include sick leave, vacation, holiday, bereavement leave and jury duty while non-compensable absences include personal business days such as a doctor’s appointment.

Are all types of compensated absences not transferable?

Non-compensable absences are non-transferable, however compensable absences can be used to either an employee or an employer. This means that a worker could use sick time as vacation time and vice versa.

What are the rules of transferring compensated absences?

The Worker’s Compensation Act (M.G.L. c. 152, §31) states that an employee may not transfer accrued compensation time to anyone other than their employer and may only receive pay for such leave upon separation from employment or in case of death benefit under a group contract.

What is the company policy on compensating absences?

The best practice when compensating absences in an organization is to follow a set of rules set out in the employee handbook. For example, if employees are required to report any absence prior to that day begins they can be compensated for that day; sick leave may be used after it has been accrued; vacation pay can be used for sick leave, bereavement and personal business days.

What are the guidelines for compensating for an absence?

When deciding whether or not to compensate an absence, look at the terms of employment. It should state whether employees will be reimbursed for their time off. If it does not, there is no obligation on the part of the employer to compensate. Employees should be told this information before they start working for a company and it should also be stated in their contract. If an employee misses out on paid time off due to illness or injury, they can ask their employer for permission to use compensated absences instead.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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