Cash Basis or Accrual Basis Accounting

On the other hand, accrual basis of accounting means recording income and expenditure as and when those are incurred, meaning though received in cash or not if the goods or services are sold income is recorded and when paid in cash or not if the goods and services are obtained expenditure is recorded. As per the income tax laws of UAE a company that exceeds 3 million UAE dirhams should follow.

Applicable accounting standards or the framework a company should follow in UAE to prepare its financial statements such as income statement, balance sheet, cashflow statement, changes in equity statement and relevant notes is international financial reporting standards (IFRSs). If a company generates a revenue of less than 50 million UAE dirhams it can use the small and medium sector standards of IFRSs which are less complex than IFRSs relevant large businesses.

Both the cash basis of accounting and accrual basis to the extent described by the tax laws in UAE are acceptable within international financial reporting standards.

However, the drawbacks of cash basis of accounting such as not recording the actual revenue generated, actual expenditure incurred in generating the revenue, inability of showing acquired assets unless paid by cash and liabilities incurred, will bring disadvantages to companies in communicating their performances and financial positions to investors and other interested parties. Despite those disadvantages the governments or the public sector in most of the regions are still follow the cash basis of accounting.