Key takeaways
- Accrued annual leave is a liability on the balance sheet as it is earned, not an expense that appears only when the employee takes the holiday.
- Long service leave in the building industry may be funded through a portable scheme, so each worker’s arrangement has to be confirmed rather than assumed.
- A leave register that shows each employee’s balance, reviewed monthly and reconciled to the payroll, makes the liability visible before it becomes urgent.
- A recorded liability still has to be paid in cash, so the business should plan a reserve or a leave schedule that spreads the cost across the year.
- The questions to put to a bookkeeper are whether the leave is recorded, how the portable scheme applies, how the register reconciles and what the cash would look like if the largest balance fell due.
Ask a small builder what they owe their staff and they will usually name the wages for the fortnight, the superannuation, and perhaps the tax withheld. Few mention the leave. The annual leave a carpenter has built up over the last year, the long service leave a bricklayer has been quietly accumulating since they started, the entitlement a supervisor will take with them if they leave on Friday. All of it is money the business owes, and most small builders do not carry it anywhere in their numbers.
That omission flatters the profit. A year in which the crew worked hard, took little leave and nobody left looks better than it should, because the cost of the leave they earned has not been recorded as a liability. The bill arrives later, when someone takes a long break, when a valued supervisor resigns, or when the business is sold or the owner retires and the accounts are read by someone who is not inclined to be generous.
This article explains what accrued leave is as a balance sheet liability, why it matters to a builder’s cash, and how to track it without a complicated system. It is aimed at a licensed builder who runs a team and does the books, or who relies on a bookkeeper and wants to ask the right questions. It does not cover payroll mechanics or superannuation, which are separate topics.
Accrued leave is a liability, not a future expense
Leave is earned as work is done. An employee who works through the year builds up an entitlement to annual leave, and that entitlement is a debt the employer owes to the employee, whether or not the leave has been taken. In accounting terms it is a liability on the balance sheet, recognised as the leave accrues, and not something to be recorded only when the employee actually goes on holiday.
The distinction matters because it changes what the profit figure means. Profit that ignores accrued leave is profit that has not paid for the work the staff have already done. A business that pays its crew fully each week while carrying an unrecorded debt for their leave is, on paper, healthier than it is. The debt has not gone away; it has simply been left out of the picture until it has to be paid.
Long service leave works on the same principle, but the period and the rules are longer and more specific, and the entitlement builds over many years. The longer an employee stays, the larger the accumulated liability, and for a business with a stable team that can become a significant sum. Check the entitlements that apply to each person under their award or agreement and under the long service leave rules that cover the work, rather than working from a general assumption.
Long service leave in the building industry may be handled differently
Building and construction is one of the industries where the long service leave arrangements can differ from the usual employer-held entitlement. In New South Wales, many construction workers are covered by a portable long service scheme, under which the employer pays a levy that funds the entitlement rather than carrying the accrued liability on its own books. Whether a worker falls under that scheme depends on the work they do and the award that applies, and it changes the liability picture considerably.
The practical lesson is that the accrual question must be answered for each worker, not for the business as a whole. A tradesperson whose long service is paid through a portable scheme does not create the same balance sheet liability as an office employee whose entitlement sits with the business. Confirm which scheme applies to each person, what levies the business pays, and what remains as the employer’s own liability, and then record the remainder properly.
Because the rules are technical and change, a builder should check the current position with an accountant or the scheme itself rather than relying on a summary from a forum. The mistake is not to get the exact treatment wrong on the first attempt; it is to assume there is nothing to record at all.
Annual leave: the accrual that builds up quietly
Annual leave is the entitlement small builders most often underestimate, because it is taken in patches. A crew that works through a busy winter and takes its leave in a quiet month may look fine on any single month’s figures, while the liability across the year grows steadily in the background. The balance is only visible when someone sits down and adds it up across every employee.
Track the balance for each person, not just the total. The total tells you there is a debt; the individual balances tell you who is carrying the most, who has been working without a break and is due a rest, and who would be expensive to lose with a large entitlement outstanding. That information matters for planning the programme, because a crew member with a large accrued balance will need to take leave at some point, and the timing of that leave affects whether the business has enough people on site.
