The UAE has the most vibrant business environment that encourages entrepreneurship and business investments. Thanks to its easy policies and streamlined processes for setting up businesses.

For small and medium enterprises (SMEs), navigating UAE’s business environment requires an understanding of many fundamental factors. 

To begin with, accounting and booking, the two most basic but critical aspects that determine how smooth and streamlined a business is

Warren Buffet says,

“Accounting is the language of business.”

But what exactly does this mean?

In this comprehensive guide, we look at the fundamentals of accounting and booking in the UAE for SMEs.

Let’s get started!

Bookkeeping and accounting definitions

Often used interchangeably, bookkeeping and accounting have some differences, specifically, the stages of these two business processes. Let’s understand the subtle differences between the two.

Bookkeeping

Bookkeeping involves the systematic recording of daily financial transactions and maintaining proper documentation. It is the foundation of your company's financial records, which could include recording sales, purchases, receipts, and payments; managing invoices and bills; reconciling bank statements; maintaining payroll records, and organizing financial documentation, among other functions.

Accounting 

Accounting involves functions that are based on bookkeeping. These could include tasks such as, preparing financial statements (balance sheets, income statements, cash flow statements), financial analysis and interpretation, budgeting and forecasting, tax planning and compliance, financial strategy development, and management reporting, among other functions.

Accounting and bookkeeping requirements in the UAE

In the UAE context, proper bookkeeping is a legal requirement under both the UAE Commercial Companies Law and the Tax Procedures Law. With the introduction of corporate taxation, maintaining accurate books has become even more critical.

Alongside proper bookkeeping, professional accounting ensures regulatory compliance while providing the insights needed to navigate the competitive market landscape in the UAE effectively. That is why outsourcing accounting services is a common practice followed by SMEs in the UAE.

Legal framework

The UAE's legal framework establishes several requirements for business financial record-keeping:

• Commercial Companies Law: Requires companies to maintain accounting records that accurately reflect financial position.

• Tax Procedures Law: Mandates maintaining accounting records for at least five years.

• VAT Law: Specifies documentation requirements for VAT-registered businesses.

• Corporate Tax Law: Establishes record-keeping requirements for corporate tax purposes.

Documentation requirements

An important part of accounting and bookkeeping is the various documents. Whether in the form of physical paper or digital formats, businesses in the UAE must maintain comprehensive financial records. Here are some documentation requirements:

• General ledger and journals

• Sales and purchase records, such as invoices, receipts, contracts, etc.

• Expense documentation, including payment vouchers, receipts, approval forms, etc.

• Asset registers, such as details of fixed assets, depreciation schedules, etc.

• Inventory records, stock counts, valuation methods, etc.

• Bank statements and reconciliations, deposit slips, electronic transfer confirmations

• Payroll records, including salary calculations, etc.

• Tax documentation, such as VAT invoices, credit notes, etc.

Financial statement requirements

Another key requirement around accounting and bookkeeping are the many financial statements. Different business types have varying financial reporting obligations. Here are the various financial statement requirements for different business types in the UAE.

• Mainland companies: Mainland business regulations allow 100% foreign ownership in 122 economic activities across 13 sectors. These companies require the annual financial statements, potentially requiring statutory audit depending on size and legal structure.

• Free zone companies: There are more than 40 free zones in the UAE that allow 100% foreign ownership of business. The financial statement requirements vary by free zone but generally include annual financial statements, audit requirements depending on the free zone regulations and company size and annual renewal documentation including financial information.

• Public joint-stock companies: Quarterly and annual financial statements following IFRS standards.

• Specific sector requirements: Subject to additional regulatory reporting requirements. For instance, banks require additional reporting to the Central Bank of the UAE, insurance companies require specialized reporting to the Insurance Authority, and capital markets require enhanced disclosure for entities listed on UAE exchanges.

Language requirements

While Arabic is the official language for government communications, businesses may maintain accounting and bookkeeping records in English. However, authorities may request Arabic translations for specific documents.

Currency considerations

Accounting and bookkeeping records should be maintained in UAE Dirhams (AED) for tax purposes, though multi currency accounting is common for businesses with international operations.

Accounting cycle for UAE businesses

The accounting cycle in the UAE follows standard international practice with specific local considerations:

1. Transaction identification: Recognizing business events that require recording

2. Documentation: Collecting and organizing supporting documents

3. Journal entries: Recording transactions in chronological order

4. Ledger posting: Transferring journal entries to appropriate accounts

5. Trial balance preparation: Ensuring debit and credit totals match

6. Adjustments: Recording accruals, prepayments, and other period-end adjustments

7. Adjusted trial balance: Verifying balances after adjustments

8. Financial statement preparation: Creating balance sheet, income statement, cash flow statement

9. Closing entries: Transferring temporary account balances to permanent accounts

10. Post-closing trial balance: Confirming accurate closing process

11. Reporting: Preparing management reports, tax returns, and regulatory filings

For VAT-registered businesses, the cycle includes preparing and filing VAT returns, typically on a quarterly basis.

