Accruals and prepayments: what it means for UAE businesses.

What accruals and prepayments means

Also called: Accrued expenses, Prepaid expenses.

Accruals and prepayments are the adjusting entries that make accrual accounts work at a month or year end. An accrual records a cost the business has used but not yet been billed for, such as December electricity or an audit fee for the year just ended, as an expense and a liability. A prepayment does the reverse: it takes a cost paid in advance for a future period, such as annual office rent, insurance or a trade licence renewal, off the profit and loss statement and holds it as an asset until the period arrives.

In the UAE these entries feed straight into Corporate Tax. Article 28 of the Corporate Tax Law allows a deduction in the tax period in which expenditure is incurred, and the Federal Tax Authority reads "incurred" as the point at which the cost is recorded under IFRS or IFRS for SMEs. Missing an accrual pushes a deduction into the wrong year. Businesses using the cash basis, allowed for Revenue up to AED 3 million, do not post them.

VAT runs on its own rules. Input tax recovery depends on holding a valid tax invoice, not on an accrual.

How it works

• Accrual: debit the expense, credit accrued liabilities, based on usage, contracts or a reasonable estimate. Reverse it when the supplier's invoice arrives.
• Prepayment: debit prepayments, credit bank when paying ahead, then release the used portion to expense each month.
• Common UAE prepayments: annual office or warehouse rent paid upfront, trade licence renewals, visa and Emirates ID costs, and insurance.
• Corporate Tax follows the accounting timing on the accrual basis, subject to the specific adjustments in the law.
• An accrued expense with no tax invoice yet gives no input tax recovery. The VAT is claimed in the return for the period in which the conditions for recovery are met.

Worked example

A Dubai trading company with a 31 December year end pays AED 120,000 before VAT on 1 October 2026 for twelve months of office rent. At the year end it also estimates AED 4,500 of December electricity that has not yet been billed.

Rent paid on 1 October 2026	AED 120,000
Rent expense for 2026 (3 of 12 months)	AED 30,000
Prepayment carried to 2027	AED 90,000
December electricity accrued	AED 4,500
Total expense recognised in 2026	AED 34,500

Only the AED 34,500 that belongs to 2026 reduces 2026 profit and Taxable Income, and the AED 90,000 rent is expensed across 2027.

Common mistakes

• Expensing a full year of rent or a trade licence renewal in the month it is paid, which moves profit between years and tax periods.
• Forgetting year end accruals for audit fees, utilities and staff bonuses, which understates costs in the year they belong to.
• Claiming input VAT on an accrual before the tax invoice is received.

The law

• Federal Decree-Law No. 47 of 2022, as amended, Article 20, Clause 1 and Article 28, Clause 1 (deduction in the tax period incurred)
• Federal Decree-Law No. 8 of 2017 on Value Added Tax, as amended, Article 55, Clause 1 (input tax recovered once the tax invoice is received and retained)
• Ministerial Decision No. 114 of 2023, Article 1 (definition of cash basis) and Article 2 (cash basis up to AED 3,000,000)

Frequently asked questions

How is this different from accrual basis accounting?

Accrual basis accounting is the overall method. Accruals and prepayments are the specific adjusting entries that method needs at each period end to put income and costs in the right period.

Do we need prepayments for small items?

Many SMEs set a materiality limit and expense small advance payments straight away. Keep the policy consistent, and always spread large items such as annual rent.

Related terms

Accrual basis accounting · Cash basis accounting · Month-end close · Deferred revenue · Input tax. See every term in the UAE tax glossary.

For the full picture, read our guide: Month-end close for UAE SMEs: a practical checklist.

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