Cash accounting records income when money comes in and costs when money goes out. Accrual accounting records income when you earn it, usually when you issue the invoice, and costs when you incur them, whether or not anyone has paid yet. For UAE corporate tax, the default is accrual: financial statements follow IFRS, or IFRS for SMEs if revenue is AED 50 million or less. Ministerial Decision No. 114 of 2023 lets a business prepare its statements on the cash basis only if its revenue does not exceed AED 3 million, or in exceptional circumstances with the Federal Tax Authority's approval. VAT is a separate system with its own timing rules, and it ignores which method you chose. This guide explains both methods, works one month through each in AED, covers VAT, audits, Saudi Arabia, and what happens when you switch. It is general information, not legal or tax advice; confirm your position with the FTA or a licensed tax adviser.
What is the difference between cash and accrual accounting?
Both methods record the same transactions. They differ in which month each one lands in.
| Cash basis | Accrual basis | |
|---|---|---|
| Income is recorded | When the customer pays | When you earn it (usually the invoice date) |
| Costs are recorded | When you pay | When you receive the goods or service (usually the bill date) |
| Customer owes you money | Not in the books | Accounts receivable |
| You owe a supplier | Not in the books | Accounts payable |
| Annual cost paid upfront | All in the month you pay | Spread over the months it covers (prepayment) |
| Shows | How much cash moved | How much profit you made |
| Used by | Very small businesses, some freelancers | Most companies; required by IFRS and IFRS for SMEs |
Cash basis is simpler: the books look like the bank statement. Accrual basis is more accurate: a month in which you did a lot of work but were paid little still shows the profit you earned, and the money customers owe you is visible on the balance sheet.
What does UAE corporate tax allow?
Article 20 of Federal Decree-Law No. 47 of 2022 (the Corporate Tax Law) bases taxable income on your financial statements, prepared under accounting standards accepted in the UAE. Article 20(5)(a) lets the Minister set when a business may prepare those statements on the cash basis. The Minister did that in Ministerial Decision No. 114 of 2023, issued on 9 May 2023.
| Rule (MD 114 of 2023) | What it means |
|---|---|
| Default | Financial statements under IFRS |
| Revenue AED 50 million or less | IFRS for SMEs may be used instead |
| Revenue AED 3 million or less | Cash basis may be used |
| Revenue above AED 3 million | Cash basis only in exceptional circumstances, on application to the FTA |
Threshold: The cash-basis limit is revenue, not profit, of AED 3,000,000 in the tax period. It is the same figure as the Small Business Relief cap, but the two are separate rules. Small Business Relief has been extended to tax periods ending on or before 31 December 2029 and must be elected in the return; using the cash basis is an accounting choice.
Three points that adviser summaries of the FTA's accounting standards guide (CTGACS1, November 2023) report, and that you should confirm with your adviser:
- The threshold is tested on the cash basis. Revenue for the AED 3 million test is what you actually received, so unpaid invoices do not count towards it.
- The FTA's example of an exceptional circumstance is a business that expects to go over AED 3 million for one tax period only.
- Above the threshold, statements must be on the accrual basis unless the FTA has approved the exception.
Choosing the cash basis changes when income and costs count. It does not change the tax rates: 0% on taxable income up to AED 375,000 and 9% above that.
What does one month look like under each method?
A small Dubai design studio, VAT-registered, October 2026. All amounts below exclude VAT, because VAT is not income or cost for a registered business.
What happened in October:
- Issued two invoices for October work: AED 20,000 to client A and AED 20,000 to client B. Client A paid in October. Client B pays in November.
- Received AED 10,000 from client C for a September invoice.
- Paid October office rent: AED 6,000.
- Received a AED 8,000 bill from a freelance illustrator for October work. The studio pays it in November. The illustrator is not VAT-registered.
- Paid October salaries: AED 12,000.
