Vacation Accrual Downgrade (In Payroll)

This feature offers two basic options for classifying vacation pay paid within payroll, which directly impacts how it appears in your accounting entries:

1. Salary based Method (Default)

In this method, vacation pay paid on payroll is treated as a regular payroll expense. This means that when vacation pay is paid to an employee, it is recorded under the same expense category as basic salaries or other bonuses.

Accounting Concept: If your company's policy doesn't require strict separation of vacation expenses from the total monthly payroll expenses, this method is sufficient. It is the simplest and most common option for companies that want to simplify their payroll accounting, as the total employee payments (including vacation pay) appear under the general "Salaries and Wages Expenses" heading.

2. Accrual-Based Method

This method is considered more accurate and suitable for companies that strictly follow the accrual accounting principle or have detailed financial reporting requirements. Here, vacation pay paid on payroll is treated as a separate and specific vacation expense and directly reduces the employee's vacation accrual balance.

Accounting Concept: This method requires a dedicated "Vacation Accrual" account in the general ledger. When an employee accrues vacation, the accrual is accrued as an expense (even if it has not yet been paid). When the employee takes their vacation and is paid, the expense is directly deducted from the "Vacation Accrual" account balance. This accurately reflects the company's financial obligation toward employee vacation and ensures that the expense is recorded in the period in which the accrual is actually used, not just when paid.

Note: The Accrual-Based Method works only if the Leave balance settlement settings were set based on "Full packaged".

Impact on accounting Entries:

Salary based Method

Accrual-Based Method