Gratuity Provision

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Prakash

Prakash (Querist)
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30 July 2009 How to make provision of gratuity in Accounts for every year? Tell me sir full Calculation details.

Abhishek Mohta

Abhishek Mohta (Expert)
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30 July 2009 As per AS-15 as ammended provision for gratuity will be made on the basis of Accturial Valuation.

You have to appoint an acctury who will give you full calculation.

Then the same will be treated in the books as follows:

a. While making the first provision:

Gratuity A/c Dr.
To Provision for Gratuity A/c

b. While making payment to the employee

Provision for Gratuity A/c Dr.
To Bank A/c

c. At the end of the second year the accturial valuation will be again done and the shortfall of the provision will be provided.

The above treatment is done when the comapny is not maintaining any fund.

If the company is maintaining any fund then the following additional entry will be made:

After creating provision pay out the provision to the fund;

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Prakash

Prakash (Querist)
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31 July 2009 As per Accounting Standard 15 Revised

A lump sum benefit, equal to 1% of final salary for each year of service, is payable on
termination of service. The salary in year1 is Rs. 10,000 and is assumed to
increase at 7% (compound)each year resulting in Rs. 13,100 at the end of year 5.
The discount rate used is 10% per annum. The following table shows how the
obligation builds up for an employee who is expected to leave at the end of year
5, assuming that there are no changes in actuarial assumptions. For simplicity,
this example ignores the additional adjustment needed to reflect the probability
that the employee may leave the enterprise at an earlier or later date.(Amount
in Rs.)

Year 1 2 3 4 5

Benefit attributed to:-
prior years0 131 262 393 524-
current year (1% of final salary)
131 131 131 131 131
- current and prior years 131 262 393 524 655
Opening Obligation (see note 1) - 89 196 324 476
Interest at 10% - 9 20 33 48
Current Service Cost (see note 2) 89 98 108 119 131
Closing Obligation (see note 3) 89 196 324 476 655
Notes:1. The Opening Obligation is the present value of
benefit attributed to prior years.
2. The Current Service Cost is the present
value of benefit attributed to the current year.
3. The Closing Obligation is the
present value of benefit attributed to current and prior years.

My query are ,
1) “a lump sum benefit, equal to 1% of final salary for each year of service” what is the meaning of lump sum amount and equal to 1% of final salary and how to calculate it?
2) Above calculation showing for 5 years but my query Is, How to calculate for any One F.Y.
3) Expected rate of return of Assets, How to calculate this ?
4) Which amount I have to make provision of any F.Y. ?

Nitin H

Nitin H (Expert)
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07 August 2022 For any assistance required with respect to Gratuity trust, superannuation trusts or any employee benefit schemes, do connect on below mentioned email id a1consultancyservices@yahoo.com. We are a 9 year old firm entrusted by many indian and multi national companies, we are specializing in the field of corporate employee benefits.

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