What Is a Chart of Accounts? Structure, Types and Examples
Namrata09 Nov 2026
| Quick fact: a business can be profitable on paper and yet completely unable to pay its bills. You can see why that is if you understand the accounting method it's using. |
A Dubai based company finished a project worth AED 50k in March, and got the money in May. Now, is that AED 50k revenue in March or in May?
How you account for it will determine the answer.
Cash accounting records the transaction when the cash actually changes hands.
Accrual accounting records the income when it is earned and the expense when it is incurred (regardless of when the payment is actually made).
Takeaway
Cash accounting is accounting for money as it comes in and goes out. Accrual accounting is the recording of income and expenses as they occur (regardless of when the actual payment is made). Cash accounting is easier for UAE businesses. Accrual accounting gives you a much clearer picture of your profitability, your outstanding invoices and your financial obligations over time.
This has a bearing on financial reporting, tax calculations, cash flow and business decisions for businesses operating in the UAE. The method selected is particularly important when a company is growing or when it commences to take on credit.
What is cash basis accounting?
| Quick fact: Cash accounting means you see the money when it hits the business bank account or when it leaves the business bank account. |
Cash accounting records revenue when the customer pays and expenses when the business pays out the money.
A Dubai based freelance designer completes a project in April and only receives the AED 8k in June. That AED 8k is the amount that appears in June under cash accounting.
This method is generally easier to manage as the transactions are in line with actual payments.
Cash accounting is ideal for freelancers, sole traders and small businesses with fairly straightforward transactions.
However cash accounting is not necessarily the best indication of how much a business has made or how much it owes at any one time.
What is Accrual accounting?
| Quick fact: in accrual accounting the business activity is recorded when it happens rather than when the payment is made. |
For instance a consultancy in the UAE will have AED 25k of services delivered in September and will receive payment in November. Revenue would normally be recognised in September.
The matching principle is applied in accrual accounting and matches the expenses to the revenues they've helped to generate.
This is the basis for financial reporting under IFRS and US GAAP (although each of those frameworks has its own specific recognition requirements).
Accrual accounting is the method most commonly used by large companies, by those who have inventory and by organisations that are either seeking finance or who wish to attract investors to their business.
Accrual v Cash Accounting: the main differences.
| Verdict: Cash accounting is all about the actual payments. Accrual accounting is all about financial performance. |
| Factor | Cash Accounting | Accrual Accounting |
| Revenue | Recorded when payment arrives | Recorded when earned |
| Expenses | Recorded when paid | Recorded when incurred |
| Complexity | Relatively simple | Requires more accounting work |
| Cash visibility | Directly reflects cash transactions | Requires separate cash flow monitoring |
| Profit reporting | Can fluctuate with payment timing | Better reflects period performance |
| Unpaid invoices | Not recognised as revenue | Generally recorded as receivables |
| Suitable for | Smaller, simpler businesses | Growing and larger businesses |
| Financial standards | Generally not suitable for full IFRS statements | Basis of IFRS reporting |
Neither approach alters the amount the customer actually owes. The difference is purely in the timing of when the transactions appear in the books.
Cash Accounting vs Accrual Accounting
The same transactions can give rise to quite different monthly profits.
For example a Dubai based IT company that provides software implementation services.
The company in March:
- completed an AED 60k project.
- Received AED 20,000 from the client.
- Staffing cost is AED 15,000.
- Pays AED 10,000 towards these expenses.
- March revenue (cash basis) is AED 20,000 and recorded expenses are AED 10,000.
Under accrual, revenue is AED 60,000 and expenses are AED 15,000.
| March results | Cash | Accrual |
| Revenue | 20,000 AED | 60,000 AED |
| Expenses | AED 10,000 | AED 15,000 |
| Profit | AED 10,000 | AED 45,000 |
Under accrual the company has made an accounting profit of AED 45,000, the net cash flow from those transactions being AED 10,000.
That difference is absolutely critical when management has to pay salaries, suppliers or rent.
Another Example: Purchasing Inventory
A trading company in Sharjah purchases inventory worth AED 30,000 on credit.
