Gratuity Funds and Accounting Entries

https://oracleaccountingall.blogspot.com/2019/04/gratuity-funds-and-accounting-entries.html

Gratuity can be defined as an after-retirement social security benefit, provided to the employees by the employer on account of the services provided by them to the establishment. Simply put, gratuity is a mark of recognition, that an employer gives to his/her employee for his contribution to the company when he/she leaves or retires. Under this scheme, a lump sum amount is paid to the employee depending on the years of service and last drawn salary.

An employee is eligible for receiving a gratuity, when there is termination of employment after he/she has served the organisation for five years of more, due to superannuation, retirement/resignation or death/disablement, as a result of accident or disease. Nevertheless, the completion of service for five years is not mandatory, where the employment contract ends out of disablement or death.

The amount of gratuity is given to the employee himself but on the demise of the employee, the amount is handed over to the nominee, when the nomination is performed and to the legal heirs, in the absence of any nomination.

The gratuity contribution is an expense for the organization. Thus on one side the expenses is charged and on other side the liability payable to employee is created by the following entry

Date	Particulars	Dr	Cr
	Gratuity Expense A/c	XXX
	Gratuity Payable		XXX

Journal Entry for Fund Transfer

The amount equal to gratuity expenses is transferred to separate bank account maintained for the purposes. Thus a fund from operation account is transferred to Gratuity Bank Account.

Date	Particulars	Dr	Cr
	Gratuity Bank A/c	XXX
	Operational Bank		XXX

Gratuity Payment Journal Entry

When gratuity is paid to an employee, then liability is decreased and Gratuity bank account also decreased due to payment. The following entry would be recorded.

Date	Particulars	Dr	Cr
	Gratuity Payable A/c	XXX
	Gratuity Banks A/c		XXX