Bonuses and sales commission are often decided or calculated weeks after the work that earned them. If they are only expensed when payroll pays them, one month or one year carries another period’s cost. An accrual fixes the timing: the expense goes into the period in which the employee earned it, and a liability sits on the balance sheet until payroll catches up.
When an accrual is needed
Accrue at a period end when the business has an obligation it cannot realistically avoid and can estimate the amount:
- Contractual commission: a salesperson earns 5% of invoiced sales, and March sales are paid in the April payroll.
- Bonus schemes with set targets: the targets for the year were met before the year end, even if the board signs off the figures later.
- Discretionary bonuses: only accrue if the decision was made, or a practice of paying created a valid expectation, by the balance sheet date. A bonus first discussed after the year end is next year’s cost.
Under FRS 102 these are short-term employee benefits measured at the undiscounted amount expected to be paid.
Accounts to use
| Account | Type | Use |
|---|---|---|
| Bonuses and commission | Expense | gross amounts earned by staff |
| Directors’ bonuses | Expense | kept separate for the directors’ remuneration disclosure |
| Employer’s NIC | Expense | the NIC the payment will attract |
| Accrued bonuses and commission | Current liability | amounts earned but not yet run through payroll |
Sales commission that varies directly with sales can sit in cost of sales rather than overheads if that is how the business measures gross margin. Decide once and keep it consistent.
Worked example
At 31 December a company owes £8,000 of fourth-quarter commission, paid in the January payroll. Employer NIC on that payment is estimated at £1,000 and employer pension at £240.
| Account | Debit | Credit |
|---|---|---|
| Bonuses and commission | £8,000 | |
| Employer’s NIC | £1,000 | |
| Employer pension | £240 | |
| Accrued bonuses and commission | £9,240 |
In January the payroll journal posts the real figures. Reverse the accrual on the first day of the new period so the January payroll journal does not double-count the cost, or post the January payroll against the accrual account directly. Any difference between estimate and actual simply lands in January.
The corporation tax timing rule
An accrued bonus is only deductible for corporation tax in the accounting period it was charged if it is paid within nine months of the period end. If it is paid later, the deduction moves to the period in which it is paid. Keep a note of each accrued bonus and the date it actually went through payroll so the tax computation can be checked. HMRC explains the rule in its Business Income Manual.
Checks before closing the period
- Agree the commission accrual to the sales report it is based on, net of credit notes issued after the period end for sales in the period.
- Confirm board minutes or scheme rules support every bonus accrued.
- Check last year’s accrual has been fully cleared; a balance left over usually means the reversal was missed.
- Make sure directors’ bonuses are not mixed into staff costs.
For the wider rules on period-end estimates, see accruals and prepayments in the chart of accounts, and for how the payment itself is posted, wages and salaries in the chart of accounts.