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General journal entries for accrued PTO for exempt employees

Accounting For PTOHi. I have received conflicting advice as to how to account for accrued PTO for exempt (salaried) employees. I understand that we need to debit PTO expense and credit Accrued PTO for the accrued vacation amount. However, when that employee takes vacation, I was told that I just need to reverse the journal entries for the amount of vacation taken - credit PTO expense and debit Accrued PTO. Debiting Accrued PTO makes sense to me, but I thought that the offsetting entry should be to wages. For example, to make it simple, Employee A earns $130,000 per year, which works out to $500 per day. He accrued 1 vacation day for the pay period, but used 2 vacation days that pay period. I was told that the general journal entires would be: Debit PTO $500 Credit Accrued PTO $500 Debit Accrued PTO $1,000 Credit PTO $1,000 Any advice is greatly appreciated.

Answers

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

If you have access to a payroll Time Off Accrual report, make it easy on yourself and program and use as your backup for a monthly reversing entry. The system automatically keeps track of the ins and outs for you.

If you are doing this manually, the way you have this shown above looks correct. I don't break out my wages in my TB, so the entry is an accrual against Wages for PTO/Vac, and then a credit aginst PTO/Vac when used. If I only worked three days of the last week and am getting paid for 5 days - I only have 3 days of wages paid, and the balance of cash comes out of my PTO accrual - not more wages, those were already expensed.

Anonymous
(VP, Finance) |

Just to clarify - those were the general journals suggested to me. However, I think that they should be:

Debit PTO $500
Credit Accrued PTO $500

Debit Accrued PTO $1,000
Credit Regular Wages $1,000

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Proformative offers 400+ online business courses with free CPE, many on Accounting.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

I have a typical mix of non-exempt and exempt employees. They are all allocated to one of a few cost centers. I do not track a separate "PTO" expense line item (why?), just total monthly salaries and wages, bonuses and commissions. On the balance sheet I have a total "accrued vacation" account. At each month end we add up each employee's accumulated vacation hours due (per the payroll) times the hourly rate (whether non-exempt or exempt) and we come up with a total new "required" accrued vacation liability, sorted by cost center. Each cost center gets a monthly up or down charge to "salary costs" based on how that vacation liability needs to be changed. The payroll system takes care of tracking how much vacation was taken or accumulated. Simple system and produces an acceptable and quite accurate expense analysis.

Anonymous
(Accounting mgr) |

Hello Lee,
I have a similar issue as this posting from Oct 2013. I am confused as to how to account for vacation taken at the end of the year. We actually have a report from ADP that shows Accrued vacation for all employees (salaried and hourly). As of 12/27, it has a balance of 100k (hypothetical). We know that we have to accrue vacation for the last 4 days in December, let's say $5k. However, we also know that there was vacation taken from 12/28-31 for $7k. What should be the balance of Accrued vacation at Dec 31? The vacation taken for $7k does not get paid until the following payroll the following year. Do we need to account for vacation taken? What journal entries should be made at Dec 31? Thank you very for your help !
Myra

Anonymous
(Accounting Manager) |

So if employees take more vacation than what they earned in a month would you reduce the accrual balance for what they haven't earned?

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

Yes. They have earned it -- in earlier periods. They cannot take vacation that they have not earned in total.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

I would go with your entries. You can true up your balance sheet accounts at year end.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Echoing Patrick, I think you are on the right track.
You are however asking two questions at once, which confuses the matter a bit.

The big question is "what happens when someone takes PTO"; per Sara and Lee, your system should just take care of it. That being said, lets take a clear example.

Jane is paid for 40 hours this week, but doesn't come into the office. Let's say she earns $1 per hour, and she uses her PTO. PTO has already been expensed from a salary point of view, so you shouldn't see a payroll expense. It its simplest form, Cash credit $40, Accrued PTO debit $40. Past all the noise, that is what it should look like.

An integrated system will give you that result. However, if you are using just a vanilla system, then you are stuck with Cash credit $40, Wage expense debit $40, and so you will want to Debit Accrued PTO and Credit Wage Expense to fix the problem.

Going back to Lee, don't obsess on the per-penny per-person entries. Do your periodic accrual to add the proper expense every period. Then just true it up by figuring out what your total PTO accrued should be for everyone, and post the adjusting entry against Wage Expense, just like you indicate above. At the end of the year, you'll have the right accrued liability, and your Wage expense will be correct.

Anonymous
(CFO) |

For small to mid-size companies, using the accrual method for PTO gives you large fluctuations in payroll expense on a month to month basis. For instance, around the 4th of July and Christmas holidays, employees use disproportionate amounts of PTO. So in July and December the Payroll Expense will be much lower than other months, when in reality you are still paying out the same amount of cash. If your revenue stream does not fluctuate in direct proportion to labor hours, then your Net Income will be overstated in these months.

Instead, why not tie your PTO Accrual to the size of your labor force? As an example, let's say you employ 100 people in year 1, and end up with a PTO liability of $100,000 at the end of the year. If you still employ 100 people at the end of year 2, then your PTO liability at the end of year 2 will probably be close to the same $100,000.

This can be adjusted during the year with small Month End journal entries based upon changing business policies. In this case, let's say wages increased by 3%, so we would have spread JE's across the year to end up with approx. $103,000 accrued PTO. Payroll expense would have remained reasonably constant throughout the year without large fluctuations.

If in year 3, you add 10 employees, then you can estimate the added PTO and spread the estimated increase throughout the year to get to say $113,000. The company would end up with approximately the same PTO liability at year end that you would have accrued using a detailed PTO tracking system, but the Income Statement would not show the large fluctuations in Payroll Expense month to month, and the accounting is simplified.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

When I can, I have implemented a use it or lose it policy. So, if an employee makes $100 for 52 weeks a year, that's what they will be paid, whether they take their full vacation or other time.

I also dovetail this, if possible to bi-monthly payroll. This all but eliminates accruals.

Should they leave employee before year end, they are paid for earned, but unused days.

So we track days, not dollars.

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