Deferred Compensation Accounting Entry

Deferred compensation is an arrangement where a portion of an employee's income is paid out at a later date after it is earned. It is often used as a tax deferral strategy for employees and can include bonuses, stock options, or retirement plans. Here are the journal entries to record deferred compensation.

Scenario: Deferred Compensation Plan

Assume a company agrees to defer ₹100,000 of an executive's compensation to be paid out in five years. The company records this deferred compensation as a liability and expense over the period it is earned.

1. Recording the Deferred Compensation Expense

Particulars	Debit (₹)	Credit (₹)
Deferred Compensation Expense A/c	100,000
To Deferred Compensation Liability A/c		100,000
(Being deferred compensation expense recorded)

Explanation:

1. Deferred Compensation Expense A/c is debited to record the expense incurred for the deferred compensation.
2. Deferred Compensation Liability A/c is credited to record the liability to pay the deferred compensation in the future.

2. Payment of Deferred Compensation

When the deferred compensation is paid out after five years, the following entry is made:

Particulars	Debit (₹)	Credit (₹)
Deferred Compensation Liability A/c	100,000
To Cash/Bank A/c		100,000
(Being deferred compensation paid out)

Explanation:

1. Deferred Compensation Liability A/c is debited to reduce the liability.
2. Cash/Bank A/c is credited to reflect the cash outflow.

Summary of Entries

1. Recording the Deferred Compensation Expense:

   • Debit Deferred Compensation Expense A/c
   • Credit Deferred Compensation Liability A/c

2. Payment of Deferred Compensation:

   • Debit Deferred Compensation Liability A/c
   • Credit Cash/Bank A/c

Additional Considerations

Adjusting Entries for Deferred Compensation

If the deferred compensation is to be accrued over multiple periods, adjusting entries would be made periodically to allocate the expense and liability.

Example: Accruing Deferred Compensation Monthly

If the ₹100,000 deferred compensation is to be accrued over 12 months, the monthly expense would be:

Particulars	Debit (₹)	Credit (₹)
Deferred Compensation Expense A/c	8,333
To Deferred Compensation Liability A/c		8,333
(Being monthly deferred compensation expense recorded)