As 2025 winds down, it’s important to review your company’s accounting for unused paid time off (PTO). Many employers allow employees to carry forward unused vacation, sick leave, or personal time. This policy may create liabilities under U.S. Generally Accepted Accounting Principles (GAAP) — and, if your staff tends to bank time off, your PTO accrual may be larger than expected. Here’s what to consider as you finalize your financials.
What PTO represents on the balance sheet
Compensated absences include paid time off that employees have earned but not yet taken. These absences may include:
- Paid vacation,
- Paid holidays,
- Paid sick leave, and
- Other forms of PTO earned by employment.
Under GAAP, when time off carries forward or must be paid out upon termination, your company generally must record a short-term liability on its balance sheet. It represents future compensation the company is obligated to provide. PTO accruals also typically create a related deferred tax asset because PTO isn’t deductible for tax purposes until it’s paid.
Quantifying PTO accruals
Start by reviewing your PTO policy and applicable state laws. Under GAAP, a liability must be recorded when:
- Employees have earned the time,
- The rights vest or accumulate,
- It’s probable employees will use or be paid for the time, and
- The amount can be reasonably estimated.
For hourly employees, the accrual is generally based on the employee’s hourly rate multiplied by unused hours and adjusted for employer taxes and benefits. For salaried employees, the calculation typically converts annual compensation into a daily or hourly rate and applies it to the unused balance.
Employers also may adjust for “breakage.” This is the portion of PTO that employees historically don’t use. Your estimate should be supported by past trends and updated periodically.
PTO accruals are a common area of auditor focus. To minimize surprises during audit fieldwork, establish a clear policy for recording PTO, apply a consistent method for calculating accruals, and provide auditors with detailed supporting schedules for your estimates. Consider reviewing your methodology now to ensure it reflects current pay rates, updated policies, and recent workforce trends.
Incorporate PTO into your year-end checklist
Growing PTO balances aren’t just an accounting matter. They may point to employee burnout, workload pressures, or scheduling challenges. To help support your employees’ well-being and productivity, encourage them to use their earned time off, especially as year-end approaches.
Contact us if you need assistance determining whether a PTO accrual is required and, if so, how to report it properly. We can also advise on best practices for managing PTO policies and monitoring the related financial impact.
For more information on the above article or any audit & assurance services, contact Melissa Motley, CPA, at (334) 887-7022 or by leaving us a message below.
