Accounting
Financial Management
Human Resources
Payroll
Vacation and PTO Accrual Accounting: Calculating and Booking the Liability
Last updated: October 8, 2026 · Independent guide · We do not sell rankings or coverage.
Vacation accrual accounting means recording a liability, and the matching expense, for paid time off that employees have earned but not yet taken. Under US GAAP (ASC 710, originally FASB Statement No. 43) you accrue it when the time relates to work already performed, the rights vest or carry forward, payment is probable and the amount can be reasonably estimated. In practice you multiply each employee’s earned, unused hours by a pay rate, add the employer payroll taxes that will be due when the time is paid, and true up the balance every month.
The formula and the journal entries
Accrued vacation liability = earned, unused hours that vest or carry forward × hourly pay rate × (1 + employer payroll tax rate), less any forfeitures you can estimate reliably.
The monthly entry is the difference between the required balance and the balance already on the books. Most companies book one true-up rather than tracking each hour earned and used. Like prepaid expense amortization, it is a recurring schedule you rerun at every close.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Vacation / PTO expense (wages) | X | Month-end true-up when the required balance has risen | |
| Payroll tax expense | X | Employer share of taxes on the accrued wages | |
| Accrued vacation liability | X | Current liability on the balance sheet | |
| Accrued payroll taxes on vacation | X | Can be combined with the line above if you prefer one account | |
| Accrued vacation liability | X | Payout at termination, or a direct relief when time is taken | |
| Cash / net pay and withholdings payable | X | Gross amount split between net pay and employee withholdings | |
| Accrued vacation liability | X | True-up when the balance falls (heavy usage, forfeiture under a lawful policy) | |
| Vacation / PTO expense | X | Reduces expense in the month of the decrease |
Worked example: a September 30 true-up
Illustration: all names, rates and balances below are invented to show the mechanics. The tax rate uses the employer share of Social Security (6.2%) and Medicare (1.45%) published by the Social Security Administration for 2026.
Steps 1 and 2: Pull earned, unused hours as of month end and convert each employee to an hourly rate. For salaried staff, divide annual salary by 2,080 hours (40 hours × 52 weeks).
| Employee | Pay basis and hourly rate | Unused hours | Wage liability |
|---|---|---|---|
| Employee A | Hourly, $28.00 | 64 | $1,792.00 |
| Employee B | Salary $93,600 / 2,080 = $45.00 | 120 | $5,400.00 |
| Employee C | Salary $135,200 / 2,080 = $65.00 | 96 | $6,240.00 |
| Employee D | Hourly, $22.00 | 40 | $880.00 |
| Total | 320 | $14,312.00 |
Step 3: Add employer payroll taxes. $14,312.00 × 7.65% = $1,094.87. No employee in this illustration is near the 2026 Social Security wage base of $184,500. In practice, drop the 6.2% for anyone who will have passed the wage base when the time is paid, and add state unemployment tax only where it will apply.
Step 4: Compare with the balance on the books. The August 31 balance was $13,098.00 of wages and $1,002.00 of taxes, a total of $14,100.00. The required September 30 balance is $14,312.00 plus $1,094.87, or $15,406.87.
Step 5: Book the difference.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Vacation / PTO expense | $1,214.00 | $14,312.00 less $13,098.00 | |
| Payroll tax expense | $92.87 | $1,094.87 less $1,002.00 | |
| Accrued vacation liability | $1,214.00 | New balance $14,312.00 | |
| Accrued payroll taxes on vacation | $92.87 | New balance $1,094.87 |
Step 6: Record a termination payout when it happens. Employee A leaves on October 15 with the same 64 hours and is paid $1,792.00 gross on the final check. You debit accrued vacation liability $1,792.00 and credit net pay and withholdings payable. You also debit accrued payroll taxes on vacation $137.09 ($1,792.00 × 7.65%) and credit FICA payable for the employer share.
