Accounting & Audit Guide for Dubai Companies.
Contents
1. Accounting Guide
- 5 Easy Steps of Accounting Process
- How does accounting differ for a Free Zone Company?
- What happens if you don’t maintain proper accounts?
- What records should you maintain?
- What are the Financial Statements?
- How to maintain Financial Statements?
- How to analyze your company’s health and performance?
2. Audit Guide
- What is Financial Audit and its purpose?
- What are the documents required for the audit?
3. Actionable Takeaways
1. Accounting Guide
1. 5 Easy Steps to Accounting Process
HOW IT WORKS
Pick the right accounting software
Determining the best software for your company
Setup Chart of Accounts
A list of Major Accounts heads to record transactions as per your Business Model
Data Entry
Recording day to day transactions in the system
Expert Verification
Making sure all transactions are entered correctly
Reporting
Generating Sales, Expense and other management reports
2. How does accounting differ for a Free Zone Company?
If you’re running a small business in a UAE Freezone, there are a few differences you need to understand to align your business with the requirements and regulations of operating in a Freezone.
- Freezone Costs: Keep track of the costs associated with your Freezone license, such as annual fees, visa-related expenses, and any additional approvals required by your business activity and include them in your financial records.
- Customs Duties: If your business involves import or export activities, ensure accurate record-keeping of any customs duties paid or owed.
- Currency Considerations: If you transact in multiple currencies, stay mindful of foreign exchange fluctuations and maintain records of currency exchange gains or losses.
- Freezone exemptions: Some Freezones offer tax exemptions, reduced customs duties, or subsidized services. Ensure that you understand and leverage these benefits while accounting for them properly.
- Payroll and Employee Expenses: Keep accurate payroll records and ensure timely payment of wages as per the UAE labor laws regarding employee compensation, including salaries, benefits, and end-of-service benefits.
- Freezone Audit Requirements: Some Freezones mandate annual audits of company financial statements. Be aware of the audit requirements applicable to your Freezone and engage a licensed auditor, if necessary.
It’s crucial to stay updated with the latest information and seek professional advice to ensure your accounting practices align with the requirements of your Freezone.
3. What happens if you don't maintain proper Accounts?
Not maintaining accounts can have serious consequences for a business.
- Legal action: Failing to keep adequate accounting records can result in heavy fines. FTA imposes a penalty of AED 10,000 for the first time and AED 20,000 for the second time.
- Bad decisions: Inaccurate financial reporting can lead to poor operational decisions, such as overestimating profits, underestimating costs, misallocating resources, or missing opportunities.
- Reputation damage: Inaccurate financial reporting can harm your credibility and trustworthiness among stakeholders, such as investors, customers, suppliers, regulators, and auditors.
- Economic loss: Inaccurate financial reporting can cause you economic loss due to missed opportunities, wasted resources, lower sales, higher expenses, lower profits, or higher taxes.
4. What records should you maintain?
A company should maintain proper books and records to support its financial statements.
This includes documents such as,
- Receipts
- Invoices
- Bank Statements
- Tax Records
- Financial Statements (Balance Sheet, Cash Flow Statements and Income Statement)
These documents should be kept for a specified period of time, usually 5 years.
The specific requirements for document retention may vary depending on the company’s industry and its regulations.
It is important to consult with a qualified accountant to ensure compliance with all applicable regulations.
5. What are the Financial Statements?
Financial statements are formal records that summarize the financial activities and position of a company. They provide a snapshot of the company’s financial performance and position over a specific period, usually a fiscal year or a quarter.
The three main types of financial statements are:
- Income Statement (Profit and Loss Statement)
- Balance Sheet (Statement of Financial Position)
- Cash Flow Statement
Financial statements are prepared based on Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) to ensure consistency and comparability across different companies and industries.
These statements are critical for financial analysis, decision-making, and compliance with regulatory requirements.
They offer valuable insights into a company’s financial health, performance, and position, allowing stakeholders to assess its creditworthiness, profitability, and long-term viability.
The three main financial statements:
Income Statement (Profit & Loss Statement)
- The income statement provides a summary of a company’s revenues, expenses, and profits or losses over a specific period.
- It starts with the company’s total revenue (sales) and then deducts various operating expenses, such as the cost of goods sold, selling and administrative expenses, and other operating costs.
- The result is the company’s net income or net loss, indicating the bottom-line profitability for that period.
Balance Sheet (Statement of Financial Position):
The balance sheet presents a company’s financial position at a specific point in time, typically the end of the fiscal year or quarter.
It consists of three main sections: assets, liabilities, and shareholders’ equity
The assets section lists the company’s resources, such as cash, accounts receivable, inventory, property, and equipment.
The liabilities section shows the company’s obligations, including accounts payable, loans, and other debts.
The shareholders’ equity section represents the owners’ interest in the company, including retained earnings, and additional paid-in capital.
The balance sheet must always follow the accounting equation: Assets = Liabilities + Shareholders’ Equity.
Cash Flow Statement:
- The cash flow statement helps to understand how cash moves in and out of the company and provides insights into the company’s ability to generate and manage cash.
