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Liabilities for Employee Fringe Benefits

7 May, 2015 - 17:02

When employers agree to pay part or all of the costs of fringe benefits, they incur an expense and a liability. Fringe benefits commonly offered by employers are vacations, health insurance, pension plans, life insurance and disability insurance. The cost of the fringe benefits should be properly matched to the period an employee has worked. If the employee has not received the fringe benefit, a liability remains. Depending on when the liability is expected to be paid, it may be classified as either short-term or long-term on the balance sheet.

 

Mr Jones works as a janitor at XYZ company. He is entitled to take two weeks paid vacation per year after working one full year. On May 5, Mr Jones completes his twelth month of work, and XYZ company records its vacation pay liability in the following entry

May 5 Vacation pay expense 2,000                    
Vacation pay payable 2,000               
To accrue vacation pay for week ending May 5 for Mr Jones

Mr Jones takes his vacation the first two weeks of August. XYZ payroll department enters Mr Jones's salary liability for the first week in the following entry:

Aug 12 Vacation pay payable 1,000
Salaries payable 800
Income taxes payable and other payroll liabilities 200
To record vacation taken by Mr Jones.

Observe that vacation pay liability can only be recorded in this manner if the company uses the accrual method of accounting.