End-of-Service Gratuity Accounting: How to Accrue It Correctly

Answer first: Under UAE law, end-of-service gratuity accrues at 21 days of basic salary per year for the first five years of service and 30 days per year after that. It is a real, growing liability that should be accrued monthly - not booked only when an employee leaves. Federal Decree-Law No. 33 of 2021 governs this entitlement for private-sector employees, and the calculation basis is the employee's last basic salary, excluding allowances, commissions, and bonuses.

Official context: FTA VAT registration guidance and UAE end-of-service benefits guidance.

Who this is for

UAE SMEs, founders, bookkeepers, e-commerce operators, and finance administrators who need cleaner records for VAT, payroll, banking, corporate tax, and management reporting.

Key takeaways

• The Legal Basis: Federal Decree-Law No. 33 of 2021.
• How to Calculate End-of-Service Gratuity: Step by Step.
• Worked Example: Gratuity Calculation.
• Why Monthly Accrual Matters.

UAE considerations

In the UAE, bookkeeping has to support more than internal reporting. The same records may be used for VAT returns, corporate tax calculations, WPS/payroll checks, free zone administration, bank reviews, and investor diligence. Pair this guide with the monthly bookkeeping checklist and Finsera's bookkeeping service so Dubai, Abu Dhabi, Sharjah, and other UAE teams keep source documents, reconciliations, and tax workings connected.

Common questions

• How is end-of-service gratuity calculated in the UAE? Gratuity equals 21 days of basic salary per year for the first five years of service, and 30 days per year thereafter. Basic salary excludes allowances, bonuses, and commissions. The total is capped at two years' total remuneration. Partial years count if the employee has completed more than six months.
• What is the difference between basic salary and total salary for gratuity? Gratuity is calculated on basic salary only - the amount stated in the MOHRE employment contract. Housing, transport, and other allowances are excluded from the calculation but are included in the two-year cap check. Using total salary instead of basic salary is the most common gratuity accounting error.

The Legal Basis: Federal Decree-Law No. 33 of 2021

The UAE Labour Law (Federal Decree-Law No. 33 of 2021, as amended) establishes end-of-service gratuity as a statutory entitlement for every non-GCC national employee completing at least one year of continuous service. Key provisions include:

• Gratuity is calculated on basic salary only - housing, transport, and other allowances are excluded
• The 21-day rate applies to the first five years of service; the 30-day rate applies from year six onward
• The total gratuity amount is capped at two years' total remuneration (basic + allowances)
• Employees dismissed for gross misconduct under Article 44 may forfeit gratuity entirely
• Unlimited-contract and fixed-contract employees are treated equally under the current law

The gratuity is not a discretionary bonus. It is a contractual and statutory obligation that creates a balance-sheet liability the moment an employee completes their probation. Accounting for it monthly is not optional - it is the only way to present an accurate financial position.

How to Calculate End-of-Service Gratuity: Step by Step

Follow this process for each employee:

1. Identify the basic salary. Exclude all allowances, commissions, overtime, and bonuses. Use the contractual basic salary as stated in the MOHRE employment contract.

2. Determine completed years of service. Count full years from the start date. Partial years are counted if the employee has completed more than six months of the final year.

3. Apply the correct daily rate. Divide the annual basic salary by 365 to get the daily rate.

4. Calculate the gratuity for the first five years. Multiply 21 days by the daily rate, then by the number of years (up to five).

5. Calculate the gratuity for years beyond five. Multiply 30 days by the daily rate, then by the number of years beyond five.

6. Sum both amounts and apply the cap. The total cannot exceed two years' total remuneration (basic + allowances).

7. Record the monthly accrual. Divide the total estimated gratuity by total service years, then book one month's portion as an expense and liability.

