Let’s get one thing cleared right away; opting for a choice in how you handle the vacation payments is only possible if it’s allowed by your local legislation. There might be options defined in a way that you can agree on something else compared to what’s described in the legislation, but for the employee it cannot be with adverse impact compared to the legislation rules.

So, let’s assume in your country it’s allowed to opt for something else – something that’s better for employees. Obviously you can come up with in addition to what we’re about to discuss, but I just want to introduce you to an option.  Continue reading →

To increase salaries or pay bonuses (if you already aren’t paying the latter, it’s a questions of whether to start in the first place) – that’s the question some employers face almost each year. On one hand you want to motivate your employees and reward them, on the other it’s a question of maintaining a salary level that keeps your employees happy and wanting to work for your company each month.

How to best answer the question should be as follows – is the company viable and able to pay more each month? Matter of fact is that if you’re wondering whether to increase salaries, you’ve most probably already made up your mind that you want to do that, but it’s a question of reasoning – why are you doing this?  Continue reading →

Paying bonuses to your employees is an admirable deed – it makes people feel motivated and valued. When it comes to rewarding in the work place, bonuses are something that works the best.

In accounting however, how should you account for bonuses?  Continue reading →

There are essentially two types of bonuses – those that are given from year to year and those which are decided ad hoc and given only on certain exceptional occasions. Whilst there are a few differences when it comes to accounting for them, in essence they are fairly the same. Both need to be recognized on the balance sheet and income statement just when it has become apparent that they will be paid and people have reason to be expecting them.

As for the year to year bonuses (whether paid on monthly, quarterly or annual basis), the expense should be spread out over the period the bonus relates to. When it is not so much of an issue when it comes to monthly bonuses obviously (though keep in mind posting them into the month the bonus is for), it is highly recommended to spread the expense more or less evenly over the months when it comes to annual bonuses. The reason behind this is simple fact that your monthly expenses stay on stabile levels instead fluctuating significantly at year end or at the end of each quarter.
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When people go on a vacation, they depending on local regulation may have to be paid up front before leaving or the payment shall continue as regular monthly salary, however the rule is that people do have to get paid when they are on vacation. Fact of the matter is that they can go on a holiday even with short notice and you have to be prepared to make the upfront payment to them if so required by local law.

In fact, as a general rule, your balance sheet should always reflect the liability you owe to your employees when it comes to vacations. For an example, when an employee decides to leave the post for good, he or she is entitled to all those vacation days and also respective payment.

So what some companies do is simply accruing a certain percentage of monthly salaries to vacation pay reserve account every month. If let’s say the employees are allowed to take 28 days off with full pay, the reserve should essentially be in the amount of one month’s payroll expense more or less depending of course on the days people have to receive. As an example, when accruing for the reserve in December, if you have all the employees having their vacation in summer and all of them have give or take 14 days on their reserve in mentioned December, the reserve amount on the balance sheet should be in the amount of roughly half of the monthly salary expense.
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