We have discussed accounting for bonuses – whether to recognize them in the first place, making the estimate and so on. However, what we haven’t discussed is how to be smart about them.

Recognizing bonuses in general includes making estimates based on the performance indicators the bonus is calculated on, i.e. profit margins, units produced etc. If the bonus is paid monthly, the expense as such is also recognized each month the conditions are met. There’s no measuring and estimating in that sense. 

However, what if we’re dealing with annual bonuses? Normally those bonuses are paid to the personnel involved either in marketing or in administration. Regardless, what we want to discuss is how to be smart about recognizing their bonus expense within the accounts.

Obviously your choice number one would be to make the entry based on actual results for the year when compiling the statements and making final entries that base on the results. So for an example, if the indicator is met taking the actual results, you’d recognize the expense in full within the last reporting period. But what if you want to measure your results mid-year and not have a one-off expense ruining your last reporting period? What if this one-off expense in fact takes you to a loss for an example?

Being smart about recognizing those bonuses means that you estimate the amount payable after the actual results have been confirmed in each reporting period. It’s using the estimates for the whole year versus actuals, making forecasts where necessary and adjusting the estimate each month ensuring that the expense is adequately spread over the whole reporting period. Only this way you’re able to measure your actual results continuously.