Casual employees are a separate case. Their arrangements differ from those of permanent staff, and whether a casual accrues leave in the same way depends on their status and the award that applies. Confirm the status of each person before assuming how their leave should be treated, because a casual who has been treated as a permanent employee, or the reverse, is a common source of error at audit or at a dispute.
Setting up a leave register that is actually used
A leave register does not need to be complicated. It needs to be kept up to date, reviewed each month and reconciled to the payroll. The register should show, for each employee, the opening balance, the leave accrued in the period, the leave taken, the closing balance, and the value of that balance at the rate the business would pay to clear it. The value is the figure that goes to the accounts as the liability.
The register is most useful when it sits in the same system as the payroll, so that accruals are calculated from the hours and rates actually paid rather than estimated by hand. Where that is not possible, a spreadsheet kept by the bookkeeper and checked by the owner each month is a reasonable alternative. What matters is that the figure is reviewed, that the review is recorded, and that the liability on the balance sheet agrees with the register.
What each employee’s leave record should show
- The employee’s status, confirming whether they are permanent, casual or covered by a portable scheme.
- The opening balance for annual leave and long service leave at the start of the period.
- The leave accrued and the leave taken in the period.
- The closing balance, reviewed and signed off by the owner each month.
- The value of each balance at the rate the business would pay to clear it.
- A reconciliation to the payroll and to the liability in the accounts.
Reconcile the register at least at the end of each financial year, and preferably each month. A year-end adjustment that tries to catch up three years of unrecorded leave is painful, and it puts a large, unexplained liability into a single set of accounts. Regular, smaller updates make the figure believable and make the cost of leave part of the normal running of the business.
Keeping the leave liability current each month
- 1Update the balancesAdd the leave accrued and deduct the leave taken for every employee in the period.
- 2Value the liabilityCalculate the cost of each balance at the rate the business would pay to clear it.
- 3Reconcile to the payrollCheck that the hours and rates in the register agree with the payroll records.
- 4Agree to the accountsConfirm that the liability on the balance sheet matches the register total.
- 5Plan the cashNote the largest balances and set aside a reserve or schedule leave to spread the cost.
Worked example: a supervisor leaves and the cash runs short
Consider a builder in western Sydney running a small team of carpenters and a site supervisor. The owner’s accounts had shown a healthy profit for two years, and the bank was comfortable with the business. Nobody had recorded the leave the crew were building up, because the bookkeeper was paid to prepare the figures for the tax return and nobody had asked for the liability to be shown.
The supervisor, who had been with the business for many years, resigned at short notice to take a job with a larger firm. Their accrued annual leave and long service entitlement, which the owner had never thought of as a debt, had to be paid out at the end of their employment. The sum was large enough to take most of the business’s spare cash for the month, at the same time as a progress payment was delayed by a client. The owner had to draw on the overdraft for the first time in the business’s history, and the bank asked why the accounts had not shown the obligation.
The fix was not dramatic. The owner set up a leave register, had the bookkeeper calculate the accrued balance for every employee, and recorded the liability in the accounts. The profit for the year was lower than it had looked, and the owner understood why. The business then planned its cash around the leave, rather than being surprised by it, and the next departure was handled from the reserve the register had shown was needed.
Leaving accrued leave out of the year-end numbers is the mistake that costs the most. It flatters the profit, hides a real debt, and presents the bill at the moment the cash is needed most, usually when a key person leaves. Record the liability as it builds, review it each month, and make sure the figure on the balance sheet agrees with the register.
Cash flow: planning for the payout
Leave is not only an accounting question. It is a cash question, because a liability that is recorded but not funded will still have to be paid in cash when it falls due. A business that tracks its leave but keeps no reserve for it has simply made the problem visible. The next step is to plan for it, by setting aside a share of the cash each period, or by agreeing a leave schedule that spreads the cost across the year.