The purchase creates an inventory asset and a liability on an accrual basis. When the goods are sold their inventory cost will normally become an expense.
In simple cash accounting, the payment is recorded when it's actually paid.
Accrual accounting provides a far better picture of stock value, outstanding liabilities and sales profitability in an inventory intensive business.
Pros and cons of each accounting method
| Verdict: Cash accounting is better if you just want simplicity and accrual accounting is better if you want detailed financial reporting. |
Advantages of Cash Accounting: easy to understand, easy to maintain.
- Lower bookkeeping and accounting costs.
- Shows the actual cash received and the actual cash paid.
- For businesses with low volumes of transactions.
Downsides: the profit numbers can be very misleading.
- Revenue reported is before the unpaid customer invoices.
- It's very difficult to do any kind of financial comparison.
- Not so good for growing businesses or businesses that have an inventory function.
Accrual basis accounting benefits: gives a much better picture of the profitability of the business.
- Keep a running record of what your customers owe you and what you owe your suppliers.
- Supports IFRS financial reporting.
- Assists investors and lenders in assessing performance.
Cons: needs much more detailed bookkeeping.
- Accounting costs could be higher.
- Reported profits are not necessarily available cash.
- Knowledge of accounting is required for the adjustments and reconciliations.
A company that's making a profit under accrual accounting can still run out of cash if its customers keep on delaying their payments.
Which accounting method should a UAE business choose?
UAE Regulation: If your business income is AED 3 million or less you can use cash accounting for corporate tax.
Under UAE Ministerial Decision No. 114 of 2023, companies that exceed that threshold will generally be required to follow accrual accounting, unless there are exceptional circumstances that would warrant approval by the FTA.
IFRS for SMEs is available to businesses with revenue of not more than AED 50 million.
When to Choose Cash Accounting:
- Your business is subject to UAE regulations.
- The transactions are fairly straightforward.
- Customers pay predominantly at the point of purchase.
- Your inventory is pretty low.
- You're looking to simplify your bookkeeping.
Select Accrual Accounting if:
- Your business is over the cash accounting threshold.
- Customers regularly buy on credit.
- You have material/inventory obligations.
- You've got plans to grow your business.
- Lenders/Investors will require the detailed financials.
Companies can change their accounting method, but any change will require adjustments to the opening balances, the receivables, the payables and the income recognition. In some cases approval from the FTA will be required so you should check the tax implications prior to making any changes.
Conclusion
The correct accounting method depends on your business transactions, reporting needs and UAE tax obligations.
Cash accounting is a good option for eligible small businesses that mostly deal in immediate payments. For growing companies, accrual accounting provides a more complete picture of revenue, expenses, and outstanding obligations.
Before you decide, take a look at the way your business makes money, pays its suppliers and handles credit. “The method should represent what you actually do and should comply with the accounting and tax requirements that apply.
FAQs
- Is cash accounting available to all businesses in the UAE?
No. Under UAE Corporate Tax law a business with turnover of AED 3m or less can elect to use cash basis accounting. In general a business over that threshold would be required to use accrual accounting. The method of accounting used must of course also be in line with any applicable financial reporting and regulatory requirements.
- Can a company use both cash and accrual accounting at the same time?
Yes, but for other purposes. A company may well keep its accounts on an accrual basis and at the same time keep a daily record of cash receipts and payments. It would of course not be permitted to switch between the two at will. Its formal accounts are subject to the relevant reporting and tax requirements.
- Why does accrual accounting show a profit when there's no money in the bank?
Because making money and getting paid are two very different things. Take a company in Dubai that has completed a project for AED 40,000 and hasn't received payment yet. Under accruals you record the revenue when it's earned even if the cash hasn't been received. That’s why it's absolutely vital that businesses look at their cash flow as well as their reported profits.
- Which accounting method is best for a small business in Dubai?
That's down to how the business operates really. If you're a small consultancy and you're getting paid promptly then cash accounting may be the simpler option. If on the other hand customers are frequently late with their payments and you're buying goods on credit then accrual accounting will give you a much better picture of your finances. You also have to consider the eligibility and the reporting requirements for UAE Corporate Tax.
