Mastering Accounting Standards in the UAE: A Guidance towards Corporate Tax Compliance
Case Study 1: Revenue and Expense Recognition under the Accrual Basis of Accounting
Revenue Recognition for Corporate Tax Purposes:
Company X, with a financial year ending on 30 April, provided consulting services worth AED 12,000 to Customer A on 5 April 2025. However, the invoice for these services was sent on 10 May 2025, and payment was received on 15 June 2025.Despite issuing the invoice on 10 May 2025 and receiving payment on 15 June 2025, according to the accrual basis of accounting, revenue should be recognized when the services are provided, regardless of invoicing or payment dates. Thus, Company X records the revenue of AED 12,000 on 5 April 2025, aligning with the period in which the services were rendered.
Expense Recognition for Corporate Tax Purposes:
Similarly, Customer A, whose financial year also ends on 30 April, incurs the expense for the consulting services provided by Company X when the services are received on 5 April 2025. Although the invoice was received on 10 May 2025 and payment was made on 15 June 2025, for corporate tax purposes, expenses should be recognized when they are incurred, not when invoiced or paid. Therefore, Customer A records the expense of AED 12,000 in the tax period ending 30 April 2025, ensuring alignment with the accrual basis of accounting and accurately reflecting the cost incurred during that period.
Conclusion:
Both Company X and Customer A demonstrate adherence to the accrual basis of accounting, ensuring that revenue and expenses are recognized when earned or incurred, respectively, rather than when cash transactions occur. This approach enhances the accuracy and transparency of financial reporting and tax compliance, providing stakeholders with a true representation of the entities’ financial performance and position.
Disclaimer:
The content provided in this document offers general guidance and should not be construed as legal, financial, or tax advice. It is recommended to consult qualified professionals for personalised guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for interpreting and taking actions based on this information, at their own risk.
Case Study 2: Revenue and Expense Recognition under the Cash Basis of Accounting
Scenario: Company A, utilizing the Cash Basis of Accounting with a financial year ending on 31 December, conducts two transactions in November 2024.
- A cash sale amounting to AED 10,000.
- A credit sale for AED 15,000, with AED 9,000 received in December and the remaining balance received in January 2025.
Revenue Recognition:
For the cash sale, the revenue of AED 10,000 is recognized in the 2024 tax period since it was received in cash during that period.
- Regarding the credit sale, AED 9,000 received in December 2024 is recognized as revenue for that tax period. The remaining AED 6,000 received in January 2025 is recognized as revenue for the 2025 tax period.
Scenario: Company B, with a financial year ending on 31 December, employs the Cash Basis of Accounting. In December 2024, it pays salaries amounting to AED 80,000 to its employees, transferred via bank on 2 January 2025.
Expense Recognition:
Despite the salaries being for work done in December 2024, as Company B follows the Cash Basis, the expense of AED 80,000 is not recognized in the 2024 tax period. Instead, it’s recorded in January 2025, aligning with when the payment was made.
Conclusion:
The above scenarios illustrate the application of the Cash Basis of Accounting in recognizing revenue and expenses, focusing on cash transactions rather than accruals. This method simplifies accounting and provides a clear picture of cash flow.
Disclaimer:
The content provided in this document offers general guidance and should not be construed as legal, financial, or tax advice. It is recommended to consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for interpreting and taking actions based on this information, at their own risk.