The mechanism of the Ac-Gly-OH-assisted palladium-catalyzed [3 + 2] annulation of aromatic amides with maleimides is investigated using density functional theory calculations. The results show that the reaction undergoes the sequential steps of N−H bond deprotonation, first benzylic C−H bond activation, maleimide insertion, second meta-C−H bond activation, reductive elimination, and oxidation. The external ligand Ac-Gly-OH acts as the internal base for hydrogen abstraction in the first benzylic C−H bond activation. The maleimide insertion step is found to be the rate-determining step. Based on the nearly same energetic span of the two pathways to generate the enantio products, the computational results are consistent with the experimental observation that the terminal [3 + 2] annulation products are racemic when using an achiral ligand. These calculation results disclose the detailed reaction mechanism and shed light on some experimental ambiguities.