With 2025 coming to a close, it’s important to review your organization’s accounting for unused paid time off (PTO). Unused vacation, sick leave, or personal time are some of things many employers allow employees to carry forward. However, this policy may create liabilities under U.S. Generally Accepted Accounting Principles (GAAP). Your PTO accrual may be even larger than expected if your staff tends to bank time off. Consider these things 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
• Other forms of PTO earned by employment

 
Under GAAP, when time off carries forward or must be paid out upon termination, your organization generally must record a short-term liability on its balance sheet. It represents future compensation the organization 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
• 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 reduce 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 PTO accruals are 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.