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? 

Rule of thumb is that bonuses are accounted in the period they relate to. That is, if the bonus was earned in first quarter of the year, it’s to be charged as an expense in the first quarter. If the bonus is deemed and calculated based on annual results let’s say 3 months after the year-end, it’s still part of the expenses of this same year the bonus was calculated based on.

When it comes to accounting entries, the bonus is initially a liability and obviously, an expense on your financial statements:

Db Expense account (i.e. salaries)

Cr Bonus payable account (a liability)

One question you need to answer before accounting for any bonuses however is if they will be payable at all. If the bonus is more probably going to be paid out (i.e. you can see the profit levels being earned or decision was made and agreed with the employees that no matter what, the bonus will be paid), you account for the payable balance and if it’s less likely the bonus will be paid out, you don’t account for the payable balance either.