Cash Basis or Accrual Basis Accounting
What is Cash Basis of Accounting
Cash basis of accounting means recording income and expenditure in the books of accounts only when cash is received by selling goods or services and cash is paid for the goods and services obtained. This is the basis of accounting a company should follow in UAE if it generates a revenue of less than 3 million UAE dirhams, as per the tax laws in UAE. Further, if a company obtains a special approval to use cash basis of accounting and if it is approved by the authorities those accounts too will be accepted as complying with the tax laws.
What is Accrual Basis of 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.