What is Vacation Pay Expense?

Vacation pay expense is a general ledger account in which is recorded the amount of vacation pay earned by employees. The amount in the account is updated at the end of each reporting period to reflect the additional expense generated as a result of employee time worked during the period.

Example of Vacation Pay Expense

A company has an employee named Sarah, who earns $4,000 per month. Sarah is entitled to 10 paid vacation days per year, which is approximately 2 weeks (based on a 5-day workweek). The company calculates vacation pay on an accrual basis, meaning it records the expense as Sarah earns her vacation days, not when she takes the time off.

Sarah earnings roughly .0833 days of vacation per month (calculated as 10 vacation days ÷ 12 months), and roughly $200 per business day. This means that the company’s vacation pay expense accrual for each month for Sarah is $166.67 (calculated as .0833 vacation days x $200/day).

The company records this expense as a debit to the vacation pay expense account, and a credit to the vacation pay liability account.

Presentation of Vacation Pay Expense

Vacation pay expense is quite a small part of the overall compensation expense recorded by a business, so it usually does not appear in a separate line on the income statement. Instead, it is aggregated into the general compensation expense line item. An alternative treatment is to report it within the employee benefits line item on the income statement.