Worked Example: Gratuity Calculation

Consider an employee with a basic salary of AED 10,000 per month and total remuneration (basic + allowances) of AED 15,000 per month, employed for 7 years:

Component	Calculation	Amount (AED)
Daily basic rate	AED 10,000 × 12 ÷ 365	328.77
First 5 years: 21 days/year	328.77 × 21 × 5	34,520.55
Years 6-7: 30 days/year	328.77 × 30 × 2	19,726.20
Total gratuity due	-	54,246.75
Cap check: 2 years × AED 15,000 × 12	AED 360,000	Cap not exceeded

The monthly accrual for this employee is AED 54,246.75 ÷ 84 months = AED 645.79 per month. This amount should be debited to gratuity expense and credited to gratuity liability every month until the employee leaves.

For an employee with 3 years of service at the same basic salary:

Component	Calculation	Amount (AED)
Daily basic rate	AED 10,000 × 12 ÷ 365	328.77
3 years: 21 days/year	328.77 × 21 × 3	20,712.51
Total gratuity due	-	20,712.51
Monthly accrual	AED 20,712.51 ÷ 36 months	575.35

The monthly accrual changes over time because the rate shifts from 21 to 30 days at the five-year mark. Most accounting systems handle this by recalculating the total estimated liability annually and truing up the monthly accrual rate.

Why Monthly Accrual Matters

Booking gratuity only on termination produces three problems:

Balance-sheet inaccuracy. The liability is invisible until departure, making the company's financial position look stronger than it is. A team of ten employees with an average AED 40,000 gratuity liability each represents AED 400,000 of unrecorded obligations.

Profit distortion. The full gratuity hits as a one-time expense in the departure month, distorting that period's profitability. Monthly accrual smooths the expense across the employee's tenure, giving management a truer view of labour costs.

Cash planning failure. Businesses without accrued gratuity records face sudden, unplanned cash outflows when senior employees resign. Monthly accrual builds the liability on the balance sheet and signals the cash need months or years in advance.

The Journal Entries

The monthly accrual and the final payout are recorded as follows:

Monthly accrual:

Dr  Gratuity Expense          XXX
    Cr  Gratuity Liability        XXX

When an employee leaves and gratuity is paid:

Dr  Gratuity Liability        XXX  (total accrued for this employee)
Dr  Additional Gratuity Expense  XXX  (if actual > accrued, the true-up)
    Cr  Bank                          XXX  (total cash paid)

If the actual gratuity due is less than the amount accrued (rare, but possible if the employee leaves before a full year or the cap applies), the difference is credited back to gratuity expense:

Dr  Gratuity Liability        XXX
    Cr  Gratuity Expense            XXX  (the over-accrual reversal)
    Cr  Bank                        XXX  (actual cash paid)

The gratuity liability account should be reviewed at each year-end. Recalculate the total estimated liability for all employees, compare it to the balance sheet, and book a true-up adjustment if the monthly accrual rate has drifted from reality.

Common Gratuity Accounting Mistakes

These errors appear repeatedly in SME books:

• Using total salary instead of basic salary. Gratuity is calculated on basic salary only. Including allowances inflates the liability and overstates expenses.
• Not accruing monthly. Waiting until departure to book gratuity violates accrual accounting principles and produces an unauditable balance sheet.
• Ignoring the two-year cap. High earners can exceed the cap. Failing to check means overstating the liability.
• Forgetting to true up annually. Employee salaries change, promotions shift the basic rate, and the 21-to-30-day transition at year five alters the accrual rate. An annual recalculation catches these changes.
• Not including gratuity in the corporate tax computation. Gratuity expense is tax-deductible when accrued on an accrual basis, provided it is properly recorded and supported by employee contracts and calculation schedules.

Accurate gratuity accounting is part of a clean monthly bookkeeping process. Businesses that skip it carry a hidden liability that distorts their financial position and surprises them on termination day.

Related Finsera guides

• the vat & bookkeeping hub
• Finsera's relevant service page
• common bookkeeping mistakes
• Ecommerce Bookkeeping uae
• How To Choose Bookkeeping Service uae