In most countries the employees are entitled to a time off that’s to be paid by you as the employer (it’s your liability until you’ve paid what you owe). This “time off” is normally called as a vacation and as mentioned, within the company’s books this is a liability. Accounting for this liability, a reserve if you may, can be achieved two ways:
1) Measuring the expense and the payable in detail each month
2) Estimating the expense monthly and doing the detailed calculation at the end of the reporting period
The first option means that you keep account on days spent, days unused and the daily wage of every person each month and account for the payable and respective expense each month. This ensures that your liability is accurate at each month end. This method is the most time consuming and as such, should be used if there’s no period your people use their vacation the most, i.e. summer, but rather take time off ad hoc and as it suits them.
To give you an example of how to account for the reserve initially and how to account for the change in the reserve, say that the initial reserve we’ve measured to be at 10,000 (note that we’ve not considered taxes as they differ in legislations).
| # | Debit-Credit | Account name | Amount |
| 1 | Debit | Vacation expense | 10,000 |
| Credit | Vacation reserve | 10,000 |
Say now that there were a few people that used their vacation (reserve decrease by 3,000) and others didn’t (reserve increase by 5,000) – the net effect in our example is that we need to increase our liability (by 2,000). Had more people used their vacation, the liability arising from the period earned on top of the already existing would be less and as such, our liability would decrease.
| # | Debit-Credit | Account name | Amount |
| 1 | Debit | Vacation expense | 2,000 |
| Credit | Vacation reserve | 2,000 |
Consequently the second method is something you’d opt for if the majority uses their vacation within one time frame (as mentioned before, i.e. summer). Second method for measuring the vacation reserve is also less time consuming and requires that you keep tally on days used and still to be used just once a year.
When it comes to accounting entries, in the second option (that is measuring the reserve just once a year), you’d account for 1/12 into expenses each month and at the end of the year would do the calculation.