End-of-service benefits: the liability most SMEs never book

Every employee accrues end-of-service benefits from day one — but many SMEs never book it, so the liability builds invisibly for years until an auditor or a resignation makes it very visible.

The fix is one monthly journal entry: accrue EOSB as staff cost each month, per the labour-law formula. Your P&L shows the true cost of employment, and departures stop being balance-sheet surprises.

If you’ve never booked it, the catch-up entry stings once. Booking it monthly afterwards costs nothing but discipline.

How the entitlement builds

Under the Saudi Labour Law, an employee accrues end-of-service benefit for every year worked. The broad shape is half a month's wage for each of the first five years and a full month's wage for each year after that, calculated on the final wage — which is why the liability grows even in years when nobody new is hired.

How much is actually payable depends on how the contract ends, and that is where most of the surprise lives. A resignation is treated differently from a termination, and the length of service changes the proportion an employee can claim on resignation. Fixed-term and indefinite contracts do not behave identically either.

The detail matters less than the principle: the obligation exists from the first year, it accrues quietly, and it is measured against a wage that keeps rising.

Why it never appears in the accounts

Nobody invoices you for it. There is no supplier statement, no bank instruction, no monthly payment prompting an entry. Cash-basis habits simply do not catch a liability that has no transaction attached.

So the accounts show nothing until an employee leaves, at which point a sum that built up over eight years lands entirely in one month's P&L. That month looks catastrophic and every prior month looked better than it was.

What it does to the numbers you rely on

Consider a firm with thirty staff and an average tenure of four years. The unbooked liability can comfortably reach several hundred thousand riyals. Three consequences follow.

Your profit has been overstated every year the accrual was missed, because a real cost of employing people was never charged. Your balance sheet overstates net assets by the same amount. And if you are ever valued, funded or sold, the buyer's accountant will find it in the first week and adjust the price by more than the liability itself, because an unbooked obligation raises the question of what else is missing.

Booking it properly

Calculate the accrual per employee at each year end using current wages and actual start dates. Post the movement — not the total — to the P&L, so each year carries its own cost, and hold the cumulative balance as a non-current provision, moving to current the portion you expect to settle within twelve months.

Recalculate whenever wages change materially. Because the entitlement is measured on final wage, a salary review increases the liability for every past year of that employee's service, not just the years ahead.

Funding it, not just recording it

Recording the provision makes the accounts honest. It does not make the money available. A provision is a bookkeeping entry, and employees are paid in cash.

Businesses that handle this well set aside against the balance — even partially — so that a wave of departures is a planned outflow rather than an emergency. It is worth knowing your worst case: if every employee resigned tomorrow, what would you owe, and could you pay it?