The rule behind the accrual
FASB Statement No. 43, issued in November 1980 and now codified in ASC 710-10-25, requires an accrual when four conditions are all met: the obligation is attributable to services already rendered, the rights vest or accumulate, payment is probable, and the amount can be reasonably estimated (FASB, November 1980). Paragraph 7 makes accrual optional for sick pay that accumulates but does not vest.
PwC’s accounting guide explains that ASC 710 requires an accrual for rights that vest or accumulate, so time that carries forward needs an accrual even if it is never paid out in cash. Time that expires at year end under a use-it-or-lose-it plan neither vests nor accumulates and needs no year-end accrual. PwC also notes that when vacation is earned on each employee’s anniversary date, an accrual is needed at every interim and annual reporting date (PwC Viewpoint, section 6.4, no date shown).
The standard does not set the pay rate. FASB deferred that question in 1980. A Journal of Accountancy article by Mark P. Holtzman says companies may use the current rate or the expected future rate discounted to present value, that many use the current rate for verifiability, and that the rate should include employer taxes and related fringe costs (Journal of Accountancy, July 1, 2021).
State payout law changes the answer
Whether time “vests” depends on state wage law as well as your handbook. California treats vacation as wages that vest as earned, calls use-it-or-lose-it policies illegal, allows a reasonable cap on accrual, and requires unused vacation to be paid at the final rate of pay under Labor Code section 227.3. It applies the same rules to PTO plans (California DLSE vacation FAQ, no date shown). Colorado’s Supreme Court held in Nieto v. Clark’s Market (2021 CO 48) that earned vacation pay cannot be forfeited at separation (Woods Aitken LLP, June 30, 2021). Massachusetts treats agreed vacation pay as wages and includes accrued vacation in the final paycheck (Mass.gov, last updated July 21, 2026).
If you have employees in several states, a forfeiture clause that removes the accrual in one state may be unenforceable in another. Confirm each state’s rules with employment counsel before excluding any balance.
Common mistakes
- Leaving out employer taxes. In the example above, taxes add $1,094.87 to a $14,312.00 balance.
- Using stale pay rates. A raise increases the value of every hour already banked, so update the liability with each rate change.
- Accruing nothing because the handbook says use-it-or-lose-it. In California and Colorado that forfeiture does not hold, so the balances vest and need an accrual.
- Booking a front-loaded grant in full on January 1. Only time attributable to service already rendered meets the first criterion. Read the policy to see when the time is actually earned.
- Double counting. If payroll already charges PTO taken to wage expense, use the true-up only and do not also relieve the liability directly.
- Never reconciling hours. Compare HR system hours with the hours behind the GL balance each quarter.
How to report it
Present the accrual as a current liability, usually within accrued compensation or accrued liabilities, because most banked time is used or paid within a year. If the four criteria are met except that the amount cannot be reasonably estimated, the Journal of Accountancy article notes that you should disclose that no accrual was recorded.
For federal income tax, IRS Publication 538 says you can deduct vacation pay in the year earned if you pay it during the year or, if it is vested, within 2½ months after year end. Otherwise you deduct it in the year paid (IRS Publication 538, revised January 2022). The part of the book accrual you cannot deduct yet is a temporary difference that usually produces a deferred tax asset. Agree the treatment with your tax adviser.
Put the vacation true-up on your month-end close task list.
How payroll, HR and accounting systems automate it
The HR or payroll system tracks hours and rates, and the general ledger holds the liability, so most teams export a liability report and post a journal entry. Our guide to accrual accounting automation covers the wider category.
Workday. The Time Off Liability report multiplies plan balances by a rate derived from annual salary, for example $50,000 divided by a 2,080-hour annualization factor gives $24.04 an hour (Workday documentation, last updated June 23, 2023). The documentation does not describe posting the result to the ledger, and it does not add employer taxes, so you still apply the tax load yourself.
