Hey there! Let's explore the different accounting methods under the UAE Corporate Tax Law.
Accrual Basis of Accounting
- Revenue and Expenditure Recognition
Under the accrual basis, revenue and expenses are recognized when they are earned or incurred, not necessarily when payments are received or made. This means you include revenue and expenses in your taxable income in the tax period when they occur.
Example 1: Revenue Recognition
Company X's Financial Year: Ends on April 30.
April 5, 2025: Delivered services worth AED 12,000.
May 10, 2025: Issued an invoice.
June 15, 2025: Payment received.
Company X should recognize the revenue on April 5, 2025, when the service was provided, regardless of when the invoice was issued or payment received.
Example 2: Expense Recognition
Customer A's Financial Year: Ends on April 30.
April 5, 2025: Received services worth AED 12,000.
Customer A should recognize the expense on April 5, 2025, when the service was incurred, regardless of when the invoice was received or payment made.
Cash Basis of Accounting
Eligibility
You may use the cash basis if your revenue does not exceed AED 3 million in a tax period, or under exceptional circumstances approved by the FTA.
Revenue and Expenditure Recognition
Under the cash basis, revenue and expenses are reported when cash is received or paid. This means no balance sheet is required.
Example 3: Revenue Recognition
Company A's Financial Year: Ends on December 31.
November 2024 Transactions:
Cash sale of AED 10,000.
Credit sale of AED 15,000, with AED 9,000 received in December and the balance in January 2025.
Revenue is recognized as follows:
- 2024 Tax Period: AED 19,000 (AED 10,000 + AED 9,000)
- 2025 Tax Period: AED 6,000
Example 4: Expense Recognition
Company B's Financial Year: Ends on December 31.
December 2024 Salaries: AED 80,000, paid on January 2, 2025.
Company B recognizes this expense in January 2025, not December 2024.
Special Circumstances and Thresholds
Exceptional Circumstances: You might be allowed to use the cash basis even if your revenue exceeds AED 3 million for a single tax period, provided you get FTA approval.
Threshold Calculation: Revenue for a tax period is determined after the end of the period. If it exceeds AED 3 million, you must switch to the accrual basis unless it's an exceptional circumstance.
How Fastlane Can Help
Navigating the complexities of accounting methods and corporate tax compliance can be challenging, but Fastlane is here to help. We offer 'Smart Compliance' solutions to manage your corporate tax obligations smoothly. Our services include:
- Advising on the best accounting method for your business.
- Ensuring compliance with regulatory requirements.
- Handling tax filings and documentation.
With Fastlane, you can focus on growing your business while we take care of the intricate details of corporate tax compliance. Schedule a free consultation with us to see how we can help your business thrive in the UAE.
