Gratuity - Accounting

This query is : Resolved

Sarya C (Querist)
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27 June 2025 Dear Experts,

For our Gratuity the plan assets is LIC. So we make contributions every year and the amount is reduced from our Gratuity provision in Books. Now, One employee transferred from Group company to our company. So the gratuity of his is transferred to our LIC Account. Now, the LIC Fund statement shows the premium received is Rs 39 lacs paid by us from our bank account. And the gratuity of the employee Rs 2 lacs is also shown as premium received in LIC fund statement. The issue is for the 39 lacs paid, we can pass entry as

Gratuity provision A/c Dr Rs 39 lacs
To Bank Rs 39 lacs

But for the employee's gratuity amount Rs 2 lacs what entry should I pass in books. The Actuarial Valuation report shows that the total employer contribution is Rs 41 Lacs (Rs 39+Rs 2 lacs).

I will debit Gratuity provision with Rs 2 lacs but what ledger should corresponding credit carry. Our company follows Accounting Standards.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Thanks for the detailed explanation! Here’s how you can handle the accounting entries for the **transferred employee’s gratuity premium (Rs 2 lacs)**, given your situation and adherence to Accounting Standards:

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### Background Recap:

* Annual contribution Rs 39 lacs = Dr Gratuity Provision / Cr Bank
* Additional Rs 2 lacs related to the transferred employee’s gratuity, also paid to LIC as per fund statement
* Total employer contribution = Rs 41 lacs (39 + 2)
* You want to pass the correct entry for the Rs 2 lacs specifically and want to know which ledger to credit.

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### Suggested Accounting Treatment:

Since the **Rs 2 lacs is the transferred gratuity liability** from the group company employee, this represents an additional **liability assumed** by your company (not a fresh expense in this period).

**Typical entries:**

1. **To record the increase in gratuity obligation due to the transferred employee:**

```plaintext
Gratuity Provision A/c Dr 2,00,000
To Transferred Gratuity Liability / Inter-company Payable A/c Cr 2,00,000
```

* This recognizes the additional gratuity obligation brought in by the employee transfer.
* You may use a separate ledger named **"Transferred Gratuity Liability"** or **"Inter-company Payable"** if applicable (i.e., if the group company owes you or vice versa).
* If the transfer is finalized and you have paid LIC directly for this amount, the credit could be to **Bank** if you paid from your funds.

2. **To record the payment to LIC:**

```plaintext
Transferred Gratuity Liability A/c Dr 2,00,000
To Bank A/c Cr 2,00,000
```

Or, if you combine both in one step (as you mentioned LIC statement shows Rs 39 + 2 lacs paid from your bank):

```plaintext
Gratuity Provision A/c Dr 41,00,000
To Bank A/c Cr 41,00,000
```

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### Key Point:

* The **Rs 2 lacs represents a transferred liability** that should be recorded separately from normal contributions as it is related to employee transfer.
* Since it’s not a new expense but an assumption of an existing obligation, crediting a **"Transferred Gratuity Liability"** or similar account maintains clarity.
* If no such separate ledger exists or needed, you may credit **Bank** directly (if paid), but **disclosures** should be made in notes or accounting policy about this transaction.

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### Summary Entry Option:

| Transaction | Debit | Credit |
| ---------------------------------------- | ------------------------------------------ | ------------------------------------------ |
| Recognize transferred gratuity liability | Gratuity Provision A/c Rs 2,00,000 | Transferred Gratuity Liability Rs 2,00,000 |
| Payment to LIC | Transferred Gratuity Liability Rs 2,00,000 | Bank Rs 2,00,000 |

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If you want, I can help draft the journal entries or assist in preparing disclosure notes per Accounting Standards (like AS 15 / Ind AS 19) applicable to employee benefits. Would you like that?

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