How to accrue end of service gratuity in the books of a UAE company

Gratuity is earned as each year of service passes, so under accrual accounting the cost belongs in the years the employee works, not the month they leave. IAS 19 treats end-of-service benefits like this as post-employment benefits. Larger companies often obtain an actuarial valuation; many SMEs use a simpler approach that calculates the amount payable if every eligible employee left at the reporting date.

Our view: for a business with fewer than fifty staff, the simple method, updated monthly and reviewed by the auditor at year end, is proportionate. Confirm with your auditor which method they will accept.

The calculation follows Article 51 of the Labour Law as summarised on u.ae: 21 days of basic wage for each of the first five years, 30 days for each year after that, part years proportionately once a year is complete, a cap of two years’ wages, and basic salary only, excluding allowances. Days of unpaid absence do not count as service.

For employees in their first year, many companies still accrue from day one, because most staff pass the one-year mark and the cost relates to that first year’s work. Others start at twelve months. Pick one approach and apply it consistently.

An employee joined on 1 January 2022 on a basic salary of AED 7,500. Using basic ÷ 30 as the daily rate for illustration, the daily wage is AED 250. In years one to five the annual entitlement is 21 × 250 = AED 5,250, so the monthly accrual is AED 437.50. From 1 January 2027 the employee earns 30 days a year: 30 × 250 = AED 7,500, or AED 625 monthly.

Monthly journal: debit staff costs – gratuity AED 437.50; credit provision for end-of-service benefits AED 437.50. At 31 December 2026, after five years, the provision for this employee should be 105 days × AED 250 = AED 26,250. If the basic salary rises to AED 8,500 in 2026, the whole provision is recalculated on the new basic, because gratuity uses the final basic wage: 105 × 283.33 = AED 29,750, and the AED 3,500 catch-up is booked when the raise takes effect.

• Monthly: accrue the period’s entitlement to the provision
• On a salary change: recalculate all past service on the new basic
• At year five: switch to 30 days a year from then on
• On exit: pay from the provision; any difference goes to staff costs

When an employee leaves, debit the provision with their accrued balance and credit bank with the amount paid (or salaries payable until paid). If the actual payment differs, for example because unpaid leave reduced service, book the difference to staff costs. Gratuity must be paid within 14 days of the end of the contract, so final settlement cash needs planning.

At year end, recalculate every employee’s entitlement from HR records and compare the total with the provision in the ledger. Adjust the difference. Keep the schedule, by employee, as the audit working paper. For corporate tax, ask your tax agent whether provisions are deductible when accrued or when paid in your situation.

HelloBooks does not calculate gratuity automatically. Set up a provision account and a gratuity expense account, enter the monthly accrual as a recurring journal, and update it when salaries change or employees join and leave. Attach the employee-level schedule to the journal each month.

The AI agent can draft the recalculation journal when you tell it what changed, for example “basic for Rania increased to AED 8,500 from 1 March; she has 4 years 2 months of service”, and it shows the arithmetic for you to check. Ask “what is the gratuity provision, and does it agree with last month’s schedule?” and it reconciles the two.