- It categorizes cash flows into three main activities: operating activities (e.g., cash received from customers, payments to suppliers), investing activities (e.g., cash spent on investments, acquisitions), and financing activities (e.g., cash received from issuing stocks, dividends paid to shareholders).
6. How to maintain Financial Statements?
Maintaining accurate Financial Statements is crucial for the success of any small and medium-sized enterprise (SME).
Steps you can take to maintain your financial statements:
1. Keep track of all financial transactions: Keep track of all your financial transactions, including income, expenses, and other financial activities. This can be done manually or by using accounting software.
2. Organize financial records: Organize your financial records in a systematic manner. This includes maintaining records of all invoices, receipts, and bills.
3. Record transactions in a timely manner: Transactions should be recorded as soon as possible to ensure accurate financial statements.
4. Reconcile accounts: Reconcile your accounts regularly to ensure that the financial statements are accurate. This involves comparing the records of financial transactions with bank statements and other financial statements.
5. Monitor cash flow: Monitor your cash flow regularly to ensure that you have enough cash on hand to pay bills and other expenses.
6. Create financial reports: Create financial reports such as income statements, balance sheets, and cash flow statements.
7. Seek professional help: Seek professional help from accountants or financial advisors to ensure that your financial statements are accurate and up-to-date.
7. How to Analyze your company’s Health & Performance?
Financial ratios are vital tools for evaluating a company’s financial position, performance, and prospects. They offer a snapshot of a company’s financial health, enabling owners to make well-informed decisions and take appropriate actions to ensure long-term success.
Once you have the financial statements, you should calculate key accounting ratios to analyze your company’s financial health and performance.
To calculate the financial ratios mentioned earlier, you will need the relevant financial information from the company’s financial statements explained earlier.
Some of important ratios for SME’s are discussed below;
Important Financial Ratios:
- Profitability ratios measure how much profit your company generates from its revenue and expenses.
- A higher profitability ratio means that a company is more efficient and profitable & a lower profitability ratio means that a company is less efficient and profitable.
- Break-Even Point (BEP): This tells you how much the company needs to sell to cover all its costs and expenses. Below this point, the company operates at a loss, and above it, it makes a profit.
- Fixed Charge Coverage Ratio: This indicates the company’s ability to cover all fixed costs, including interest and lease payments. It helps assess the company’s financial strength.
- Revenue Growth Rate: This measures the percentage change in revenue from one period to another. It shows how fast the company’s sales are growing.
- Profit Growth Rate: This measures the percentage change in profit from one period to another. It shows how fast the company’s profits are growing.
5. Efficiency Ratios:
- Accounts Receivable Turnover: This indicates how quickly the company collects payments from customers. A higher turnover means efficient credit management.
- Accounts Payable Turnover: This shows how quickly the company pays its suppliers. A higher turnover can indicate good supplier relationships.
2. Audit Guide
1. What is Financial Audit and its purpose?
A financial audit is an evaluation of a company’s financial records by an independent auditor to make sure that they are correct and follow the International Financial Reporting Standards (IFRS).
The primary purpose of an audit is to provide assurance to stakeholders that the financial statements are accurate, complete, and comply with relevant accounting standards.
What is the Auditor’s Role?
1. Review of Financial Records
The auditor reviews the company’s financial records to ensure that they are accurate and complete.
2. Assessment of Financial Records
The auditor will assess the company’s internal controls and identify any weaknesses that could lead to errors or fraud.
3. Issuance of Audit Report
The auditor will issue an audit report that outlines their opinion on the accuracy and completeness of the financial statements.
2. What are the documents required for the Audit?
In general, auditors need access to any documents that are relevant to the financial records and operations of the company being audited.
1. Company’s Legal Documents
Trade License, MOA, Share Certificates, Owner’s Passport Copies
2. Financial statements
Balance sheets, Income statements, and cash flow statements.
3. General ledger
Records of all the company’s financial transactions like Invoices, receipts, and payment records.
4. Bank statements
5. Physical inventory counts and records of inventory movements.
6. Tax returns
7. Contracts and agreements
Customers, suppliers, and other parties.
8. Employee records
Payroll records, benefits, and compensation agreements.
9. Any other document required during the audit
3. Actionable Takeaways
- Select suitable accounting software and understand Freezone-specific accounting nuances.
- Maintain proper accounts to avoid legal issues, poor decisions, and reputational damage.
- Keep essential financial records for at least 5 years and consult with accountants for compliance.
- Utilize financial statements and key ratios to assess your company’s financial health.
- Prepare for financial audits by ensuring access to required documents.
Following these actionable steps will help you effectively manage your company’s finances, maintain compliance, and prepare for financial audits for your Dubai Company.
Legal Disclaimer:
The information in the article is for general information only. It does not constitute professional advice, and it may not reflect current regulations or conditions. Readers are advised to consult with professionals such as accountants, auditors, or legal advisors, to address specific questions or concerns related to accounting, auditing, and compliance within Dubai.
The authors and publishers are not liable for any direct or indirect damages or losses arising from the use of, or reliance on, the information contained in this article.
Readers should seek professional guidance and exercise due diligence and verify the information provided before making any financial, legal, or business decisions. The application of this information is the sole responsibility of the reader.
