What is Vacation Pay?

Vacation pay is paid time off granted to an employee. This pay is usually accrued over time, where a certain proportion of vacation pay is earned for every hour of time worked; the exact terms are stated in the employer’s paid time off policy. The accrued amount of vacation pay for an employee automatically increases when he or she is given a raise, since the amount eventually paid out is now in the amount of the new and higher pay rate.

How to Account for Vacation Pay

Under the accrual basis of accounting, the employer recognizes earned vacation pay as a liability as it is being earned (with a charge to the vacation expense account). When an employee eventually uses the vacation time, the liability is eliminated. Unused vacation pay is typically paid to an employee in cash when he or she leaves the employment of an organization.