Audit requirements

Audit requirements depend on the entity type and applicable regulations. However, some types of companies have mandatory audit requirements. These include public joint-stock companies, banks and financial institutions, insurance companies, companies exceeding certain size thresholds (varies by jurisdiction), and certain free zone entities based on specific free zone regulations.

There are audit exemptions for certain types of companies, such as some small private companies, certain types of sole establishments, and specific categories of free zone entities (varies by free zone).

Audits must be conducted by auditors registered and licensed in the UAE, following International Standards on Auditing (ISA).

The UAE's taxation framework

It is imperative to talk about the UAE's taxation framework while we talk about accounting and bookkeeping. The UAE has traditionally been known as a tax-friendly jurisdiction. However, recent years have brought significant changes to the taxation landscape that businesses must understand and comply with.

With a corporate tax rate of 9% and VAT of 5%, UAE has a low tax rate compared to other countries and regions in the Gulf Cooperation Council (GCC). These tax rates are attractive to businesses.

Value Added Tax (VAT)

As introduced in January 2018, VAT applies to most business transactions in the UAE at a standard rate of 5%. Key aspects of VAT include:

• Registration threshold: Businesses with taxable supplies exceeding AED 375,000 annually must register for VAT.

• Voluntary registration: Available for businesses with taxable supplies exceeding AED 187,500.

• Compliance requirements: Registered businesses must file periodic VAT returns, typically quarterly.

• Documentation: Proper tax invoices must be issued and retained for all transactions.

• Zero-rated supplies: Include exports, international transportation, and certain healthcare and educational services.

• Exempt supplies: Include certain financial services and residential real estate.

Corporate tax

The UAE introduced federal corporate tax effective from June 1, 2023, representing a significant shift in the business taxation landscape:

• Rate structure: 0% for taxable income up to AED 375,000 and 9% for taxable income above this threshold.

• Taxable persons: Includes UAE companies, foreign companies with permanent establishments in the UAE, and natural persons conducting business activities

• Exempt entities: Include government entities, natural resource extraction businesses (subject to emirate-level taxation), qualifying public benefit organizations, and qualifying investment funds.

• Filing requirements: Annual corporate tax returns must be filed.

• Transfer Pricing: Documentation requirements for related-party transactions.

Excise tax

Implemented since October 2017, excise tax applies to specific goods considered harmful to human health or the environment:

• Tobacco Products: 100% tax

• Carbonated Drinks: 50% tax

• Energy Drinks: 100% tax

• Sweetened Drinks: 50% tax

• Electronic Smoking Devices and Tools: 100% tax

Economic Substance Regulations (ESR)

Introduced in 2019, ESR requires certain UAE entities to demonstrate sufficient economic substance in the UAE relative to the activities they undertake. While not strictly a tax, ESR compliance requires significant documentation and reporting.

Double tax treaties

The UAE has an extensive network of double tax treaties with over 100 countries, offering potential benefits for cross-border activities.

Common compliance challenges for SMEs in the UAE

• The UAE's regulatory environment evolves rapidly. Keeping up with regulatory changes can be challenging for small and medium sized businesses.

• Businesses operating across emirates or free zones face complex compliance requirements as they have to navigate and follow multi-jurisdiction operations. 

• Maintaining proper documentation for tax and regulatory purposes based on entity, location, etc., can be challenging without the use of an efficient accounting software or without outsourcing accounting services if companies do not have in-house resources.

• Meeting various filing deadlines throughout the year can get challenging, especially for small businesses with limited in-house resources.

• In the UAE, some official communications are primarily in Arabic. This language barrier can get challenging.

Best practices for financial compliance in the UAE

• Stay informed by subscribing to updates from relevant authorities (Federal Tax Authority, Ministry of Finance).

• Implement strong controls by establishing clear financial procedures and controls.

• Leverage technology by using accounting software and compliance management tools to track deadlines and requirements.

• Conduct periodic reviews of financial processes and compliance status.

• Get professional support by engaging qualified accountants familiar with UAE regulations. Timber, an AI-powered finance solutions provider, supports SMEs based in the UAE with a combination of human accountants and advanced accounting and bookkeeping software. 

Conclusion

Understanding the basics of accounting, bookkeeping, and taxation is essential for business success in the UAE. Whether you're a startup navigating your first year or an established SME looking to optimize operations, proper financial management provides the foundation for sustainable growth.

If you’re looking for accounting and bookkeeping services in the UAE, you’re in luck with Timber. The accounting software for UAE businesses offers the expertise, technology, and support SMEs need in the UAE. Timber’s AI-powered solutions combined with human accountant expertise help small and medium enterprises transform their financial operations from compliance burdens into strategic advantages. 

Our comprehensive solutions enable you to focus on growing your business while ensuring your financial foundation remains solid. To understand how Timber can help your business, contact Timber.