Definition
Compensated absences refer to periods during which employees are paid despite not attending work. This concept is essential in both managerial and financial accounting as it affects payroll, financial reporting, and compliance with accounting standards. Compensated absences are classified into two categories:
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Accumulating Compensated Absences: These are benefits that employees can carry forward to subsequent financial periods if not utilized within the current financial period. The primary type of accumulating absence is annual leave or vacation days.
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Non-Accumulating Compensated Absences: These benefits cannot be carried forward. Examples include maternity leave, jury service, and sick leave.
Accounting Treatment
The detailed rules for the accounting treatment of accumulating and non-accumulating absences are set out in Section 28 of the Financial Reporting Standard (FRS) applicable in the UK and Republic of Ireland. The relevant International Accounting Standard is IAS 19, Employee Benefits.
Examples
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Accumulating Absences: An employee has 5 unused vacation days at the end of the year. These days can be carried forward to the next year, and thus, they represent a liability on the company’s balance sheet.
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Non-Accumulating Absences: An employee takes 10 days of sick leave within a year. These days cannot be carried forward, and the expense is recognized in the period it occurs, without carrying any liability forward.
Frequently Asked Questions
What are compensated absences?
Compensated absences are periods during which employees are paid even though they do not attend work. They can be either accumulating or non-accumulating.
What is the difference between accumulating and non-accumulating compensated absences?
Accumulating compensated absences can be carried forward to subsequent financial periods, while non-accumulating absences cannot.
How are accumulating compensated absences accounted for?
Accumulating compensated absences are recognized as a liability on the company’s balance sheet, as they represent a future obligation.
How are non-accumulating compensated absences accounted for?
Non-accumulating compensated absences are expensed in the period they are incurred and do not create any future obligations on the company’s balance sheet.
What standards govern the accounting treatment of compensated absences?
Section 28 of the Financial Reporting Standard applicable in the UK and Republic of Ireland and IAS 19, Employee Benefits, govern the accounting treatment of compensated absences.
Related Terms
Accrual Accounting
Accrual accounting is a method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.
Liability
A liability is a company’s legal financial debts or obligations that arise during the course of business operations.
Employee Benefits
Employee benefits are various types of non-wage compensation provided to employees in addition to their normal wages or salaries.
Online References
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William Thomas
- “Employee Benefits Design and Compliance” by Ann E. Dunwoody
Accounting Basics: “Compensated Absences” Fundamentals Quiz
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