Final answer:
To record a bonus as a current liability, debit the Bonus Expense account at the time the decision is made, and credit the Bonus Payable or Bonuses Accrued account. When the bonus is paid, debit the liability account and credit Cash.
Step-by-step explanation:
Recording a Bonus as a Current Liability
When a company decides to grant bonuses to its employees, it must record the bonus amounts as a current liability until they are paid out. This is because, from an accounting perspective, the bonuses represent an obligation that the company has committed to pay. Here’s a step-by-step guide on how to record a bonus:
- Determine the total amount of the bonus to be paid.
- At the time the decision is made (before the bonuses are disbursed), make an entry to debit the Bonus Expense account. This reflects the expense incurred by the business due to the bonus.
- Credit the Bonus Payable or Bonuses Accrued account, which increases the current liability for the business. This shows the company's obligation to pay this amount shortly.
- When the bonuses are paid out to employees, debit the Bonus Payable or Bonuses Accrued account to decrease the liability, and credit the Cash account to reflect the cash outflow.
This process ensures that the company’s financial statements accurately reflect its liabilities and expenses related to employee bonuses.