Bonus Accounting Entry

A bonus is a form of additional compensation given to employees, typically as a reward for achieving specific performance targets or as an incentive to motivate higher productivity. When recording bonus payments in the accounting books, the following entries are made:

1. Accrued Bonus Expense:

Debit: Bonus Expense Account
Credit: Accrued Bonus Liability Account

At the end of the accounting period or whenever the bonus is earned, an entry is made to recognize the expense and create a corresponding liability. Debiting the Bonus Expense account increases the expense and reduces the net income, while crediting the Accrued Bonus Liability account reflects the amount owed to the employees.

2. Paid Bonus Expense:

Debit: Accrued Bonus Liability Account
Credit: Cash or Bank Account

When the bonus is paid out to the employees, the Accrued Bonus Liability account is debited to reduce the liability, and the Cash or Bank account is credited to reflect the outflow of cash.

Example

Let's consider an example where a company offers a performance-based annual bonus to its employees. At the end of the year, the total bonus amount is $50,000.

1. During the year, as employees achieve performance targets, the company records an accrued bonus expense entry:

Debit: Bonus Expense Account - $50,000
Credit: Accrued Bonus Liability Account - $50,000

This entry recognizes the liability to pay the bonuses and increases the bonus expense.

2. When the bonuses are paid at the end of the year, the company records the paid bonus expense entry:

Debit: Accrued Bonus Liability Account - $50,000
Credit: Cash or Bank Account - $50,000

This entry reduces the accrued bonus liability and reflects the cash outflow for paying the bonuses.