- Paid AED 2,400 for a 12-month software subscription starting 1 October.
| October 2026 | Accrual basis (AED) | Cash basis (AED) |
|---|---|---|
| Client A invoice (paid in October) | 20,000 | 20,000 |
| Client B invoice (paid in November) | 20,000 | 0 |
| Client C payment for September invoice | 0 | 10,000 |
| Income | 40,000 | 30,000 |
| Rent | 6,000 | 6,000 |
| Illustrator bill (paid in November) | 8,000 | 0 |
| Salaries | 12,000 | 12,000 |
| Software (1/12 of AED 2,400 on accrual) | 200 | 2,400 |
| Costs | 26,200 | 20,400 |
| Profit for October | 13,800 | 9,600 |
The difference is AED 4,200. Income is AED 10,000 higher on accrual (client B's AED 20,000 is in, client C's AED 10,000 belonged to September). Costs are AED 5,800 higher on accrual (the AED 8,000 illustrator bill is in, and only AED 200 of the AED 2,400 software is October's cost). AED 10,000 minus AED 5,800 is AED 4,200.
On the accrual balance sheet at 31 October, the studio also shows what the cash basis hides: client B owes AED 21,000 including VAT, the illustrator is owed AED 8,000, and AED 2,200 of software is prepaid for the next 11 months.
Over time these differences even out, but not at the year end, and the year end is what the corporate tax return uses.
Does the cash basis change when VAT is due?
No. UAE VAT follows the date of supply under the VAT Decree-Law (Federal Decree-Law No. 8 of 2017), whatever method your books use. For services, the date of supply is broadly the earliest of: the date the service is completed, the date you receive payment, or the date you issue the tax invoice. Goods follow similar rules based on delivery, payment and invoice. Periodic and continuous supplies have their own rule. A tax invoice must be issued within 14 days of the date of supply.
In the example, the studio owes AED 2,000 output VAT on the two October invoices in its October to December return, including the AED 1,000 on client B's invoice that will not be paid until November. Client C's AED 500 VAT belonged to the July to September return, because that invoice was issued in September.
This is the main practical risk of running the books on the cash basis: the VAT return needs invoice-date figures, so you still have to track every invoice issued and every bill received. A cash-basis ledger alone does not give you the VAT return. The return itself is covered in how to file the UAE VAT return (VAT201).
When must financial statements be audited, and does that rule out the cash basis?
Ministerial Decision No. 82 of 2023 requires audited financial statements from:
- A taxable person with revenue above AED 50 million in the tax period.
- Every Qualifying Free Zone Person, whatever its revenue.
Ministerial Decision No. 84 of 2025 adds tax groups for tax periods starting on or after 1 January 2025.
A business above AED 50 million is far above the AED 3 million cash-basis limit, so it uses IFRS on the accrual basis. Both IFRS and IFRS for SMEs require accrual accounting for everything except the cash flow statement, and audited statements are normally prepared on those standards. A free zone company that is small enough for the cash basis but needs an audit as a QFZP should agree the basis with its auditor before the year starts. More on free zone rules is in our QFZP guide.
What about Saudi Arabia?
We found no Saudi equivalent of the UAE's AED 3 million cash-basis option. Unlisted Saudi companies report under IFRS for SMEs as endorsed by SOCPA, effective since 2018, and listed companies under full IFRS. Both are accrual standards. Saudi VAT, like UAE VAT, is generally due at the earliest of the supply, the tax invoice or the payment, not when your books say so. For Zakat, a business that keeps financial statements is assessed on its accounts, and a sole proprietor without them can be assessed on the estimated method; see our Saudi Zakat guide. In practice, a Saudi company should plan for accrual books from the start. Confirm the details for your entity with ZATCA or a licensed adviser.
Which method should a UAE small business choose?
| Your situation | Sensible choice |
|---|---|
| Freelancer or micro-business, revenue well under AED 3M, few unpaid invoices at any time | Cash basis is allowed and simpler |
| Revenue AED 2–3M and growing | Accrual now, to avoid a forced switch mid-growth |
| You give customers 30–90 day terms | Accrual: unpaid invoices are a large part of what you own |
| You hold stock or pay big annual costs upfront | Accrual: cash basis distorts month-by-month profit |
| You need a bank loan, investor or buyer to read your accounts | Accrual: lenders and buyers expect IFRS-style statements |
| Free zone company claiming QFZP status | Accrual: audited statements are required |
| Company with revenue above AED 3M | Accrual is required unless the FTA approves an exception |
What happens when you switch from cash to accrual?