Restaurant365. Its PTO Liability report multiplies accrued, unused hours by each employee’s rate, converts salaries to an hourly rate and includes terminated employees. It runs only as of today’s date, so run it on the last day of the period (Restaurant365 documentation, no date shown).
QuickBooks Online. Payroll tracks PTO hours, but a September 2022 community reply says it does not convert unused PTO to dollars, and a March 2025 reply says journal entries cannot be set to reverse automatically (QuickBooks Community, March 3, 2025).
NetSuite and Business Central. Both handle the ledger side well. NetSuite journal entries take a Reversal Date and can defer the reversal until that date (Oracle NetSuite Help, no date shown). Business Central’s recurring journals offer a Reversing Variable method that clears the amount after posting and posts the balancing entry the next day (Microsoft Learn, last updated April 7, 2026). You can then book the full balance each month and let it reverse.
How we researched this
We read FASB Statement No. 43, PwC’s accounting guide, the Journal of Accountancy, IRS and SSA pages, state agency pages and vendor documentation, all checked on October 8, 2026. We also reviewed the top-ranking articles for this search. Most come from payroll vendors and say little about employer taxes, state forfeiture rules or the tax deduction.
Related guides
- GASB 101 Compensated Absences: Leave Liability Guide
- General Ledger Reconciliation: Steps, Frequency and Review
- Church Payroll: Minister Taxes, Housing Allowance, Software
Frequently asked questions
Do I have to accrue vacation if employees are not paid out when they leave?
Often yes. ASC 710 requires an accrual for rights that vest or accumulate, and time that carries forward to future years accumulates even if it is never paid in cash. Only time that expires unused, under a policy that is enforceable in the employee’s state, escapes the accrual.
Should I use current pay rates or future pay rates?
The standard does not specify a rate. Many companies use current rates because they are verifiable, though a future rate discounted to present value is also acceptable.
Do I include payroll taxes in the vacation accrual?
Yes. The employer share of Social Security and Medicare, and any other rate-based costs that will be due when the time is paid, are part of the cost of the absence. Exclude the 6.2% Social Security portion for employees who will already have passed the annual wage base.
Do I need to accrue sick leave?
Not if it accumulates but does not vest. FASB Statement No. 43 makes accrual optional for nonvesting accumulating sick pay. If sick time is paid out at separation, or is combined with vacation in a single PTO bank, treat it like vacation.
What about unlimited PTO?
Under a genuinely unlimited policy nothing is earned or carried forward, so there is usually nothing to accrue. A cap, carryover or payout practice can still create an accruable balance.
Sources
- FASB, Statement No. 43, Accounting for Compensated Absences, November 1980.
- PwC Viewpoint, Pensions and employee benefits guide, 6.4 Compensated absences, no date shown.
- Mark P. Holtzman, Journal of Accountancy, Vacation and sick pay accruals resulting from the pandemic, July 1, 2021.
- IRS, Publication 538, Accounting Periods and Methods, revised January 2022.
- Social Security Administration, Contribution and Benefit Base, no date shown (2026 figures).
- California Labor Commissioner (DLSE), Vacation FAQ, no date shown.
- Woods Aitken LLP, Earned Vacation Pay Cannot Be Forfeited in Colorado, June 30, 2021.
- Mass.gov, Massachusetts law about vacation leave, last updated July 21, 2026.
- Workday, Report Liability for Time Off, last updated June 23, 2023 (vendor documentation).
- Restaurant365, PTO Liability Report, no date shown (vendor documentation).
- QuickBooks Community, Automatic reversal journal entries, March 3, 2025 (vendor forum).
- QuickBooks Community, Liability for unused paid time off, September 7, 2022 (vendor forum).
- Oracle NetSuite Help, Reversing Journal Entries, no date shown (vendor documentation).
- Microsoft Learn, Work with general journals (Business Central), last updated April 7, 2026 (vendor documentation).
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
