With bonuses to employees it’s important to remember one simple rule – they’re always supposed to be expensed within the reporting period they relate to. I know it’s obvious, but for some reason the mistakes happen often enough to have this explained further. There are questions people struggle with and hence it seems safer to recognize the bonuses within the period they are either paid out or when the answers are definite. 

What it’s not sure whether the bonuses will be paid? What was the last years’ experience? Remember that reversing an expense is just an accounting entry, and the question you’re having is an estimate the management needs to make. If it’s more certain than not so that the bonuses will be paid, i.e. the goals will be met, the expense should be accounted.

What if the amount to be paid out is not sure? If the amount is not sure, but it’s more probable the bonuses will be paid, it’s again an estimate the management is obliged to make. Surely there are estimates, some formulas or maximum levels of bonuses to pay out etc. to work around when calculating the expense. It’s impossible to say in such a situation that “we don’t know how much bonuses we have to pay”. I would say that it’s poor management of the company and weak monitoring of performance of operations and finances.

So take the time, make the estimate and account for the related expense and payables.