Annual bonus
In one sentenceAn amount the business pays its employees once a year in recognition of their performance or as a share of its results, according to its policy or what the contract provides.
Simply put
If the bonus is stated in the contract or follows an established policy, it is an obligation of the business; otherwise it is a discretionary management decision each year.
Do not wait for the payment month to record it: if it is expected, spread its estimate over the months of the year as an accrued expense, applying the matching principle, so that one month does not bear a whole year's cost.
Worked example
A trading company expects to pay annual bonuses to its employees totaling 60,000 SAR after the year ends.
Monthly installment: 60,000 ÷ 125,000
Dr Bonus expense5,000
Cr Accrued bonuses5,000
Accrued bonuses balance after 12 months60,000 SAR
Formula: Monthly installment = expected bonuses for the year ÷ 12
Don't confuse it with
End-of-service benefitThe end-of-service benefit is a statutory right paid when the contract ends, while the annual bonus is paid during service according to the policy or the contract.