You will usually switch because revenue goes above AED 3 million, or because you choose to. Either way, plan the change from the first day of a tax period, and get your adviser to confirm the treatment.
On the first day under accrual, the books need an opening position for items the cash basis never recorded:
- Receivables. List every invoice issued but unpaid at the switch date. Enter each as a receivable.
- Payables. List every bill received but unpaid. Enter each as a payable.
- Prepayments and accruals. Annual costs paid upfront, and costs incurred but not yet billed.
- Stock, if you hold any, at cost.
The tax risk is counting income twice or not at all. An invoice issued in the last cash-basis year and paid in the first accrual year was not income in year one (not yet paid) and is not income in year two either if the switch simply opens it as a receivable. Article 61 of the Corporate Tax Law sets the opening balance sheet for corporate tax as the closing balance sheet for accounting, subject to adjustments the Minister may prescribe, and the FTA's accounting standards guide covers revenue fluctuating around the threshold. Your adviser should make the transitional adjustment so that every dirham of income and cost is taxed exactly once. The mechanics of loading opening balances are in opening balances when switching accounting software.
Switching back to the cash basis after a temporary spike above AED 3 million is not automatic. Ask the FTA through your adviser.
From the platform: Staks keeps accrual, double-entry books. A draft invoice posts nothing; when you issue it, it posts on the invoice date as a receivable, sales and VAT payable, and recording the payment later clears the receivable. A bill posts as a payable on its bill date once it is no longer a draft. The profit and loss report is labelled "Accrual basis" and is built from the journal. Staks has no cash-basis setting and does not produce a cash-basis profit and loss. What it gives you instead is a Cash Flow Statement (direct method) that shows where cash actually came from and went in any period, split into operating, investing and financing, with beginning and ending cash. The P&L, balance sheet and cash flow reports are on the Growth plan ($49 a month). One limitation to know for VAT: expenses post their gross amount with no VAT split, so to recover input VAT, enter the supplier document as a bill, which carries tax.
Frequently asked questions
Do I need FTA approval to use the cash basis if my revenue is under AED 3 million?
Under Ministerial Decision No. 114 of 2023, an application to the FTA is only needed for the exceptional-circumstances route above the threshold. Within AED 3 million, the cash basis is an option you can use. Keep a record of the revenue figure for each period, because it decides whether the option is open to you.
Is the AED 3 million cash-basis limit the same as Small Business Relief?
The number is the same, the rules are not. Small Business Relief treats a business with revenue of AED 3 million or less as having no taxable income, if elected in the return, for tax periods ending on or before 31 December 2029. The cash basis only changes when income and costs are recorded. A business can use one, both or neither. Details are in UAE corporate tax registration and filing for small businesses.
Can I keep cash-basis books and still file VAT correctly?
Yes, but you need a separate record of every tax invoice you issue and every supplier tax invoice you receive, by date. VAT is due based on the date of supply, usually the invoice date or the payment date if earlier, not on when cash arrives.
Does accrual accounting mean I pay tax on money I have not received?
It can, at the year end. An invoice issued in December and paid in February counts as income in the year it was issued. That is why customers who never pay matter: a written-off bad debt is a cost on the accrual basis, and VAT has its own bad debt relief rules, covered in VAT bad debt relief in the UAE and Saudi Arabia.
Related reading
- UAE corporate tax registration and filing for small businesses
- Month-end close checklist for small businesses in the UAE
- How to file the UAE VAT return (VAT201)
- Opening balances when switching accounting software
If your revenue is under AED 3 million you can choose; above it, or with a lender, buyer or audit in view, keep accrual books and read a cash flow report beside them. Start a 14-day free trial of Staks to keep accrual, double-entry books with the P&L, balance sheet and cash flow reports built from the same ledger.