Accounting

Accounting For Annual Leave Journal Entries

Southern Lindley has four employees in its Mississippi branch. Each employee is entitled to 20 days of paid recreational leave per year, referred to as annual leave . At 1 July 2012, the balance of the provision for annual leave was $4360. During the year employees took a total of 70 days of annual leave, which cost Southern Lindley $9160. After annual-leave taken during the year had been recorded, the provision for annual leave account had a debit balance of $4800 in the trial balance at 30 June 2013 before end-of-period adjustments. All annual leave accumulated at 30 June 2013 is expected to be paid by 30 June 2014.

A liability must be recognized for accumulated annual-leave at 30 June 2013. This is measured as the amount that is expected to be paid. As annual leave is vesting, all accumulated leave is expected to be paid. The first step in measuring the liability is to calculate the number of days of accumulated annual-leave for each employee at 30 June 2013. Although this calculation would normally be performed by payroll software, we will manually calculate the number of days to enhance your understanding of the process. The next step is to multiply the number of days of accumulated annual-leave by each employee’s daily wage.

The calculation of accumulated annual-leave in days and the resultant liability are as follows:
East: 9 + 20 − 16 = 13 days × $120 per day = $1560
North: 7 + 20 − 16 = 11 days × $160 per day = $1760
South: 8 + 20 − 14 = 14 days × $180 per day = $2520
West: 8 + 20 − 24 = 4 days × $90 per day = $360

The above calculations show that a liability of $6200 should be recognized for leave at 30 June 2013. After recording annual leave taken during the year, the unadjusted trial balance shows a debit balance of $4800 for the provision for annual-leave. Thus, a journal entry is required to record an increase of $11 000.

Accrual of Annual Leave – Journal Entries:

Wages and Salary Expenses  Dr. $11000

      Provision for Annual Leave                        Cr. 11000

(To record the accrual for Annual Leave)

In the above example, an annual adjustment was made to the provision for annual-leave. Some entities make accruals for annual-leave more frequently to facilitate more comprehensive internal reporting to management. This is easily achieved with electronic accounting systems or payroll software.

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