Understanding Provisions
A provision is an accrued expense for a company.
Provisions are generated for two main reasons:
To cover the earnings financially, so that when your company has to pay this earning, it is prepared to do so.
From a general ledger perspective, each provision is a debt that your company is accruing, and sooner or later, it has to be paid. So, debt accounts are balanced with the use of provisions.
To keep track of costs.
Although the employee receives his earnings at the end of the year or on his anniversary date, the cost is generated every day that the employee works. Costs can be controlled and distributed accordingly to the real cost generation.
In Global Payroll for Mexico, you can generate three types of provisions:
Christmas bonus provision
Vacation provision
Vacation premium provision
The vacation premium and Christmas bonus are legal earnings that are assigned to an employee on a yearly basis, depending on his seniority. For every day that an employee works, he earns a fraction of these earnings. Even if an employee leaves the company before receiving his bonus, a proportional part of this earning will be paid in his termination pay.
While Global Payroll for Mexico delivers deductions for the Christmas bonus provision, vacation provision, and vacation premium provision, you can also create your own deductions for other provisions.
To define a provision:
Define the provision on the Deductions component.
The payroll process will calculate the proportional amounts of the provision for the period corresponding to the actual days worked.
This topic provides an overview of provision calculation and discusses:
Christmas bonus provisions
Vacation provisions
Vacation premium provisions
Provision Calculation
Global Payroll for Mexico delivers deductions that are used to calculate provisions for vacation, vacation premium, and Christmas bonus. All of these provisions are defined as non-taxable for ISR and are not subject to state taxes. These earnings do not affect any other earning, deduction, or accumulator.
The system calculates the proportion of the provision for each pay period in terms of Actual Worked Days for an employee. Every time a regular payroll process is run, the system determines the corresponding quantities of provisions for vacation, vacation premium, and Christmas bonus according to the procedures detailed below.
Christmas Bonus Provisions
To determine the corresponding amount of the Christmas bonus provision, this formula is used:
(Days of Christmas bonus according to seniority/365 days * Worked days in the period) * (Salary type)
Here's an example:
Days of Christmas bonus = 25
Worked days in a period = 15
Daily salary = 100.00
The formula calculates the corresponding amount of the Christmas bonus provision as:
(25/365 * 15) * 100.00 = 102.74
Note: An employee's salary can be taken from either his daily salary rate or any average salary. You can choose which salary type you want to use in calculating the Christmas bonus provision. Global Payroll for Mexico delivers the provision calculation using the daily salary. Seniority has to be calculated to the date of the Christmas bonus payment, not to the processing date, nor the period begin or end date. Otherwise, the provision will not be accurate. The provision has to reflect the payment that the employee is going to receive as a Christmas bonus in December. By law, this date is no later than December 20.
The Christmas bonus provision will not be included in the NET accumulator (TOTAL NETO), since this deduction won't be deducted from the employee.
Vacation Provisions
To determine the corresponding amount of the vacation provision, this formula is used:
(Number of days according to the vacation table/365 days * Worked days in the period) * (Salary type)
Here's an example:
Vacation days = 25
Days worked in a period = 15
Daily salary = 100.00
The formula calculates the corresponding amount of the vacation provision as:
(25/365 * 15) * 100.00 = 102.74
Note: An employee's salary can be taken from either his daily salary rate or any average salary. You can choose which salary type you want to use in calculating the vacation provision. Global Payroll for Mexico delivers the provision calculation using the daily salary. Seniority has to be calculated to the date of the next anniversary, not to the processing date, nor the period begin or end date. Otherwise, the provision will not be accurate. The provision has to reflect the payment that the employee is going to receive as vacation on the date that the employee earns the entitlement.
The vacation provision will not be included in the NET accumulator (TOTAL NETO), since this deduction won't be deducted from the employee.
Vacation Premium Provisions
To determine the corresponding amount of the vacation premium provision, this formula is used:
(Number of days according to the vacation table/365 days * Worked days in a period) * (Percentage of vacation premium) * (Salary type)
Here's an example:
Days of vacation = 20
Days worked in a period = 15
Daily salary = 100.00
Vacation premium percent = 25%
The formula calculates the corresponding amount of the vacation premium provision as:
((20/365 * 15) * (25%)) * 100.00 = 20.55
Note: An employee's salary can be taken from either his daily salary rate or any average salary. You can choose which salary type you want to use in calculating the vacation premium provision. Global Payroll for Mexico delivers the provision calculation using the daily salary. Seniority has to be calculated to the date of the next anniversary, not to the processing date, nor the period begin or end date. Otherwise, the provision will not be accurate. The provision has to reflect the payment that the employee is going to receive as vacation on the date that the employee earns the entitlement.
The vacation premium provision will not be included in the NET accumulator (TOTAL NETO), since this deduction won't be deducted from the employee.
Note: You can generate a provisions report in Global Payroll for Mexico.