The timing of the cash is harder to predict than the amount. A progress payment that arrives late, a variation that is disputed, or a retention held back at the end of a job can all leave the business short at the moment a payout falls due. The article on retention and defects liability periods looks at how held-back money affects the cash position, and the two should be planned together.
Careful bookkeeping is the foundation of all this. The leave register, the payroll, the accounts and the bank position should agree, and the guide to bookkeeping systems for builders sets out how to keep them in step without a large overhead. A builder who knows the leave liability, the cash behind it and the timing of the next payout is in a much stronger position than one who finds out when the bill arrives.
When employment ends: the payout is the moment of truth
Everything in the register comes due in one place when employment ends. The employee is entitled to be paid out what they have accrued, and the business cannot defer that payment because the cash is inconvenient. The payout is usually calculated from the same register, which is why an unreconciled register turns a routine departure into an argument over what is owed.
Check the final pay calculation against the award or agreement that applies, and against the leave balances the employee sees on their payslip. A payslip that shows a balance the business has not recorded in its own register is a disagreement waiting to happen. Where the employee is covered by a portable long service scheme, the paperwork may need to go through the scheme rather than being paid out by the business, so confirm the route before the final pay run.
A departure also tests the wider controls. The person leaving may hold the keys, the job files, the subcontractor relationships and the knowledge of which client is slow to pay. Finish the final pay and the leave calculation on the same day the handover is done, so that neither is left until the last moment.
Questions to put to the bookkeeper or accountant
A small builder does not need to become an accountant, but should be able to ask the right questions. Ask whether accrued annual leave and long service leave are recorded as liabilities in the accounts, and at what value. Ask which employees are covered by a portable long service scheme and what the business pays into it. Ask how the leave register is reconciled to the payroll, and how often. And ask what the business’s cash position would be if the largest leave balance on the books were paid out next month.
If the answers are vague, that is the signal to tighten the process before a departure makes the issue urgent. A bookkeeper who can answer these questions clearly is doing the job; one who cannot is leaving the owner exposed.
Keeping the leave picture in view
Leave accruals are easy to forget because they do not show up in the week’s bank transactions. They build up quietly, in the background of a busy business, and they become real only when someone leaves or takes an extended break. The discipline is to make them visible: a register that is kept, a liability that is recorded, and a cash plan that allows for the payout. That discipline costs a little time each month and removes a surprise that can otherwise threaten the business.
For the wider business and compliance picture, the guide to how NSW builder CPD works sets out the licence obligations that sit alongside running a team. Leave is one of the costs of employing people well, and a builder who plans for it is more likely to keep the good people the business relies on.
Questions builders ask
Is accrued annual leave a liability for a small builder?
Yes. Annual leave that employees have earned is a debt the business owes them, whether or not it has been taken. It is recorded as a liability on the balance sheet as it accrues, and it has to be paid in cash when it is taken or when the employment ends.
Do builders have to record long service leave?
It depends on the worker. Many construction workers in New South Wales are covered by a portable long service scheme funded by employer levies, which changes what the business has to record. Confirm which arrangement applies to each person, and check the current position with an accountant.
What is a leave register and do I need one?
A leave register records each employee’s accrued and taken leave and the value of the balance. It is the working document that supports the liability in the accounts. A small business needs one, even if it is a simple spreadsheet kept up to date and reviewed each month.
How often should accrued leave be reviewed?
Review it monthly if you can, and at least at the end of each financial year. Regular updates keep the liability believable and avoid a large catch-up adjustment that puts an unexplained debt into one set of accounts.
Why does leave matter for cash flow?
A liability that is recorded but not funded still has to be paid in cash when it falls due, often when a key employee leaves. Planning a reserve or a leave schedule stops a payout from draining the cash needed for wages, suppliers and the next job.
Does leave accrue for casual employees?
Casual employees are generally treated differently from permanent staff, and whether they accrue leave depends on their status and the award or agreement that applies. Confirm each person’s status before deciding how their leave should be recorded.
Sources
- Continuing professional development for builders and swimming pool builders · NSW Government
- General building work licensing · NSW Government
- Home Building Act 1989 (NSW) · NSW Legislation
Published 30 September 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.
