Wages Liability

[David Harrison]

On Mon, 18 Oct 2004 14:38:59 -0400, Derek Atkins <warlord at mit.edu> wrote:
> David Harrison <DavidHarrisonCGA at gmail.com> writes:
> 
> > I would use a liability account called something like Employee
> > benefits payable.  The expense side would be called Employee benefits.
> 
> For the benefit of everyone, could you also supply example transactions?
> How would you use these accounts to accrue vacation and then expunge it?
> 
> -derek, who does not always have the answer ;)

What, I thought you knew everything! ;)

I was trying to avoid answering in that much detail, as it is tied
into the tax laws of the country you are in! ;)

Anyway, here's an example based on my local laws (BC, Canada). 
Vacation pay is, to start, 4% of gross wages.  Sick pay is at the
discretion of the employer.  When paid out, both amount are subject to
wage deductions (CPP, EI, and income tax).  Both vacation pay and sick
pay, when paid out, would also have vacation pay on them (yes, you get
vacation pay on your vacation pay).

For an example, lets assume a biweekly pay period.  In the first two
week period, they earn a gross salary of $1,000.00.  This would mean a
vacation accrual of  $40.00 ($1,000 x 4%).  For the sake of arguement,
let's also do a 4% sick pay accrual (that works out to about 10 days a
year).  This would also be $40.  The posting would be something like
this:

Wages (expense)                                         $1,000.00
Employee benefits (expense)                               80.00
Employer portion of CPP and EI (expense)             ?
           Bank                                                       
              Net pay
           Wage deductions payable                                             ?
            Employee benefits payable                                 
       80.00

Note, that I didn't feel like calculating the wage deductions, as it
is not really relevant to this discussion (and it would be slightly
different where you are anyway.)

Next, lets say the employee was sick for 5 days, and took vacation for
5 days.  This would mean that they would get paid $1,000.00 gross pay
for the two week period ($500 sick, $500 vacation).  So, you would
have to accrue again (at least where I am) vacation pay and sick pay
on this amount as well.  So here is the entry for that:

Employee benefits payable                           $1,000.00
Employee benefits (expense)                               80.00
Employer portion of CPP and EI (expense)             ?
           Bank                                                       
              Net pay
           Wage deductions payable                                             ?
            Employee benefits payable                                 
       80.00

The only difference is, instead of posting the gross wages to the
expense account, you are posting them as a debit to the payable
account.  This is because they are already expensed when they were
accrued.

The only additional thing I can think of is what about the T4 (or
equivalant year end reporting of employee wages in your country).  The
concern here is keeping track of what was paid to the employee versus
what was accrued, as the T4 is based on what the employee actually
received during the year.  Most of the wages paid will be in the wage
expense account.  However, some of it will be in the employee benefits
expense account, but not all of this expense has actually been paid to
the employee (have I confused you yet?).  You may then want to make an
additional entry to move the expense paid out from one account to the
other when you pay out the vacation/sick pay to the employee.  Using
the above example, you would  make the following entry:

Wages (expense)                   $1,000.00
        Employee benefits (epxense)               $1,000.00

The point of this is that the wages expense account now equals the
gross wages that were paid to the employees during the year.

Again, my examples are based on my local laws.  You should check the
requirements where you are and modify my examples accordingly.  The
theory should be the same (I hope).

Dave