Question

When should an employer accrue an expense and the related liability for an employees' compensation for future absences (such as vacation pay)?

Answer 1

An employer should accrue an expense and the related liability for an employee's compensation for future absences, such as vacation pay, when the employee has earned the time off but has not yet taken it.

Step-by-step explanation:

An employer should accrue an expense and the related liability for an employee's compensation for future absences, such as vacation pay, when the employee has earned the time off but has not yet taken it. This is because the employer has an obligation to pay the employee for the time off, and that obligation creates an expense and a liability. The expense is recognized in the financial statements when the employee earns the time off, and the liability is recorded to reflect the amount that the employer owes the employee.

Answer 2

Final Answer:

An employer should accrue an expense and the related liability for an employee's compensation for future absences, such as vacation pay, in the accounting period in which the employees earn the right to the compensation.

Step-by-step explanation:

Accruing expenses for future absences, like vacation pay, follows the accrual accounting method, which recognizes economic events when they occur, rather than when the cash transaction takes place. In the context of employee compensation, the accrual should be made in the period in which the employees earn the right to receive the compensation, even if the payment is made in a later period.

For example, if employees accrue vacation days throughout the year, the employer should recognize the expense and the related liability for these future absences at the end of each accounting period based on the employees' earned entitlement.

This accrual ensures that financial statements accurately reflect the company's financial position by recognizing the cost associated with employee compensation in the period it is earned, aligning with the matching principle in accounting.