How to do bonus accrual accounting entries?

When a firm grants an extra amount of reward to its employees based on their performance, it is termed a bonus. An accrued bonus is contingent on performance. Bonus accruals are recorded in the books so that inaccuracies can be avoided in the financial statements.

Such bonuses may be given as a single flare amount or as a percentage of their salaries. These bonuses can be given quarterly or annually or in any manner in which the firm decides.

If the bonus is accrued to its employees at 5% of their salary of Rs 30,000, then the accrual bonus can be shown in the journal as follows:

The bonus expense account is debited because according to the modern rule of accounting “Increase in expense is debited”. Accrued bonus liability is credited because according to the rule of accounting, “Increase in liability is credited”.

When it is time to pay such bonus amounts to its employees, then they can be journalised as:

In this case, the accrued bonus liability is eliminated and hence debited because according to the rule of accounting, “ Decrease in liability is debited” whereas cash account is credited since “the decrease in the asset is credited.”:

Failing to accrue these bonuses will lead to an overstatement of revenues in the financial statements and hence result in inaccurate data. If employees do not meet the required performance targets, then a bonus will not be given and hence the entries will be reversed.