Accrual vs Cash Accounting
There are two main bases for recognising income and expenses:
- Cash basis — record income when cash is received and expenses when cash is paid.
- Accrual basis — record income when it is earned and expenses when they are incurred, regardless of when cash moves.
Why It Matters
Under cash accounting, a business that makes a large sale in December but collects the cash in January shows the income in January. Under accrual accounting, the income belongs to December — when the sale was made.
The difference affects profit reporting, the timing of tax obligations, and the comparability of financial statements.
UAE Position
UAE Corporate Tax law generally requires businesses to use accrual accounting for corporate tax purposes. This means income and expenses are recognised when they are earned or incurred, not when cash moves. A business that prepares its books on a cash basis will usually need to adjust them to an accrual basis for tax reporting.
Impact on Profit
A business can be profitable on paper but run out of cash. This happens when income is recognised (accrual) but the customer has not yet paid. This is why cash flow management — covered later in the curriculum — matters as much as profit reporting.