Compliance is generally an ongoing matter; however, there are certain times when it is necessary to have special attention. For instance, the time of year-end closing is important in this regard. This is the time when books or accounts are reconciled and move towards the direction of finalization. The end product of financial year closing is the financial statements, such as the balance sheet and the income statement. The financial statements are one of the prime components of corporate tax computation and filing. Therefore, the finalization of books and corporate tax filing are interrelated, as they both are part of the compliance responsibilities.
Year-End Closing: Are Your Books Compliant with Corporate Tax Laws?
There is a thin line of difference between the tax laws and the accounting standards. Therefore, it is important to understand the difference between taxable income and accounting income.
Taxable Income vs. Accounting Income
In the UAE, businesses generally prepare their accounts as per the International Financial Reporting Standards (IFRS). However, corporate tax law governs the computation and filing of the corporate tax. Therefore, businesses need to convert the accounting income (IFRS) to taxable income (corporate tax law) to compute the tax liability.
The core of the difference between the two is the treatment of expenses. Certain expenses are deductible under the IFRS but are not deductible or are treated differently under the tax laws. Furthermore, tax laws also offer tax incentives for various businesses. Therefore, accounting income and taxable income are mostly not the same for most entities. Let’s highlight the tasks to finalize the accounts at the year-end.
The Process of Year-End Closing & Compliance
The finalization of books is usually not as simple as we say. There is a whole process to follow for year-end closing. Let’s discuss some of the common elements of the financial year closing.
1. Reconcile Accounts
Firms must reconcile all the account balances to verify that the figures depicted in the financial statements are accurate. These accounts may include cash, accounts receivable, accounts payable, and so on. A third-party document, such as a bank statement from a bank to verify the cash balance, is often considered an authentic source.
2. Adjusting & Closing Entries
Several items need adjustment at the period end. For instance, depreciation, accruals, prepayments, prepaid assets, and so on. For instance, in the case of prepaid expenses, only accrued expenses for the year are taken to the income statement through an adjusting entry.
3. Inventory Count
In the case of the presence of physical stock, there is a need to depict the true value in the financial statements. Therefore, it is important to conduct an inventory count to verify the actual amount of inventory available. Furthermore, inventory counts also analyze if there is a need to write down inventory item(s) if necessary.
4. Analyze Accounts Payable and Receivable Balances
For most businesses, the balances of accounts receivable and accounts payable are crucial and important for users of financial statements. Therefore, firms must make arrangements to verify these balances. In the case of debtors, a business should analyze the recovery of debts and charge bad debt expenses or adjust the allowance for doubtful debts accordingly.
5. Produce Financial Statements
After reconciliations, adjustments, and closing entries, the next step is to produce financial statements. It starts with the trial balance. If there are no errors, firms move on to prepare financial statements such as the balance sheet and the income statement.
6. Prepare for Audit & Tax Filing
In the UAE, many firms undergo an external audit. This can be as a result of a legal duty or a voluntary action. The audit function works in close relation with the accounting function. Therefore, accountants work tirelessly to organize documents and perform other audit-related duties to prepare for the year-end audit.
Furthermore, you must ensure that your books are ready for filing tax returns and comply with all the relevant laws and regulations of the UAE. The tax return is due within 9 months from the end of a relevant tax period. The tax authority may require audited financial statements for certain businesses; therefore, it is important to get relevant information beforehand. This will ensure that you comply with the UAE laws and thus avoid penalties. An entity must also ensure that they have the necessary information and documentation available to claim tax deductions and tax incentives and to calculate an accurate figure of taxable income and tax liability. A recommended approach is to get assistance from a tax expert, such as CZTA.
7. Documentation Arrangements
As per the UAE tax laws, most businesses must maintain records for at least 7 years from the end of the relevant tax period. Therefore, one of the important compliance duties includes document preservation and maintenance. This includes both physical and digital record-keeping. The best way to do it is by maintaining proper filing and numbering all year round. This, in turn, will avoid a mess during the year-end activities. Furthermore, it will also help during the year-end audit. Proper documentation and archiving not only help in keeping a business compliant, but if anything comes in the future, such as a tax audit, you will be able to produce documents as and when needed. For digital records, you might look for the need for cloud storage and other options.
Conclusion
As the new corporate tax regime is in place in the UAE, there is a need to close the books with an alignment with the tax laws. This, in turn, will keep the overall business running smoothly and also tax-compliant. Entities must understand the difference between the accounting income and taxable income. The accuracy of taxable income is dependent on the accuracy of the accounting income. Therefore, firms must make arrangements to finalize the accounts and follow a systematic process properly. Entities then move on to the process of tax filing and computation of tax liability. Firms must also ensure that proper documentation is attached and archived for future use for a specified period of time.
Creative Zone Tax & Accounting (CZTA)
Are you looking to focus solely on your business while remaining compliant with tax laws? At CZTA, with our esteemed team of tax and accounting experts, you can focus on your business and leave the rest to us. From bookkeeping to year-end closing and compliance, we provide services at all levels. Contact us today.
