It sounds like you understand, from your post, that QBO does not make financial entries for vacation accruals, so you must do those yourselves. However, you mentioned that you only make these adjustments at the end of Q2 and Q4. There are several things wrong with this from an accounting principle standpoint, according to both GAAP and IFRS.
- If you are using QBO's vacation payroll item to record vacation taken:
Vacation accruals or any employee benefit must be recorded in the period in which it is earned. So for each pay period, an entry should be made from your QBO vacation reports. The entry is:
DR Wage Expense
CR Vacation Payable (liability)
If you were using the Vacation payroll item in QBO, this is the entry QBO will make when someone takes vacation:
DR Wage Expense
CR Bank account
Note that you now have DR Wage Expense twice for the same vacation time. This is because QBO only records Vacation expense at the time that vacation is taken. To correct this, you would have to reverse all Vacation expense recorded at the time it is taken, because you will have already recorded it in your accrual entry above. Your adjusting entry for vacation taken would be:
CR Wage Expense (only for amount of vacation taken & paid out in a pay period)
DR Vacation Payable (liability)
I have just found out this morning from @Andrew82 , that QBO will be corrected regarding the erroneous reporting of Vacation pay/payable and that we will all be notified once that happens. But in the meantime, the above is your solution.
2. All jurisdictions in Canada require that vacation pay be reported as Vacation pay on an employee's paystub. For an employee to simply keep receiving their regular salary during a vacation period is not acceptable, and mostly this is true more for the employer than the employee. Reason being, if an employee ever decides to go to their provincial employment standards and make a complaint that they have not received any vacation pay, and can provide paystubs to show this is true, the employer can be ordered to pay vacation pay on top of all other wages the employee has received. So for the employer's protection, you should be identifying vacation pay on the paystub.
If you continue to record vacation the way you are currently doing it, I would do your accrual entries as follows:
DR Wage Expense (for all vacation that should have been accrued in your time period)
CR Vacation Payable (as above)
CR Wage Expense (for all vacation that has been taken during the same period, because it has already been DR twice - once in your regular salary, and once in your accrual above)
DR Vacation Payable (as above)
The entries for both situations ends up being the same because in 1) The vacation expense is recorded in the accrual and again when the vacation is taken, thus debiting the wage expense twice, and in 2), The vacation expense is ‘included’ in your regular salary and also in your accrual, thus debiting wage expense twice. Either way, until it’s fixed in QBO, you will need to CR the Wage Expense for vacation taken and DR the Vacation Payable liability, assuming you have made your initial vacation accrual entries where you DB Wage Expense and CR Vacation Payable.
