What is bonus accrual?

Bonus accrual is a liability recorded for employee bonuses earned but not yet paid, recognizing the expense in the period in which they were earned rather than when they are paid. For professional service firms with performance-based compensation, bonus accruals ensure accurate financial statements and proper expense matching.

Key characteristics

• Liability for unpaid bonuses

• Matches the expense to the earning period

• Often recorded at year's end

• Reversed when bonuses are paid

• May require estimation

• Impacts period profitability

Why it matters for professional service firms

Without bonus accruals, financial statements understate compensation expense in the period bonuses are earned and overstate it when paid. Proper accrual ensures accurate monthly and annual profitability. Professional service firms should accrue bonuses monthly or quarterly based on expected payouts.

Real-world example

Marcus planned to allocate $120,000 in year-end bonuses to his team. Monthly bonus accrual: $10,000 expense recorded each month with corresponding liability. By December, the $120,000 accrued liability matched planned bonuses. When paid in January, the liability cleared with no impact on the income statement. Monthly financials reflected true compensation costs throughout the year.